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FINANCING INFRASTRUCTURE RENEWAL WITH ENERGY SAVINGS:
A SUCCESSFUL APPROACH
Alan R. Neuner, CHFM
Associate Vice President, Facilities Operations
Geisinger Health System
ABSTRACT THEORY
This paper describes the accomplishments of a facilities All buildings and systems have a life cycle including the
renewal program in healthcare that is totally self-funding. replacement of roofs, mechanical, and electrical systems at
Through planned replacement of aging energy consuming regular intervals to assure reliable operation. This is more
equipment, this facility reduced energy consumption by critical in a hospital than most other buildings since many
more than $2 million dollars annually. The paper also of those systems support life. A planned investment
discusses investments in a steam plant, chilled water approach to replacing these vital assets assures reliability
systems, medical compressed air, vacuum systems, and reduces operational costs.
lighting, and water systems. Geisinger Health System uses
the resultant energy savings from those initiatives to fund From the book Working and Thinking on the Waterfront by
the program into the future, alleviating the competition for Eric Hoeffer (1969), the author states, “It is the capacity
capital funding with medical needs. for maintenance which is the best test for the vigor and
stamina of a society. Any society can be galvanized for
BACKROUND awhile to build something, but the will and the skill to keep
The Geisinger Health System is comprised of 60 hospital things in good repair day-in, day-out are fairly rare.”
and clinic sites located in 31 counties of Pennsylvania. Organizations, like society rarely appropriately value the
The total building square footage is three million, of which significance of maintaining their vital infrastructure.
two-thirds is attributed to the main campus in Danville, Establishment of a deliberate program to reinvest in facility
Pennsylvania. The main campus is contained on a 450- assets will pay dividends to the organization for years to
acre site, which serves as the corporate offices as well as a come.
tertiary care teaching hospital, multi-specialty group
clinical practice, children’s hospital, level one trauma For the purpose of this program, infrastructure is defined as
center, rehabilitation hospital, and basic science research being all components of the building and site that make the
center. asset usable. For clarity, these components can be
categorized as follows: building shell and code
The management of Geisinger’s Facilities Department compliance; electrical systems; heating, air conditioning
established energy efficiency as an opportunity in 1988. and ventilating systems (HVAC); interior finishes; utility
At that time, the main site was 1.2 million square feet. systems; site; and other. This categorization becomes
Through well-designed infrastructure investments, the helpful when estimating the useful asset life and
campus utility cost and electrical demand are the same constructing a five-year plan for asset replacement.
today for a 2 million square foot campus as they were for
the 1.2 million square foot campus in 1988, resulting in Before a facilities department can develop a plan, an
savings of $2.2 million annually. estimate of necessary funding should be determined.
There are several methods available to determine the
Geisinger’s Facilities Department received numerous magnitude of funding required. The first methodology is
awards for energy efficiency and innovation including to estimate the life expectancy of various building
recently, the 2000 Business for the Bay Award for large components as shown below in Table 1.
businesses presented by the Chesapeake Bay Foundation
and the 2002 FAME Award presented by the Association
of Facilities Engineering for its pioneering work in the
elimination of legionella in domestic water systems.
TABLE 1 – EXPECTED LIFE OF BUILDING most important aspect of this funding plan is how the
COMPONENTS available dollars are invested.
Roofs 20 Years
Finishes 10 Years A study conducted by Johnson Controls categorized the
Windows 30 Years expenses of building ownership during a 40-year period.
Mechanical Systems 30 Years Surprisingly, only 11 percent of that expense is for the
Electrical Systems 30 Years construction of the building. By far, the largest expense in
Paving 10 Years this study was the operational expenses (maintenance and
Structure 50 Years utilities), which account for 50 percent of the total cost.
See Figure 2.
Examination of this data yields that the average life of a
building component is approximately 25 years. For
estimation, this means that 4 percent of the asset value
should be budgeted annually to maintain the asset without Cost of Ownership Construction
considering inflation. Using this assumption, 4 percent of Financing
11% Renovations
the initial cost of the building should be budgeted annually
14%Operating Expense
to maintain the infrastructure. Since buildings are typically
depreciated over 30 years, 3-1/3 of the 4 percent is already
funded for the first 30 years.
50%
A somewhat easier method, for some facilities, is to link
the infrastructure renewal funding level to square footage, 25%
since that is generally a commonly used metric in facilities
management. Because of the numerous old buildings FIGURE 2 – 40 - YEAR COST OF OWNERSHIP
within Geisinger Health System, the net book asset value is
approximately $300 million for three million square feet, With the disproportionate share of building expenses being
or $100 per square foot (sqft). Conveniently, this works energy related, Geisinger invested $8 million of the $20
out to $4/sqft for our system. million funded toward reducing these operating costs.
While it would be advantageous to get a return on
While Geisinger has not yet attained this level of funding, investment for every dollar spent, that is not possible for
Facilities Operations has been successful in at least items such as interior finishes or paving. Those items have
structuring annual funding dedicated to infrastructure returns based primarily on customer satisfaction and first
renewal. Although the analysis indicates a funding level of impressions, which are difficult to quantify in terms of
$4/sqft as appropriate, it was determined that $2 was a dollars. However, the refurbishment of a unit has caused
more realistic number for Facilities to sell to our operating patient satisfaction scores to increase. The food suddenly
management as reasonable. Figure 1 depicts tastes better, the nursing care improves, and the entire
patient satisfaction score for that unit increases. While not
Infrastructure Renewal Funding Levels documented, one would believe that this improved patient
satisfaction might marginally decrease length of patient
6000000
stay.
5000000
4000000
Once a target funding level is established, the next step is
to develop a plan for how to spend the money. When
Dollars
3000000
selling this concept to executive management, it’s
2000000 important to provide some detail of where the money will
1000000
be spent. The five-year plan can be put together based on
rough estimates for categories of expenses, i.e. roofs,
0
Goal 1995 1996 1997 1998 1999 2000 2001 2002 2003 paving, utility systems, building shell, code compliance,
Fiscal Year
etc. The actual detailed planning of the specific projects
does not need to be completed until after the plan is
infrastructure-funding levels during the past nine years. approved and funded. The plan should be adopted long
FIGURE 1 – FUNDING LEVELS 1995 TO 2002 range, but updated annually. This allows the plan to adapt
to changing conditions and priorities. Many times,
As seen on the graph, Geisinger has not attained the facilities managers develop detailed plans for infrastructure
targeted funding of $2/sqft (far left bar). However, $20 replacement, and are then never able to get funding.
million has been funded during the past nine years. The
Unless you have time to waste, save the details until after provide a positive cash flow. Projects with little
the dollars are in hand. risk, such as lighting upgrades, should utilize an
operating lease, whereas projects with a higher
FUNDING risk of return are best suited for a performance
Obviously, the most critical piece of the entire process is contract.
getting the organization to commit the dollars in a planned Considering the vulnerability of the investment
fashion for infrastructure renewal. It is intuitive that there market. The case can currently be made that
needs to be some level of renewal funding, but it is infrastructure investments that save energy offer a
amazing how counter-intuitive some Chief Financial higher and safer return than the stock market.
Officers (CFO) can appear to be when faced with limited
capital availability and competing demands. While there is Hopefully, after following the previous steps, you have
no panacea for how to accomplish this task, the following convinced your organization to fund the renewal of its
points may be of assistance when dealing with the CFO: assets in a planned and deliberate fashion. Once there is
Liken infrastructure renewal to home ownership. agreement to establish the program, there are several other
Most people understand that something needs to points that should be considered:
be replaced around the house every year. Establish a minimum funding level that would be
Find out the current annual depreciation expense taken off the top of the corporate pot, and not
for the building assets. This is a non-cash available for other capital needs.
expense; meaning money is available for The pot is best if set up as a maintenance bank
reinvestment. where unspent funds from one year carryover to
Discuss average age of plant (an accounting the next. That way, savings incurred flow back
calculation) and explain how building new into the pot for funding additional projects. In the
facilities artificially lowers it. The older the future if the pot grows because of carry forwards,
buildings you have, the greater this distortion will a decision can be made to reduce the funding
be. level if necessary.
Explain that the building and system assets Expect that you will be asked to manage not only
generally account for about 75 percent of total commitments, but also cash flow. If you have a
assets. pot of dollars available, expect some parameters
Discuss the effect building condition has on other to be set on how much cash can be spent in any
aspects of the business, i.e. the affect renovation given fiscal year.
has on customer satisfaction.
Emphasize the downside of a lack of investment. MEASURING SAVINGS
What happens when the chiller fails, the roof Once a renewal fund and project plan has been established,
leaks, or someone is injured? What would be the the next most important step is to document the savings
magnitude of the resultant business loss or law achieved from the energy related projects to demonstrate
suits? success and secure future funding. The first rule is to
speak in terms management understands: DOLLARS! No
These points are generally used to convince management one cares about Btu’s, kWh, or kW/ton outside the
of the need to fund an infrastructure renewal program. The Facilities team. Calculated savings are fine to help plan
argument can be made more convincingly if there is a the project, but hopefully the project will be significant
monetary return from an investment such as energy enough that it is discernable on the utility bill. Ignore
savings. Identifying the following points will strengthen maintenance savings when justifying or evaluating savings.
this argument: Unless staffing dollars are reduced, they do not exist.
Savings in energy go directly to profits.
Many businesses focus on new revenue. Taking For some projects, savings calculations are relatively easy.
anticipated savings and dividing it by the desired In the case of lighting retrofits, or chiller replacement, it is
corporate profit margin can depict the equivalent simply the kW savings times the run hours times the
new revenue. For example: An energy project is electric rate. For other improvements, it may be beneficial
expected to save $100,000 per year. If the to look at a metric before and after to verify savings. For
expected company profit is 5 percent, this yields example, in upgrading boiler efficiency, calculate the cubic
equivalent new revenue of $2 million per year. feet of gas consumed to produce a pound of steam. After
Projects that yield savings may be considered for the project is successfully completed, this metric should
alternative financing, i.e. a performance contract have decreased, and the savings can be calculated based on
or an operating lease. They can be structured in the actual steam produced. In general, be conservative in
such a way as to fund the lease payment as well as projecting savings before investment, and boastful when
they exceed the early projections.
CASH OR CREDIT TABLE 2 – PROJECT LISTING AND ROI
Depending on the type of organization, it may be beneficial Project Cost Savings ROI
to utilize leases or performance contracts. The difference 69kv Substation $525,000 $250,000 2.10
Lighting retrofit $1,800,000 $460,000 3.91
in these financial instruments is that a performance
Replace absorbers with chillers $750,000 $360,000 2.08
contract will carry with it a guarantee of the projected Electrical distribution upgrade $550,000 $50,000 11.00
savings. Realize however, that this guarantee does not Air handler upgrade $400,000 $30,000 13.33
Medical air upgrade $100,000 $20,000 5.00
come without a cost. The cost is generally in the form of
Boiler Upgrade $300,000 $300,000 1.00
an interest rate that is several points higher to cover the Incinerator replacement $300,000 $50,000 6.00
risk of the guarantor. If a project has little or no risk such Condensate recovery $10,000 $25,000 0.40
as lighting upgrades, a simple operating lease would be a Tower upgrades $500,000 $50,000 10.00
Tower control $20,000 $40,000 0.50
more appropriate financing vehicle. Performance contracts Elevator Upgrades $1,000,000 $45,000 22.22
are best utilized on complex projects where the savings Steam trap monitoring $50,000 $50,000 1.00
may be dubious. Building automation control upgrades Water side economizers $150,000 $50,000 3.00
Vacuum system enhancements $70,000 $10,000 7.00
may be a wise choice for this type of financing Domestic water pumps (vfd) $100,000 $25,000 4.00
arrangement. Obviously the easiest option for the facilities Chilled water loop $200,000 $50,000 4.00
manager is cash, but depending on the organization’s Chilled water vfd pumping $100,000 $50,000 2.00
Replace underground steam mains $250,000 $50,000 5.00
philosophy or financial strength, alternative forms of Occupancy sensors - lighting $30,000 $15,000 2.00
financing may provide the only viable solution for funding Well system upgrades $50,000 $20,000 2.50
energy conservation projects. Waste oil heater $3,000 $2,000 1.50
Building automation upgrades $200,000 $100,000 2.00
Canopies, foyers, etc $250,000 $10,000 25.00
ACCOMPLISHMENTS Window replacement $200,000 $10,000 20.00
Utilizing these strategies, the Facilities Department at Instrument air upgrade $50,000 $20,000 2.50
Blowdown control & condensate monitoring $5,000 $30,000 0.17
Geisinger has been successful in achieving documented Heat recovery systems $75,000 $15,000 5.00
energy savings of $2.2 million annually. These savings Install dealkalizers $13,000 $13,000 1.00
can be documented in several ways. Total $8,051,000 $2,200,000 3.66
Utility actual dollar expenditures are the same
today as ten years ago despite campus growth Some of the more significant projects accomplished are as
from 1.2 million sqft to 2 million sqft (66 percent) follows:
Electrical demand has remained at 8.7 megawatts
though this period of growth. 69kV Substation
Maintenance manning has not increased despite a Upgraded service supply from 12.47kV to 69kV to achieve
66 percent growth; in fact it has decreased a rate savings from the utility of 10 percent.
because of consolidated and updated systems. Project cost $560,000
Of the $20 million invested in infrastructure Savings $250,000 annually
during the past nine years, $8 million was Outages reduced 97.5 percent
invested in energy conserving equipment.
Return on Investment (ROI), on energy Electrical Distribution Upgrade
investments averaged 3.7 years Replaced entire 12.47kV electrical distribution network
ROI on entire funding of $20 million is 9 years. and switchgear on a 100-acre campus. Discovered 40
Infrastructure investment of $2 million annually is amps of leakage during cable replacement.
now self-funding. Project cost $500,000
Although some of these ROIs may not seem overly Savings $50,000 annually
attractive, one must consider that these were replacements Reduced outages 99 percent
that had to be completed anyway because of the age of the
equipment or other building components. By wisely Lighting Upgrade
choosing the replacement systems for maximum Upgraded all lighting fixtures (24,000) utilizing T-8 lamps
efficiency, the success of the program is guaranteed. and electronic ballasts utilizing an operating lease as the
financial vehicle.
PROJECTS Project cost $1.8 million
Table 2 depicts all the energy related projects Savings $460,000 annually
accomplished, and the respective ROI. Reduced electrical demand on substation one
megawatt
Positive cash flow of $160,000 annually after
lease payment (7 years)
Replace Absorbers with Electric Chillers Investment $100,000
The facility was almost exclusively cooled with low- $20,000 annually
pressure absorbers. The cost to operate the absorbers was
$.09/ton. Based on the electrical rate structure and new Vacuum Pumps
chiller efficiencies the cost to operate electric chillers is Replaced water seal vacuum pumps with dry running hook
$.03/ton. and claw system for improved efficiency and reliability.
Investment $750,000 Investment $70,000
Savings $360,000 annually Electrical savings $5,000 annually
Water savings $5,000 annually
Cooling Tower Replacement
The existing towers were all cross-flow, and designed with Boiler Upgrade
a 10 approach to wet bulb. By replacing the towers with Replaced burners and controls on 34-year-old water tube
5 approach to wet bulb counter flow towers, fan boilers with gun type burners having direct digital controls
horsepower and chiller savings were realized. Reducing and oxygen trim.
the condenser water temperature reduces the head on the Investment $300,000
chiller compressor yielding savings of 2 percent/degree. First year savings $300,000
Counter flow towers also utilize less fan horsepower for
the same approach compared to cross-flow towers. Steam Trap Monitoring
Additionally, the towers were converted to an approach to Installed a system to monitor the majority of steam traps
wet bulb control which significantly reduces fan for flooding and blow-by.
horsepower compared to a single set point. Investment $50,000
Project cost $500,000 Savings $50,000 annually
Savings $90,000 annually
Waterside Economizers CONCLUSION
Plate frame exchangers were installed on all chilled water A planned approach to facility infrastructure renewal
systems to utilize condenser water to cool the chilled water increases the safety, reliability and appearance of the
directly when outdoor temperatures are favorable. facility. Judicious investments in energy efficient systems
Investment $150,000 create sufficient cash flow to make the plan self-funding.
Savings $50,000 annually The key is to understand where the opportunities exist and
Reduces 1,400 chiller run hours per year maximize the return on investment for energy related
systems.
Condensate Recovery
Capture the condensate from the majority of air handlers
and utilize it as cooling tower make-up. Since this water is REFERENCES
pure, significant savings are also realized in the chemical 1. Financial Planning Guidelines for Facility Renewal
treatment of the condenser water. A spill control pallet is and Adaptation, SCUP, 1989
used as a basin to capture the condensate and a small sump
pump to pump it into the condenser pump suction. No 2. Biedenweg, F., Weisburg-Swanson, L., and Gardner,
controls are necessary since the evaporative load of the C., Planning for Capital Reinvestment: Alternatives for
towers generally coincides with the condensate generated. Facilities Renewal Budgeting, Pacific Partners Consulting
Cost $500 per air handler Group, 1998.
Savings $25,000 annually (make-up water and
chemical treatment) 3. Analysis of Capital Funding for School Facilities,
Ontario Ministry of Education and Training, 1996.
Compressed Air Upgrade
Replaced 25 water ring, reciprocating and screw
compressors and associated dryers with two variable
frequency drive oil free screw compressors with heat of Alan R. Neuner, CHFM, is Associate Vice President,
compression dryers. These dryers are desiccant type and Facilities Operations for the Geisinger Health System
utilize the waste heat from the compressor for located in central Pennsylvania. He has more than 30
regeneration. Additionally, the purge air is recycled, years of facilities management experience in iron and steel
negating the normal 15 percent loss. Eliminating the need production, cryogenics and healthcare. For questions
for cooling water to the water seal compressors increased regarding this paper, he can be contacted at (570) 271-
system reliability. 5515 or e-mail:aneuner@geisinger.edu
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