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CIOs eager to use ESPCs to finance data center projects

Sep. 16, 2013 - 06:00AM   |  
By ANDY MEDICI   |   Comments

For more than a decade, agencies have used innovative financing deals, known as Energy Savings Performance Contracts (ESPCs), to pay for extensive energy-saving retrofits to their facilities.

But a recent effort by the Energy Department to use an ESPC to finance a data center consolidation is running into headwinds. And a number of agencies are watching the project closely with hopes they too can use ESPCs to consolidate data centers and refresh aging IT infrastructures.

Under an ESPC, a vendor pays the upfront costs of energy-saving retrofits in exchange for payments from energy cost savings over time. The contractor guarantees the energy savings for the life of the contract or pays the balance.

In an unusual application of an ESPC, the Energy Department in July 2011 selected Lockheed Martin to help the agency consolidate its data centers and reduce operating costs — all without spending any appropriated funding.

More than two years later, the contract has languished. The Energy Department said in a statement it is still reviewing the contract. But it appears to be the Office of Management and Budget that is holding up the project.

Several House and Senate lawmakers are pressing the Obama administration to let the project proceed.

“The action of OMB regarding a single project is creating an impasse across the federal government and sending a chilling effect across federal agencies pursuing data center ESPCs,” said Sens. Ron Wyden, D-Ore., and Al Franken, D-Minn.; and Reps. Peter Welch, D-Vt.; Anna Eshoo, D-Calif.; and Gerald Connolly, D-Va., in a July 10 letter to Energy Secretary Ernest Moniz and Office of Management and Budget Director Sylvia Burwell.

According to one industry executive who asked not to be named, OMB is holding up the project because too much of the projected savings — about 70 percent — comes from operations and maintenance, as opposed to energy savings. As a result, policy makers are having “internal discussions” about the role of operational savings in ESPCs, the source said.

Other agencies are anxious to see the matter resolved and move on with their own projects because agencies are under pressure from OMB to close 40 percent of their “non-core” data centers by 2015, an effort OMB estimates would save $3 billion.

On June 23, the Air Force issued a notice of opportunity for an ESPC to reduce the size and energy use of two of its data centers at Edwards Air Force Base, Calif.

And in May, officials at the Air Force Civil Engineering Center told vendors at an industry briefing that computers, servers and data centers are “prime targets” for ESPCs. Les Martin, the ESPC program manager at the AFCEC, said the Air Force is committed to improving the energy efficiency of its data centers.

“ESPCs could be one of the avenues used to make this happen,” Martin said.

The Interior Department is also considering an ESPC to consolidate its data centers.

“There are some creative ways to essentially fund what are substantial up-front transition costs or capital investment costs and those are things we continue to explore,” said Andrew Jackson, Interior’s deputy assistant secretary for technology, information and business services.

He said the budgeting process that governs agency operations can be a barrier, making alternative financing arrangements more challenging than in the private sector.

Jeff Sherman, director of Federal Energy Solutions at energy contractor Schneider Electric, said ESPCs are one of the few tools agencies have to complete the data center consolidation mandate.

“Once the first few get through the process and other agencies see that it can be a way to make data centers more efficient at no cost, we will see a snowball of projects,” Sherman said.

He said ESPCs could technically be used to replace aging IT equipment, since it is an energy conservation measure.

Jennifer Schafer-Soderman, the executive director of the Federal Performance Contracting Coalition, said ESPCs could be expanded to include any electrical device that needs to be plugged in, including computers. But she is not aware of any agency that has tried it.

Roger Flanagan, director of energy services at Lockheed Martin Information Systems and Global Solutions Civil Division, said information technology drives electricity bills and that ESPCs can offer agency CIOs a way to reduce costs without spending appropriated money that could be used for other programs.

“The intersection of these initiatives and data center consolidation via ESPC is very much in the public interest, and CIOs want to pursue it,” Flanagan said.

He said Lockheed Martin looks forward to begin work on the stalled Energy Department project “at the first opportunity.”

Some agencies are not considering the use of ESPCs in data centers. For example, the Army has no plans to use ESPCs for that purpose, said Army spokesman Dave Foster.

“However if a data center is within a facility that requires energy conservation improvements, it would be considered,” he added.

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