“Energy Savings Performance Contracts are an expedited way to help achieve Defense Health Agency priorities when addressing Military Treatment Facility sustainment and resilience needs.”
Thomas “T.W.” Williams, Business Development Manager, Southland
The Military Health System (MHS) consists of 52 hospitals, 401 medical clinics, and 246 dental clinics (collectively known as Medical Treatment Facilities or MTFs) across the country and around the world. These MTFs comprise approximately 70 million square feet with an estimated average energy use of 12 million MMBtu per year, resulting in an approximate annual energy spend of $300 million.
The administration and management of MTFs for the Army, Navy, and Air Force is scheduled to transition to one system managed by the Defense Health Agency (DHA) by September 30, 2021. The DHA Campaign Plan for Fiscal Year (FY) 2021 described four critical priorities: “Great Outcomes, Ready Medical Force, Satisfied Patients, and Fulfilled Staff.” For certain, to achieve these priorities, MTF sustainment, restoration, and modernization (SRM) will be a foundational requirement.
A recent report by the Office of Inspector General describes the challenges DHA Facilities Enterprise personnel are facing as they assume SRM responsibility for all MTFs. The DHA audited 60 MTFs at 6 installations, identifying more than 760 unfunded SRM requirements with an estimated cost exceeding $550 million. These included 3 safety and 4 mission requirements that could cause death or major property damage if not addressed immediately, and 92 that could cause severe injury or moderate property damage if left unaddressed.
These issues are a subset of a much larger problem. On a broader level, $14.8 billion in unfunded requirements across the entire MHS were identified by facility staff in 2019. When comparing this total to the funding available in the FY 2019 SRM budget of $1.1 billion, only $441 million was targeted for restoration and modernization. At this level of annual SRM funding, it would take 33 years to correct the identified deficiencies.
Clearly, relying on future SRM funding would mean years of delay in addressing these needs with the problem only worsening as existing systems age. The report states that delays “could worsen the overall condition, readiness, use, functionality, and services provided.”
Third party financing is a proven solution for addressing the critical funding challenges the DHA is facing. Partnerships with the private sector through alternative financing such as Energy Savings Performance Contracts (ESPCs) or Utility Energy Services Contracts (UESCs) can solve large, long-standing infrastructure deficiencies without requiring SRM funds. As an example, with an achievable 30 percent energy save per facility, $100 million could be reallocated from utility budgets and back into the annual funding stream for facility upgrades. Over typical financing terms, this would translate into $1.5 billion in upgrades throughout the system.
These contracting mechanisms are budget neutral, meaning there is no upfront cost. The project is financed by industry with the project costs being paid from guaranteed recurring energy, water, and operational savings and any available avoided costs, rebates, and grants. Avoided costs are those from repairs, replacements, retrofits, or capital improvements that are budgeted, but are no longer required because financed dollars are used. Using utility rebates, grants, and avoided costs in the ESPC or UESC can free SRM dollars to be used for longer return on investment, capital intensive needs.
Private and state-owned healthcare systems have used ESPCs to successfully address infrastructure and resilience requirements. For example, Southland completed the Doylestown Health Hospital ESPC in Pennsylvania, which included a 1.6 MW natural gas-fueled cogeneration or CHP (combined heat and power) unit for power generation, boiler plant improvements, chiller plant improvements, and a building automation system upgrade and expansion.
This Southland ESPC helped Doylestown Hospital realize more than $700,000 of energy cost savings in the first year, reducing annual utility costs by more than 40 percent. The CHP system provides approximately 80 percent of the hospital’s electricity needs to reliably operate at nearly full capacity — even during a power outage.
Additionally, the CHP unit enabled the hospital to use 100 percent of recovered heat from the generator for other operations, such as HVAC, domestic water heating, medical equipment sterilization, and humidification.
Doylestown Hospital offset nearly 25 percent of the total project costs through a utility rebate program and Pennsylvania’s Alternative Clean Energy (ACE) grant program, reducing the total project cost to $5,170,000 with a 7.4-year simple payback.
Private and state hospital systems are not the only example of successful healthcare facility ESPCs. The Department of Veterans Affairs reported in December of 2020 that they have leveraged $912 million in third party financed ESPC/UESCs at 83 medical centers, resulting in $53 million in annual energy and operational savings or $1.4 billion in avoided costs over the next 20 years.
Historically, MTFs were often excluded from ESPC or UESC projects being undertaken on their host installations primarily because of overlapping jurisdictional boundaries between installation and MTF facility staffs, and the complexity of contracting in that environment. The reorganization of all service MTFs under the DHA is an opportunity to overcome this barrier, better positioning these facilities to leverage energy savings for their specific and unique facility needs versus shared savings with the host installation.
The Department of Defense (DOD) medical commands were also concerned that implemented third party financed contracts could limit the ability to make future changes to the MTF resulting from new medical technologies and regulatory requirements. This concern should be reexamined by the DHA with industry input. DOD and industry best practice is to use energy and water master plans and future requirements as key inputs to develop energy savings and resilience strategies.
Furthermore, existing ESPCs can actually increase a MTF’s flexibility to respond to future requirements by leveraging the performance contract’s Operations and Maintenance and Repair and Renewal requirement during the performance period. The ESCO can evaluate the MTF’s new requirements and perform retrofits either with SRM funds, funded by original base project energy savings, or financed through new energy savings from a subsequent phase of the original ESPC. Using the existing ESPC can result in fast and efficient modifications to address new MTF requirements.
As the DHA transitions the MTFs to their operational control, ESPCs and UESCs can be major contributors to assist DHA facility staff in reducing the significant unfunded requirements, replacing aging infrastructure and improving resilience. ESCO industry expertise and third party financing would enhance the DHA’s ability to address its critical priorities at little to no cost and much more quickly, ultimately focusing budget resources to provide better care to service members and their families.