P3s: The Partnerships Powering Higher Ed Energy Projects

July 2019

Many public and private universities have been struggling with reductions in funding, competitive pressure on tuition increases, and limited desire by their trustees to issue additional debt. The leadership of these institutions is increasingly turning to the private sector to help finance and deliver new infrastructure to meet their strategic plans. While this trend started with student housing initiatives, campus leaders are now looking at how public-private partnerships, or P3s, can improve energy infrastructure on their campuses. P3s for energy projects leverages private sector expertise, innovation, and capital, therefore helping universities reduce energy costs, preserve limited debt capacity for academic projects, and achieve sustainability and resiliency goals.

Key Learning Points in this Article:

As public universities receive less government funding, the institutions are increasingly relying on public-private partnerships to finance and deliver campus infrastructure improvements more efficiently.
The high costs of building, maintaining and providing utility services make P3s an attractive option for energy projects.
Many universities have energy and sustainability initiatives that will require significant investment in updating existing infrastructure.
The private sector, including private equity, energy infrastructure contractors, and utilities operators also see great potential in campus partnerships.
Because energy project P3s require a long commitment and shared risk, universities should select potential private partners with care.

University Budget Report Card

Each year, colleges and universities are finding it more difficult to make their budgets work. State funding is down while the pressure to limit tuition increases is simultaneously mounting. In a single decade, funding has significantly decreased. In 2018, state funding of public universities was down more than $7 billion from 2008, and 45 states spent less per student in the 2018 school year than in 2008.

At the same time, higher education administrators are hesitant to use their limited debt capacity for non-academic purposes. This constraint means the maintenance of campus infrastructure is often under-funded, and the deterioration of heating, cooling, and lighting systems is accelerated. That deferred maintenance has created significant pent-up demand for energy projects, particularly those that support sustainability and renewable energy goals.

The Energy Opportunity in Universities

The higher education sector spends more than $6 billion on annual energy costs. In a typical college or university classroom building, lighting represents 31% and space heating accounts for 28% of total energy use, making those systems the best targets for energy savings. Of course, students need well-lit, heated, and cooled spaces to learn and live, so finding ways to bring down the cost of utilities is imperative.

Additionally, updating energy infrastructure on campuses offers benefits beyond balancing budgets. Many universities have aggressive energy-reduction and climate action plans. To reach these goals, leading universities have developed a suite of shared energy-efficiency and renewable generation policies and initiatives, including the American College & University Presidents’ Climate Commitment (ACUPCC) and the Association for the Advancement of Sustainability in Higher Education Sustainability Tracking, Assessment & Rating System (STARS).

Another key issue for higher education facilities departments is improving the resiliency of university utility plants, particularly as campuses face climate change and resulting extreme weather events.

Private Sector Investment & Innovation On Campus

Partnering with the private sector on energy projects can alleviate a burden on higher education administrators as they try to do more with tighter budgets and free them to focus on their institution's core mission. A number of public and private universities, including California State University – Fresno, Dartmouth College, University of Maryland, and University of Iowa, have publicly stated their intent to pursue P3s for energy, and a few are already providing a model for how it can be done.

In 2017, The Ohio State University entered a 50-year concession under which a joint venture between Axium Infrastructure and French energy giant Engie (Ohio State Energy Partners or OSEP) will assume responsibility for most utility services at The Ohio State University's main campus in Columbus. The agreement incorporates elements of a P3 transaction alongside features that are more common in a utility acquisition or brownfield transaction.

Dartmouth College has used private partnerships to help meet its campus sustainability plan. The university, which has already established a purchased power agreement with ReVision Energy to provide solar-powered electricity, issued a new request for qualifications in 2019 for a firm to develop and operate a thermal generation facility powered by a renewable fuel source to provide hot water on its campus.

Understanding the Participants and the Deals

Many private sector companies see significant opportunity in campus infrastructure partnerships. Deal participants may include:

Equity Investors: U.S. or International private equity funds, as well as strategic investors that are also operators or contractors who have long-term “skin-in-the-game” and ultimately responsible for financing and delivering the project.
Contractors: Firms that build the energy infrastructure on campuses on a fixed-price, date-certain basis.
Operators: Firms who provide long-term operations and maintenance of the project on a fixed-price basis with performance guarantees, many of whom might be the contractors who built it.

Universities have been seeking partners (a consortium comprised of multiple firms as outlined above) to design, build, finance, operate, and maintain the project for approximately 30 years or more. In exchange for the costs and risks incurred, the private participant will receive periodic payments from the university as either an “availability payment” or a more typical arrangement with “capacity charges” – a flat minimum payment for making the capacity available – and “demand charges” – a variable payment based on energy produced.

Making the Right Choice for Your Institution

Because these deals have a long life – 30 years or more in most cases – and may require extensive infrastructure work on campus, as well as maintenance, universities must choose their partners carefully. Here are some tips for forming an enduring and successful relationship:

Before starting the process of procuring a partner, the university should think about what it wants from the project and have clear output specifications, project goals, and objectives.
Consider risk sharing and mitigation. Not all risks are best undertaken by the private party, otherwise, the project may become unaffordable or set up for challenges.
Structure the transaction so that risks are allocated to the participant that is most capable of managing them.
The private partner should have the requisite experience, demonstrated commitment, and solid financial capacity.
Ensure the private partner is willing and incentivized to engage with students and stakeholders to advance energy efficiency and engineering educational opportunities.

Conclusion

P3 projects can bring down energy costs on campus, provide dependable and well-maintained infrastructure while also meeting ambitious sustainability and resiliency objectives. Most importantly, these partnerships allow universities to focus on their primary mission – improving education outcomes.

KeyBanc Capital Markets^®’ infrastructure and P3 practice supports clients with a broad suite of financial products and services across sectors. Our ability to offer bank debt, private placements and bond underwriting capabilities makes us product agnostic and allows Key to serve as an objective advisor supporting clients in achieving their financial goals and objectives.

To learn more, contact Managing Director, Head of Infrastructure Thomas Mulvihill or Director Stephen Hill.