Audit Report: DOE-OIG-18-07

November 6, 2017

National Nuclear Security Administration’s Energy Savings Performance Contracts

The National Nuclear Security Administration (NNSA) uses Energy Savings Performance Contracts (ESPCs) to help reduce the overall energy used at its Management and Operating Contractor run sites. An ESPC is a contract between a Federal Agency and an energy service company. Such a contract allows a Federal Agency to undertake energy-savings projects without first obligating capital funds or requesting special Congressional appropriations. These projects incorporate energy savings measures, which are upgrades to equipment and controls intended to save energy and associated costs. There are currently over $300 million worth of ESPCs managed by NNSA. Under ESPCs, energy service companies have guaranteed that the savings generated will cover the costs of those projects over the terms of the contracts (up to 25 years). These guarantees use projections of energy cost escalation from the start of the contract. The Federal Agency pays for the contract using the savings generated from the project and keeps all additional cost savings after the contract ends.

The Federal agency is responsible for oversight of installation of energy saving equipment, verification of its functionality and performance, and, where agreed upon in the contract, maintenance of the equipment. Failure to perform such oversight can reduce the effectiveness of the installed energy savings measures and result in significant losses to the government. Due to the importance of ensuring energy savings are being achieved, and an allegation that NNSA had modified ESPCs to accept increased costs and reduced energy savings, we conducted this audit to determine whether the NNSA is realizing guaranteed energy savings from its ESPCs.

Energy savings measures in ESPCs at the Los Alamos National Laboratory (Los Alamos) and Y-12 National Security Complex (Y-12) did not always achieve the full energy savings under the contracts. Specifically, we found that:

• NNSA entered into an ESPC at Los Alamos, which guaranteed savings of at least $33.4 million, which included the installation of energy savings lighting equipment that was not installed.
• NNSA paid an energy service company the full contracted amount even though the company reported that it failed to meet guaranteed savings that were to be achieved from upgrading thermostats at Los Alamos.
• Los Alamos used different thermostat settings than what the ESPC specified for several buildings, resulting in NNSA not achieving the full savings from the thermostat upgrades that were completed.
• A Y-12 ESPC, which guaranteed savings of at least $54 million, has not achieved the full savings from one of its energy savings measures that involved reconnecting a condensate return system in a facility.

In addition, we were tasked with validating an allegation that NNSA modified an ESPC for work at Los Alamos that increased the cost, extended the schedule, and reduced the scope of the contract.  These changes required a cost increase to the contract of nearly $5 million and an additional 2 years of contract term to pay back the additional cost.  If two years are added to a contract without additional cost savings being generated, the government will have to pay the energy service company costs. In this case, the government will pay an additional amount of approximately $5 million without the generation of additional energy savings.

The identified issues occurred because of inadequacies in oversight and follow-up, construction support, and project planning.  The issues we identified with the implementation of the energy savings measures installed under these ESPCs could lead to approximately $9 million in savings that may not be realized over the life of the respective ESPCs (which guarantee savings of approximately $87 million), if not corrected.  These issues are similar to those identified in our September 2009 report on Management of Energy Savings Performance Contract Delivery Orders at the Department of Energy (DOE/IG-0822, September 2009).  Management generally concurred with the report’s recommendations and indicated that corrective actions had been initiated or were planned to address the issues identified in the report.

Topic: Management & Administration