June 1, 1999

To:Works Committee

From:Commissioner, Works and Emergency Services

Subject:Energy Efficiency Office - Continuation of the Better Buildings Partnership and other Energy Efficiency and Building Renewal Initiatives

Purpose:

To report on the ongoing and planned program initiatives for the reduction of carbon dioxide and other emissions that are harmful to the environment.

Funding Sources, Financial Implications and Impact Statement:

(1)Initiatives outlined in this report do not impact on the approved 1999 Budget.

(2)The Loan Recourse Fund Agreement which was executed in May 1999 and is fully described in this report has the potential to become a new source of revenue for the City up to a maximum amount of $2 million.

Recommendations:

It is recommended that:

(1) City Council endorse the ongoing and planned program initiatives of the Energy Efficiency Office as outlined in this report, in support of the City's goals to significantly improve the local air quality and to reduce carbon dioxide emissions by 20% relative to 1990 levels by year 2005;

(2) the Commissioner of Works and Emergency Services develop in consultation with the appropriate industries, residential contractor organizations, community organizations and various stakeholder associations, a residential sector public outreach program to increase awareness and participation in initiatives to improve energy/water efficiency in single family and low-rise buildings.

(3) the Commissioner of Works and Emergency Services in consultation with the Director of Purchasing and Materials Management, and in co-operation with the Better Buildings Partnership partners, be authorized to identify by means of Request for Pre-Qualification, Request for Qualification and/or Request for Proposal processes where necessary, various community groups, energy management firms, consultants, contractors, manufacturers, retailers and other delivery and distribution channels, for the purpose of identifying these groups as qualified service delivery agents;

(4) the service delivery agents involvement in the Better Buildings Partnership continue to include their traditional role of providing sales support, marketing support, merchandising, product and equipment distribution, auditing, feasibility advice, financing, engineering design, implementation, project management, monitoring, verification and reporting, in support of the Better Buildings Partnership;

(5) the Commissioner of Works and Emergency Services be authorized to utilize funds deposited into the Better Buildings Partnership Loan Repayment Reserve Fund in support of the Better Buildings Partnership Loan Program and other program initiatives of the Energy Efficiency Office;

(6) all loan recoveries, estimated to be about $700,000 per year, received from public/non-profit sector building owners as a result of the repayment of loans previously made under the Better Buildings Partnership loan program be deposited into the Better Buildings Partnership Loan Repayment Reserve Fund, By-Law No. 1997-0568;

(7) all Budgeted Incentive Contributions received from Enbridge Consumers Gas in accordance with the terms of Retrofit Facilitation Agreement, be deposited into the Better Buildings Partnership Loan Repayment Reserve Fund, By-Law No. 1997-0568 upon dissolution of the Loan Recourse Fund;

(8) the administration of the Better Buildings Partnership loan program for the public and non-profit sectors be continued and be based on the criteria outlined in this report. Furthermore, that this loan program continue to provide fully secured, partially secured or unsecured loans and loan securitisation on a case by case basis as determined by the Chief Financial Officer and Treasurer in consultation with the Commissioner of Works and Emergency Services, for renewal projects in existing buildings and the replacement of energy inefficient, obsolete buildings;

(9) the City Solicitor be authorized to redraft legislation if necessary, pertaining to the foregoing recommendations, and where necessary prepare application(s) for special legislation in support of the various types of transactions to be carried out under the Better Buildings Partnership program;

(10) the Commissioner of Works and Emergency Services continue to consult with the Chief Financial Officer and Treasurer, the City Solicitor and the Director of Purchasing and Materials Management regarding the implementation of the recommendations set out above; and

(11) the appropriate City officials be authorized and directed to take the necessary action to give effect thereto.

Council Reference/Background/History:

Council of the former City of Toronto at its meeting of June 23 and 24, 1997 adopted Clause 18 embodied in Executive Committee Report No. 17 entitled, "Better Buildings Partnership: Criteria for Provision of Canada/Ontario Infrastructure Works Interest-Free Loans for Energy and Water Efficiency Retrofits in Non-Profit Buildings", and in so doing revised the existing lending criteria to permit the approval of partially secured and unsecured repayable loans to public sector and non-profit building owners.

At its meeting of July 14 and 15, 1997, the former Toronto City Council adopted Clause 13 of Executive Committee Report No. 18 entitled, "Better Buildings Partnership Program: Modifications to the Financing Framework Design of the $2 million Securitization Fund", and in so doing authorized City to enter into negotiations with Enbridge Consumers Gas and the Toronto Atmospheric Fund for the purposes of establishing a Loan Recourse Fund.

The former City of Toronto Council at its meeting of October 6 & 7, 1997 amended and adopted Clause 50 embodied in Executive Committee Report No. 23 entitled, "Better Buildings Partnership: Continuation of the Pilot Program into a Full-Scale Energy/Water Efficiency and Building Renewal Program Beyond 1998", and in so doing established the Better Buildings Partnership Loan Repayment Reserve Fund, By-Law No. 1997-0568

City Council at its meeting held on July 8, 1998 received for information, Clause 10, embodied in Report No.6 of the Works and Utilities Committee entitled "Strategic Action Plan to Reduce Carbon Dioxide Emissions in the New City of Toronto", which outlined the expansion of the former City's of Toronto Strategic Action Plan for the reduction of carbon dioxide emissions across the new City of Toronto.

City Council at its meeting of October 28, 29 and 30, 1998 adopted Clause 1 embodied in Report No.7 of the Striking Committee which recommended that sustainability be considered a primary option for the unifying and integrating concept for the Council's Strategic Planning Process and that the attainment of sustainability requires programs such as the Better Buildings Partnership which simultaneously promote economic, environmental and social equity goals.

Comments and/or Discussion and/or Justification:

The Chief Financial Officer and Treasurer, the City Solicitor, the Director of Purchasing and Materials Management and Better Buildings Partnership stakeholders have been consulted in the preparation of this report.

1.0 The Better Buildings Partnership

In July 1990, the former Toronto City Council established the Energy Efficiency Office with a mandate to develop and implement a comprehensive energy efficiency and conservation strategy for the city. One of the programs developed in support of this mandate was the Better Buildings Partnership.

The Better Buildings Partnership was initiated by the former City of Toronto's Energy and Water Savings Committee in response to the threat of global warming. It was launched as a "Green Economic Initiative" and was further developed jointly with public and private sector parties namely; Enbridge Consumers Gas, the Toronto Atmospheric Fund, Toronto Hydro, Ontario Hydro and in consultation with a broad range of stakeholders such as the International Council of Local Environmental Initiatives, financial institutions, building owners and managers, the environmental community, trade unions, community groups, equipment manufacturers, and the construction energy/water efficiency service delivery industries.

The Better Buildings Partnership was launched as a program on June 13, 1996. Most notable amongst 26 goals and objectives that were identified for the program, were targets to generate $30 million in spending by building owners, create 400 person years of employment and reduce carbon dioxide emissions by 40,000 tonnes annually. The Better Buildings Partnership has proved to be an innovative and successful public-private partnership that has to date resulted in the renewal of more than 150 industrial/commercial/institutional (ICI) and multi-residential buildings, surpassing the program's target of 100 buildings. Better Buildings Partnership participants have spent over $60 million, more than double the target of $30 million and created 3000 person-years of employment. The environmental impact has been equally impressive, surpassing the goal of 40,000 tonnes/year reduction in carbon dioxide and other harmful pollutants, to achieve a total reduction of 65,000 tonnes/year.

Momentum has been established to build on the initial success of the Better Buildings Partnership. It is being recommended that the Better Buildings Partnership, which is primarily geared to Institutional, commercial and industrial and multi-residential buildings, be complemented by a residential sector public outreach program developed by the Commissioner of Works and Emergency Services to increase awareness and participation in initiatives to improve energy/water efficiency in single family and low-rise buildings. Consultations should be pursued through the appropriate industries, residential contractor organizations, community organizations and various stakeholder associations in order to explore the nature and scope of any future role to be assumed by these respective groups.

2.0 The Role of Energy Management Firms

Surpassing the Better Buildings Partnership's initial targets was in large measure due to the professionalism and dedicated efforts of the three Energy Management Firms participating in the Better Buildings Partnership. It is recognized that expanding the Better Buildings Partnership across the entire amalgamated City addresses a potential market for building improvements and new construction projects which is beyond the scope and capabilities of only three Energy Management Firms carrying out work on Better Buildings Partnership projects. Request for Pre-Qualification, Request for Qualification and/or Request for Proposal processes may be required to identify various community groups, Energy Management Firms, consultants and contractors, manufacturers, retailers and other delivery and distribution channels as Better Buildings Partnership qualified agents. These agents will provide sales support, marketing, auditing, feasibility advice, financing, engineering design, implementation, project management, monitoring, verification, reporting and other program support services.

Therefore, it is being recommended that the Commissioner of Works and Emergency Services in consultation with the Director of Purchasing and Materials Management, and in co-operation with the Better Buildings Partnership partners, be authorized to identify by means of Request for Pre-Qualification, Request for Qualification and/or Request for Proposal processes where necessary, for the purpose of identifying the aforementioned groups as Better Buildings Partnership qualified service delivery agents. By increasing the number of Energy Management Firms involved in the program, a higher participation rate will be realized, resulting in a greater reduction in carbon dioxide emissions and a more successful program. Consultations will be held with Energy Management Firms as well as with the appropriate industries, organizations and various stakeholder associations in order to co-operatively determine the nature and scope of any future enhanced role to be assumed by these respective groups.

The implementation of the full-scale Better Buildings Partnership program should include where feasible, the involvement of Better Buildings Partnership utility partners, private, public/ non-profit, and corporate organizations, particularly with regard to development, co-investment, management, and administration to ensure a streamlined application, approvals and loan repayment process, effective market-oriented management of deposits, and to position the Better Buildings Partnership to make timely adjustments to ongoing changes in the marketplace.

3.0 Better Buildings Partnership Financial Mechanisms/Strategies

During 1997 and 1998, the Better Buildings Partnership assisted building owners and managers to determine the technical and financial options available for the renewal of their buildings. New lending criteria were developed to allow more retrofits to be completed in the public and non-profit sectors. The Better Buildings Partnership incorporated innovative financial strategies beyond traditional energy service financing to enhance the attractiveness of the program to building owners, the energy service community and the financial community and the financial services industry. It is of importance to note that the Better Buildings Partnership does not provide financial grants to building owners. Rather the Better Buildings Partnership program facilitated the provision of repayable interest-free loans for up to two-thirds of the retrofit project costs with the remaining one-third being secured through private sector financial institutions or the building owner's own resources such as reserve funds. In principle, the utility bill savings assisted building owners in the repayment of loans.

3.1 Canada-Ontario Infrastructure Works Program Interest-free Loans to

Public/Non-profit Sector Building Owners

The Better Buildings Partnership was allocated $12 million under Phase 1 of the Canada Ontario Infrastructure Works Program. This program utilized a tripartite funding arrangement whereby the federal, provincial and municipal governments each contributed a one third share, in this case $ 4 million each. The City's share was provided by the Energy Management Firms as private sector financing. This arrangement allowed the Better Buildings Partnership to use $8 million in Canada Ontario Infrastructure Works program funding i.e. the federal and provincial shares, in conjunction with $4 million in private sector financing, to provide loans to public sector and non-profit building owners to implement energy and water efficiency measures. It is important to note that the Better Buildings Partnership program was allocated up to $1.9 million of the $12 million as administrative or sunk costs thereby allowing $10.1 million for investing in energy efficiency projects. The Better Buildings Partnership was able to decrease its administrative costs to approximately $1.4 million resulting in loans to energy efficiency projects totalling $10.6 million. Two-thirds of this amount or $7.1 million is being repaid to the City in scheduled monthly intervals over an average ten year term as noted in the following table.

As at April 30, 1999, $812,000 of the approximately $7.1 million in loans has been repaid resulting in an outstanding balance of $6.25 million.

3.2 Better Buildings Partnership Loan Recourse Fund

While the overall market response exceeded the goals of the Better Buildings Partnership pilot program in both the participation rate and the technical penetration, the market response of the small-medium Institutional, commercial and industrial & Multi-residential buildings sector proved to be less than initially anticipated. Discussions with Energy Management Firms and financial institutions continue to reveal significant barriers to the successful implementation of energy efficiency projects in the small-medium institutional, commercial and industrial sector. The three most significant barriers pertain to:

(a) the lack of availability of financing;

(b) the lack of awareness of the benefits of energy efficiency; and,

(c) the high transaction cost incurred by Energy Management Firms in the sales/marketing process.

In recognition of these barriers, Enbridge Consumers Gas, the Toronto Atmospheric Fund and the City have entered into an agreement and have established a Loan Recourse Fund. This Loan Recourse Fund provides the opportunity for more readily accessible loans to building owners and managers in need of financing. Specifically, the Loan Recourse Fund provides security for loans made by Enbridge Consumers Gas through its on-bill financing and is supported by its on-bill collecting program. Financing is provided through Enbridge Consumers Gas or through designated third party sources for qualified projects under the Loan Recourse Fund.

Under terms of the agreement, Enbridge Consumers Gas or a designated third party would provide loans primarily to building owners in the small/medium Institutional, commercial and industrial and multi-residential sector. The agreement also permits loans for the retrofit of large buildings where necessary. The scope, terms and conditions of the existing financing programs have been modified and adapted as new criteria for loans through Enbridge Consumers Gas or designated third party sources to match the market needs of building owners. This should result in increased access to financing and faster credit approval. Building owners are offered an opportunity to benefit through Enbridge Consumers Gas in-depth understanding of the value of implementing energy and water efficiency retrofits, the one-stop-shopping convenience provided by the company, and the establishment of an enhanced long term relationship with customers.

The agreement to establish this fund drafted jointly by the City, Enbridge Consumers Gas and The Toronto Atmospheric Fund was fully executed in May 1999.

3.2.1 Budgeted Incentive Contributions

The agreement with Enbridge Consumers Gas includes a provision for receipt by the City of budgeted incentive contributions as approved by the Ontario Energy Board based on projected gas savings of qualified buildings participating in the Better Buildings Partnership. A budgeted incentive contribution or avoided cost is the cost in dollars to the utility for not having to produce and transmit a unit of energy (in this case, a cubic metre of gas) as a result of implementing energy saving measures within a given year. Enbridge Consumers Gas has estimated that an amount of $739,000 has been contributed by them into the Loan Recourse Fund to date. These payments by Enbridge to the Loan Recourse Fund are based on the magnitude of energy efficiency improvements achieved in the end used of natural gas. Contributions are calculated at the rate of $0.125 per m³ of gas efficiency.

All Better Buildings Partnership eligible projects regardless of their source of financing, including public, non-profit and private sector buildings would be able to accrue budgeted incentive contributions into the Fund based on their natural gas savings; however only projects financed by Enbridge Consumers Gas would be eligible to access the Loan Recourse Fund in the event of loan default.

The continuation of the Loan Recourse Fund will be re-evaluated after the first two years of operation. In the event that the Loan Recourse Fund is dissolved, all Budgeted incentive contributions up to a maximum of $2 million received from Enbridge Consumers Gas in accordance with the terms of the agreement, will be transferred to the City for deposit into the Better Buildings Partnership Loan Repayment Reserve Fund.

3.2.2 Operational Framework of the Loan Recourse Fund

The key points in the operation of the Loan Recourse Fund are summarized below.

(a) The Toronto Atmospheric Fund issues a letter of direction in the amount of $2 million

(this amount was previously allocated to the Better Buildings Partnership in the form of segregated funds in a Reserve Account) to initially capitalize the Loan Recourse Fund.

(b) Enbridge Consumers Gas adds to the Loan Recourse Fund by contributing budgeted incentive contributions for each Better Buildings Partnership project that is fully commissioned and that is recorded as a qualified program participant, and would be based on the projected natural gas savings that resulted from Better Buildings Partnership projects. To date $739,000 has been the amount expressed by Enbridge Consumers Gas as their contribution.

(c) Enbridge Consumers Gas or a designated third party agency provides financing for qualified projects under the Loan Recourse Fund. It is important to note that the City is not providing financing to any projects under the Loan Recourse Fund agreement. The Loan Recourse Fund consisting of: the Budgeted incentive contributions; interest earned on the Budgeted incentive contributions; as well as the Toronto Atmospheric Fund funds on deposit ($2 million) would be accessible only in the event of loan default.

(d) Given Enbridge Consumers Gas' existing administrative capacity, the day to day administration and management of the Loan Recourse Fund as well as the financing, credit approval and collection procedures jointly established by the three parties are being carried out by Enbridge Consumers Gas staff. Enbridge Consumers Gas reviews and approves/ rejects all applications for financing under their existing financing programs. The City has the right to review each potential application for technical merit, but the credit approval decision resides with Enbridge Consumers Gas and/or a designated third party financial agency.

(e) The International Council of Local Environmental Initiatives has done preliminary financial analysis based on empirical data from similar demand side management programs which indicated a maximum loan default rate of 5%. Their analysis has projected that the Loan Recourse Fund balance at the end of 2007 could grow to over $10 million net of loan defaults and annual interest payments to the Toronto Atmospheric Fund on its $2 million investment. This assumes the Better Buildings Partnership can maintain an annual retrofit project volume of $40 million from 1999 to 2007.

3.3 Better Buildings Partnership Loan Repayment Reserve Fund

As stated previously, interest-free loans totalling approximately $7.1 million dollars have been approved for the implementation of retrofits in public and non-profit sector buildings. The term of these interest-free loans average approximately ten years with repayment to the City scheduled at monthly intervals. Furthermore, up to $2 million in budgeted incentive contributions could be transferred to the City upon dissolution of the Loan Recourse Fund. Therefore, it is recommended that the Better Buildings Partnership Loan Repayment Reserve Fund be used for the purpose of receiving all loan repayment funds collected from public/non-profit building owners that had previously received loans under the Better Buildings Partnership Loan Program, estimated to be approximately $700,000 per year. Furthermore, all Budgeted Incentive Contributions received from Enbridge Consumers Gas in accordance with the terms of Retrofit Facilitation Agreement, will be deposited into the Better Buildings Partnership Loan Repayment Reserve Fund, By-Law No. 1997-0568 upon dissolution of the Loan Recourse Fund

Given the economic and environmental success of the Better Buildings Partnership to date- $60 million in projects, 3000 person years of employment and 60,000 tonnes of carbon dioxide emissions- it is also recommended that the Commissioner of Works and Emergency Services be authorized to utilize funds deposited into the Better Buildings Partnership Loan Repayment Reserve Fund in support of the Better Buildings Partnership Loan Program and other program initiatives of the Energy Efficiency Office.

Furthermore, it is imperative that the revised security requirements of the Better Buildings Partnership loan program for public sector/non-profit sectors be continued for the following reasons.

(a) The operating environment of many non-profit organizations makes the securing of a letter of credit problematic. They are generally not in a position to offer the City 100% security for Better Buildings Partnership loans. In general, non-profit organizations become substantially encumbered in order to finance the acquisition of real property.

(b) The participation rate of non-profit buildings in the Better Buildings Partnership will be significantly reduced. This adverse impact would occur as only a small number of financially secure non-profit buildings would be able to meet the City's requirements, while a large number of smaller buildings in need of renewal would be excluded from participation in the Better Buildings Partnership. A lower participation rate would make it very difficult for the City to realize its 20% carbon dioxide emission reduction goal

Therefore it is recommended that the administration of the Better Buildings Partnership loan program for the public and non-profit sectors be continued and be based on the criteria outlined in this report. This loan program will continue to provide fully secured, partially secured or unsecured loans and loan securitisation on a case by case basis as determined by the Chief Financial Officer and Treasurer in consultation with the Commissioner of Works and Emergency Services, in order to facilitate the implementation of energy efficiency and building renewal projects in existing buildings and the replacement of energy inefficient, obsolete buildings in these sectors

3.3.1 Better Buildings Partnership Loan Program Criteria

Council of the former City of Toronto approved revised criteria to facilitate interest-free loans to the public and non-profit building sectors which modified standard security requirements to allow partially secured and unsecured repayable loans to public sector and non-profit building owners. By maintaining the revised Better Buildings Partnership loan criteria and extending loans to these building owners, the City would be lending against the projected total cash flow of the entire non-profit organization as well as the taking of a security interest on the real property and income. Naturally, this approach would take into account that the energy cost savings resulting from the retrofit, would reduce the annual operating cost and strengthen the overall cash flow of the non-profit organization.

The basic requirements for approving interest-free loans is based on the building owner's financial capability, including the taking of a security interest on the real property and income in addition to the following considerations:

(a) use of portions of the non-profit organizations reserve funds as a down payment to ensure that the project has a positive cash flow;

(b) assignment of revenue streams until all debt obligations are satisfied taking into consideration energy and operational cost savings;

(c) perfected security interest in the real property as well as existing personal property; and,

(d) the realizable salvage value of installed equipment and systems.

Other standard practices and procedures are to be continued to ensure a reasonable expectation of repayment of funds from public and non-profit organizations participating in the Better Buildings Partnership.

3.3.2 The Roles of the Chief Financial Officer and City Treasurer and the Commissioner of Works and Emergency Services

We have consulted with the Chief Financial Officer and City Treasurer to determine the potential delineation of roles and responsibilities as follows:

(a)The Chief Financial Officer and City Treasurer would review and approve the credit worthiness of each loan application and would also recognize Council's directive for the granting of fully secured, partially secured and unsecured loans to public sector and non-profit building owners.

(b)The Commissioner of Works and Emergency Services would review the technical, economic and environmental impact potential of each project. The Commissioner would make recommendations with respect to the acceptance/standing of each loan based on the contribution of the project to the City's carbon dioxide reduction goal notwithstanding the credit worthiness of the applicant and in recognition of Council's directive for the granting of fully secured, partially secured and unsecured loans to public sector and non-profit building owners.

Conclusions:

The Better Buildings Partnership has made a significant impact across the City of Toronto by:

(a)communicating the benefits of energy efficiency and building renewal retrofits;

(b)establishing highly effective public/private partnerships; and

(c)implementing environmental improvements to reduce carbon dioxide and other harmful emissions that adversely affects our citizens health and the environment.

The program has demonstrated to the community, ways and means by which energy/operating costs savings can be used to underwrite renewal projects to improve both the asset value of buildings, the environmental conditions and at the same time contribute to reductions in harmful emissions. Many of the Better Buildings Partnership participants/building owners stated that had it not been for the Better Buildings Partnership and the benefits realized through participation, they would not have contemplated a building renewal project.

At this time the City is well on its way to fully entrenching a major economic and environmental and sustainability instrument that contributes to; job creation, economic renewal, training and development of the workforce, recycling of the City's building stock, enhanced corporate image both locally and globally, competitiveness, and most importantly, a major contribution to the reduction of carbon dioxide emissions that contribute to climate change as well as other harmful emissions that cause urban smog.

If the recommendations presented in this report are adopted by Council, the Better Buildings Partnership can continue to implement a high level of retrofit activity in the New City of Toronto, consistent with the goals, objectives and benefits foreseen by Council. The Commissioner of Works and Emergency Services will continue to consult with the Chief Financial Officer and Treasurer, the City Solicitor and the Director of Purchasing and Materials Management regarding the implementation of the recommendations set out above.

Contact Name and Telephone Number:

John Warren, Director, Environmental Services

Technical Services Division

Tel: (416) 397-4625

Fax: (416) 392-627

Tom Denes, P. Eng.Barry H. Gutteridge

Executive DirectorCommissioner

Technical Services DivisionWorks and Emergency Services