KAISER PERMANENTE
Kaiser Permanente’s virtual power purchase agreements allow the system to pay a set amount for renewable energy through four projects and reap savings. One of the projects is the Golden Hills Wind Farm in Altamont Pass, Calif.
As NYU Langone Health was planning construction on its combined heat and power building more than 10 years ago—the centerpiece of the academic medical center’s sustainability strategy—leaders considered enlisting a third-party funder to get the $100 million project off the ground.
It’s not uncommon outside of healthcare for utilities or investors to pay for an efficiency project in exchange for keeping the savings it generates. NYU Langone, however, had good credit, low cost to capital and, quite frankly, didn’t feel like splitting the rewards with an outside company looking to make a profit, said Paul Schwabacher, the not-for-profit system’s senior vice president of facilities management.
“We don’t need a guaranteed savings,” he said. “We think it’ll work.”
They were right, by the way. The building, completed in 2016, has slashed NYU Langone’s energy costs—$15 million in fiscal 2020, for example—by cutting the amount of electricity it imports from a utility. And because it uses waste from electricity production to make steam for heating and cooling, the system no longer buys steam from a utility.
“It’s so energy efficient,” Schwabacher said. “Because it recovers what’s typically lost—waste heat—it reduces energy consumption and therefore reduces cost.”
The climate crisis has forced cross-industry innovation and collaboration. Private companies and public entities have devised myriad ways to fund energy efficiency projects in commercial buildings, universities, multifamily residential buildings and hospitals. But they often involve doing things hospital chief financial officers aren’t comfortable with: raising the debt load—which could threaten their bond rating—assuming risk, and sharing profits with a third party.
Sources of emissions, waste in hospitals
Waste is a big part of the healthcare industry’s carbon footprint. There are a number of areas hospitals can make reductions.
Supplies: The healthcare supply chain is the biggest source of the industry’s emissions—71%, according to Health Care Without Harm. That includes the production, transportation and disposal of medical devices, hospital equipment, instruments, chemicals and pharmaceuticals. Several health systems said they’ve implemented sustainable purchasing policies with strict standards on suppliers’ sustainability practices. Some are buying more reusable gowns and other devices, and others are increasing their use of reprocessing, a practice of cleaning and reusing certain instruments.
Operating rooms: Commonly used gases for anesthesia like nitrous oxide and desflurane are potent greenhouse gases. HCWH estimates they contribute at least 0.6% of healthcare’s global climate impact. Some hospitals are adding capture systems that mitigate the impact. Others described replacing the gases with less harmful versions. HCWH noted that in addition to being the worst environmental offender among anesthetic gases, desflurane is also often the most expensive. Operating rooms also demand lots of energy because of high air exchange rates and air pressure requirements.
Heating and cooling: A hospital requires more energy to power, heat and cool than a typical building because of its higher air change rates and air pressure needs. With more than 6,000 hospitals in the U.S. spending north of $6 billion each year on energy, the impact adds up. The most common changes health systems have made are replacing their heating, ventilation and air conditioning with more efficient, automated systems. Many health systems have increased the share of renewables in their energy portfolios. HCWH recommends hospitals conduct regular energy audits.
Waste: HCWH estimates healthcare produces 5 million tons of waste annually, one quarter of which is plastic. Many health systems have established environmentally preferable purchasing policies and avoid toxic materials like mercury and polyvinyl chloride (PVC). Hospitals are also switching to reusable products wherever possible, including oral medications instead of injectables if they’re equally effective. They’re also implementing water conservation strategies like efficient faucets, measures to prevent plumbing leaks, digital imaging instead of film-based, and landscape that uses drought-resistant plants.Sources: Health Care Without Harm, Modern Healthcare reporting
A big part of the problem
Healthcare is one of the most carbon-intensive industries. The U.S. healthcare industry, compared with healthcare sectors in other countries, is far and away the world’s top emitter in both absolute and per capita terms, producing 57 times more emissions per person than India’s healthcare industry. The world’s biggest healthcare emitters—U.S., China and the European Union countries—make up 56% of the world’s total healthcare climate footprint, according to Health Care Without Harm, a nongovernmental organization focused on making the healthcare sector more sustainable.
Hospitals are massive energy users still powered largely by fossil fuels, with facilities that must be fully operational at all times. Health systems emit directly through their buildings and transportation and indirectly through the energy they buy from utilities. Their biggest emissions impact comes from the enormous amount of supplies they buy.
Despite all that, health systems have been comparatively insular when it comes to financing energy efficiency projects. Most fund projects internally, but that’s something only those with scale and financial wherewithal can do.
“We don’t see enough innovative financing in healthcare,” said Jessica Wolff, who directs Health Care Without Harm’s U.S. climate and health program. “It is a conservative, risk-averse industry in general.”
As of April 2021, just one health system—California giant Kaiser Permanente—was among the Environmental Protection Agency’s top 100 green power users under the agency’s Green Power Partnership. The EPA declined an interview, but a spokesperson said the agency is trying to change the healthcare industry’s priorities by highlighting the impact of pollution on human health.
“The efforts to decarbonize the healthcare industry and supply chain are still nascent,” the spokesperson wrote.
To be fair, there are factors that make healthcare delivery unique. Many hospitals, especially those that serve high numbers of Medicaid patients, operate on razor-thin margins. Not only that, their No. 1 priority is patient care, so sustainability will always take a back seat to safety and quality. And facility upgrades, especially with third-party crews, can be tricky given their highly regulated, 24-7 operations.
The roughly 300 safety-net hospitals that are members of America’s Essential Hospitals had an average operating margin of just 2.9% in 2019, according to the trade group. Hospital executives described limited resources and competing priorities as barriers toward energy efficiency when surveyed for a 2019 Essential Hospitals report.
“Some of the CEOs said, ‘When I have to make a decision about treating people and making sure they survive versus a new HVAC, clearly my focus is going to be on clinical care,’ ” said Elizabeth Frentzel, manager of sponsored projects for America’s Essential Hospitals. “Whereas other businesses aren’t in that position. I don’t think there’s a fair comparison.”
NYU LANGONE HEALTH
NYU Langone Health’s combined heat and power building, completed in 2016, has dramatically cut the health system’s energy costs. The system did not use outside funders to pay for construction.
Turning to external financing
Kaiser Permanente is exactly the kind of organization one would expect to be the darling of environmental groups and federal agencies for its sustainability work.
After all, it has scale: almost 40 hospitals and more than 12 million health plan members—over 30% of California’s population. And it has resources: More than $6 billion in profit and almost $90 billion in revenue in 2020. On top of that, its headquarters and most of its operations are in a state known for its progressive environmental policy.
Oakland-based Kaiser became the first U.S. health system to be declared “carbon neutral” in 2020, an international recognition bestowed by the global consulting firm Natural Capital Partners. Kaiser transitioned to 100% renewable electricity with the help of financing methods rarely used among healthcare providers.
The biggest piece of the green power portfolio is what’s called virtual power purchase agreements, explained Ramé Hemstreet, Kaiser’s vice president of operations for national facilities services and chief energy officer. Kaiser has 20-year agreements to pay a set amount for energy from four renewable energy projects—two wind and two solar—that produce a total of 335 megawatts of power, enough to power 85,000 homes each year.
Kaiser’s buy-in allows the projects to be financed and constructed. The projects’ investors receive investment tax credits that Kaiser, as a not-for-profit, can’t use. However, the credits are indirectly passed to Kaiser in the form of cheaper monthly rates. Then every month, the energy producers calculate Kaiser’s fixed payment against the actual value of the energy, resulting in either a check or a bill.
Hemstreet said it’s critical that the renewable energy projects feed into California’s grid, the same grid Kaiser buys electricity from.
“It’s a swap in a couple of ways,” he said. “We’re swapping green power for brown power and we are hedging the 20-year cost of procured electricity.”
Department of Energy’s recommended external funding sources for healthcare providers
Energy Savings Performance Contract (ESPC): Energy service company coordinates installation and maintenance of efficiency improvements in a provider’s facilities and gets paid from resulting energy savings. It’s better suited for large projects, $1 million and up, that are more complex with high upfront costs. Good for a provider that wants a third party to take on performance risk and provide savings guarantee and is comfortable with 10- to 20-year contract.
Leasing: Healthcare providers can use lease financing to directly lease energy equipment or pay for the costs of an ESPC. Can include capital leases or, for public organizations, tax-exempt leases. Most common types are on-balance-sheet capital leases and off-balance-sheet operating leases. At the end of the lease, customer may have an option to buy equipment, return equipment or extend the contract. Good for credit-worthy organizations willing to take on equipment performance risk.
Power purchase agreements: A third-party developer installs, owns and operates the energy system on a healthcare provider’s property, most commonly renewable energy. The healthcare provider then buys the energy output for a set amount. The healthcare provider gets a stable, often cheaper source of energy with no upfront cost. If the provider and renewable energy project aren’t located in same region, the agreement can be a virtual PPA. In that case, the provider and energy operator agree on a set rate, and the operator regularly sends the provider either a payment or a bill, depending on how the set rate compares with energy prices, which fluctuate based on factors like demand and the season.
Debt or loan: Providers can borrow money directly from banks or other lenders to pay for energy projects. The provider then arranges purchase, installation and management of equipment by outside contractor or in-house staff. Many equipment manufacturers, vendors, contractors and banks offer loan financing. Loan terms depend on provider’s creditworthiness and debt.
Commercial property-assessed clean energy (CPACE): Building owners borrow money for energy efficiency projects and repay through an assessment on their property tax bill. The financing arrangement stays with the property if it’s sold. Can be funded by private investors or government programs, but only available in states with enabling legislation and active programs.
Efficiency as a service: A healthcare provider implements energy and water efficiency projects with no upfront capital expenses. The energy company pays for construction, installation and maintenance. Once the project is operational, the healthcare provider pays based on energy savings or other performance metrics, resulting in lower expenses. An energy services agreement (ESA) is the most common type of arrangement.
Source: U.S. Department of Energy Better Buildings program
Slow going for green bonds
Another financing method that hasn’t gained much steam in healthcare is green bonds. That’s where the issuer borrows money from an investor specifically for sustainability-focused projects, with use requirements formalized in the contract.
When Boston Medical Center kicked off its campus redesign back in 2013, it harnessed a green bond. The pact held BMC to a host of efficiency metrics throughout the project.
Bob Biggio, BMC’s senior vice president of facilities and support services, said the most obvious benefit of the green bond was the lower financing rate. But what quickly became interesting was working with a different breed of socially conscious investors who actively monitored the status of the project.
“Some wanted to tour the campus,”he said. “They asked us to report back on progress.”
BMC ended up taking out two green bonds—one in 2015 and another in 2017—totaling just over $200 million.
Created through a 1996 merger, BMC at the time was still two large campuses only a block apart. The renovation consolidated operations into one expanded campus that reduced overall space by around 400,000 square feet and increased patient capacity. The more efficient space usage saves 11 million kilowatt hours of energy, about $8 million annually.
As part of that project, BMC also added a more efficient combined heat and power plant and connected multiple chilled water plants to create a modernized, efficient chilled water loop for cooling its campus. In one of its older buildings, BMC widened the duct work to decrease the fan horsepower needed to send air into the building, a project Biggio said cost about $2 million after energy efficiency incentives and saves about $1 million annually.
The Ohio State University, which includes the seven-hospital Ohio State Wexner Medical Center, a seven-hospital academic medical center, signed a 50-year lease agreement in 2017 that pioneered a new approach to energy management. The deal triggered the formation of a new company, Ohio State Energy Partners, which paid the university $1.1 billion to lease all of its energy generation and distribution infrastructure.
Ohio State Energy Partners now oversees the university’s power and gas distribution and has paid for a number of efficiency upgrades, such as adding insulation to steam piping and installing heat recovery chillers. The university pays for the upgrades through higher utility costs. However, the idea is that the campus’ overall consumption will be low enough to cover those higher costs, said, Brett Garrett, Ohio State’s director of energy and facilities operations and development.
The ultimate target in the contract is 25% lower energy consumption across Ohio State’s campus—including its hospitals—over 10 years. So far, the operation has reduced energy consumption by 10%, which Garrett said is “very good progress.”
The benefit of doing that was twofold, Garrett explained. Not only is the university’s capital freed up to pay for other priorities like ambulatory centers or new research buildings, it dramatically boosts the speed at which the project can proceed.
That’s just one piece of the organization’s overall strategy, a hallmark of which is its environmental procurement guidelines, said Aparna Dial, Ohio State’s senior director of sustainability and strategic services. Ohio State now has 23 different attributes it considers when deciding which suppliers to buy from, including whether they use harmful chemicals and whether materials are recyclable.
“There are things that are hidden,” Dial said. “People don’t take into account the climate change impacts of our purchasing practices.”
HEALTHPARTNERS
HealthPartners worked with its utility provider to ensure a cafeteria upgrade at its hospital in St. Louis Park, Minn., would be as energy efficient as possible. The most impactful changes involved heating, air conditioning, ventilation, water and equipment upgrades.
Going it alone, with help
When it comes to sustainability work, making friends with your utility provider is key. Just ask HealthPartners.
Every year, Minneapolis-based Xcel Energy, the dominant utility where the not-for-profit system operates in Minnesota, helps HealthPartners identify ways to lower its natural gas and electricity usage. Last year alone, the system installed projects that will save about $152,000 annually, said Dana Slade, the system’s director of sustainability solutions. On top of that, Xcel gives rebates for reduced energy demand.
“We have completed projects that we may not have otherwise done in the time frame we did them as a result of the incentives our utilities have for us,” Slade said. “Xcel’s incentives are some of the best in the country.”
That’s because Minnesota lawmakers over the years have set aggressive standards that require utilities to invest in energy savings and renewables. The state’s governor has even proposed requiring utilities use only carbon-free energy resources by 2040.
A newly updated cafeteria at a HealthPartners hospital in St. Louis Park, Minn., showcases a suite of efficiency features, some of which are hidden behind walls and in ceilings. The system is also running a “Greening the OR” project that includes installing “smart” building systems that conditions rooms less when they’re not in use, sending liquid waste to a sanitary sewer, buying more reusable supplies and reprocessing single-use devices.
Across the border in Wisconsin, Gundersen Health System in June marked the milestone of officially having recouped its $40 million in energy efficiency investments since 2008. Savings moving forward will be net positive, said Alan Eber, the not-for-profit system’s director of facility operations.
Hallmarks of Gundersen’s work include a tri-generation project that uses methane from a local landfill to produce electricity. Then it uses the byproduct of that to heat its facilities instead of natural gas, and then chilled water from that heat using what’s known as an absorption chiller. The system also has four windmills and solar panels on more than a dozen of its buildings, including hospitals, clinics and parking ramps.
Like HealthPartners, Gundersen is also focused on its ORs, which require more frequent air changes and higher air pressure than other parts of the hospital. When the rooms aren’t in use, the system turns down the air changers, lowering their energy use.
Gundersen has also opted to fund the work internally, albeit with help from state and federal grants. It was a risk and a significant investment, but Eber said it’s the right thing to do from a mission standpoint, especially as a healthcare provider. Now that the system has recouped its investments, it’s poised to start reaping savings.
“We’ve paid back that college debt, so to speak, and now we’re poised to accelerate on that initial investment,” Eber said.
Another system that’s chosen to go it alone is Providence, a system with 52 hospitals and more than 2 million health plan members.
The Renton, Wash.-based system has used what’s known as a green revolving fund—a method touted by the Energy Department—that involves funneling energy efficiency savings back to an account that funds future energy projects. Providence draws more than $25 billion in annual revenue, but it has operated on slim or negative operating margins in recent years.
Those internal funds can be managed in different ways—a centralized fund that hospitals apply for or a division of the facilities department, for example, said Maria Vargas, who directs the Energy Department’s Better Buildings initiative.
A big focus area for Providence is its purchased goods and services, which account for 40% of its carbon footprint, said Ali Santore, the system’s chief advocacy officer. Providence only uses vendors that meet its environmentally preferred purchasing policy, which includes transparency into their footprint.
The system has also cut anesthetic gas emissions by 80% by switching out the agents used, a change that also saves $500,000 annually.
In a system as big as Providence, sustainability can’t just be unplugging computers and turning off lights, Santore said. It involves emissions, recycling, procurement and waste reduction.
“Environmental sustainability is never a side hustle,” she said. “It’s something that is embedded in the ethos of our organization.”
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