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Launceston General Hospital: Saving a million dollars in operational costs through Performance Based Contracting

The Launceston General Hospital (LGH) is a 300 bed public hospital providing acute care facilities for residents of Launceston and the Northern Region of Tasmania, Australia. The LGH entered into an Energy Performance Based Contract (PBC) that enabled it to upgrade its engineering services - while still providing consistent quality of care within the Hospital. This arrangement generated significant annual energy savings and substantially reduced LHG's maximum demand for power services.

Background

The LGH, like most hospitals, had much of its working capital tied up in operations, including a substantial portion in ongoing maintenance costs. There was no structured energy management process in place at the LGH when Honeywell approached it with the new concept of an Energy Management Performance Contract. Honeywell had previously initiated Energy Management Performance Contracts in the United States, but the LGH was Honeywell's first energy management performance contract in Australia.

Honeywell was able to provide the opportunity for the LGH to upgrade plant and equipment, with the added advantage that the LGH did not have to use it's own funds to do the upgrade work. The Hospital decided to enter into the Performance Based Contract (PBC) because it recognised the benefits of this opportunity. Honeywell had an excisting maintenance contract at the Hospital, so there was already an established working relationship between the two parties. Once the process was proven in Stage 1, Honeywell was able to identify more saving opportunities and proposed further actions.

The Process

The building services at the LGH were from an era during which energy costs were relatively inexpensive. When these systems were designed and installed there was no real focus on saving energy. For example, some of the air handling systems did not include return air so the heating loads in winter were unnecessarily high. While the LGH monitored energy consumption, they had not focussed on the potential savings and other benefits that could be achieved. The efficiency performance of the previous systems had therefore been considered acceptable within the prevailing knowledge boundaries and budgetary constraints. It wasn't until Honeywell approached the LGH providing a clear measure of how and where the savings could be made, and how these changes could be implemented within LGH budget constraints, that Honeywell's services were employed. The prime motivator for the LGH was financial with the additional incentive of reducing energy use.

Performance Based Contracts - An Important Eco-Efficiency Tool

PBCs are a useful technique and particularly helpful towards implementing Cleaner Production initiatives where the availability of capital or expertise is otherwise limiting. Under PBCs, a third party adopts the risk for managing a discrete part of an organisation's operations and gains financial rewards for increasing the efficiency of this aspect of the business. Depending on the terms of the agreement, the savings made by the organisation are used to pay the consultant and to purchase equipment or upgrade services. Ongoing savings eventually fully benefit the principal organisation. PBCs can be used for organisations' inputs and outputs, and have been successfully applied in areas such as transport, energy, waste and chemical use. More information about performance based contracts.

Cleaner Production Initiative

The PBC between the LGH and Honeywell was based on guaranteed savings. If the agreed savings were not met, Honeywell would pay the difference. The contract provided enough savings to enable the LGH to upgrade boilers and chillers; utilise a dual energy supply for extra savings in energy, and shift the timing of loading for energy and heating.

The PBC started with an audit and the implementation of programs targeting almost all of the LGH's energy producing equipment, followed by an evaluation of the operating costs. The detailed 2-month audit scrutinised all resources including water, electricity, heating, cooling and lighting. Upgrades were conducted after the initial audit undertaken in 1995. Programs were established and implemented in three stages.

Honeywell invested the money to fund Stage 1 upfront and were paid back based on the results of any savings made. If the LGH didn't make savings then Honeywell would pay the difference based on the energy of the prior year being used as the benchmark. Under the agreement these activities were fully self-funding by Stage 2 of the programme. The contract was conducted concurrently with a maintenance contract that involved the installation and upgrade of the Hospital's control system. This new system could manage plant and equipment through smart control and software - thereby providing the LGH with a state-of-the-art management system.

The concurrent maintenance contract was essential in assisting the LGH get the best maintenance and energy tariffs to fully capitalise on the upgrades. With 'unit of demand' tariffs being based on the highest 15 minutes of use for that year and used for the next 12 months on tariff rate it was essential to maintain energy efficiency and manage peak loads. At the end of 2003 the plant upgrade will be paid out and Honeywell will have no more claim on the savings.

The guaranteed savings were estimated from the initial energy audit. Outputs were then constantly measured to convert savings into dollars, and ongoing monitoring highlighted further savings throughout the stages. The LGH will make comparison savings of approximately $1.1 million per annum and have achieved upgrade of its plant.

Stage 1

As part of the first stage, the excisting building control system was upgraded to reduce energy usage. Through the initial audit, major inefficiencies were identified and Honeywell set a goal of $387,890 savings over 21 months as part of the contract and guaranteed to cover the shortfall if these savings were not achieved.

The first step was to install a graphic central head-end for 24 hour monitoring of air-conditioning, security and fire systems. Upgrades were also made to the central plant equipment control systems, including the provision of economy cycles to air handling units enabling the use of outside air when it was efficient to do so. This was also conducted at Stage 2 and 3. Honeywell refined the chiller and boiler controls so that much of the radiant heat and electric ducting was put onto load shedding and duty cycles. Greater control allowed the operators to level out the peak energy use, which had not been achievable before.

Stage 2

As a consequence of the success of Stage 1, the Hospital entered into Stage 2, which included the conversion of three 20,000-litre capacity hot water storage tanks. This enabled LGH to heat water overnight when the electrical load is low - thus reducing the maximum peak demand during the day. Stage 2 also added economy cycles to the air-handling units enabling the use of outside air for cooling. Lighting controls were also introduced, and following these changes the guaranteed savings after Stage 2 were $300,000 per annum.

Stage 3

Stage 3 involved major upgrades of plant and equipment including eight new air-cooled chillers with a total investment of $6.5 million. With negotiations for better electrical tariffs failing, Honeywell introduced four new 1.1 MW gas-fired boilers to enable the Hospital to operate with an alternative energy source, and a more favourable gas price was negotiated. The original electrical boilers were also maintained as a back up if the gas supply failed. The transition from gas to electricity takes approximately half an hour.

The final phase also saw the upgrade of the Hospital's security system, and lighting such that all 36W fluorescent lights were refitted with electronic ballasts.

Advantages

All the upgrades and stages under the PBC have paid for themselves. Honeywell was able to highlight major inefficiencies and set a goal of $387,890 savings in the first 21 months as part of Stage 1. Honeywell guaranteed to cover the shortfall if the savings were not achieved. As a result of the Stage 1 upgrade the Hospital achieved savings of $220,000 in year one, well in excess of what Honeywell had guaranteed. In addition, opportunities for extra savings were also identified during Stage 1.

The ongoing savings allowed the funding for Stage 2 to be established. After Stage 2 was completed the savings increased to $300,000 per annum. Stage 3 cost a total of $6.5 million, and with it annual savings of approximately $1.1 million were realised. Stage 3 was completed in November 1998.

The three-stage programme has been characterised as a win-win from the start. Savings have been made at each stage of the project - with the savings being used to fund other parts of the programme. Importantly, the programs were also undertaken without disruption to the Hospital's core activities.

Stage 3 advantages included:

From the third stage onward, the PBC has generated total annual energy savings of approximately $1.1 million, with maximum demand reduced from 4.6 MW to 2.9 MW in just over 4 years of staged upgrades. Following the implementation of stage 3 the Hospital's average daily electrical power consumption plummeted from 56,000 kWh per day to 44,000 kWh per day.

Benefits of the Performance Based Contract

The activities and associated benefits of the PBC are summarised in the table below:

Time Period Activities
Cumulative Investment
Guaranteed vs. Actual Savings
Honeywell
LGH
Honeywell Guaranteed Cumulative Savings
Actual Cumulative Savings
$
kW Hours
$
kW Hours
1994 - 1995 Stage 1
Auditing and implementation of programs targeted at the LGH energy producing equipment:
Upgrade excisting building controls
Installation of Graphic Central head end 24 hour monitoring of air conditioning, security, and fire systems
Upgrade to Central Plant equipment and control systems
$368,760
0
$368,760
5,200,000
$407,000
5,400,000
1996 - 1997 Stage 2
Utilised savings in Stage 1 and included:
Installation of hot water storage
Expansion of economy cycle capabilities
Ongoing maintenance programme
$547,970
0
$547,970
7,800,000
$860,000
12,200,000
1998 - 2002 Stage 3
Extensive technical evaluation processes:
New electric chillers, gas fired boilers, upgrades in security, lighting and laundry systems
$6,500,000
0
$6,400,000
32,000,000
$7,400,000
37,000,000
2002+ Ongoing Savings
Based on continuation of savings from Stage 1-3
 
 
$1.1M per annum
 
$1.1M per annum
7GWh per annum

Stage 1 of the programme rolled into stage 2, and the success of all 3 stages cumulated to pay the overall bill for the upgrades. There are also no Greenhouse Gas Emissions reductions as electricity in Tasmania is provided from Hydro Power.

Incentives

The central incentive for the programme was to upgrade ageing plant and equipment so that the reliability of the engineering services at the LGH was enhanced. Also integral to the programme was the targeted reduction in ongoing maintenance and operating costs. These added operating benefits and savings acted as major incentives. The provision of a back-up energy source for the largest component of the LGH energy use was an important driver, as was the spin off of lower energy costs and the capacity to utilise the best environmental energy source available at any given time. The LGH can either operate on electricity that is generated from the new wind farm recently commissioned by Hydro Tasmania, or alternatively, can use natural gas that now reaches Tasmania via the pipeline installed by Duke Energy under Bass Strait.

Barriers

The LGH were unaware of the savings that could be made prior to being approached by Honeywell with the proposal for a PBC. Any barriers to the PBC were eliminated by risk minimisation through guaranteed savings to the LGH by Honeywell. If there was a shortfall in the savings Honeywell guaranteed payment of the difference. Honeywell was comfortable with the guarantee due to an extensive audit process that highlighted potential savings at the LGH and provided clear gains for both the LGH and Honeywell in the process.

Essentially this was a win-win situation, and once the benefits to the LGH were clearly demonstrated by Honeywell, there were no significant barriers to the implementation of this project, which also had the advantage of being fully supported by the State Government. The ultimate success of this PBC was also largely attributable to the cooperation achieved between Honeywell and LGH staff, which fully participated in and supported the programme.

Further Developments

The energy management programme is constantly monitored and evaluated. Quarterly reports are produced to demonstrate that the programme continues to achieve its goals, and these also serve to highlight any fluctuations or changes. Honeywell personnel and the LGH staff hold regular meetings to review the performance of the contract, and new opportunities are continually examined. While three stages of this project have already been implemented, in the future it is a common goal that a fourth stage will become a reality.

Contacts

Mr Wayne Moles
Technical Services Manager
Launceston General Hospital
PO Box 1963
Launceston TASMANIA 7250
Telephone: 03 63 48 7431
Fax: 03 63 48 7430
Email: wayne.moles@dhhs.tas.gov.au Website: http://www.lgh.dhhs.tas.gov.au/

Mr David Jobson
Operations Manager: Tasmania & New Zealand
Honeywell Ltd
22 Main Road
Derwent Park TASMANIA 7009
Telephone: 03 6271 0888
Fax: 03 6271 0889
Email: david.jobson@honeywell.com Website: www.honeywell.com

Implementation Date: 1996 to 2002
Case developed by Centre of Excellence in Cleaner Production (Curtin University of Technology)
Last modified: June 2003