7. Show me the money: Funding Decarbonization
- - How other organizations have made financial moves necessary to decarbonize healthcare
- - Learn strategies to fund specific energy projects
- - Learn other organizations experience with alternative financing
- - Explore the role finance played in achieving net-zero emissions for a health care system
Eric Berzon (Kaiser)
What is your organization’s strategy for funding decarbonization projects?
(Berzon) What differentiates decarbonization projects from other projects, is that the economics of renewable and decarb projects are hinged on federal and state tax credits, which are written to inhibit tax-exempt organizations from benefiting from those credits.
To make a renewable or decarb project work, you need to get your hands on those tax credits.
Kaiser’s strategy is to use finance as a tool to structure the engagement when tax credits are involved. If no tax credits, it falls into the normal capital planning process.
Kaiser considers PPAs or capital planning projects to design them as cost reduction opportunities.
How do you think of simple payback in finance and what is your most helpful metrics to use when assessing decarbonization projects?
(Berzon) Simple payback ignores risk and a lot of other factors. Kaiser prefers to use IRR and NPV as well as assess risk on the project. Also, tracking energy prices and their effect on profit margins.
Jeff Thompson (Gunderson Lutheran)
What is your organization’s strategy to get to energy independence and why you framed the strategy that way?
(Thompson) Did not talk about climate change or decarbonization, back in 2007.
Assess the priorities of the board and determined the quality of healthcare, community, and the bottom line.
Framed it to the board with the amount of pollution into the air, the air that children with asthma, heart patients, and COPD patients breathe, putting mercury into the water, all from our energy use. If I could decrease pollution, lower the cost of care, and improve the local economy.
Start with conservation and go to the local generation of power onsite.
Showed a 60% return on investment because the organization had not done any conservation before.
Able to drop GHG by 95% by changing sourcing of power.
How would you advise someone starting on a decarbonization journey today?
(Thompson) We focused on pollution. Find out what your leaders’ priorities are. Could be pollution, energy, waste, or pharmaceuticals going to waste. Could be a moral imperative to be responsible. Or could be the ability to make money.
Jason Scheidler (Medxcel)
Tell us about your organization and its structure.
(Scheidler) Medxcel is the largest sole provider of fully integrated healthcare facilities management in the US. Take aspects of facility mgmt, energy mgmt, planning, design, construction, real estate, compliance, and life safety, and put under one umbrella. A lot of synergies in decarbonization of healthcare facilities as well.
What's your org’s strategy for decarbonization projects?
(Scheidler) Finding motivations and determining social determinants of health. The clients’ impact cannot be ignored, waste streams, water, environmental factors, and socioeconomic factors. Determine how to get organizations and structures there to be sustainable long-term, long after the current leadership is in place.
How do you recommend going about making a business case for decarb projects?
(Scheidler) Get a lot of small wins to build up to a larger strategy. Old aging facilities that exist and there is opportunity for MEP assessments across campus to identify initiatives and projects with high positive ROIs, which are some of the highest ROIs that healthcare will see in the short term, 20-40% returns. Work in good low hanging fruit with projects with lower ROIs to blend in and tackle larger issues.
Is there anything different about your story since you aren't embedded in the hospital organization?
(Scheidler) We bring every discipline to the table and can bring all SME’s to align on common purpose and execute on large projects.
Geoff Glass (Providence St. Joseph’s Health) (via Austin Barolin, Mazzetti)
What is your organization’s strategy for decarbonization projects?
Providence is committed to achieving carbon neutrality (and going negative) by the end of the decade. They have an All-in approach… and the commitment is cascading through their organization. Their strategy has a number of key ideas to ensure they achieve the goals they set. They are actively working on a GHG inventory for their entire portfolio which includes looking at Scope 1, 2,3 and also includes their investments. They are even looking at the embodied carbon that goes into new construction projects. They have various ongoing studies for projects in the master planning stages to assess future carbon emissions. In some sense, they include an internal price of carbon on major project decisions. They have included performance metrics for their executives on carbon emissions reductions where they are tasked with 3-5% reductions per year and are now part of the individual performance goals which includes quarterly reports on how they are doing. Lastly, they use a green revolving fund as a mechanism to fund future environmental projects.
After BO rooms
One of the challenges we heard was the idea that energy and decarbonization projects need to compete with capital that could be invested in Wall Street. How did your organization overcome that barrier?
(Thompson) Savings built up and invested. Pull out of savings, get enough of the board to pull money out to invest in part of a program that is continually framed to decrease pollution, improve health, and decrease cost of care.
(Berzon) The not-for-profit healthcare model sits on cash so we should collectively normalize using that money for our communities.
You said that energy projects perform better than anything else that people invest in, but that’s not what most people think. What is the journey to discover that energy projects are really great investments?
(Scheidler) It starts with data and analytics to prove your point and measure your returns. Have your MEP specialist go through the building with an energy expert and finance expert to find where those energy projects lie. Start with what’s noticeable – LED lighting, water conservation, IOT devices. Bundle enough of those together that you start to notice a difference. Organizations should capture those little projects themselves without the help of ESCOs and then use those returns to fund the other bigger projects.
(Berzon) What Jason described is why ESCOs come calling to market their businesses. They typically go for the easy projects that organizations could do themselves instead of helping do the harder ones.
How do you use the concept of a revolving fund as part of your strategy in order to fund energy projects?
(Scheidler) We identify the projects for them, capture the savings centrally, and give them the ability to reinvest their savings from those projects out. This way, the funds are rediverted internally to capture all the “low-hanging fruit” savings in one place where it accumulates and can be used to do bigger projects.
(Thompson) Many of our savings went back into operations and departments so it didn’t look as good as one round larger number. These solutions/opportunities won’t be the same for each organization. You have to figure out what things fit you and your organization best instead of copying what others are doing.
If you’re in an area of the country where energy is cheap, how can you overcome the high upfront costs and long payback for energy use projects? What are the right tools to use to overcome those barriers?
(Thompson) You have to go back to the fundamentals – decarbonization is about more than just energy. When you start factoring in the damage that carbon causes, cheap energy may not be so cheap anymore. You need to start building resiliency and go after the things that are the biggest impact right now.
How do you think about community benefit in terms of dollars but also in terms of the ethos of wanting to be a positive impact, and how do we leverage that in order to help decarbonization efforts?
(Thompson) Organize it as part of the fabric of the organization, not as a project. He pointed out at a board meeting; finances are just a tool to achieve a higher mission. Fold decarbonization and environmental equity and sustainability into the organization and the finances are just a tool.
(Berzon) We want to do this work because it has value in itself, but what is reported as direct community benefit on tax returns is an important factor for not-for-profit organizations. It would be both more fair and better incentive to fund these projects if organizations could get credit in their direct community benefit reporting for incremental expenses that improve our community environments
Issue of Taxing Carbon- How are hospital level financial leaders thinking about external prices on carbon and internal prices on carbon or on instruments to help your organizations internalize the fact that carbon has a cost?
(Scheidler) Internal carbon tax, especially on construction projects is a hot topic right because there are just some projects where the bass pro forma is different to have the sustainability component to it.
You know it's a very punitive measure, and it's a way to get a strategy that's not aligned through an organization across the hurdle, and if it needs to go that way, so be it. It's a very non-value-added task if the strategic alignment at the top of an organization is to do the right thing and look at the portfolio approach. Internal carbon tax does cause a bunch of the accounting and paper money to move around; it doesn't actually change the impact of the business.
And so, once you get over that perception that says we no longer need to have a paper presentation and you start getting the strategy alignment and wrap everything around the portfolio for social determinants of health, community benefit like Eric talked about, the alignment long term prospects, and then the total cost of ownership of the building and not just the actual construction costs… now you're adding value added conversations.
(Thompson) Not something that most organizations needed—another layer of internal measurement, but perhaps useful to get things started. We should be a principle-based org, not rules-based. Staff responsible for improvement; same thing with this. (Though Silicon Valley, big pharma, in Europe, etc. doing the internal carbon tax) Could be used as strategic jump-start approach.) No bad tools, it’s how people use it.
What are the risks of NOT addressing the carbon emissions now?
(Scheidler) Every day you delay, don’t address it, every construction project you do in the meantime may need to be revisited. A cost associated with waiting. If this is truly a social determinant of health and we're moving more to risk-based population contracts, then, this is actually a cost saving tool and helping the execution of those risk-based contracts and population health, rather than a fee for service model.
(Thompson) Issues are gaining more and more strength in society as a whole and more accountability is being called upon. Data now shows what impact healthcare is having now. Stack up as multiple risks, see what resonates and run with that.
(Berzon) When a project comes forward, no shortage of people that will point out the risk of doing something. What ifs… legislation, technology, tariffs, etc. We are very inarticulate in describing the risk of not doing anything.
What would you tell someone who has no idea where to start or what to do?
(Thompson) It's not 1940, it's 2021. We all have allies within the organization who are passionate about it and will help understand where the power is who makes decisions, and as a group, where can we start small, make gains, broaden our tent to expand the circle that this is important work consistent with the mission and compatible that includes financing and other.
(Berzon) Most important element is passion, organization in the future will be judged on how they responded to this. It's now a business imperative. Develop relationships with financial person.
(Scheidler) Most unlikely supporters are the people you would talk to the least. Green teams in the facilities. Getting masses behind the participation bills, who knows the data and has access to it to build small cases. Get the group together and develop the ideas.