Commentary

Ohio State University Approves $1.165B Energy Management PPP

$1+ billion upfront payment will support university's endowment, academic mission.

Earlier this month, Ohio State University’s (OSU’s) Board of Trustees approved a long-term lease with a private consortium to operate the school’s power, heating and cooling systems over the next 50 years, ending a three-year process that initially saw 44 participants wanting the opportunity to power one the nation’s largest universities.

A consortium comprised of French firm ENGIE and the Montreal–based firm Axium will operate those systems, as well as manage the university’s energy purchases from outside providers.

The agreement provides a $1.015 billion upfront payment to the University that provides an immediate 25% increase to its endowment, plus another $150 million in academic collaboration support. In return, the university will pay the consortium annual fees for its operations and improvements in three categories:

  • A fixed fee that starts at $45 million per year, with 1.5% annual increases for inflation
  • An operating fee tied to the 3–year annual average of OSU’s operating and maintenance costs, which starts at $9.2 million
  • A variable fee, tied to any returns on capital investments made by the consortium

The fee structure was designed to resemble what the school pays currently for its power, heating and cooling, while also providing incentives for energy conservation.

As reported in Reason Foundation’s Annual Privatization Report 2016: State Government Privatization, OSU spends $100 million per year on energy and faces $250 million in needed energy efficiency projects to meet the school’s sustainability goals, prompting the pursuit of a public-private partnership to tap private financing for the upgrades, as well as reduce current power expenditures.

The energy deal follows OSU’s agreement in 2012 with QIC Global Infrastructure for a 50–year lease of the university’s parking system, which provided a $150 million upfront payment to the university.

Such asset leases allow universities greater control over their core missions—education and research—while allowing expertise from outside to help provide goods and services that falls outside of those core missions. As OSU senior energy adviser Scott Potter said earlier in the process, “We’re a university. We’re not a building company. At our pace, we can manage five, six seven buildings a year. We have 450 buildings. We’ll never catch up.”

Declining commitments from the state over the past few years have further hindered OSU’s finances, leading for a need to search for other sources for financial resources. Former OSU president Gordon Gee once quipped, “If you can’t give us money, give us freedom — the flexibility to manage the institution, be agile and to use creative resources.”

As universities all over the country face budget uncertainties and demands for greater amenities from faculty and students, Ohio State is demonstrating that non-core assets can be leveraged to help improve a university’s ability to deliver its core academic functions. While OSU is only the second major university to lease its energy systems to the private sector (the University of Oklahoma became the first in 2010), demands for more and cleaner energy over the coming years appear to make private sector expertise in managing energy of greater potential benefit.

The widespread industry interest in the OSU proposal further signals a private sector ready and willing to meet universities’ energy challenges in the coming decades. Letting the private sector manage energy for universities can enhance the ability of higher education institutions to focus on their core academic missions, and tying lease terms to standards of performance can ensure greater control over those outcomes most important to university officials.

More information on the OSU energy PPP is available here.