Hospitals Partner with Energy Providers to Modernize Infrastructure

Hospitals, on average, consume three times more energy  than other commercial buildings, exacerbating the negative effects of rising utility costs. To meet the challenge of operating complex heating, cooling and specialized equipment around the clock, hard-pressed hospital administrators are turning to novel joint ventures with energy companies to operate no-fail critical infrastructure.

Across the U.S., electricity costs for commercial buildings rose by 20.5% from 2019 to 2024. Moreover, the demand for electricity is only expected to increase, ticking up 9% by 2028 and 18% by 2033, compared with 2024, consulting firm ICF predicts.

"Households and health systems alike are seeing rate increases year over year from their utility providers," says Matthew Tarpley, managing director and head of Fifth Third Bank’s real estate investment banking group. "Energy costs account for 2.5% to 4% of the operating expenses for a health system annually, and nonprofits operate in the low-single-digit margins already. With trepidation around reimbursement cuts from Washington, health care providers need to find innovative solutions to ensure operational stability and address necessary capital expenditures for aged infrastructure."

It’s not just the rising costs of energy that have health care systems concerned about their energy consumption — there are increasing calls for health care systems to examine their own hospital emissions and environmental impact, particularly state-affiliated and academic medical centers. The U.S. health care sector contributes 8.5% of the country’s greenhouse gas emissions, according to a study by the Commonwealth Fund.

While some hospitals have used their own resources to embrace sustainability projects that include solar, wind and biogas to reduce consumption, the costs can be prohibitive. "Replacing, retrofitting and upgrading critical energy infrastructure requires significant capital expenditure," says Tarpley. "Health systems are looking to find a solution to address large-ticket expenses in an optimal manner outside of traditional financing for upgrades and replacement. That’s where joint ventures are playing an important role."

Hospital systems are increasingly partnering with energy companies to improve and operate critical utility infrastructure. In return, the energy companies secure long-term operating and maintenance contracts, often for 20 to 30 years.

The health systems partner with an energy-as-a-service company to finance and maintain their energy-efficiency upgrades. Over the last decade, EaaS partnerships have become increasingly popular in other industries, such as universities, schools and municipal buildings. Unlike most joint ventures, in which the two partners share ownership and management decisions, these energy joint ventures are usually in the form of long-term contracts and control provisions to ensure 24/7/365 operations.

How joint ventures with EaaS Firms work

EaaS companies provide turnkey solutions that involve designing, financing, building and managing energy-efficiency projects and equipment. The EaaS provider guarantees its customer a minimum fixed reduction in utility consumption each year for the length of the contract, while supporting and maintaining the upgrades and equipment during that time. The customer, in turn, pays the EaaS for the energy service and may receive a portion of the shared savings in utility expenses based on consumption. "The energy company is incentivized to drive through even greater reductions in energy consumption, since any additional energy cost savings beyond the guaranteed rate are shared between the customer and the energy company," says Tarpley. The EaaS partner also assumes the risk that the energy-efficiency upgrade will deliver the expected energy cost savings.

The partnership can also potentially generate revenue for a health system if it produces excess energy that could be sold to third-party off-takers.

"By entering a partnership with an EaaS provider, a health system can outsource its energy management to specialists who have the advanced technologies, expertise and systems to reduce energy consumption and align with health system KPIs," says Tarpley. "That frees the health system to allocate capital to their mission of delivering best-in-class medical care."

Hospital energy consumption: a partnership case study

An example of how a hospital-energy joint venture can be a success is PIH Health, a not-for-profit health system based in Whittier, California.

The process of determining the value proposition of a partnership involved surveying 2.3 million square feet of space across three medical campuses and reviewing more than 1,000 utility bills to determine the best strategy for reducing energy costs. The EaaS partner needed to have expertise developing and installing critical energy infrastructure in the highly specialized setting of a hospital with its strict code and environmental regulations to ensure patient safety.

The agreements that comprise the joint venture, on which Fifth Third’s real estate investment banking team advised, included a fixed reduction in utility consumption for the next 30 years. The new equipment and the ongoing management and maintenance of the energy infrastructure are expected to reduce utility consumption and thus utility expenditures.

"Historically, health systems have been more cautious about adopting new business models until they see proven success in other industries," says Tarpley. "Based on the tremendous benefits other health systems have recently realized through partnerships with energy-as-a-service companies, more hospitals and health systems will want to investigate this strategy to sustainably reduce their energy consumption and costs."

With energy prices set to continue rising, health care providers are increasingly seeing the benefits of using joint ventures with EaaS firms to control costs and find innovative financing to modernize their aging infrastructure. Hospitals can outsource their energy needs to specialist firms with a track record of improving performance, avoiding large capital expenses and reducing their energy consumption while still meeting their important goals.

For more than 15 years, the real estate investment banking professionals at Fifth Third Corporate & Investment Banking have successfully served as advisors on real estate transactions in excess of $15 billion nationwide. For additional information, contact Matthew Tarpley, managing director, real estate investment banking, at Matthew.Tarpley@53.com.