Extraordinary Payback

it started with a $400,000 oil leak, and ended with an Extraordinary Payback

When a worker struck oil in a basement tunnel, it was not time to yell, “Eureka!” It was time to say, “Get out your checkbook, it’s going to be an expensive ride!”

Indeed. When all was said and done, the discovery of an oil leak at a 290-unit co-op in Bayside, Queens, would leave the property $400,000 poorer – but would also make the residents more energy savvy. In fact, the board managed to turn a negative into a positive, becoming one of the few properties in the city to install a residential cogeneration system – and saving a pile of money in the process.

This Story of Yours

The story begins on a spring day in 2008, when a worker discovered oil in a basement tunnel of the Americana, the Queens co-op. Heating oil was leaking from the property’s 25,000-gallon underground storage tank, seeping into the soil and threatening to spill into neighboring Little Neck Bay. The New York Department of Environmental Conservation (DEC) began sampling the soil, digging trenches into the courtyard, and tearing up parts of the concrete parking lot to see how far the oil had spread.

Cleaning up the mess was costly, but if the oil had contaminated the bay, the co-op would have been hit with crippling fines. “Everybody was upset when it happened. We’re right near the water,” says board president Flora Langer, who has lived in the building for 40 years.

But the board wasn’t just thinking about fines. The directors were environmentally and energy conscious. Before they discovered the leak, for instance, they had begun thinking about updating their energy system. The property, a 16-story tower and a block of townhouses, was built in 1968. At the time of the leak, it was still using its original chillers, boilers, and oil tank. The system relied on No. 6 heating oil, which is now being phased out. And the boilers, two lumbering monstrosities, were inefficient and a sign of a system that was outmoded.

But it was the crisis in the back of the Americana – a giant hole that kept getting larger as the DEC demanded they dig up more contaminated soil – that gave the community the sense of urgency. It needed to move ahead with all deliberate speed.

The on-site property manager, Carl Caridi, an account executive at Metro Management, suggested that the co-op consider installing a natural-gas-fueled cogeneration plant, also known as combined heat and power (CHP). It would generate electricity for the building and create heat that would be used to power the air-conditioning system, heat the domestic water, and heat the building in the winter. The price tag would have been hefty for any community, but this middle-class community would be especially hard hit by a bill of $3.6 million.

Getting the Money

Luckily, since the project would reduce energy usage by 20 percent, it qualified for New York State Energy Research and Development Authority (NYSERDA) financing, as well as some money from federal programs. That would bring down the final price tag.

Cogeneration reduces a building’s energy usage in three ways: (1) the property generates its own electricity; (2) in the process, it captures and reuses the excess heat; and (3) it burns natural gas, which is cheaper than heating oil and is cleaner. “It really sounded great because we were making our own energy and we didn’t have to use oil anymore,” says Langer.

But when oil was leaking out of their tank, the situation looked dire, and residents couldn’t be certain that the savings would materialize. What they did know was that few residential buildings in the city had a cogeneration plant and that installing one in their building would cost millions.

Of Con Ed’s 3.3 million customers, only 125 use a cogeneration plant, and many of them are commercial properties, according to Con Ed. They are generally found in institutions like hospitals, nursing homes, and schools. Among residential buildings, they are almost unheard of, as condo and co-op boards tend to shy away from such a complicated capital project.

“One of the challenges for large residential buildings is educating co-op boards and property managers so they can get over that fear factor,” says Margaret Jolly, a spokeswoman for Con Ed. “It is a fairly complex undertaking. You don’t just go to Lowe’s and buy one and plug it in.”

With few residential examples to look to for guidance, the Americana was going it alone. Several board members toured Fairway Market in Brooklyn to visit that property’s cogeneration plant.

To install the system, the Americana would need to bring in a natural gas line; replace its aging boilers with seven smaller ones; buy three cogeneration units; and substitute two new chillers for the old ones. “Residents were concerned, but we had to do it. We had no choice,” says board treasurer Ira Kaye.

Meeting Time

The board called a meeting of all the shareholders. William Cristofaro, president of Energy Concepts, the engineering firm that designed the Americana plant, made a presentation. The turnout was large as residents expressed doubts that the system would deliver the savings it promised and worried that the co-op was taking on too much debt.

There were other financial considerations in play. The building was in the midst of two capital projects: a $1.2 million balcony renovation and a $1.7 million roof replacement. These were financed by a $2 million line of credit and a $1.5 million second mortgage.

But when the board members crunched the numbers and looked at the savings they could ultimately get from generating their own electricity and reusing heat, they reached a consensus to go ahead. Residents were reassured at the shareholder meeting.

“It was something new, but everybody was eager to have it done because we didn’t see another way. It was better than anything else,” says Langer. Kaye recalls the mood of the building: “We said: ‘Just do it already!’”

To finance the cogeneration project, the co-op refinanced its underlying mortgage in 2010, paying off the line of credit and the second mortgage. They took out an additional $2.5 million, bringing the mortgage up to $12 million. But with a 5.6 percent interest rate, the new mortgage was 1 percentage point lower than the previous one.

The building qualified for a $1.45 million NYSERDA-backed loan with a 1 percent interest rate. Once the plant was up and running, the co-op began receiving a $500,000 rebate from NYSERDA, which is paid out in installments. The co-op also took advantage of two federal programs. Each shareholder was able to write off a portion of the boilers and air conditioners on his or her tax returns, up to $1,500. And the U.S. Treasury sent the building a $100,000 check, which the Americana received last January.

Even with the financing in place, navigating permitting, inspection, and approvals took time. DEP and Con Ed both inspected the new pipes. Con Ed had to run a gas line to the head of the service so the building could convert to natural gas.

For the Americana, the approval and inspection process was grueling. “You accomplish a lot more if you have someone’s e-mail address,” says Caridi of all the back and forth. In its comprehensive energy plan, the city pointed to the slow approval process, lack of access to natural gas lines, and lack of coordination between various players as barriers to cogeneration. Even once the system was up and running, it took nearly a year to get billed properly. Because the building electricity demands were suddenly 85 percent lower, Con Ed rejected the property’s meter readings, assuming something was wrong. “Billing can be confusing at first, although it shouldn’t be,” says Jolly of Con Ed. “But since we’ve only done this 125 times so far, there’s some room for improvement.”

Brave New World

The new system is certainly remarkable. Step into the 1,680-square-foot mechanical room and the first thing you notice is the hum. It’s a loud, constant noise that tells the story of the electricity being generated here. The noise is so loud that a few nearby apartments have been affected. According to Langer, engineers are working to resolve the problem. The hum is also audible from the back courtyard.

The seven boilers – rectangular units about the size of refrigerators – stand against a sidewall. They are a far cry from the original boilers, which “looked like Civil War submarines,” according to Caridi. The cogeneration units sit in the center of the room. They have double doors that open up to show the engines working inside. A network of white, silver, and yellow pipes wind out of the machines.

At any time, day or night, the building’s super, Peter Munoz, or the property manager, Metro Management’s Carlo Caridi, can log into a computer program or check an iPhone app to see what is happening in this room. The program shows the system at work, with every pipe color-coded and the machines spinning and pulsating. If anything goes awry, the staff is alerted instantly. About 90 percent of issues are resolved before anyone notices the water isn’t hot or the air conditioning isn’t cold. Caridi says: “It’s the heartbeat of the mechanical room. It’s the pulse.”

In the end, the story that started with a $400,000 oil leak ended with an extraordinary payoff. The co-op, which has central air conditioning, now produces 85 percent of its electricity, relying on Con Edison for the rest. The monthly electric bill has dropped from $60,000 to $15,000. In 2011, the first year the system was operating, the board put $340,000 into its reserves. This year, the board is putting away $20,000 a month. Never, in all the years since the building went co-op in 1983, has the board been able to save at such a fast clip. Maintenance hasn’t gone up in two years. Residents have also noticed that the building is cooler in the summer and there are fewer heating and cooling problems overall.

Time to yell, “Eureka!”