What is an Energy Performance Contract (EPC)?
Energy Performance Contracting is a smart, innovative, affordable and increasingly common form of contracting, designed to accelerate investment and overcome barriers in the delivery of cost-effective energy conservation measures (ECMs) for all types of existing buildings, industrial processes and other facilities. Any large building or group of buildings is an ideal candidate for performance contracting, including council, state and federal sites, schools, hospitals, commercial office buildings, retail centres and light industrial facilities.
An EPC is a partnership between an energy service company (“the ESCO”) and normally a government agency (“the customer”) however any organisation can engage in such an initiative. EPCs allow the customer to accomplish energy savings projects without up-front capital costs and with reduced financial risk. The energy savings must be guaranteed by the ESCO so the ESCO bears all financial risk for any shortfall in energy savings over the contract period.
Why an EPC?
Facility owners and operators know that energy costs are significant, and that these costs could be reduced by investing in proven and cost-effective energy-saving technologies, systems and procedures. Yet they face a formidable number of barriers that can deter capital investments in energy efficiency upgrades or retrofits. Some lack technical knowledge, others lack adequate finances, or are unable to raise sufficient finances; while others have reservations about the ability of energy-saving equipment to perform as promised. Energy Performance Contracting allows facility owners and managers to upgrade ageing and inefficient assets while recovering capital required for the upgrade directly from the energy savings guaranteed by the ESCO.
Typical contract terms are between four and 10 years – a relatively long period, but necessary to be able to structure the contract so the guaranteed savings cover the capital repayment and all ongoing costs to ensure a positive cash flow to the customer. Under the Victorian Government Department of Treasury’s Efficient Government Buildings EPC Program, ESCOs are obligated to deliver project works with a simple payback of exactly 7.0 years (refer to http://www.dtf.vic.gov.au/About/Projects/Efficient-Government-Buildings).
What does the ESCO do?
The ESCO is engaged to improve the energy efficiency of a facility, with the guaranteed energy savings paying for the capital investment required to implement improvements over the term of the contract. The ESCO will recommend and implement cost-effective building and equipment upgrades and guarantee that the resulting savings will cover all project costs.
- examines and conducts a comprehensive energy audit for the facility
- identifies improvements to save energy
- evaluates and quantifies the level of energy savings that could be achieved
- offers to implement the project and guarantee those savings
- designs and constructs a project that meets the customer’s needs
- if required arranges the necessary financing
- guarantees that the improvements will generate energy cost savings sufficient to pay for the project over the term of the contract.
Summary of ESCO roles
- Project Management from design phase to the installation of energy monitoring equipment
- Identifies and evaluates energy-saving opportunities, quantifies utility cost savings and provides equipment performance guarantees
- Performs preliminary energy audits of facilities and conducts an economic feasibility study called a Detailed Facility Study
- Establishes baseline energy use for specific equipment, systems or the facility as a whole
- Develops engineering designs and specifications as part of project design in consultation with the customer
- Presents a net positive cash flow for the project for the period of the EPC
- Undertakes the turnkey supply, installation and commissioning of equipment
- Trains management and operations staff
- Operates equipment in conjunction with operations staff
- Provides maintenance services in conjunction with the customer for the life of the contract
- Arranges for financing if required
- Guarantees that savings will cover all project costs
- Seeks out product and system technical performance and contractor proficiency and reliability to deliver contractual guarantees and minimise their financial risk.
- Designs and conducts a Measurement and Verification Plan to determine the actual savings
How is an EPC different from other contracting?
The provision of ESCO services from a single company is the key difference between performance contracting and more conventional project implementation and project funding. Different contractors may use different technologies and often provide divergent solutions. An EPC creates incentives for the ESCO to provide quality products and services over the lifetime of a project.
The methodology of an EPC differs from traditional contracting that is invariably price-driven; performance contracting is results-driven and ensures quality of performance for the entire project life.
- The ESCO takes the technical risk and guarantees the energy savings
- the customer may not be required to make an up-front capital investment (if the contract is structured as an operating lease or if the ESCO provides direct financing)
- if the customer is required to borrow funds, a loan agreement can be structured such that the guaranteed savings stream will exceed the loan repayment obligations, producing a positive cash flow and results in immediate and real benefits from a project
- the payments to the ESCO are contingent, to varying degrees, upon the level of energy savings achieved; and
- since the outcomes are guaranteed by the ESCO, technical and financial risks are shifted from the customer to the ESCO.
Measurement and Verification (M&V) Plan
Once project works and fully commissioned, the ESCO, or a third party auditor, continues to measure or monitor energy use and costs of the project in accordance with a M&V Plan. The ESCO compares actual energy costs with the baseline cost to determine total savings and assesses and accounts for any variations in parameters that impact on energy savings. The standard methodology for a M&V Plan is the International Performance M&V Protocol (refer to www.evo-world.org). Without an adequate M&V Plan, there is no solid and defendable basis for the determination of annual energy savings from the implemented of ECMs. CarbonetiX has trained and certified M&V specialists with experience in the drafting of M&V plans.
After the contract ends, all additional cost savings accrue to the customer. The ESCO is usually paid a project management fee out of these savings (if there are no savings, there is no payment) and is usually obligated to repay savings shortfalls over the life of the contract. At the end of the specific contract period the full benefits of the cost savings revert to the customer.