What is EPC?

Energy performance contracting (EPC) is when an EPC provider is engaged to improve the energy efficiency of a facility, with the guaranteed energy savings paying for the capital investment required to implement improvements. Under a performance contract for energy saving, the EPC provider examines a facility, evaluates the level of energy savings that could be achieved, and then offers to implement the project and guarantee those savings over an agreed term.

The ESCO takes the technical risk and guarantees the savings. The ESCO is usually paid a 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.

The EU wide definition provided by the Energy Efficiency Directive (EED): ‘energy performance contracting’ means a contractual arrangement between the beneficiary and the provider of an energy efficiency improvement measure, verified and monitored during the whole term of the contract, where investments (work, supply or service) in that measure are paid for in relation to a contractually agreed level of energy efficiency improvement or other agreed energy performance criterion, such as financial savings;”.

What is EPC provider?

‘EPC provider’ means a natural or legal person who delivers energy services in the form of EPC in a final customer’s facility or premises”

Such definition respects the fact that EPC is only one type of energy services, and is in line with the definition of the energy services provider specified in the EED as follows:

‘energy service provider’ means a natural or legal person who delivers energy services or other energy efficiency improvement measures in a final customer’s facility or premises”, where the ‘energy service‘ is defined by the EED as follows: “the physical benefit, utility or good derived from a combination of energy with energy-efficient technology or with action, which may include the operations, maintenance and control necessary to deliver the service, which is delivered on the basis of a contract and in normal circumstances has proven to result in verifiable and measurable or estimable energy efficiency improvement or primary energy savings”.

EPC process

Is it good practice to have only one type of buildings (e.g. offices) in an EPC pool, or is it advisable to mix building types (offices, etc.)? If we combine more building types, we spread/reduce the risks but at the same time, the SPIN will need to engage more energy experts (one specialized in schools, one in offices, one in hospitals, etc.). This is costly and could finally increase the risk. What is recommended?

The answer to this question is pending on the reason for composing a pool. If the idea of bringing in more buildings and categories is part of a strategy to create a critical mass making an EPC project financially/structurally possible, it probably is a good idea. However, if the reason is “risk-management” by differentiation of buildings, it may not be a good strategy. Because if there are doubts on performance guarantees for example, it may be preferable to focus on one type of building and ensure that it is assessed appropriately and that the project is carried out perfectly.

Is it safe to assume that relatively new buildings with a complex HVAC-installation (e.g. heating and cooling with induction units, etc.) typically have a fairly large energy saving potential with low payback period; since significant energy saving can be achieved via ‘simply’ tuning the existing control systems?

This is usually true, as there is often a gap between the designing ideas, the final installation, and the actual commissioning; as well as between the initial designing ideas and the people allocated to the O&M work. To be successful in these optimisation projects, one must act as an “information coordinator” to actually be clear about what’s installed and how it’s intended to work. For newer buildings, the ideal method is to form a small taskforce which includes the company responsible for installing the controls and the building’s head of O&M.

Is it appropriate for an EPC project to combine newer offices with older offices, where replacement of windows, provision of roof insulation are required? As a result these energy saving measures will have a longer payback. Is this is a good approach?

Yes, that is a good approach. This is the very basic idea for an EPC project, namely that you build your project based on a “portfolio” of different buildings, with some generating large savings from small investments, and others in need of substantial investments/modernisation, but which as a single project would have difficulties in financing itself.

What is a SPIN?

SPIN comes from the definition “SME Partnerships for INnovative Energy Services”. It is a cluster of small and medium sized companies that offers jointly tailored energy efficiency services, in the model of Energy Performance Contracting (EPC).

Financial issues

An ESCO specialised in HVAC admitted that they wouldn’t be competitive anymore if they were to combine HVAC-measures with building envelope measures (i.e. roof insulation, windows replacement, etc.) although these building envelope measures seem pretty straightforward. Is this a common view, and is it justified?

There is space for both type of projects on the market, but if the ESCO business is to expand and be a serious component in national energy efficiency strategies, both HVAC and building envelope need to be addressed. However, having that said, projects also including building envelope must normally be calculated and handled with differently from a financial point of view. While HVAC measures often is looked at in more of a pay-off perspective, building envelope measures normally needs to be looked at in more of a depreciation perspective, and that needs to be agreed with the customer.

Are there specific assurances for EPCs contracts? If so, who offers them?

Using the Czech Republic as an illustrative example, during the procurement procedure the ESCO negotiates with banks the conditions of the contract and gets the best offer from a bank in the tender. When an ESCO wins the procurement procedure, the content of the contract from the tender is in the phase of finalisation. And banks which are already in the phase of negotiation on the tenders can provide assurance (promise) that the signature of the prospective contract will be acceptable and sufficient for the loan. After the signature of the contract, the assurance (promise) of the bank is confirmed to the ESCO and also to the customer. Following this, the installation of the energy efficient measures are financed.

When are the costs of an EPC paid?

They must only be paid after the signature of the contract between the SPIN and the customer.

Contractual issues

Where can I find examples of EPC contracts to see examples of EPC provisions?

A very comprehensive overview of model contracts is available on IEE website: http://ec.europa.eu/energy/intelligent/in-action/energy-performance-contracting/

Typically, which costs are paid by the ESCO and EPC facilitator?

This really depends on the type of EPC contract. Almost all solutions are feasible / possible. It depends on the agreement between all stakeholders, but in theory any financial design is possible.

However, it must be costs in relation to the technical preparation of the project, i.e. analyses of EPC suitability in the selected buildings, completion of technical data for next preparation of baseline and detailed description of the energy systems in selected buildings, etc. The volume of the costs, which the winner of the procurement procedure will pay, has to be included into the tendering documentation. And all competitors are obliged to include these costs as part of their quoted price, and to explain the exact calculation of these costs.

Marketing

Which are the most successful ways to get in contact with potential clients or project developers for countries with a developing EPC market?

Events (workshops, seminars, conferences, personal talks etc.) are the best way to meet and get in touch with relevant stakeholders. It is always useful to mention the projects you are currently involved with, even if they are still at a very early stage. Be pro-active, particularly if SMEs are expected to be present in the audience. Alternatively, international associations such as eu.ESCO are also important to discuss ideas and network.

The EPC Plus website is also another good marketing channel and allows the SMEs to keep informed about the project activities and reports.

 

Which communication instruments shall be used to communicate the value and quality of EPC to clients?

It is always important to refer to best practice projects. If none are available in the country, try to find similar projects (e.g. opera houses, hospitals, schools, residential buildings, etc.) from countries with a more mature EPC market. That way it is easier to explain in an effective way the success stories, achieved savings, project time-line, etc.