Energy Performance Contract (EPC)

DEFINITION: A low-risk method of financing and delivering energy efficiency improvements and renewable projects for businesses that lack the funds, technical experience and man power needed for such projects. The EPC is formed between the client and an external organisation (ESCO), with the upgrades funded through cost reductions.

 

More detail:

What is an Energy Performance Contract (EPC)?

An EPC is a low-risk method of financing and delivering energy efficiency improvements and renewable projects for businesses that lack the funds, technical experience and man power needed for such projects.

How does an EPC work?

The EPC is formed between the client and an external organisation (ESCO). The energy upgrades are funded through cost reductions. The income from the cost savings, or the renewable energy produced, is used to repay the costs of the project, including the costs of the investment. An EPC guarantees a return equal to the cost of investment for the client with the percentage of future savings accrued by the client dependent on the type of EPC in place.

As responsibility for covering the cost of the initial investment falls to the ESCO through performance of installed generation or efficiency schemes, EPCs are seen as fairly low-risk.

What are the benefits of an EPC?

  • Financial Benefits
  • Guaranteed energy savings
  • Reduction in backlog maintenance levels, maintenance costs and other running costs
  • Reduction in CRC Scheme costs
  • Creating the opportunity for renewable energy generation and income from the Feed In-Tariff and Renewable Heat Incentive schemes
  • Reducing the impact of future energy price rises through significantly reducing energy use

 

Wider benefits

Delivering CO2 reductions and helping to achieve corporate CO2 reduction targets

Improving the building environment and comfort for occupants through upgraded and more efficient heating and cooling systems. An important benefit, as a growing body of evidence suggests, is that improved building environments can improve productivity and reduce absenteeism

Creating a safer environment through improved lighting, reduced equipment failures and better building management systems to help identify issues

Investment in buildings and green technologies to help generate local jobs and improve local skills

What are the performance targets of EPCs?

Performance targets can be based on CO2 savings, energy savings and generation of a certain kWh level of renewable energy per annum. The targets can vary depending on the type of EPC.

What are the different types of EPC available?

Shared savings

Under a shared savings contract the customer takes over some of the performance risk of the installed measure, so will not be responsible for the initial investment risk. The ESCO therefore assumes both performance and credit risks, securing the loan against its share of anticipated energy cost savings.

The cost savings under a shared savings scheme are split for a pre-determined length of time in accordance with a pre-arranged percentage: there is no 'standard' split as this depends on the cost of the project, the length of the contract and the risks taken by the ESCO and the consumer.

Guaranteed savings

Under a guaranteed savings contract the ESCO guarantees a certain level of energy savings thereby removing an element of performance risk for the customer, but will not finance the project. Financing for such schemes are generally provided by banks or financing agencies.

If the savings are not enough to cover the initial investment then the ESCO has to cover the difference. If savings exceed the guaranteed level, then the customer pays an agreed upon percentage of the savings to the ESCO. Usually the contract also contains a proviso that the guarantee is only good, i.e. the value of the energy saved will be enough to meet the customer debt obligation, provided that the price of energy does not go below a stipulated floor price.

Chauffage

A common contract in Europe is the 'chauffage' contract, where an ESCO takes over complete responsibility for the provision to the client of an agreed set of energy services and provides in effect an extreme form of energy management outsourcing. The ESCO takes on the responsibility for providing the agreed level of energy service for lower than the current bill or for providing improved level of service for the same bill. The more efficiently and cheaply it can do this, the greater its earnings.

Chauffage contracts are typically very long (20-30 years) and the ESCO provides all the associated maintenance and operation during the contract.

A BOOT model may involve an ESCO designing, building, financing, owning and operating the equipment for a defined period of time and then transferring this ownership across to the client.

Related items

Starbucks and McDonald’s are aiming to develop a global solution that stops plastic-lined paper coffee cups being sent to landfill

McDonald's joins Starbucks to fund new coffee cup innovations

McDonald's has committed £3.8m ($5m) to help research, develop and commercialise recyclable and compostable coffee cups, joining Starbucks as a founding member of the NextGen Cup Consortium and Challenge.

The funding is helping to drive climate action initiatives in developing nations

UK’s climate fund to support developing nations reaches £4bn

The UK has mobilised more than £4bn in public and private funding towards tackling climate-related challenges in developing countries since 2011, reducing or avoiding more than 10 million tonnes of greenhouse gas (GHG) emissions as a result, according to new Government figures.

City Hall will help public-sector bodies and SMEs install energy efficiency technologies through the dedicated fund

London Mayor launches £500m energy efficiency fund for businesses

The Mayor of London, Sadiq Khan, has today (July 9) launched a £500m fund to help SMEs, universities and public-sector organisations across the capital install energy efficiency measures in their buildings as part of his bid for London to become a "zero-carbon" city by 2050.

A number of eye-catching and potentially transformational innovations aimed at tackling dirty air have emerged

CityTrees and electric bin lorries: the best green innovations for Clean Air Day

To mark Clean Air Day (21 June), edie has rounded up some of the ground-breaking innovations being explored by companies across the globe as we look to tackle the dangers of air pollution.

C&A Foundation has provided funding for the innovative projects which it believes could bridge the gap in the implementation of circular business models

C&A Foundation commits more than £1m to circular fashion innovations

C&A Foundation, the corporate foundation affiliated with global fashion retailer C&A, will invest more than £1m (€1.29m) in a string of initiatives aimed at accelerating the industry's transition to a circular economy.

FareShare will be undertaking a UK volunteer recruitment drive, aiming to increase the number of volunteers to more than 1,000

£5m Lottery grant to help FareShare divert 25,000 tonnes of food from landfill annually

Food redistribution charity FareShare claims that the £5m of National Lottery funding it has been awarded this week will enable it to almost double the amount of food it redistributes and diverts from landfill.

Areas of opportunity that could be addressed through the fund, include energy storage, heat decarbonisation and the stabilisation of smart grids

Government launches £102m fund for clean energy research

The UK Government has launched a £102.5m investment programme in a bid to tackle the challenges the UK faces as the renewables revolution continues, suggesting that the nation's energy sector could soon be poised to take clean power sources mainstream.

Almost half of the gas industry’s hopes for new power stations for Europe are slated for the UK

'From coal to clean' - UK does not need to turn to gas, says WWF

The UK has no need to build new large gas-fired power stations to replace the coal plants that the government has pledged to switch off by 2025, the World Wide Fund for Nature has argued.

Lloyds is the latest in a string of High Street banks to increase its investments in green business projects in recent months

Lloyds launches £2bn Clean Growth Finance scheme

Lloyds Banking Group has announced it will be providing a further £2bn of funding for sustainable investments, increasing its total UK green finance commitments to £3bn.

More than £227m was invested in 400 new independent renewable energy projects across Great Britain in 2017

Subsidy cuts slow growth of independent renewables, report finds

Investment in new, independent renewable energy projects in the UK totalled £227m in 2017, down by almost 20% from 2016 figures, according to a new report published this week.

A delay to the government’s £400m electric charging plan could hamper efforts to reduce pollution from cars

Ministers' £400m plan for electric car charging infrastructure delayed

A £400m government plan to build electric car charging points looks likely to be significantly delayed, in a blow to car manufacturers and efforts to tackle air pollution in UK cities.

WEBINAR: How to uncover savings and improve your operational performance through energy insight

Our expert panel will discuss how to use advanced energy insights to help you to uncover savings and improve your operational performance.

The announcements for part of a £3.5bn plan to improve air quality and reduce harmful emissions

UK Government launches £220m Clean Air Fund

The UK Government has unveiled a £220m fund to improve air quality across the most polluted areas in the country, alongside a £40m support scheme for local authorities to combat air pollution.

NatWest purchases 100% of its energy from renewable sources

NatWest delivers £3.5bn low-carbon lending in three years

Banking giant NatWest has pledged to deliver of £10bn lending to UK renewable energy and energy efficiency projects by 2020, having provided £3.5bn over the past three years.

Paris, Frankfurt and New York were noted as centres most likely to grow across the rankings over the next two to three years

London ranked as global leader in green finance movement

London has been ranked as the best financial hub in the world for green financing offerings, with a new report predicting that the market for green offers will grow "substantially in size and quality".

Gore Street Capital expects that energy storage will play a prominent role in balancing frequency management services that can stabilise grids and add flexibility to the electricity market

Energy storage investment fund to raise £100m on London Stock Exchange

The world's first listed investment fund targeting energy storage developers and projects is attempting to raise £100m after floating on the London Stock Exchange.

Investments into projects will be repaid and recycled into additional initiatives across the Greater Manchester region

Greater Manchester launches £15m infrastructure renewables fund

The Greater Manchester Combined Authority has created a new £15m loan fund for property developers and infrastructure providers to increase uptake of renewable energy use on development projects.

The four-year EV-elocity scheme has already attracted £7m funding from Innovate UK

Honda to play central role in V2G demonstrator project

Car giant Honda has teamed up with other firms, local bodies and academic institutions for a new project that aims to demonstrate the business case for Vehicle-to-Grid (V2G) technologies across the UK.

The 30% cashback offer can generate up to £10,000 for SMEs, while the energy efficiency improvements could create savings of up to £8,000 on average each year

Scottish SMEs offered 'cashback' loan for energy-efficiency projects

Small businesses in Scotland have been encouraged to take advantage of a new "cashback" scheme that could enable them to cut annual energy usage by a quarter and save up to £10,000 in the process.

UK law firm TLT advised Santander that the energy storage market is “ripe for debt funding”

Santander invests £28.5m in UK battery storage firm

Banking firm Santander has become one of the first senior debt lenders to provide financial support to the energy storage sector, after backing an independent UK battery developer with a £28.5m funding investment.

Research and development costs of the alliance members have reached more than €8.5bn in studies and projects

World's largest automotive alliance launches $1bn fund for future driving innovations

The world's largest automotive alliance has today (10 January), announced a new corporate venture capital fund to provide up to $1bn in investment for innovative electrification, autonomous and connectivity projects.

Taking the lead on energy: 10 business examples of low-carbon innovation

The global energy system is undergoing a radical transition. Renewable energy costs are tumbling and new approaches to energy management such as battery storage and demand response are offering new ways for organisations to operate more sustainably.

edie Explains: Greening your fleet

What are the business benefits of transitioning to low-carbon vehicles? Which fuel types are the most efficient? And what role can technology play in changing driver behaviours? This free edie Explains guide provides everything you need to know when it comes to greening your fleet.

The bank worked with ESG research providers Sustainalytics to create the framework

Barclays updates green bonds to capture 'compelling' economic opportunity

Barclays has signified its shift towards a low-carbon economy, by announcing a set of green finance products that will help promote sustainability in the UK and across the globe.

Commercial banks are also igniting signals that funding for fossil fuels with soon be a thing of the past

World Bank, major businesses and nations unite against coal funding

The One Planet Summit in Paris has signalled the beginning of the end for the coal industry, after the World Bank, numerous financial institutions and a group of nations and major businesses all pledged to phase out fossil fuel funding and use.

Through the network, communal fridges are filled with surplus food from local businesses for surrounding communities to access free of charge

Hubbub's Community Fridge Network secures funding for national expansion

Environmental charity Hubbub's Community Fridge project to reduce the amount of food waste generated in the UK looks set for a national expansion, after the charity secured £160,000 in National Lottery funding.

edie Explains: Energy storage

How does energy storage work? What are the business benefits of commercial battery systems? And how can they interact with other onsite energy technologies? This free edie Explains guide gives you everything you need to know.

Centrica Business Solutions: Resilience

UK businesses without an energy resilience strategy are risking 17% of their revenue, equating to £2.8m each year in damages and lost opportunities. This is a key finding from Centrica Business Solutions’ research into the current state of energy resilience.

edie Explains: Building energy management systems (BEMS)

In the latest in the edie Explains series, we look at building energy management systems (BEMS), exploring what they are, what they do and what the business benefit is.

edie Explains: Energy resilience

Energy resilience is about ensuring a business has a reliable, regular supply of energy and contingency measures in place in the event of a power failure.

edie Explains: The green office

The purpose of a green office programme is to enable a business to improve the efficiency of its everyday operations by taking practical steps to reduce office resource consumption and implement more sustainable practices that benefit both the organisation and its employees.

The committee has set 4 November as the deadline for submissions

Commons launches electric vehicle inquiry

The increased demand on the grid from the mass roll-out of electric vehicles (EVS) will be under the spotlight in a new House of Commons inquiry.

edie Explains: Solar PPAs

A power purchase agreement (PPA), is a contract between an energy generator and an energy buyer or ‘end-user’. PPAs can provide a fixed price for energy generated over the duration of the contract, removing exposure to energy price volatility and allowing for accurate and predictable cost planning.

TfL claims that the London fund will support innovative new approaches, such as using lampposts as charging stations

London boroughs to add 1,500 electric vehicle charging points

The Greater London Authority (GLA) and Transport for London (TfL) have allocated £4.5m to 25 London boroughs to roll-out 1,500 new charging points for electric vehicles (EVs) across the capital.