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.

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The UK Government has earmarked £3.8bn of stimulus funding for legacy fossil fuel and nuclear generation, compared to just £121m for renewables, a damning new report has claimed.

Unilever is aiming to use at least 25% PCR by 2025 and expects to double the amount it uses over the next 12 months

Unilever expects to double use of recycled plastics in next 12 months

Unilever has confirmed that 10% of its plastic footprint now consists of post-consumer recycled plastic (PCR), as the company pushes ahead to meet a target of halving the use of virgin plastic.

Mission Possible: Achieving a green recovery for hospitality and leisure

edie's Mission Possible campaign has evolved to focus on the green recovery, with a new series of reports outlining the challenges that businesses in key sectors face in relation to the coronavirus pandemic, and the opportunities that the green recovery will bring. Up next, hospitality and leisure.

NEP transportation and storage infrastructure linked to both sites could enable almost 50% of the UK’s industrial emissions to be decarbonised

Energy giants launch Northern Endurance Partnership to explore carbon capture opportunities

A group of businesses including BP, Shell and the National Grid have formed the Northern Endurance Partnership (NEP), which is aiming to develop carbon transportation and storage infrastructure in the North Sea to assist with plans to decarbonise the UK's industrial clusters.

edie explains: Science-based targets

What makes emissions targets "science-based"? How can businesses go beyond 2C alignment and strive for 1.5C? And what role do these targets play in the net-zero movement? This free edie explains guide answers all of these questions and more.

Pictured: Equipment arriving at the recycling plant in Perthshire, Scotland. Image: Recycling Technologies

Unilever and UK Government back chemical plastic recycling innovation

A joint project hoping to scale-up chemical recycling for hard-to-recycle plastics waste, involving Unilever and synthetic fuel giant Neste, has received a £3.1m grant from UK Research and Innovation (UKRI).

The Chancellor announced in March the UKEF would receive an additional £2bn to finance clean energy projects overseas

UK Export Finance could support 42,000 green jobs by reallocating funds from oil and gas

The UK Government's direct lending facility could support more than 40,000 jobs in the renewables sector annually by 2035, if it were to assume liabilities for renewable exports like it currently does for oil and gas, new research has found.

The technologies identified could add up to €790bn of gross added value to the European economy annually by 2030

Capgemini: EU must invest in high-impact climate technologies through green recovery funding

The EU must allocate portions of its €750bn Covid-19 recovery fund to emerging, innovative technologies which decarbonise energy, the built environment, industry, transport and the agri-food sector if it is to meet its net-zero goal by 2050, new analysis has found.

Depending on the individuals' net-worth, it could take as little as 5,000 people to meet the $10bn goal

New initiative to help investors funnel $10bn into climate solutions annually

By allocating just 0.25% of their savings and investments to fund not-for-profit projects aiding climate adaptation and mitigation, individual investors could collectively funnel $10bn per year into this space by 2030, a pair of ex-financiers have claimed.

Several major banks have outlined new climate targets since the pandemic began

HSBC sets net-zero target, plans $750bn of low-carbon investment by 2030

HSBC has committed to reaching net-zero financed emissions by 2050 and outlined plans to finance at least $750bn of low-carbon activities within a decade.

The Government is facing mounting pressure to join-up its approach to financing a green economic recovery from the recession

Issue green sovereign bond to finance UK's Covid-19 recovery, investors urge Government

A group of 30 major investors with more than £10trn of assets under management collectively are calling for the UK Government to launch a green sovereign bond to ensure adequate funding is put behind its mission to deliver a "green" Covid-19 recovery.

Just 2% of the world’s terrestrial habitat which is degraded and would benefit from restoration is currently receiving such attention

$500bn per year needed to halt nature loss and boost biodiversity, nations and businesses told

A coalition of more than 140 nature conservation groups is calling on governments and businesses to ensure that $500bn of funding is provided annually to protect, restore and create habitats.

The fund will expand to cover mining and extractives in the coming years

Blackrock's circular economy fund has raised $900m in its first year

BlackRock has revealed that its investment fund dedicated to accelerating the global development of a circular economy has raised more than $900m in its first year, growing from just $20m of seed funding from the asset management giant itself.

Funding from the grant will also enable the farmers to conduct their own research into soil and water usage

Sustainable MacFries Fund: McDonald's to invest in climate-friendly farming practices

McDonald's has launched a "Sustainable MacFries Fund" in partnership with McCain to improve the resilience of British potato farmers, while also collaborating with the Walmart Foundation, WWF and Cargill in the US to improve land use practices.