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 Plan was originally due out in late 2020 but was delayed amid Covid-19 and, reportedly, calls for more ambitious targets 

'Clarity and confidence for the road ahead': Green economy reacts to Transport Decarbonisation Plan

The UK Government's Transport Decarbonisation Plan is set for publication today (14 July), outlining plans to align all domestic travel and logistics with the national net-zero target. Here, we round up the reaction to this policy package from thought leaders and key organisations across the green economy.

Pictured: Chamberlain Square in Birmingham. Mayor Andy Street is one of the communique's 32 signatories. 

Give UK local authorities new powers to accelerate net-zero transition, Mayors urge Government

More than 30 mayors and council leaders from across the UK have co-signed a new communique urging the Government to grant them additional funding and powers to transition to net-zero across sectors including energy, transport and the built environment.

The new Tracker covers some $25trn of managed and owned assets

Analysis: Two-thirds of UK finance firms have climate targets, but most are failing to shift investments

While most of the UK's biggest banks and asset managers have updated their climate targets in light of net-zero, finance flows are still ultimately favouring high-carbon projects and businesses, according to new analysis of more than 1,200 financial institutions.

Achieving the benefits forecast in the report will require further investment in incentives for learners and employers, as well as changes to schooling

Report: UK green jobs set to be better-paid than roles in high-carbon industries

New jobs created to help drive the UK's transition to net-zero could pay 18% more than the national average salary - and 30% more than the average salary offered by companies in high-emitting sectors.

#SustyTalk: Ashden's Harriet Lamb on scaling international climate finance

edie's #SustyTalk interview series continues with an exclusive discussion with Ashden's chief executive officer, Harriet Lamb, focusing on climate solutions.

Both draft business plans are subject to final approval from regulator Ofgem

Net-zero energy transition: UK Power Networks and Northern Powergrid outline £7.7bn investment plans

Electricity distributors UK Power Networks and Northern Powergrid have outlined business plans backed by £4.5bn and £3.2bn of spending respectively, both with a heavy focus on low-carbon generation and technologies.

Investors for a Just Transition is France-based at present, with an international launch planned at COP26 in November

Investors worth €3.6trn collaborate to promote just transition to net-zero

AXA, Aviva France and Eiffel are among the members of a new coalition of investors convened to promote a just low-carbon transition across Europe. Collectively, members represent €3.6trn of assets under management.

The EAC report also criticises funding cuts to public bodies and calls for the Government to increase Natural England’s multi-year funding

UK's 'poorly mixed cocktail' of policy driving biodiversity decline, MPs warn

The UK is not treating biodiversity loss with the same urgency as the climate crisis, according to a group of MPs that have warned that current Government policies are inadequate to address a sharp decline in nature-based losses.

So far the European Commission has endorsed nine recovery plans from EU countries

Recovery plans fall short of EU green spending goals, campaigners warn

As the European Commission starts endorsing national recovery plans submitted by EU countries, campaigners are growing concerned that the EU executive may not fully enforce the fund's green spending target.

Leeds (pictured) is hosting the new Bank

UK's National Infrastructure Bank launches, with tackling climate change as key objective

The UK's National Infrastructure Bank (NIB) is launching in Leeds today (17 June), with Chancellor Rishi Sunak promising that it will funnel billions of pounds into the UK's net-zero transition.

The UK's 2019 'State of Nature' report revealed that most UK species have declined since the 1970s, with 15% now facing extinction 

UK Government commits to 'nature-positive' future following landmark biodiversity review

Following the publication of the landmark Dasgupta Review, which argued the case for biodiversity considerations to be embedded in all economic decisions by the government, a new commitment for all large infrastructure projects to be 'nature positive' has been made.

Image: Neighbourly 

WRAP: 2020 was record year for food redistribution by UK firms

More than 92,000 tonnes of surplus food was redistributed in the UK last year, marking a 45% year-on-year increase, partly caused by the response to Covid-19.

The TNFD has officially launched today

Can the Taskforce on Nature-related Financial Disclosures solve the global ecological crisis?

The Taskforce on Nature-related Financial Disclosures (TNFD) officially launched on Friday (4 June) with an overarching aim to align corporate reporting and financial spending to alleviate nature-related risks. Here, edie explores whether the new initiative can generate enough momentum to deliver tangible change.

Verified methodologies will be developed to ensure investment supports social and environmental improvements

Unilever, Google and Amazon among new Business Alliance to Scale Climate Solutions

Major businesses including Salesforce, Amazon, Netflix, Unilever and Microsoft have formed a new alliance aimed at mobilising funding for scalable climate solutions.

Housing and business buildings are responsible for 78% of the capital’s annual operational emissions

London Mayor Sadiq Khan declares 'retrofit revolution' to slash building emissions

London will soon host a new £3.5m 'centre of excellence' to help social housing providers retrofit their homes, and City Hall has also entered a new partnership deal that could unlock £10bn of private finance to cut building emissions.

The report reveals the extent of strings-free financing to high-emitting sectors, often in misalignment with the Paris Agreement or with banks and investors' own climate commitments

WWF: UK banks and investors financing projects with double nation's climate impact

UK banks and asset managers collectively financed projects emitting 805 million tonnes of greenhouse gases in 2019 - around twice the UK's annual national carbon footprint.

UK's ultra-rapid EV charging stock to triple with new £300m funding package

The UK's energy networks have jointly pledged a further £300m in funding for low-carbon technologies across 200 projects, including almost 1,800 new ultra-rapid electric vehicle (EV) chargers.