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.
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
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?
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.
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.
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.