Energy contracting – the Basics
In deciding to improve the energy efficiency of your facilities you may choose a ‘Traditional Approach’ or one of the ‘Energy contracting’ options.
Traditional approach vs Energy contracting
Under the traditional approach, the host organisation carries out most of the preliminary work (often with the assistance of external consultants), procures the works and provides the financial resources. Whether or not the actual savings are as expected is a matter for the host, not the consultant or contractor; indeed, savings are rarely measured and verified.
With energy contracting, the idea is that you pay for performance. There are three types of energy contract:
It is considered easier to obtain investment financing through energy contracting, because (unlike the traditional approach) there is a guarantee that the savings will materialise and this provides a cash flow to repay the investment cost. The finance for the investment may be provided by a third party financing entity, or the Energy Services Company (ESCO) itself, or combinations thereof; alternatively the host organisation may self-finance the project. To support the financing of projects that use energy contracting, the government in conjunction with private investors has established a €70million energy efficiency fund; the fund will invest in projects, and will be repaid from the project savings.
No matter which contracting route – traditional, EPRP, EPC or LESC - is selected, good practice should be followed to ensure that the project is viable and worthwhile. SEAI propose a 5 stage process (see below) to be followed for ALL projects. The first two stages are common to all contract routes, and when project viability and internal support are established, then an appropriate contracting and financing option is selected.
For more on the project development process see the 5-Stage Process.
Contract Types Explained
Energy contracting offers the opportunity to first use performance related contracts (EPC & EPRP) to reduce energy demand, and then look to supply energy better through LESC.
Energy Performance Related Payments (EPRP)
EPRP refers to a contractual arrangement whereby a vendor (ESCO) gets paid a fee for providing a product, service or undertaking work that will improve the energy efficiency of a facility, and a portion of that fee is contingent on a verified improvement in energy performance. In theory this can be accomplished by addition of EPRP clauses in existing well known contract forms, and / or in tender documents. SEAI advocates that every energy saving project contains an EPRP element as a minimum. It will lead to more accurate quantification and verification of savings, and in its simplest form is not too different from traditional contracting.
For more on EPRP see the Energy Performance Related Payments Guide.
Energy Performance Contracting
An energy performance contract is an agreement between a vendor (ESCO) and a host organisation whereby the ESCO implements energy efficiency improvements and guarantees the energy savings (in some cases the savings may be shared). If the savings fall short, the ESCO covers the difference.
Energy performance contracting can overcome the need for upfront capital investment by the host organisation, as investments in energy efficiency are paid for over time by the value of the energy savings achieved. The works are often financed by a 3rd party financier, either directly to the host organisation or to the ESCO.
For more on EPC see the Energy Performance Contracts Handbook.
The key elements of an energy performance contract are:
- The ESCO undertakes to improve the energy efficiency of the facility, utilising design, implementation and finance resources.
- The contract is contingent on demonstrated performance, i.e. the ESCO takes a risk in guaranteeing savings.
- There is an agreed method for measuring and verifying energy savings.
An EPC arrangement may involve the energy efficiency investment being financed by either the host, the ESCO or a third party financier, or even a combination of different financing solutions. As there will be a guaranteed savings stream, it is considered easier to source internal or external finance.
Typically the ESCO delivers a complete service package (including design, build, financing, operation & maintenance) and co-ordinates and manages the project.
Local energy supply contract
A Local Energy Supply Contract (LESC) is an agreement between a host organisation and a vendor (ESCO), whereby the ESCO undertakes installation works and supplies energy to a particular point at the host’s facility and is paid for the quantity of energy supplied over the term of the contract. For example, the host may purchase the heat produced by a biomass boiler, or the heat and electricity from a combined heat and power unit.
For more on LESC see the LESC Overview.
SEAI are currently developing an LESC contract tailored for CHP. Check for updates in the Support, Guidance & Documentation pages or contact firstname.lastname@example.org if you want to know more.
Benefits of energy contracting
The main benefits of energy contracting include technical benefits, financing benefits and savings benefits.
Technical risk - energy contracts shift the risk from your organisation to an ESCO.
Savings - the objectives are generally to save energy, save money and save greenhouse gas emissions. Energy contracting by its nature, requires measurement before and after the works, in order to evaluate the savings achieved; this is referred to as “Measurement & Verification”.
Financing - energy contracting gives you different options for accessing capital and the option to fund your project out of the energy saving cash flow instead of capital expenditure. EPC and LESC are best suited to securing long term financing because the ESCO is involved in a long term contract. However, EPRP may also obtain 3rd party financing.
Facility Improvement - often the energy savings finance the project, but the project itself results in an improvement in the facility. For example, new light fittings may give aesthetic improvements, or a new boiler house will improve reliability.
Glossary of Terms
Performance contract - agreement between an energy service company (ESCO) and a host organisation whereby the ESCO implements energy efficiency improvements and guarantees the energy savings.
ESCO - Energy Services Company. An ESCO delivers energy services and/or other energy efficiency improvement measures in a host organisation’s facility, and accepts some degree of financial risk in so doing.
EPC - Energy Performance Contracting. An EPC is a contractual arrangement whereby a supplier or contractor implements an energy efficiency improvement to a host organisation’s facility (and/or equipment renewal) and its fee is based on the value of the energy savings delivered.
EPRP- Energy Performance-Related Payments. An EPRP is a contractual arrangement whereby a supplier or contractor gets paid a fee for providing a service or undertaking work that will improve the energy efficiency of a facility, and a portion of that fee is contingent on a verified improvement in energy performance.
M&V - Measurement & Verification of the energy savings.
NEEF– National Energy Efficiency Fund