Energy Performance Contracting (EPC) is a form of ‘creative financing’ to fund energy efficiency improvements for organisations. The EPC vendor, termed an ESCO or Energy Services Company, will install the necessary equipment to improve energy efficiency at no charge to the client. In return the EPC vendor will take a significant proportion of the savings made.
Advantages of energy performance contracting
Energy Performance Contracting can be of benefit to organisations that find it difficult to raise funds for capital projects or have little experience of managing such projects.
Disadvantages of energy performance contracting
The main disadvantage is that the ESCO will take up to 80% of the energy cost savings for the typically the first 7 years leaving you with just 20% of the savings. After 7 years you will have 100% of the savings but the equipment installed by the vendor may need replacing or refurbishing before too long.
What are the steps involved in an EPC.
The steps are as follows (these may vary slightly between ESCOs)
- ESCO confirms that client is serious and not talking to other ESCOs. Why – the steps in agreeing a contract are expensive.
- Undertaken walk through audit to inform ESCO that the project is viable
- A contact is drawn up and conditionally agreed.
- Undertake an Investment Grade Audit (IGA). If the client decides not to proceed, they may be asked to pay the cost of the IGA. These audits will cost between €/£20,000 to €/£50,000.
- ESCO installs new equipment or upgrades existing equipment and the energy savings start to be made.
- The savings are split as agreed in the EPC.
An alternative to Energy Performance Contracting
Our view is that EPC is only a suitable option for large organisations with an imposed policy to reduce energy consumption, where energy cost savings are a secondary consideration and where capital spending is difficult.
Where organisations are interested in reducing their energy consumption and also in making financial savings, then better value can be obtained by working with Environmental Efficiency on an Energy Reduction Programme (ERP). This is because we have found that at least 20% cost savings can be made through no cost actions and low cost actions.
Further savings of between 20% and 30% can be found with capital projects. For capital projects significant financial aid is available from state organisations and Obligated Parties. Thus an ERP will allow clients to keep a much higher proportion of the energy savings but with much lower capital costs than traditionally expected. For this service Environmental Efficiency will charge a fee for the audit plus a management fee equivalent to 20% of the savings for five years.