Energy Performance Contracting (EPC)
The EPC model is based on delivering energy savings compared to a predefined baseline. In the Energy Performance Contracting (EPC) model, an Energy Service Company (ESCO) enters into arrangements with property-owners to improve energy efficiency of their property by implementing various measures. Thus, the application span of Energy Performance Contracting involves the entire building as one incorporated energy-consuming unit. In other words, under an Energy Performance-Contracting (EPC) business model, an Energy Service Company guarantees energy cost savings (also labelled as ‘Negawatt-hours’) in comparison to a historical (or calculated) energy cost baseline. For its services and the savings guarantee, the ESCO receives performance-based remuneration in relation to the savings it achieves. Generally, savings achieved can only be measured indirectly as difference between consumption before and after implementation of the EE and RE measures (relative measurement: savings = baseline – ex post-consumption).
The standard scope of services encompasses the entire building. RET may play a role but with most EPC projects the focus is on the implementation of energy conservation measures. EPC models run under long-term contracts of typically ten years, depending on the payback time of the energy savings measures and the specification of the building owner.
ESCOs can also finance or arrange financing for the operation, and their remuneration is directly linked to demonstrated performance regarding the level of energy savings or energy service.
In conclusion, more than a funding model, an EPC is a programme of practical engineered energy efficiency measures that are implemented in buildings to deliver real energy savings such as HVAC, lighting, controls and building fabric improvements. In addition, to ensure the building is used in the most efficient way, building occupants receive training on energy efficiency practices.
Indeed, when measuring savings through a comparison between a baseline and post-retrofit energy costs, two major difficulties may occur:
- The baseline itself may be difficult to determine with enough accuracy due to a lack of availability of historic data (e.g. from bills or meters).
- The determined energy cost baseline is not a constant but subject to changes in climate conditions (e.g. ambient temperatures, solar radiation etc.) and in energy prices. Besides, utilization of the building may change. These changes need to be taken into account when calculating energy cost savings. Especially the changes in utilization may cause considerable difficulties for the ESCO and the facility owner in adjusting the baseline.
The intention is to keep the total energy consumption to a minimum – by way of demand side energy efficiency methods. To ensure promised energy savings have been achieved over the contract duration, a procedure termed “measurement and verification” is used. Adhering to an internationally recognized protocol such as the International Performance Measurement and Verification Protocol (IPMVP), customers can be assured that guaranteed savings have actually been delivered despite changes to the climate, the building and its use over time. The procedure is subject to the EPC contract, regulating the partnership between the ESCO and the customer. The contract regulates general issues such as property rights, usage of the systems and partnership duration. Furthermore, it stipulates the amount and structure of the investment, its implementation, how it is controlled as well as the maintenance of the energy saving measures which have been taken. It particularly determines the extent and distribution of the annual savings.
The EPC light business model aims at achieving energy savings mainly through optimization and organizational measures with low or no investments in technical equipment. The ESCO acts as an external energy manager taking over the responsibility to operate and optimize the energy related installations (heat boilers, building automation, lighting control). Usually the contract duration is short (2-3 years), since pay-back of high investments on hardware is not necessary. In this model the energy savings are still guaranteed by the ESCO. This model is very interesting for customers with little capacity or few resources for sustainable energy management. The first EPC light pilot project was developed in in Pankow district, in Berlin, Germany, during the guarantEE project.
The EPC plus business model extends the service of the ESCO to comprehensive structural measures on the building shell like insulation or window replacement. These services are usually not part of the classical EPC because of excessively long pay-back periods. The contractual arrangement contains special regulation on financing. Usually the customer has to pay a share of the investment through a grant or by combination of EPC with subsidy programs. EPC plus is very suitable in buildings with high need for renovation. The combination of both structural renovation (EE) and energetic optimization (RET) leads to high energy savings up to 50%. The ESCO can involve a cluster of SMEs, responsible of jointly supplying EE measures and RET services.
"What” (value proposition)
The key benefits include risk transfer, the ability to modernise a building’s energy infrastructure without necessarily having the funds and accessing external expertise. The key focus is on saving energy at the point of use first, before optimizing the supply of that energy.
For many potential customers financing is the most attractive part of EPC services for public buildings
"Who” (target customer)
The main target market is currently largely limited to public institutions buildings (at a federal, state and regional levels) including special purpose buildings like universities, hospitals, swimming facilities and leisure facilities. This is because a large project is a prerequisite (energy cost baselines can be set at 100,000 €/y).
"How” (value chain, activities, resources)
The ESCO is responsible for the implementation and operation of the energy efficiency package at its own expenses and risk, according to the project specific requirements defined by the client and the ESCO. Purchasing of final energy (electricity, fuels) mostly remains with the building owner.
EPC full service spectrum thus include: financing, planning, construction, energy management, risk transfer, operations, maintenance & repair.
Considering the Refurbishment Package, an EPC contract may feature savings for all energy carriers such as electricity, gas or water. Typical measures are energy management and controls, HVAC-technologies like air conditioning systems, hydraulic adjustment of distribution networks or lighting. Sometimes an exchange of boilers or adjustment of dis-trict heating connections is also undertaken. In addition, the scope of services frequently also includes influencing the behaviour of building occupants through information campaigns and incentive programmes.
"Why” (revenue model and cost structure)
Cost structure: Transaction and measurement and verification costs of EPC projects are high. The ESCO is responsible for the implementation and operation of the energy package at its own expenses and risk, according to the project-specific requirements set by the client. Typically this includes the implementation of the measures, their operation & maintenance, pre-financing of the investment and taking over risks according to the project specifications defined in the contract. If the ESCO (co)-finances the equipment, the remuneration must also cover capital costs.
Revenue stream: The ESCO’s remuneration in an EPC model is often labelled as ‘Contracting rate’. It is usually calculated as a percentage of the savings achieved through the EE and RE measures. In case of underachievement the ESCO needs to compensate for the losses, but it will receive an additional remuneration in case of overachieving the savings guarantee. After the end of the contract term, the facility owner benefits from the full energy cost savings, but all operation and maintenance expenses are on his accounts. The contracting rate needs to cover all expenses of the ESCO for the defined scope of services throughout the contractual period (‘all inclusive prices’). In addition to the resources necessary (high transaction and operational costs), the baseline determination and adjustment can cause a considerable degree of insecurity and monetary risks for the (prospective) project partners. Determining and adjusting the baseline is a crucial issue in the EPC business model and needs to be undertaken for all performance based billing periods over the en-tire contract term.
Related Case Study
The renovation of Torrelago district was implemented in the framework of the FP7 funded CITyFiED project (http://www.cityfied.eu/) .
Torrelago district involves 31 private multi-property residential buildings (1488 dwellings) that were constructed in the 1970s–1980s, more than 140,000 m2 and 4000residents involved. Former conditions of the district were very low in terms of efficiency, comfort and costs, which fostered the intervention. Main energy measures implemented at the building scale are buildings external insulation (Composite System-ETICS, ventilated façade), connection to district heating (twelve new heat exchange substations at building level), individual metering to raise users’ awareness.