The use of Energy Performance Contracts (EPCs) is becoming more prevalent in the energy industry, as they can increase investment beyond what a company is willing or able to make by themselves. At its most basic an EPC is an arrangement between an energy user and a third-party Energy Services Provider (ESP) to improve the efficiency of the user, whether through joint investment, shared savings or just expertise to deliver a savings target. EPCs could be a big part of the future of energy management, but as with any innovation there are merits and pitfalls to the EPC approach. Let’s take a look at what my experience as an Energy Manager has taught me about the good, the bad and the ugly of EPCs.
- Mutually beneficial partnerships
The first positive impact an EPC can have is to build a partnership approach to energy management, with a specialist ESP taking responsibility for finding and implementing efficiency projects. To build this partnership requires a shared outcome and a building of trust between the partners – the arrangement needs to be mutually beneficial in a way both parties acknowledge.
- Driving Investment
The major benefit of an EPC, and indeed the reason most would consider one, is the opportunity to get capital from the ESP to speed up investment in efficiency projects, or even allow investment in projects your company wouldn’t normally invest in. This works because the ESP properly understands the potential for the technology so is willing to fund projects on the promise of future income, beyond a normal commercial return on investment.
The (Potentially) Bad
- Know your stuff: Although the ESP will bring a lot of knowledge to the table, it is important that there is sufficient expertise on the customer side as well to make sure both sides go into the arrangement with their eyes open. This begins with understanding the technical feasibility of the proposal, to ensure both parties are happy that the project can actually do what it is expected to do. A proposal to reduce energy consumption by a fixed amount through unnamed measures may still be acceptable but it introduces risk – what if the measures proposed aren’t acceptable to the customer? Other areas of expertise required include legal advice on the contract and data analysts to measure performance, as discussed below.
- Measure the outcome: An EPC generally requires an involved relationship between customer and ESP, as the ESP is usually paid only after a saving is seen by the customer on their energy bills, but given that energy bills change all the time, whether based on weather, time of year or on things like production volume, finding the level of savings needs a detailed Measuring and Verification (M&V) plan. International standards such as IMPVP and ISO50002 have been developed to provide a framework for the M&V of energy projects, but they are not easy to implement and still need to be developed by knowledgeable practitioners to capture all the possible complications. The M&V plan should ideally be agreed before work starts on saving energy so there is no argument after the fact, and this needs to be factored into the project timeline. 3 months of work before a single kWh is saved might not seem palatable, but is infinitely preferable to interminable arguments all the way through the contract.
- Changing of risk profiles: An EPC by itself does not remove risk from a project, it just changes its nature from a technical risk – will this piece of kit save me energy? – to a contractual one – will my ESP save me energy as expected under the terms of the contract? This is a double problem; firstly because in general energy managers will be more expert in assessing technical risk than legal risk, so immediately the main purchasing manager is no longer an expert on the most important aspect of the EPC; secondly, the relative novelty of the EPC market means that legal experts are hard to come by and generalists may miss some of the important aspects which need to be managed. Bear this in mind if you are thinking of using an EPC and make sure your technical and legal experts are working together.
- When is a guarantee not a guarantee? A lot of EPCs will come with a guaranteed saving to ensure the customer sees a return on investment, but it is important to realise that this doesn’t mean the savings are actually guaranteed! The ESP needs to manage its own risk so will often place get out clauses to cover events outside their control. Should the ESP lose money because the customer chooses to close a site? Or course not! What about if a site opens for an extra couple of hours a day or replaces its heating system? Surely we would need to make an adjustment for that, but how do you calculate that – and who is responsible for the calculation? It is easy to get to a situation where the reasonable and necessary caveats in the contract means that no energy is saved from the bill but the guarantee is difficult or impossible to enforce – not the message you want to be taking to your FD if that is how you sold the project.
Making an EPC work
- Energy Performance Contracts can definitely add value for companies of all sizes, bringing expertise and funding to deliver energy savings for a business. However, the complexities of the EPC means that there are many differing aspects which need to be considered, and having the experience on your side when negotiating an EPC is more important than ever.