Energy Performance Contracting
This is a form of creative funding for capital enhancement that permits the upgrading of funding energy upgrades from cost reduction. In Energy Performance Contracting (EPC), and Energy Saving Company (ESCO) is assigned the responsibilities of executing an energy efficiency or a renewable energy project. The production of energy or saving in the project finances the initial investment of the project that is to be carried out. The ESCO is compensated in regard to the performance revealed and delivered towards the agreed energy saving. EPC is the most considered option for infrastructure investments when encountering a lack of technology or manpower information, energy engineering skills, and capital.
When ECP is done perfectly, it is considered today by most experts as the most appropriate and cost-effective method in delivering and optimising energy efficiency measures and investments in industrial and building facilities. So far, the EPC has been recognised for a long time, with its first application recording was established in the 1980s in North America. By then, it was used to deliver assured and sustainable energy savings ( Novikova et al, 2017).
Energy Performance Contract (EPC)- Guaranteed savings
In a guaranteed savings EPC, the energy saving is based on standards that would guarantee performance based on level of energy savings. The ESCO conducts and facilitates the whole performance risk while the municipality, funded either by a financing agency or the bank, is assigned the responsibility of investment repayment risk. This type of EPC serves creditworthy clients. (EEEP-JRC)
In all EPC models, the private partner assures a particular level of energy saving. This aids the municipality by allowing it to figure out the costs that have higher reliability. This is because the private partner endures all the risk related to achieving energy savings. It is also debated that there would be a reduction of the payments to be made by the private partner in case it the model does not succeed in providing guaranteed savings. As this shoulder the private partners all the risks, the guaranteed saving already proposed avails a buffer to absorb such shortcomings.
Advantages: The fact that the city will acquire new energy efficient infrastructure without a significant increase in the amount that the public spends is the primary advantage of EPC – guaranteed savings. The amount that is paid prior to the EPC is at least equal to the amount that is covered by the city during the duration of the contract, and it may even be less. After the contract expires, the owners of the city's energy-efficient infrastructure will benefit financially from the reduced operating costs. The fact that the private partner is taking on a significant portion of the risks is yet another advantage for the city.
Disadvantages: Some disadvantages are indicated above, including those associated with low energy prices and/or the efficiency of the existing infrastructure. The cheap cost of energy and the high efficiency of the infrastructure are both considered to be among the pros, but there are also some drawbacks. Another demerit of EPC – guaranteed savings is that it does not encourage the private partner to minimise energy demand to a level below that assured in the signed contract.
Projects that can be financed with this model:
For projects that have the potential to provide significant cost and energy savings, the EPC – guaranteed savings model is the most appropriate choice. Aside from that, the period of the contract can be excessively long for the purpose of attracting private partners. In addition, local governments should have sufficient financial resources to enable them to pay the same amount or a slightly lower amount over the course of the contract's duration. This is true even if the payments are split so that a portion goes toward covering the costs of the private partner as well as the energy costs.
This model would be very effective to project that provides significant cost and energy savings, the EPC – guaranteed savings model. Aside from that, the period of the contract can be excessively long for the purpose of attracting private partners furthermore, local governments should have the financial resources to enable them to pay the same amount or a little reduced amount throughout the course of the contract's lifetime. This is something that should be considered before signing any agreement. This is true even if the funds are divided in such a way that a portion of each payment goes toward covering the costs of the private partner in addition to the price of the energy.
Novikova, A., Stelmakh, K., Hessling, M., Emmrich, J., and Stamo, I. 2017. Guideline on finding a suitable financing model for public lighting investment: Deliverable D.T2.3.3 Best practice guide. Report of the EU-funded project “INTERREG Central Europe CE452 Dynamic Light”, October 2017.
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