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) - Shared savings
In a shared savings EPC, the performance guarantee is evaluated based on the cost of energy saved. The cost savings are split according to previously agreed upon percentage based on cost of the project and risks taken by the ESCO, and for a previously agreed time span based on the length of the contract. The ESCO carries both performance and credit risk, and compensation is linked to the energy prices. This type of EPC serves clients that do not have access to finance.
One of the most recognised merits of this model is that both parties have inducements to reconsider and acknowledge the addition of energy savings, even in the case where neither scheduled nor forecasted. Under this model, Municipalities still have the opportunity to put their portion of cost savings from energy efficiency initiatives into such projects. The benefits that are provided by the concept of assured savings are connected in a close way to this model..
One of the most evident challenges of this model is that it does not stimulate contract parties to familiarise themselves with energy-saving above the guaranteed levels. Even though this problem can be solved using the shared saving model, the solving method does not solve other demerits, including the long payback periods that corollary with low energy prices.
Projects that can be financed with this model:
The criteria for EPC guaranteed savings also apply here. The shared savings model is appropriate only if potential energy savings are high; otherwise, the amortisation period is too long.
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.