26. April 2012 09:17
Energy Performance Contracts (EPCs) can help remove the barriers that leave many energy efficiency improvement projects sitting on the shelf.
Technologies such as variable speed drives and energy management systems are available and well documented to improve energy efficiency. More often the stumbling points to implementing projects are the availability of financing or management uncertainty about the results.
Enter the Energy Services Company (ESCO), experts who create energy performance contracts that guarantee energy savings, and help companies get around operational and financial barriers. ESCOs provide turnkey solutions that bring together the many skills needed to realize savings, from the process side (engineering, installation and maintenance) to the business side (risk management, legal, financial).
Financial fluency is critical, as the future-looking cash flows of energy efficiency projects are not as straightforward to CFOs or financial institutions as traditional investments. An ESCO can help translate energy efficiency projects into business value that decision makers can understand, as well as adding insights such as tax benefits or the pros and cons of different finance structuring options.
EPCs can be structured in many ways, depending on local markets and infrastructure, industry standards, and the end-user's financial strategy. Some EPCs are built as guaranteed savings, where the end user finances the project and the ESCO implements and guarantees the results (e.g., full project payback from energy savings in 3 years).
Another type of EPC is the shared savings, where the ESCO finances the project and is paid as a percentage of the energy savings they create. Shared savings EPCs are therefore 'off balance sheet' and have positive or neutral cash flows from day one.
One of the most important dimensions of an EPC is the measurement and verification (M&V) of savings. This is pre-agreed as part of the contracting process based on global or local standards, and is always done with full transparency.
Some manufactures believe that using an ESCO is more expensive than simply doing projects themselves. However, many components of an EPC must be done in any case, regardless of who owns the project, from an investment grade energy audit to project management and maintenance.
The added benefit of an EPC is that the energy savings are guaranteed by the ESCO, whereas a company must assume accountability for these with their own implementation. This often leads back to the original barrier, uncertainty of the results that leaves many worthy and achievable projects sitting on the shelf.
Reported by Phil Lewin