Last edited 24 Sep 2015

Energy performance contracts

Energy Performance Contracts (EPC’s) are contracts for the implementation of energy saving and renewable energy measures by a contractor sometimes referred to as an Energy Service Company (ESCO) or EPC provider. They first emerged in the US in the 1970’s and 1980’s. They can be appropriate for domestic and commercial properties, but are most often associated with public-sector clients.

Most commonly, Energy Performance Contracts include a guarantee from the provider that the specified energy savings will be achieved, and so there is no risk to the client. Less commonly, contracts may adopt a shared savings approach, in which savings are shared on a percentage basis for a pre-agreed period. In this case, the client and the provider are to a certain extent sharing the risk.

Schemes can include financing, often by a third party, but sometimes by the EPC provider, in which the savings generated by the measures implemented should be sufficient to make the repayments required. At the end of the contract, all subsequent savings are kept by the client.

Typically, the EPC provider will carry out an energy audit of the premises, design the measures it considers will best achieve the required savings, implement the measures and arrange the financing. As a result, EPC providers tend to be large organisations with experience in the sector and with the capability of standing by guarantees for long periods of time (up to 15 years). This might include; energy suppliers, energy consultancies, facilities management companies and large equipment suppliers.

EPC’s can be useful in enabling energy efficiency measures to be implemented quickly, with no capital expenditure by the client, and with little risk. However, they have been criticised for being difficult to negotiate, for a lack of transparency in the costs of the measures implemented and because of the lack of low-cost financing. In addition, there are complexities for properties that are leased and when properties are sold, and because EPC’s are such long-term contracts, there are inevitable uncertainties in relation to the future of the energy market, future technologies, changes of use and so on.

It may be appropriate to seek independent advice when negotiating Energy Performance Contracts.

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[edit] External references

  • Eu.bac, Energy Performance Contracting in the European Union.