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Last edited 06 Feb 2023
Energy performance contracts
Energy Performance Contracts also referred to as EPC’s (not to be confused with energy performance certificates (also shortened to EPC) 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.
 Pre-occupation energy rating
Today most buildings have to make an assessment of the amount of energy they will use, or their energy rating. In the UK the main mechanism for this is the Standard Assessment Procedure (SAP) which uses various variable including the Target Fabric Energy Efficency (TFEE) and the Dwelling Fabric Energy Efficiency (DFEE) to calculate a likely energy rating for a new dwelling. This energy rating is then represented in the buildings Energy Performance Certificate or EPC (not to be confused with Energy Performance Contract also shortened to EPC). In most cases a certain level of performance in the EPC will be stipulated by the buildings regulations, the planners or the client and as such will form part of the contract obligations, although this is a part of the contract or employers requirement related to energy performance that sits in the contract it is not necessarily normally considered as Energy Performance Contracting.
 In-use energy rating
A Display Energy Certificate (DEC) unlike an SAP or EPC is based on an overall in-use assessment of a buildings energy and is therefore a more realistic assessment of a buildings performance. In general lessons from post occupancy evaluations, building performance evaluation and Soft-Landings indicate that post completion, there is a two year period during which the energy use of a building settles.
One performance contract mechanism can therefore be to require a certain level of energy performance to be achieved 1 or 2 years after completion, assessed via the Display Energy Certificate. This approach can be used for existing buildings assessing a level of improvement, but unlike other approaches, can also be used for new buildings by assessing against a defined level of performance, A-E. In terms of contractual obligations and payment mechanisms, the client pays for the measures as part of the newly constructed or refurbished building, but might keep a retainer in a separately allocated account that will be paid to the contract one or two years after completion if the building performs in-use as targetted.
One of the issues with this approach is that in order to achieve higher level performance, how the occupants use the building after it is competed can significantly impact its performance ( ie it may be only partly due to design aspects). As a result the Soft-Landings approach which involves the building management team and some occupants from a very early stage in the design process can be key, in order to understand occupants and management responsibilities in keeping energy use low. More often than not the most successful buildings in terms of energy performance are made up of a considered design but also user who are aware of energy consumption issues and use the building accordingly.
An approach similar to this, by example was written into the employers requirements by Bathnes District council prior to and for the construction of their new council offices located in Keynsham in 2016.
 Guaranteed savings
Guaranteed-savings contracts are the most common type performance contract. In this example the client finances the design and installation of the improved efficiency measures, and funds are borrowed from a third party, or in some cases via lease agreements. Here an Energy Savings Company (ESCo) then guarantees that the cost savings achieved through the measures implemented will at least meet the costs of the loan or lease payments. Although the client assume some risk in terms of the initial capital cost, loan or lease agreements the ESCo agrees to pay the difference if the measures do not achieve the agreed cost savings to meet the repayments.
Shared savings contracts are very similar to the above guaranteed savings contracts, however the ESCo not the client, funds the entire project, including initial capital costs, either themselves or through a loan. The risk is therefore far less on the client, which as a result means most of the financial savings ESCo itself. These types of arrangements are often used in the public sector where levels of borrowing for initial capital costs are not possible such as public buildings, hospitals or state funded schools.
 Mixed savings
In mixed saving contracts, the ESCo provides the capital cost for the works and guarantees savings up to a certain level, if that level is exceeded and there are greater cost saving benefits, they are shared between the Esco and the client. In turn the savings payment are paid to the ESCo and equipment continues to be owned by it for the duration of the contract until the contract ends, where the equipment ownership transfers to the client.
 Pay from savings
In this model the client pays for the upfront capital costs of the works, borrowing from a lender, and repays the loan in line with a specified share of the savings as they vary over time. As such the level of energy saving and the amount of repayment can vary with the energy use depending on season, occupancy as well as energy prices. In this form risks to the client are diminished by the variable rates and risks to the ESCo minimised because it has not invested the capital costs.
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