Energy Performance Contracting (EPC), as defined in Directive 2012/27/EU on energy efficiency, is ‘a contractual arrangement between the beneficiary and the provider of an energy efficiency improvement measure, verified and monitored during the whole term of the contract, where investments (work, supply or service) in that measure are paid for in relation to a contractually agreed level of energy efficiency improvement or other agreed energy performance criterion, such as financial savings’.
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Development and Challenges
In an Energy Performance Contracting project, the provider of the improvement measure, usually an Energy Service Company (ESCO), offers its technical expertise and takes on the performance risk to ensure the proper implementation of energy efficiency measures and the achievement of the estimated energy savings. These savings can be used to refinance the measures' investment cost. Concerning the remuneration of the ESCO, there are two major variations in the performance contracting models:
- Shared savings: the cost savings are split for a pre-determined length of time in accordance with a pre-arranged percentage. This split depends on the cost of the project, the length of the contract and the risks taken by the ESCO and the consumer.
- Guaranteed savings: the ESCO guarantees a certain level of energy savings, protecting the client from any performance risk.
But this is just one item in a large pool of available contracting options. Models may differ in the assignment of roles, responsibilities and risks between building owners and ESCOs. The most important factors are the payment process, the financing terms, the measurement and verification and, finally, the termination of the project. This report from the Institute for Building Efficiency can provide a more detailed look into the contracting model procedures.
The market development of EPC in Europe varies from one country to another. The Joint Research Centre report Energy Service Companies Market in Europe estimated that in 2010 there were 700-1040 active ESCOs in the EU representing a market volume of EUR 6.7-8.5 billion. However, the market potential was estimated at EUR 25 billion. Even though the EPC market is well developed in some Member States, it is, overall, still considered a niche market.
Deployment in most Member States is hampered by a number of reasons, the most important of which are:
- Lack of awareness from the demand side of the market for energy services
- Poor understanding of energy efficiency and EPC by financial institutions
- Small size of projects
- Incompatibility of legal and regulatory frameworks
- Low level of understanding of measurement and verification protocols
- Administrative hurdles
- Lack of motivation
- Limited government support
Despite the difficulties in taking advantage of the full potential of Energy Performance Contracting, there are already several examples of its successful application, from which interested parties and stakeholders can draw useful information. The range of examples can vary greatly, covering projects of different scope while showcasing the versatility of the EPC model in facilitating investments in energy efficiency. Let’s have a look at some best examples:
- Large scale municipal project tackling heating, ventilation and lighting in Norway
- Renovation and upgrading of a district heating system in Slovenia
- Reconstruction and regulation of the heating system in 9 buildings (schools, kindergartens and public buildings) in Slovakia
- Heating system renovation in a large bakery in Czech Republic
- Large project covering 98 public buildings in Milan
The previous examples are EPC applications that did not encounter significant difficulties. That is not always the case however, especially in complex projects that require the willing and active participation of a large number of tenants and/or are not considered profitable by current market standards. This may be the circumstance in social housing, as can be seen from the FRESH project feedback. For a detailed look into one of the contracts handled by FRESH, check out the presentation of this social housing project in France.
Increasing AwarenessIn light of the difficulties encountered in developing the ESCO/EPC market in Europe, the European Commission's Directorate-General for Energy has launched an EPC campaign to promote and build capacity for EPC and ESCOs throughout Europe. The campaign will be implemented mainly through the organisation of capacity building workshops and webinars supported by ManagEnergy and the Covenant of Mayors, respectively. The EIB’s European PPP Expertise Centre (EPEC) is also supporting the EPC campaign. In addition to the ‘Financing’ section on BUILD UP, other EU funded projects like EUROCONTRACT and ChangeBest are also good sources of insight into the EPC challenges.
Join the BUILD UP Community Energy Performance Contracting (EPC) today!