Energy Performance Contracting: A Comprehensive Guide

Energy Performance Contracting (EPC) gains popularity as a method to enhance the energy efficiency of buildings and facilities.

It involves a contract between an energy service company (ESCO) and a client, usually a building owner or facility manager.

The ESCO assures energy savings from energy efficiency measures implementation.

The ESCO funds, designs, installs, and maintains the energy efficiency improvements, and the client covers the upgrades using part of the generated energy savings.

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This article aims to provide an extensive overview of EPC, including its concept, main components, process, advantages, challenges, and successful project case studies.

It targets building owners, facility managers, energy managers, sustainability professionals, ESCOs, financiers, and policymakers interested in implementing EPC in their buildings or facilities.

Defining Energy Performance Contracting (EPC)

EPC is a contract between an ESCO and a client, typically a building owner or facility manager.

The ESCO guarantees energy savings from the implementation of energy efficiency measures.

The ESCO is responsible for financing, designing, installing, and maintaining the energy efficiency upgrades, while the client pays for these upgrades using a portion of the energy savings generated.

EPC operates on the shared savings principle, meaning that the ESCO and client both benefit from the energy efficiency improvements.

The ESCO assumes the project's financial risk, while the client enjoys reduced energy bills and enhanced building performance.

The contract usually spans a few years, during which the ESCO monitors and verifies the energy savings.

The Significance of EPC

EPC serves as a potent tool for decreasing energy consumption, greenhouse gas emissions, and operating costs in buildings and facilities.

It allows clients to improve their energy infrastructure without initial capital investment while lowering their energy bills and enhancing building occupants' comfort and productivity.

EPC is also an effective means to fulfill sustainability goals and comply with regulations.

Numerous governments and organizations have established targets for reducing energy consumption and greenhouse gas emissions, and EPC can contribute to achieving these objectives.

Moreover, EPC can generate jobs and stimulate economic growth by increasing demand for energy-efficient products and services.

EPC projects often engage local contractors and suppliers, positively impacting the local economy.

Essential Components of EPC

The EPC concept is grounded in the notion that energy efficiency upgrades can be funded by the savings they produce, rather than requiring upfront capital investment.

EPC allows building owners and facility managers to execute energy efficiency measures without incurring capital costs, while ESCOs recoup their investment through a share of the generated energy savings.

The key elements of EPC include:

Energy Audit

The Energy Audit is the initial step in the EPC process. It evaluates current energy consumption and pinpoints potential Energy Efficiency Measures (EEMs) to reduce energy usage and enhance energy performance.

ESCOs or third-party energy consultants typically perform energy audits. Based on the audit, the ESCO creates a list of EEMs, prioritizing them by potential energy savings, cost-effectiveness, and occupant impact.

Energy Efficiency Measures (EEMs)

Using the energy audit, the ESCO devises a list of energy efficiency measures that can be implemented to decrease energy consumption and boost energy performance.

EEMs can involve lighting upgrades, HVAC improvements, building envelope enhancements, renewable energy installations, and other measures.

Performance Guarantee

The ESCO offers a Performance Guarantee, assuring a specified level of energy savings from the EEMs implementation.

If actual energy savings fall short of the guaranteed savings, the ESCO covers the difference.

This guarantee provides building owners and operators with confidence that the energy efficiency measures will yield the anticipated savings.

Financing Mechanism

The ESCO also supplies a Financing Mechanism to fund the EEMs implementation, typically through a mix of its own capital and third-party financing.

The financing is repaid using a portion of the generated energy savings, allowing building owners and operators to implement energy efficiency measures without upfront capital investment.

Types of EPC

Energy Performance Contracting (EPC) presents three primary contract types: Shared Savings, Guaranteed Savings, and Hybrid.

Each contract has distinct features and advantages, designed to address the specific needs of building owners or operators.

Shared Savings

In the Shared Savings model, the ESCO and client split the energy savings produced by the EEMs.

The sharing ratio usually favors the client, at 50/50 or 60/40. Here, the ESCO finances the EEMs implementation and oversees the maintenance and operation of installed equipment.

The client compensates the ESCO based on a percentage of generated energy savings.

For instance, an ESCO audits a commercial building identifies energy efficiency measures, and finances their implementation.

The client pays the ESCO based on a percentage of the energy savings generated. If the upgrades create $10,000 in annual energy savings with a 50/50 sharing ratio, both the ESCO and the client receive $5,000.

Guaranteed Savings

In the Guaranteed Savings model, the ESCO ensures a specific level of energy savings, while the client pays a fixed amount for the EEMs, independent of actual energy savings generated.

The ESCO finances the EEMs implementation and handles the maintenance and operation of installed equipment. If actual energy savings are lower than guaranteed savings, the ESCO covers the shortfall.

For example, an ESCO audits a hospital identifies energy efficiency measures, and guarantees $50,000 in annual energy savings.

The client pays a fixed amount for the upgrades. If the upgrades generate $60,000 in energy savings per year, the client benefits from the extra $10,000 savings.

Hybrid

The Hybrid model combines aspects of Shared Savings and Guaranteed Savings. The ESCO guarantees a minimum level of energy savings, and the client pays a fixed amount for the EEMs.

If actual energy savings surpass the guaranteed savings, the ESCO and client share the additional savings, with the client receiving a larger portion.

For example, an ESCO audits a university identifies energy efficiency measures, and guarantees $100,000 in annual energy savings.

The client pays a fixed amount for the upgrades. If the upgrades generate $120,000 in energy savings per year, the ESCO and client share the extra savings, with the client obtaining a larger share.

EPC Process

Step 1: Pre-qualification

The EPC process starts with ESCO pre-qualification, evaluating its experience, qualifications, financial stability, and references.

The client issues a Request for Qualifications (RFQ), and ESCOs respond with their qualifications.

Step 2: Energy Audit

The second step involves conducting an energy audit to assess current energy consumption and identify potential energy efficiency measures. This audit is typically performed by the ESCO or a third-party energy consultant.

Step 3: Development of EEMs

Based on the energy audit, the ESCO creates a list of energy efficiency measures to decrease energy consumption and enhance energy performance.

The ESCO submits a proposal that details the EEMs, estimated energy savings, implementation schedule, financing plan, and performance guarantee.

Step 4: Implementation of EEMs

After the proposal's acceptance, the ESCO implements the EEMs as per the agreed schedule.

The ESCO monitors energy consumption and verifies the energy savings produced by the EEMs.

Step 5: Measurement and Verification (M&V)

The final step in the EPC process is measuring and verifying the actual energy savings generated by the EEMs.

The ESCO conducts a post-implementation energy audit, comparing actual energy consumption with baseline consumption.

The ESCO then issues a report documenting the actual energy savings and verifying the performance guarantee.

Benefits of EPC

Financial Benefits

EPC offers several financial benefits for building owners and facility managers:

  1. No upfront capital investment: A key financial advantage of EPC is the ability to implement energy efficiency measures without upfront capital costs. EPC projects often use third-party financing, enabling building owners and facility managers to allocate capital to other business needs while enjoying reduced energy consumption and operating costs.
  2. Energy savings: EPC generates significant energy savings, lowering operating costs for buildings and facilities. Energy efficiency measures, such as lighting and HVAC upgrades, result in reduced energy consumption and lower energy bills. Some projects achieve savings of up to 50% or more.
  3. Improved asset value: EPC enhances buildings' energy performance, increasing their asset value and marketability. Energy-efficient buildings are more appealing to tenants and buyers due to lower operating costs and a sustainable environment. Certified green buildings, like those under LEED or BREEAM, often have higher real estate value.
  4. Positive cash flow: EPC creates positive cash flow, as energy savings typically exceed project financing costs. This can be reinvested in the building, used for debt payment, or funding future energy efficiency projects or capital improvements.
  5. Long-term cost certainty: EPC offers long-term cost certainty since energy savings are typically guaranteed throughout the contract. This helps with budget management and planning while mitigating the risk of energy price increases.
  6. Reduced maintenance costs: EPC reduces maintenance costs due to decreased wear and tear on building systems and equipment. Early identification of maintenance issues also prevents major problems, further reducing maintenance costs over time.

For instance, the City of Houston's EPC program is projected to save $37 million by reducing energy consumption and operating costs.

The Empire State Building's EPC project is expected to save $4.4 million annually and provide a payback period of under 3 years, increasing asset value and marketability.

Overall, EPC delivers significant financial benefits, including reduced operating costs, improved asset value, and long-term cost certainty.

These benefits enhance financial performance while contributing to a sustainable, energy-efficient built environment.

Environmental Benefits

EPC offers several environmental benefits, such as:

  1. Reduced greenhouse gas emissions: EPC decreases energy consumption and greenhouse gas emissions, enhancing sustainability and reducing the environmental impact of buildings and facilities.
  2. Improved air quality: EPC lowers fossil fuel consumption, leading to better air quality and public health.
  3. Conservation of natural resources: EPC reduces demand for natural resources like coal, oil, and gas, conserving them for future generations.
  4. Reduced water consumption: EPC can lower water consumption through measures like low-flow toilets and faucets, addressing water scarcity and reducing the environmental impact on local water resources.
  5. Reduced waste: EPC encourages sustainable materials and practices in building design and construction, reducing waste through the use of recycled content and waste reduction programs.
  6. Improved indoor environmental quality: EPC enhances indoor environmental quality by reducing toxic chemicals and improving ventilation and air quality, promoting a healthier and more comfortable indoor environment for occupants.

For example, the Empire State Building's EPC project aims to reduce energy consumption by 38% and greenhouse gas emissions by 105,000 metric tons over 15 years.

It will also decrease water consumption by 4.4 million gallons per year and waste by 50%.

Operational Benefits

EPC provides several operational benefits, such as:

  1. Improved comfort and productivity: EPC enhances building occupants' comfort and productivity by improving energy performance.
  2. Reduced maintenance costs: EPC decreases wear and tear on building systems, lowering maintenance costs and extending equipment life.
  3. Improved reliability: EPC enhances building systems' reliability, reducing downtime and increasing operational efficiency.
  4. Enhanced building operations: EPC can improve overall building operations through upgrades to automation and control systems like building energy management systems (BEMS), allowing better monitoring and management of energy consumption and performance.
  5. Improved occupant satisfaction: EPC can increase occupant satisfaction, leading to higher tenant retention and occupancy rates, ultimately enhancing financial performance.
  6. Regulatory compliance: EPC helps the building owners and facility managers comply with regulatory requirements related to energy consumption and greenhouse gas emissions, avoiding potential fines or penalties for non-compliance.

For example, the Willis Tower retrofit in Chicago is expected to reduce energy consumption by 80 million kWh per year, saving $10 million annually.

The project will also enhance comfort and productivity for tenants and reduce maintenance costs over time.

Challenges of EPC

Lack of Awareness

The foremost obstacle to EPC adoption is the limited awareness and comprehension among building owners and facility managers.

Reasons for this include insufficient educational initiatives, minimal EPC project exposure, and inadequate understanding of EPC's financial and technical aspects.

To tackle this issue, we must increase awareness and educate stakeholders on EPC benefits and processes through outreach programs like seminars, workshops, and webinars. Showcasing successful EPC projects through case studies can also build confidence.

For instance, the U.S. Department of Energy's Better Buildings program offers technical assistance, and resources, and highlights successful EPC projects for building owners and facility managers.

Navigating Complex Procedures

EPC's complicated process poses another challenge. The multiple steps, from pre-qualification to measurement and verification, can be overwhelming for those unfamiliar with EPC.

To counter this obstacle, guidance and support during the EPC process are essential.

Experienced ESCOs can guide stakeholders and offer technical expertise throughout the process, including EEM development and implementation.

The European Energy Service Initiative (EESI) offers such guidance, providing a step-by-step EPC guide, tools, and templates for EEM development and implementation.

Financial Hurdles

EPC financing is another challenge. Substantial initial capital investment may be difficult for some stakeholders to secure, and complex financial instruments like performance bonds and guarantees might be challenging to obtain or understand.

To address this, exploring diverse financing options and partnering with experienced EPC financiers is crucial.

Many financial institutions offer EPC financings, such as loans, leases, and energy savings performance contracts (ESPCs).

The U.S. Department of Energy's Federal Energy Management Program (FEMP) offers ESPCs as a financing option for federal agencies, providing technical assistance and support for ESPC projects, including ESCO selection and contract negotiation.

Conclusion

EPC offers numerous benefits, but it also presents challenges. By overcoming these obstacles through education, expert ESCOs, and alternative financing options, EPC can significantly reduce energy consumption, greenhouse gas emissions, and operating costs in buildings and facilities.

As awareness and financing accessibility improve, EPC is expected to play a critical role in energy reduction and sustainability efforts.

All stakeholders are encouraged to explore EPC as a powerful tool for enhanced energy performance, environmental impact reduction, and financial and operational benefits.

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