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Task XVI ´Competitive Energy Services´
Subtask 1: Review of Task X
Purpose of the Review
A brief review of Task X ´Performance Contracting´ was carried out with the view of finding out such elements in that work which could help to set the starting points to Task XVI and to contribute to its objectives and expected results.
Objective of Task X
The general objective of Task X was to facilitate greater use of performance contracts between professional building owners and all types of companies offering these services.
In order to reach the objective the Experts of the Task laid out definitions for the terms used in the EPC context to set a common language for the industry especially in the international communication. The work specified various forms of implementing EPC by laying out alternative contracting arrangements to discuss their applicability and advantages in various investment conditions. The palette of services that are or could be offered using the ES-concept is introduced. The reporting also includes listing of barriers that had been faced in the participating countries in trying to expand the EPC-market.
Task X work was performed in 2000-2004. The participating eight countries in Task X were: Austria, Finland, France, Greece, Italy, Japan, the Netherlands, Norway, Sweden and the United States. The two essential elements in the output of the work are the Country Reports and the presentation material from the Experts’ meetings and workshops. The first three workshops were held in Oslo, Milan and Tokyo in 2002. These meetings concentrated on exchanging information on the national plans and activities, especially within the framework of the Country Reports. The other meetings and workshops were held in Stockholm, Milan and Graz in 2003 and in Athens in 2004. In the Stockholm workshop performance contracting was dealt with from the point of view of the applications in the participating countries.
The topics of the Milan workshop were:
· EPC Project Initiation,
· EPC Process and Procurement,
· EPC and Government Policy, and
· Refurbishment Projects.
The two workshops arranged in connection with the Experts’ meeting in Graz concentrated on
· EPC and General Refurbishment Projects and
· EPC and Government Policy.
The workshops in connection with the meeting in Athens went on dealing with
· EPC and Government Policy,
· EPC and Public Procurement and EPC, and
· Certificate Trading.
The material from the workshops gives definitions for the terminology commonly used in the context of Energy Performance Contracting, lots of information on national implementation activities, on the status of the EPC-business in each of the countries as well as versatile case studies of EPC projects.
Definitions
The EC directive on “Energy End-use Efficiency and Energy Services” defines energy services as “the physical benefit, utility or good derived from a combination of energy with energy efficient technology and/or with action, which may include the operations, maintenance and control necessary to deliver the service, which is delivered on the basis of a contract and in normal circumstances has proven to lead to verifiable and measurable or estimable energy efficiency improvement and/or primary energy savings.” The directive also defines "Energy service company" (ESCO) as
“a company that delivers energy services, energy efficiency programmes and other energy efficiency measures in a user’s facility, and accepts some degree of technical and sometimes financial risk in so doing. The payment for the services delivered is based (either wholly or in part) on meeting quality performance standards and/or energy efficiency improvements.”
In Task X an ESCO is defined as a company engaged in developing, installing and financing comprehensive, performance-based facility improvement projects, typically 7-10 years in duration, centered around improving the energy efficiency and reducing maintenance costs for facilities owned or operated by customers.
Energy Performance Contract (EPC) is a contractual agreement for the obligations between the client and the ESCO. EPC can be defined as a comprehensive energy service package aiming at a guaranteed improvement of energy performance and cost efficiency of buildings or real estate objects. An ESCO carries out an individually selectable cluster of services (planning, building, operation & maintenance, (pre-)financing, user motivation, …) and takes over technical and economical performance risks and guarantees. Most projects include third party financing. The services are predominantly paid out of future saved energy costs.
Scheme 1. The business elements in performance contracting (from Jan Bleyl’s presentation in the kick-off meeting of the Experts, Helsinki, 21-22 September 2006).
The key features are the following:
¡ An Energy Service Company (ESCO) plans and realizes energy efficiency measures and is responsible for their operation and maintenance throughout the contract term.
¡ The ESCO has to guarantee energy cost savings compared to a present state energy cost baseline.
¡ The efficiency investments are (partly) paid back out of the future energy cost savings.
¡ The client continues to pay the same energy costs as before (sometimes even a smaller amount). After termination of the contract, the entire savings will benefit the client.
¡ The ESCO’s remuneration is the contracting rate and depends on the savings achieved. In case of underperformance the ESCO has to cover the shortfall. Additional savings are shared between the building owner and the ESCO.
Types of ESCOs
Various forms of arranging an EPC-contract are applied in the market. Task X names the following:
- Shared savings: ESCO offers the financing and takes both the performance risk and the credit risk.
- Guaranteed savings: ESCO takes the performance risk and the customer is responsible for the financing.
- First out: all energy cost savings are used to pay the interests and amortization of the loans until full repayment.
- Contract for energy management (Chauffage Contract): offering better service at the current cost.
Public Internal Performance Contracting (PICO) means that one unit in a public sector organization enters into an EPC with another unit within the same organization.
Services offered
The services of an ESCO may cover all or some of the following functions: energy supply, engineering, design, supply of equipment, facility management and maintenance, monitoring, and financing. Complete service packages may be offered also by broker-ESCOs which are the contract partner to the client but subcontract all services except financing.
According to the listing presented in the Task X reporting following service elements have been included in performance contracts: technical consultation and detailed design, upgrading some parts of the facilities, management of engineering and construction, monitoring during the commissioning and contracted period for operation and maintenance, financing or financing advice, energy supply, refurbishment, operation and maintenance, training, and outsourcing.
An example of the different possibilities for service contracting is illustrated in Scheme 2 below.
Scheme 2.
From Jan Bleyl’s presentation in the kick-off meeting of the Experts, Helsinki, 21-22 September 2006.
While the emphasis in energy supply contracting (ELC) is most commonly on efficient procurement and supply of energy, the energy saving contracting (ESC) concentrates on efficiency measures at the end-user.
ESC is an individually tailored service package where the client decides which components he wants to have included in the contract and which components to take care of by its own organisation. For example financing can be given to the contractor or taken care of by the client, depending on the conditions for the financing. In many cases shared financing gives the optimal result. Typically the client takes care of the daily operational tasks. The essential elements belonging to the contractor are the risks of installation and functionality as well as the performance (savings) guarantee.
The various phases in a contracting package are shown in Scheme 3 below.
Scheme 3.
From Jan Bleyl’s presentation in the kick-off meeting of the Experts, Helsinki, 21-22 September 2006.
Barriers
The Experts in Task X brought up a long list of obstacles that have been identified when marketing and implementing energy services: slow movement from buyers, lack of understanding of the opportunities, lack of information, time-consuming work for raising interest, cost-consuming efforts to establish the baseline, lack of public recognition, lack of clear procurement rules and contract arrangements, lack of general contract conditions, lack of guarantees and securities, lack of financing alternatives, challenges in measurement and verification, lack of technical experts, separated responsibilities for investment and operation, low energy prices, costly tendering process, limited time available on the customer’s side, no incentive to make improvements, concern for the own personnel, problems in entering into multi-year contracts, overlapping roles between the client’s person in charge and the ESCO-representative, ESCO’s insufficient knowledge of the client’s specific problem, disadvantageous profit/risk outlook, legal barriers with public tenders, efficient use of energy, difficulties in the evaluation of bids, and variable quality of consultants.
Opportunities
Even though many obstacles have been met in the market place the opportunities are still there offering a professional ES-entrepreneur chances to find ways to outweigh the barriers: existing improvement potential of energy efficiency, encouraging examples of implemented EPC-projects, relieving use of resources to the client’s core business, and speeding up of the implementation of improvements.
In its reporting Task X is limited to introducing the basics of EPC with several conclusions from the Country Reports regarding the conditions for successful EPC-business. Instead, the Task does not provide any other practical tools than examples of contract models in some countries to facilitate easier operation in the business. This is where Task XVI is continuing with the objective of introducing e.g. a couple of manuals to the actors in the energy services market.
Procurement&Contracting
Regarding the procurement process in public sector projects further consideration is seen necessary in terms of
Ø selecting independent consultants to prepare documents for the competitive bidding,
Ø formulating the bidding requirements so that enough interest can be found among the potential bidders,
Ø taking care of the customer’s competence to manage the competitive bidding process
These considerations emphasize the necessity of training and information material in removing barriers from the procurement process of energy services in the public sector.
Since the implementation of Task X some new directives have entered into force in the European Union calling for and making room for additional actions for energy efficiency improvements.
ESCO project cases in Task X countries
A number of ESCO-projects implemented in Task X are presented in the Country Reports and listed in one of the appendices to the Summary Report, giving information of many of the characteristics of the projects. Estimates of the EPC market potential in Europe, Japan and the U.S. are given, indicating that the then volume of the business covers only 0,2-3,0 % of the potential.
Recommendations of Task X
The final report of Task X concludes with the following recommendations as to the actions to facilitate greater use of performance contracts between professional building owners and all types of companies offering these services:
1. Credibility and trust
Short term actions: information, creation of networks, demo projects
Long term actions: International ESCO Association, global EPC-network, energy management, accreditation
2. Process&procurement
Short term actions: clarification of rules, guidelines, energy audits and feasibility studies, prequalification and two-stage tendering, conditional award of contract
Long term actions: alternative ways of initiating EPC-projects
3. Contracts
Short term actions: national standards by public property owners (FEMP)
Long term actions: contract conditions finalized (FIDIC), manuals
4. Financing
Short term actions: bank awareness, multi-year contracts for local governments, economic incentives, government guarantees, warrantee formulations, insurance arrangements
Long term actions: certificate trading (white and green), EPC performance bonds
5. Measurement&Verfication
Short term actions: analysis of existing protocols, pilot projects, simple benchmark alternatives, yearly measuring
Long term actions: simplified benchmarking, measuring routines
6. Market
Short term actions: EPC-competitions by public bodies
Long term actions: transition to developing countries
Conclusions
Task X material includes references to the market segments: public and private service sector, commercial sector, apartment buildings, process and other industry, showing that the energy services concept can be made to work in various sectors of energy use.
The most important actions to promote the services and to overcome the barriers are:
Ø to raise the general credibility through aimed information
Ø demonstration projects
Ø accreditation of ESCOs
Ø special performance guarantees
Ø process and procurement guidelines
On the basis of the presentations in the workshops of Task X it can be concluded that the role of governments is considered crucial in establishing the playing field for the energy service business e.g. through
Ø procurement adaptation
Ø public buying
Ø standard contracts
Ø energy audits
Ø public facilitators
Ø regulations
Ø financial mechanisms
Ø subsidies
Ø tax benefits
Ø information
Energy services of ESCOs enjoy substantial support of the national governments setting a challenge to the market actors to succeed.
Public sector entities can act (and have acted) as forerunners assuming the client’s role, establishing processes and models to be followed in the energy services business. At the same time it raises the question: Can EPC live without (extensive, continuous) public support?
In its reporting Task X is limited to introducing the basics of EPC with several conclusions from the Country Reports regarding the conditions for successful EPC-business. Instead, the task does not provide any other practical tools than examples of contract models to facilitate easier operation in the business. This is where Task XVI is continuing with the objective of introducing e.g. a couple of manuals to the actors in the energy services market.
Reflecting the results of Task X against the targets of the National Implementation Activities in Task XVI the following congruence (marked with the green YES) could be identified:
Capacity build-up, training of market actors / NO / NO / NO / NODevelopment of standards/templates, model contracts, procurement / YES / NO / NO / NO
Participation in the activities of the centre of excellence / NO / NO / NO / NO
Adoption of the manuals / NO / NO / NO / NO
General market information and development / YES / NO / NO / NO
Developing model projects / YES / NO / NO / NO
Designing, elaborating and testing of innovative energy sevices and financing models / NO / NO / NO / NO
↑
A C T I V I T I E S / ↑ / ↑ / ↑ / ↑
TARGETS AND EXPECTED RESULTS / Enlargement of the energy services market / Higher quality of energy services and implementation capacity / Contribution to the implementation of the Energy Service Directive / Integration with the international energy services community
I N S T R U M E N T S ↓ / ↓ / ↓ / ↓ / ↓
Opportunity cost tool / NO / NO / NO / NO
Educating of the clients / NO / NO / NO / NO
Supply contracts with dsm-measures / YES / NO / NO / NO
Measurement and verification protocol / YES / YES / NO / NO
Other international projects in the field of energy services