If you are a customer who wishes to implement energy efficiency or renewable energy project but do not have in-house capacity or do not wish to take all the risk associated with the savings from such project, energy performance contracting is a useful tool.
What is EPC?
Energy Performance contracting is a service in which a customer can get a set energy efficiency projects implemented by an energy management firm through contractual arrangement. The energy management firms are popularly known as Energy Service Companies. In addition to the customer and ESCO, third party financial agents (e.g. investors, creditors or utilities) are also a part of the project. The terms of the contract depends on the risk taking capacities of all the three entities.
What is the approach of EPC?
The approach is based on the transfer of risks from the client to the ESCO based on performance guarantees given by the ESCO. In EPC ESCO remuneration is based on demonstrated performance. A measure of performance is the level of energy savings or energy service. EPC is a means to deliver infrastructure improvements to facilities that lack energy engineering skills, manpower or management time, capital funding, understanding of risk, or technology information.
Models of contract for EPC
There are primarily two models of contracting between the client and the ESCO – guaranteed savings and shared savings. There are other models such as ‘chauffage’ contract, the ‘first-out’, the Build-Own-Operate-Transfer (BOOT) contract and leasing contract. In the guaranteed savings model the loan for the project goes on the client’s balance sheet and in the shared savings model the loan goes to the ESCOs balance sheet. The approach to financing is only one factor in structuring an EPC. The allocation of risks, the services contracted (e.g. maintenance and operation), the length of the contract, the split of savings between the client and the ESCO over the contract, the degree of monitoring and verification of savings felt necessary etc. also shape the contract. Hence, there are many variants that are possible. Each of the models has pros and cons both for the client and the ESCO. Detailed discussion on the different models can be obtained from the references.
What is the status of EPC in India?
ESCOs have long been expected to play an important role in promoting energy efficiency. While the concept of ESCOs is very popular in the western countries, the growth of the ESCO industry in India has not taken place despite repetitive efforts by the Government. One of the Government reports highlights lack of knowledge from building owners on the performance contracting route for energy efficiency improvements, high transaction costs in preparing documents for bid requests and a lack of true ESCO s who understand the ESCO concept and who can bring in third-party financing for the projects as barriers to immature markets of EPC in India.
In India most of the ESCOs are often equipment companies that focus on sales of a single technology, rather than a suite of energy conservation measures. Lack of technical expertise in these ESCOs to undertake comprehensive energy efficiency measure is a major barrier to EPC in India. However, enormous growth potential for ESCO activity in India has been estimated given financial and policy support.
- Institute of Building Efficiency, Johnson Control
About the Author:
Abhishek Jain is an Alumnus of IIT Bombay with almost 10 years of experience in corporate before starting Bijli Bachao in 2012. His passion for solving problems moved him towards Energy Sector and he is keen to learn about customer behavior towards Energy and find ways to influence the same towards Sustainability. More from this author.