A guide to Energy Performance

Contracts and Guarantees

This guide discusses the incorporation of energy performance guarantees into service contracts
in order to transfer some of the energy savings risk from the customer to the supplier. It identifies
a range of such service contract models and examines the use of energy savings to pay down the
cost of energy efficiency investments, in some cases using external finance.
A number of common Energy Performance Contracts (EPCs) models - shared savings, guaranteed
savings and variable contract term are explained and a number of short case studies are outlined.
It also illustrates the EPC procurement stages and identifies contractual considerations that are of
particular relevance to public sector organisations.
The guide is of relevance to public and private sector managers interested in alternative methods of
achieving and financing energy efficiency, as well as ESCOs. It is anticipated that the guide will also
assist in achieving a common understanding of terminology and contract models, thereby assisting
in market development.
Contents
02

Traditional Approach To Energy Management

03

Energy Service Models & Performance Guarantees

05

Energy Performance Contracts (EPCS)

06

Key Considerations When Engaging Energy Services

07

EPC Models & Third Party Financing

09

Measurement & Verification of Savings

10

Case Studies

14

Other Considerations

15

Public Sector Considerations

19 Glossary
20 References
Version: Draft for consultation

02

Traditional Approach to Energy Management

Organisations wishing to improve their energy

efficiency and reduce energy-related costs
may engage contractors, product suppliers
and service providers to assist. Traditionally
organisations might start by engaging an
energy consultant to conduct an energy survey
(see bottom of the ladder below). This survey
identifies opportunities for energy savings,
ranging from operating practices (such as
heating schedules), to maintenance (such as
a faulty cooling valve), to controls (such as
occupancy control of lights), to equipment
investments (such as efficient light fittings or
boilers). The organisation then makes some
changes directly, generally operational, and
arranges for their own maintenance staff
or a maintenance contractor to resolve the
maintenance issues. Other works controls and
equipment upgrades - require substantial effort
by the customer to engage design consultants
and contractors to undertake the works. new
equipment may be purchased or leased. The
organisation may also arrange an ongoing energy
management service, possibly with the original
energy consultant, to support their efforts and
implement an energy management programme.

This fragmented approach calls for the

organisation to commit management time and
financial resources to procuring and achieving
energy savings. As many organisations dont have
energy management and project management
capability in house, they are uncertain that
savings will materialise: indeed, the customer
organisation takes the energy performance risk
that savings will be achieved as predicted. A
common outcome is that some energy saving
opportunities are implemented (or partially
implemented), but the full potential for energy
savings is not achieved.

Fig.1 Traditional Approach to Energy Management

Internal Energy Management with Support from External Suppliers

Energy Project Design

Facilities or Maintenance Management

Energy Management Services

Energy Consultancy

A GuIdE TO EnERGy PERFORMAnCE COnTRACTS And GuARAnTEES

Customer Supply of Capital

Customer Risk of Achieving Savings

Equipment Purchase or Lease

Energy Service Models and Performance Guarantees

To address this risk to the customer organisation

that savings do not materialise, energy
performance guarantees can be incorporated
into contracts with service providers, contractors
or product suppliers, so that some or all of the
performance risk is transferred to the supplier.
For convenience, we refer to this mix of service
providers, contractors and product suppliers as
Energy Service Companies. These ESCOs may
also provide or source finance for the energy
efficiency investment, but that is not
a prerequisite.
The ladder (below) illustrates a range of energy
product and service contract models that
incorporate performance guarantees. The
higher a service is on the ladder the more
comprehensive the retrofits, the more

03

performance risk is assumed by the ESCO,

and the greater the access to external capital
(if needed). However, comprehensive retrofits
and use of external capital has implications:
A larger contract size to cover the
transaction cost.
A longer contract duration to cut deeper into
energy use.
A more specialised and longer procurement
process.
A greater emphasis on the measurement
and verifications of savings.
using procurement frameworks and model
contracts can help simplify the procurement
effort and minimise transaction costs.

Fig. 2 Alternative Approach to Energy Management

Energy Service Companies take Performance Risk
With
ESCO/TPF

10-20 Years
1M+

Negotiated
Tender

IPMVP

Supply of Capital

Size and Duration of Contract

Procurement Process

Energy Measurement and Verifcation of Savings

With ESCO

Integrated Energy Contract

Energy Performance
Contract

Energy Supply
Contracr

Energy Performance Contracts

Shared Savings
Guaranteed Savings

Risk of Achieving Savings

Variable Contract Term (Optional First Out)

Local Energy Supply Contract (ESC)

Equipment Lease/Supplier Credit with Performance

Guarantee & Payments Matched to Energy Savings
Energy Project Design
with Performance Payment or Guarantee

Facilities or Maintenance Management Service

with Performance-Based Payments

Energy Management Service

with Performance-Based Payments
With
Customer

With
Customer

Months
1,000+

Three
Quotes

Simple
Checks

See Fig.3 overleaf

for a more detailed
description of Energy
Services.

04

Fig.3 Detailed Description of Services Incorporating Energy Performance

Integrated Energy Contract
This is a combination of an Energy Supply Contract, possibly involving a CHP to supply heat and power, and an
Energy Performance Contract, possibly involving lighting and BMS upgrades, fabric improvements, etc.
Energy Performance Contracts
Shared Savings
The ESCO designs, finances and implements the project; verifies energy savings; and shares an agreed
percentage of the actual energy savings over a fixed period with the customer. The ESCO may receive financing
directly from a third party.
Guaranteed Savings
The ESCO designs and implements the project and guarantees the energy savings. If the savings are less than
expected, the ESCO covers the shortfall. A third party provides the financing directly to the customer; the
ESCO may facilitate the financing arrangements.
Variable Contract Term
The ESCO designs, finances and implements the project; verifies energy savings. If the savings are less than
expected, the contract term can be extended to allow the ESCO recover its full payment. In the First Out
variation of this, the ESCO takes all the savings until it has received its full payment.

(Local) Energy Supply Contract

The ESCO takes over operation and maintenance of the equipment and sells the output (steam, heating, cooling,
lighting) to the customer. Costs for all equipment upgrades, renewals, repairs are borne by the ESCO, but ownership
typically remains with the customer. Simpler variations include CHP or biomass heat supply contracts.
Equipment Leasing/Supplier Credit with Performance Guarantee and Payments Matched to Energy Savings
The supplier installs the equipment and may maintain it; lease/credit payments financed by verified savings.
Ownership generally transfers at the end of a lease, whereas ownership may transfer on supply in the case of
a credit arrangement.
Energy Project Design with Performance Payment
Design engineers guarantee a project/projects will achieve a certain level of energy savings, with a portion of the
fees linked to verification of these savings. This incentivises the design engineer to stay with the project until issues
that may affect savings are resolved.
Facilities or Maintenance Management Service with Performance-based Payments
An energy performance indicator, such as DEC rating, is incorporated into the contract, thus bringing it into
the service providers frame. May include a financial incentive to use their services to improve the efficiency
of the facility.
Energy Management Service with Performance-based Payments
Service provider conducts an audit and assists with project implementation, possibly including ongoing energy
management activities such as staff awareness. A performance-based fee can include penalty/bonus if energy
savings are less than/greater than agreed (gain share arrangement).

Basic Energy Performance Payments & Guarantees

There are a range of options when it comes to the ESCO taking some of the risk that a project
may not deliver the energy savings originally envisaged. For instance, in a performance payment
arrangement it might be agreed that 80% of the ESCOs fees are fixed, but 20% is variable based
on the extent to which savings materialise and are verified as projected. In a case where an ESCO
is delivering savings through facility and energy management activities, rather than investments,
a gain-share arrangement could be that the ESCO gets a percentage of the value of the savings
achieved. In a performance guarantee, the ESCO might only receive the final payment once it
demonstrates that savings reach a particular level, either in energy or percentage terms. In all these
cases the ESCO supplies a product or service and assumes a degree of performance risk, but much
of the risk remains with the customer; the ESCOs payment is not entirely or directly based on the
level of savings achieved.

A guide to Energy Performance Contracts and Guarantees

Energy Performance Contracts (EPCs)

The top rungs of the ladder are comprehensive

Energy Performance Contracts (as distinct from
performance guarantees or payments). Such
EPCs are not structured around the supply of
a physical product or service, but around the
desired outcome (or customer utility) such as
energy savings and/or equipment renewal.
These are generally long term contractual
agreements where the customer benefits from
new or upgraded energy equipment, and the
ESCOs payment is directly tied to the energy
savings achieved. The cost of investment can be
paid back from the savings, and if the savings
fall short, the ESCO covers the shortfall. These
comprehensive EPCs typically involve the entire
building or estate as a single entity in which to
deliver energy savings.
Comprehensive EPCs are more than just
financing mechanisms. They are programmes of
practical engineered energy efficiency measures
that are implemented in buildings to deliver real
energy savings through heating, ventilation, air
conditioning, lighting, peak load management,
thermal insulation, controls and building fabric
improvements.
The programmes may also include retraining of
staff on modern efficient operating methods,
or direct operation by the ESCO. The intention
is to keep the total energy consumption to a
minimum by way of demand side energy
efficiency methods.

The key benefits of comprehensive EPCs

to the customer include:
Avoided capital expenditure by
transferring this role to the ESCO or a
financier.
Energy and cost savings are delivered
quickly and for the long term although
there is a relatively long procurement lead
time, once an EPC is in place the ESCO
can generally deliver savings more quickly
and efficiently than a piecemeal approach
of procuring individual energy projects.
The ESCO can guarantee savings will be
sustained over the long term.
Risk transfer the risk of achieving savings
and the credit risk are generally transferred
from the customer to the ESCO and
financier.
Modernisation of a buildings energy
infrastructure the ESCO will make
investments that reduce energy use,
but may also improve reliability, reduce
maintenance costs, improve comfort and
upgrade plant and equipment that has
reached end of life. Staff training may also
be included.
Reduced management time
management can focus on the desired
outcomes (energy and cost savings),
without having to manage how they are
achieved. Freed of the need to understand
and approve energy saving predictions
and designs, management time can be
focussed on core business.

EPC in a Nutshell
An important principle of energy performance contracting is that energy efficiency investments are
paid for over time by the value of energy savings achieved.
Key elements of any energy performance contract are:
The ESCO undertakes to improve the energy efficiency of the facility.
The contract is structured so that the compensation is contingent on demonstrated performance,
i.e. the ESCO takes a risk.
There is an agreed method for measuring and verifying energy savings.
An EPC arrangement may involve the energy efficiency investment being financed by either the
ESCO or a third party financier.

05

06

Key Considerations When Evaluating a Project for an EPC

When evaluating the suitability of a project, or

group of energy saving opportunities, for energy
performance contracting there are four key
considerations, as illustrated below.
Fig.4 Key Considerations for EPCs

Savings

Capital
Financially
Viable
Project

Risk

The first and core consideration is that the

project has to be viable in its own right: in
order to justify anybody spending capital on
implementing an energy saving project, the
savings generally have to be sufficient to recover
the original capital cost and investment return
over a number of years (3 to 20 years). If the
energy savings (and any maintenance savings) are
insufficient, then the customer may have to fund
a portion of the works as a cost of ownership.
Furthermore, the project must be of sufficient
scale to justify the transaction cost and attract
finance.
If the project is viable, then one must consider
how the capital will be supplied to finance
the works, how the savings will be distributed
and how the various risks will be allocated.
Traditionally these are all borne by the customer,
but an EPC allocates them to the customer, the
ESCO and the financier.
The capital can be supplied out of the
customers own funds, by the ESCO, or by a
third party (e.g. a public capital fund, a private
capital fund, an energy utility, a bank). The overall
capital is likely to be financed from a number of
sources. If capital is supplied by an ESCO or third
party, then a multi-year contract is required so
they can recover their investment with interest.
The associated contract options are discussed
further in the next section. The cost of this capital
is critical, and this depends largely on the risks,
discussed below.

A guide to Energy Performance Contracts and Guarantees

The next consideration is risk. As already

discussed, there is a risk that equipment will not
perform as was expected, or projected savings
will not materialise because the underlying
assumptions in predicting savings were incorrect.
This risk is typically borne by the ESCO, this being
their area of expertise and value added. The risk
may be borne entirely by the ESCO, such as when
the ESCO guarantees the savings, or in part, such
as when the savings are shared.
There is also the credit risk, i.e. the risk that the
customer cant, or wont, pay at some point in
the future. This will be assessed by the ESCO or
the third party financier and will affect the cost
of capital.
Finally, there is the energy price risk. If energy
prices change, so does the value of the savings.
As the customer is already inherently exposed
to fluctuations in energy prices and has most to
gain if energy prices fall, this risk is typically borne
by the customer. This can be done by agreeing
a fixed energy price, or an energy price floor, at
which savings are valued.
The fourth consideration is savings. Not just the
value of savings, but also how those savings are
allocated amongst the different parties. Generally
the higher the savings, and the greater the
proportion of savings that are allocated to the
ESCO or financier, the shorter the contract term.
Typically the contract life is determined by the
length of time needed for the savings to repay
all the costs of the project (capital, project
management, financing costs, etc). It may be
extended if the customer wishes the repayment
terms to be lower by spreading them over a
longer period of time; or where the client wishes
the ESCO to guarantee the savings for a longer
period of time. There is usually a premium for this.
The capital cost of a project, the annual cost
savings it will deliver and the number of years
for which savings accrue (project life) will
determine the size of the overall project return
(i.e. its viability, or Internal Rate of Return). How
this return is distributed is determined by who
supplies the capital, and how the risks and
savings are allocated.

EPC Models and Third Party Financing

Different ESCO models (as defined in different

forms of contract) and contract clauses allocate
these risks and the rewards between the
different parties.
As mentioned, the ESCO, the customer
organisation, or a third party (e.g. public fund,
private capital fund, energy utility or bank) may
provide the capital. One of the principal benefits
of EPCs is that it provides a mechanism for the
customer organisation to save now and pay later
out of the savings achieved. This future cash
flow, arising from a capital investment in energy
savings, provides a means of capital repayment
that may be satisfactory to a financier.

07

Shared Savings Contract

Fig.5 Cash Flow in Shared Savings Contract

Customer

Energy
Investment

Share of
Savings

Repayments

ESCO
Loan

If Third Party Financing is used, the financier

may supply the capital directly to the ESCO or
to the customer, resulting in a range of contract
permutations. To bring clarity to the discussion,
Energy Performance Contracts are most easily
initiated by beginning with some form of
contract model or framework which can be
customized for the specific project.
Three EPC business contract models are
discussed here:
Shared savings.
Guaranteed savings.
Variable contract term.
We discuss each below assuming a financier is
involved. If the financing is provided by an ESCO
or the customer organisation, then this simplifies
the contractual arrangements considerably. There
are a number of short case studies from page 10
onwards which the reader may find helpful to
refer to.

Third Party
Financier

FIG. 5 CASH FLOW IN SHARED SAVINGS CONTRACT

In a typical Shared Savings Contract the ESCO

provides the capital (perhaps out of its own
funds, or it may take out a loan from a third party
financier to cover the cost of the investments in
energy savings). Once completed, the customer
has lower energy costs and will share an agreed
portion of these savings with the ESCO over the
term of the contract. The ESCO uses these savings
to repay the loan from the financier. Typically the
term of the contract and the loan will match, and
the ESCOs share of the savings will exceed the
loan repayment costs. Importantly, the financier
is taking the risk that the ESCO may be unable to
repay the loan; if the ESCO is a small or medium
enterprise, the cost of credit may be quite high.
In some cases the energy savings may be valued
based on prevailing energy prices, which means
the ESCO also takes the energy price risk. These
considerations generally mean the ESCO is a large
enterprise with strong balance sheet and access
to capital markets.
Although this contract arrangement can specify
that the ESCO will guarantee, rather than share,
the savings, the ESCO is likely to prefer to share
the savings. From the ESCOs perspective, sharing
savings incentivises the customer to minimise
energy use and reduces the ESCOs energy
performance risk. As the ESCO is relieving the
customer of the need to provide finance, the
ESCO is likely to be able to dictate the use of
shared savings.
The ESCO typically retains ownership of the asset.

08
Guaranteed Savings Contract

Variable Contract Term

Fig. 6 Cash Flow in Guaranteed Savings Contract

Fig. 7 Cash Flow & Variable Contract Term

Baseline Energy Cost

Customer

Energy
Works

ESCO

Payment
for work

Repayments

Loan

Annual Energy Costs

Savings
Guarantee

Savings Paid to
ESCO or Financier

Savings Kept
by Owner

Post-Retrofit Energy Cost

Third Party
Financier
Contract
Begins

In a typical Guaranteed Savings Contract the

customer takes out a loan from a financier to
finance the investments in energy savings. The
customer contracts with the ESCO to implement
the energy savings works. The ESCO assumes
performance risk by guaranteeing energy
savings. The customer pays the ESCO for these
works on acceptance of the installation, possibly
withholding a portion until savings have been
verified. The customer may also pay the ESCO an
ongoing fee to verify savings annually or maintain
the equipment. If the savings are insufficient, the
ESCO pays the difference between what was
achieved and what was guaranteed. The savings
are valued based on a fixed energy price agreed
at the outset. This contract type means the ESCO
takes the performance risk, the customer takes
the energy price risk, and the financier takes the
credit risk.
As the customer is arranging financing based
on the value of energy savings, the customer
is generally anxious that the ESCO guarantees
energy savings. In this case the customer is not
relying on the ESCO for capital and is likely to
be able to dictate that the ESCO will guarantee
savings. As the ESCO does not need access to
capital, or a credit rating, smaller ESCOs can
participate. This arrangement is well-suited to
public sector organisations where the financier
may be a public investment fund.
Although the ESCO does not provide the
capital, the ESCO is likely to have an established
relationship with the financier and to be able
to bring the financier to the table. The ESCOs
reputation in delivering on its guarantee is an
important consideration. A performance bond
may also be used.

A GuIdE TO EnERGy PERFORMAnCE COnTRACTS And GuARAnTEES

Early
Payout

Maximum
Contract
Term

FIG.7 CASH FLOW & VARIABLE CONTRACT TERM

Variable Contract Term is similar to a Shared

Savings Contract, except it reduces the risk to
the ESCO if the quantity or value of savings is less
than expected.
In the example illustrated, a customer signs an
EPC with an ESCO whereby the ESCO receives
90% of the verified energy savings each year
until the ESCO has been paid its original capital
investment plus an agreed rate of return. Once
the ESCO has received full payment, the contract
ends (early payout) and the future savings
are kept by the owner. normally a maximum
contract term would be agreed, at which point
the contract would end even if the ESCO has not
received full payment, and all future savings are
kept by the owner.
A variation on this arrangement is called First
Out, in which case the ESCO receives 100% of the
energy verified savings each year until the ESCO
has received its original capital plus agreed rate
of return. At that point the contract ends and the
owner receives all savings. The advantage of this
arrangement is it reduces the amount of time the
customer and ESCO are bound together.
The Variable Contract Term arrangement is
appealing as it is very transparent, and the ESCOs
Internal Rate of Return (IRR) is agreed up front.
In the event that the customers circumstances
change and the customer wishes to buy out the
ESCO, the value of the contract can be calculated
thereby allowing an early termination.
In the above example, a financier rather than the
ESCO, may provide the capital and receive the
repayments. However, the ESCO is likely to remain
guarantor of the energy savings.

Measurement and Verification of Savings

09

of instantaneous electrical (or gas or heat) load

before and after may be sufficient. In most cases
logging of energy use at regular intervals over
a representative timeframe will be required. In
cases where there is no historical baseline data,
a calibrated simulation may be undertaken;
however, this requires time and skill to do
accurately.

Savings, of course, are a measure of avoided

energy use and cannot be measured directly.
They are established by comparing measured
energy use before and after implementation of
energy conservation measures with adjustments
for changes in weather, occupancy, opening
hours, production, etc.
Records of energy use before any changes are
made, or Baseline Energy use, are invaluable.
Consideration should be given to gathering
Baseline energy records at the Measurement
Boundary (discussed below) for this purpose very
early in the process.

To establish the impact of an energy

conservation measure on energy use, a set of
rules must be agreed at the outset to measure
and verify savings. This is called a Measurement
and Verification Plan and includes the records of
Baseline Energy, the Measurement Boundary, the
method of measurement, how adjustments will
be made to take account of changes in weather,
etc., and how savings will be calculated.

When planning to measure and verify savings, a

fundamental consideration is the Measurement
Boundary, i.e. savings may be determined from
measuring an entire facility, or just a portion of it.
The Measurement Boundary should be selected
so that the savings will be high enough to be
confidently discriminated from the Baseline
Energy data.

The above concepts are generally based on an

established protocol, such as the International
Performance Measurement and Verification
Protocol (IPMVP). Certified Measurement and
Verification Professionals can provide guidance.
A list of certified professionals is available at www.
evo-world.org/CMVPs.

The other fundamental consideration is how

energy use will be measured to establish
savings. In some cases, taking a measurement
Fig.8 Measuring and Verifying Energy Savings as
a Result of an Energy Performance Contract

Energy Conservation Measure Installation

Energy Use
Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Savings

Jan

Feb

Mar

Baseline Period

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Reporting Period Year 1

Baseline Energy
Adjusted Baseline Energy (Increased Activity)
Measured Energy
Source: EVO

FIG.8 MEASURING AND VERIFYING ENERGY SAVINGS AS A RESULT OF AN ENERGY PERFORMANCE CONTRACT.

10

Case Studies

Case Study of Energy Management with Performance-Based Payment

Benefits
The ESCO is motivated to remain involved until
energy savings meet or exceed projections.

Customer
Port of Cork.
ESCO
Longship.

Investment
270,000.

Measures
The ESCO undertook lighting, heating and
insulation upgrades to buildings, water saving
projects and specific works to dockside cargo
handling equipment such as straddle carriers and
mobile cranes which are used to move containers
around the facility. Local energy metering is also
being installed.

Savings
It was calculated that these projects would result
in a 5% overall reduction in energy use by the
Port in 2012 relative to 2011. This will kick start
the Port of Corks journey to implementing the
ISO50001 energy management standard and
achieving their target of a 33% energy efficiency
improvement by 2020.

Contract
The project was financed and is owned by the
customer (with grant assistance from SEAI). There
is a gain share agreement between the customer
and the ESCO, whereby if actual savings are 4-6%
of overall energy use, then the ESCO will be paid
their fees in full. If savings are less than 4%, then
the customer may claw back a percentage of the
fees paid to the ESCO. If savings are greater than
6%, the ESCO will be paid bonus. Savings will
be monitored and the final fee paid at the end
of 2012.

With ESCO

With ESCO/TPF

10-20 Years 1M+

Negotiated Tender

IPMVP

Risk of Achieving
Savings

Supply of Capital

Size and Duration

of Contract

Procurement
Process

Measurement
and Verification
of Savings

With Customer

With Customer

Months 1,000+

Three Quotes

Simple Checks

A GuIdE TO EnERGy PERFORMAnCE COnTRACTS And GuARAnTEES

11
Case Study of Equipment Supply & Installation with Energy
Performance Guarantee
Customer
44 poultry broiler sheds across 22 sites in six
counties.
ESCO
Candelas Ltd.
Measures
Lighting only retrofit involving the removal of
existing incandescent lighting and replacing
it with dimmable fluorescent T5 corrosion
proof fittings, including dimming systems and
waterproof distribution boards. The lights were
hung using a catenary wire suspension system,
and wired using seven-core cable for maximum
dimming flexibility.
Contract
The ESCO assembled a group of farmers, and
applied for co-funding from SEAI. The ESCO
guaranteed energy savings of 65% (typical,
depending on each farms existing installation)
based on a direct reduction in lighting load.
Further savings associated with the use of
dimming were not included in the guarantee due
to the added complexity of verifying savings.
Cost meters also installed on lighting circuits and
farmers trained in their use.
The farmers paid 50% to the ESCO up front, and
50% on installation and verification of
energy savings.
With ESCO

The reduction in lighting load was verified by

measuring the power drawn by the lighting
circuits before and after the installation. Lux
levels were also measured before and after to
demonstrate light levels were the same or better.
The ESCOs guarantee is that if the energy savings
are less than those guaranteed, the ESCO refunds
the difference between actual and guaranteed
savings
The SEAI grant, once received by the ESCO, was
returned to the farmers as a rebate.
Benefits
The ESCO assembled a group of farmers with
a common need to create a viable project
of sufficient scale to justify its management
time. The farmers risk was reduced by the
performance guarantee. The new lights have a
longer life, and associated lower maintenance
costs. The dimming feature has saved energy
and improved light management; anecdotal
evidence suggests bird weights, mortality rates
and bedding costs have improved (currently the
subject of further research).
Investment
200,000.
Savings
75,000 / 538,000kWh.

With ESCO/TPF

10-20 Years 1M+

Negotiated Tender

IPMVP

Supply of Capital

Size and Duration

of Contract

Procurement
Process

Measurement
and Verification
of Savings

With Customer

Months 1,000+

Three Quotes

Simple Checks

Risk of Achieving
Savings

With Customer

12
Case study of Energy Performance Contract with Shared Savings
Customer
Royal Victoria Eye and Ear Hospital.

performance, energy usage and optimisation of

plant control based on continuous tariff analysis.
Measurement and verification of savings is being
conducted independently by an obligated party.

ESCO
ARAMARK.
Measures
The ESCO carried out an investment grade
audit and assessed the feasibility of upgrading
equipment in the hospital to provide energy
savings. The equipment was selected, installed
and commissioned including a 70KWe combined
heat and power plant, building management
system, efficient lighting, insulation and a remote
energy monitoring system.
Contract
The project was financed by the ESCO and
the customer (with grant assistance from SEAI).
The customer receives a quarterly report and
invoice detailing the savings. The costs on the
invoice are fully financed by the savings in the
utility bills. This is a shared savings agreement
over 10 years with future savings going directly to
the hospital. There is an incentive for both
the customer and the ESCO to work together to
achieve additional savings.

Benefits
This project resulted in guaranteed electrical
and fuel savings for the client combined with
improved comfort conditions for both staff and
patients. All operational and maintenance risks
are the responsibility of the contractor.
Investment
300,000 financed by the ESCO and the
customer (with grant assistance from SEAI).
Savings
Circa 60,000 per annum.

A full structured ongoing energy management

service is provided as part of the contract
including staff awareness campaign and routine
audits, outlining further opportunities for savings.
There is also remote measuring of plant
With ESCO

With ESCO/TPF

10-20 Years 1M+

Risk of Achieving
Savings

With Customer

Negotiated Tender

IPMVP

Procurement
Process

Supply of Capital

Size and Duration

of Contract

With Customer

Months 1,000+

A GuIdE TO EnERGy PERFORMAnCE COnTRACTS And GuARAnTEES

Measurement
and Verification
of Savings

Three Quotes

Simple Checks

13
Case Study of Integrated Energy Contract with Shared Savings
Customer
Stewarts Hospital.
ESCO
dalkia.
Measures
Fuel conversion from oil to gas. new energy
centre and district heating system incorporating
2no. 1 tonne steam boilers, 700kW heating boiler,
and 140kWe CHP. new main distribution board
and emergency generator. Controls to optimise
the boilers and provide 55no. heating zones.
Energy monitoring system. Energy efficient
lighting. Second 140kWe CHP at leisure centre.

Benefits
new, reliable plant with no upfront capital cost.
Energy savings, arising from supply side and
demand side efficiencies, help offset monthly
payment cost. Operational and maintenance
risks transferred to contractor. Greenhouse gas
reduction.
Investment
1.5 million, financed by dalkia (with grant
assistance from SEAI).
Savings
Circa 100,000 per annum.

Contract
The project was financed and is owned by the
ESCO (with grant assistance from SEAI). ESCO
invoices monthly to cover cost of energy supply,
financing, operation, maintenance and energy
management, replacement guarantee on failure.
Shared savings agreement. Lower energy costs
help offset financing costs. 15 years.

With ESCO

With ESCO/TPF

10-20 Years 1M+

Negotiated Tender

IPMVP

Risk of Achieving
Savings

Supply of Capital

Size and Duration

of Contracr

Procurement
Process

Measurement
and Verification
of Savings

With Customer

Months 1,000+

Three Quotes

Simple Checks

With Customer

14

Other Considerations

Comprehensive Refurbishment
Generally EPCs are used to implement energy
conservation measures for building technologies
such as heating, ventilation, air conditioning/
cooling systems which often have payback
periods of up to 10 years. In most cases a building
envelope refurbishment (or refurbishment of
plant with low energy consumption) is excluded
due to the much longer payback of these
measures. This results in a large portion of the
overall energy saving potential being neglected
during refurbishment and lost until the next
comprehensive refurbishment cycle of the
building, more than 30 years later.
It is worth noting that this still provides the main
benefits of EPC: transfer of technical performance
risk using a turnkey solution with guaranteed
energy (and maintenance) savings, and those
savings used to (in this case partially) cover the
investment cost. The additional funding provided
by the customer simply faces up to the reality
that energy efficiency cannot finance everything.

A guide to Energy Performance Contracts and Guarantees

The scope of an EPC can be extended to

incorporate fabric-related measures by:
Bundling projects with different payback
periods into a single energy performance
contract.
Securing a grant.
Incorporating maintenance budgets where
the refurbishment has maintenance and
energy benefits, e.g. flat roof insulation
combined with roofing material renewal.
Providing additional funding as a cost of
ownership associated with non-financial
benefits, e.g. improved building appearance,
improved occupant comfort, health and
safety requirements, end of life, risk of failure.
Extending the EPC term to 20+ years.
Agreeing to pay the ESCO/financier a
residual value at the end of the contract.

Public Sector Considerations

Drivers
The National Energy Efficiency Action Plan provides
a vision for 2020 that the public sector will improve
its energy efficiency by 33% and will be seen to
lead by example showing all sectors what is
possible through strong, committed action1. As
part of its plan to reach this goal, and in line with
the EU Energy Services Directive, SEAI is promoting
the use of Energy Performance Contracts (EPCs)
in the public sector, particularly EPCs that involve
the deployment of private sector capital to finance
investments in energy efficiency. In essence, SEAI is
encouraging the development of a market where
the private sector makes investments in energy
efficiency, with the energy savings being used to
repay those investments over time.
Avoid Skimming The Cream
Despite discussion about project viability, it is
important to remember the public sector goal of
a 33% reduction in energy use by 2020. Achieving
the public sector goal usually requires deep
retrofit, i.e. implementing projects with long
paybacks (exceeding 10 years). When assessing a
menu of energy saving opportunities, it is tempting
to implement those with the shortest payback first
(skimming the cream). However, doing so makes
it difficult to finance subsequent projects with
longer paybacks that may be needed to reach the
33% saving target. Consideration should be given
to bundling a number of opportunities of varying
investment attractiveness into a single project.
Balance Sheet Considerations
Whoever receives the finance effectively carries
this liability on their balance sheet. Balance sheets
show an organisations assets and liabilities. If an
organisation is perceived to have borrowed money
to purchase an asset (in this case energy efficiency
equipment), then the asset and the loan (liability)
are shown on either side of the organisations
balance sheet. For some organisations, particularly
those in the public sector, whether or not the
financing cost is on that organisations balance
sheet is an important consideration.

1 More information is available at

http://www.seai.ie/Your_Business/Public_Sector/
Funding_Finance_Procurement/

15

To address this, ESCOs and financiers may propose

the following EPC arrangement with public sector
organisations:
The ESCO agrees to design and build the project,
and then transfer the assets to the customer for
a nominal fee (e.g. 1). This gives the customer
asset ownership, which is generally regarded as
essential by public bodies.
The customer agrees to pay the ESCO a
monthly service fee for the savings achieved
plus, where appropriate, any operation and/or
maintenance fees.
The ESCO guarantees the savings. If savings
do not reach the agreed level, the ESCO must
reimburse the customer for the additional
energy cost incurred by the customer.
The financier agrees to provide the finance to
the ESCO, using the cash-flow arising from the
ESCOCustomer agreement as collateral. Note
that whilst a financier might normally seek
collateral in the form of the asset title, in this case
the assets are scattered and of limited resale
value once installed.
Whether or not the energy efficiency investment is
perceived as a being financed by a loan depends
upon how the deal is structured to take account of
accountancy standards, organisation practices and
in the case of the public sector, EU (Eurostat) rules.
The EPC Development Process
Developing a comprehensive Energy Performance
Contract is a multi-stage process, outlined below.
From a public procurement standpoint, it is critical
to bear in mind that the ESCO provides an energy
efficiency service, not a product. Care should be
taken at the outset before significant human or
financial resources have been committed to ensure
that your organisation is suited to this type of long
term contract model, and that an ESCO is likely to be
interested in what you have to offer.
The chart below shows a process for developing a
comprehensive EPC, particularly in the public sector.
However the ESCO may be engaged at an early
stage, depending upon: the owners ability to absorb
preliminary costs, the services needed by the owner,
the risk allocation strategy, the terms of the contract,
and the procurement constraints of the organisation.

16

Fig. 9 EPC Development Process

No ESCO Involved

Get Commitment

Get Organised

Preliminaries

ESCO Tender

Objectives?
Identify your
organisations
financial and energy
objectives.

Establish a strategic
group and sponsor.

Basic energy survey

to quantify energy
use and likely
savings.

Appoint legal
advisors.

Is EPC a solution?
Consider appetite for
risk, access to capital,
energy expertise.
Will EPC work?
Consider
organisation
structures and
culture; type of
buildings and
potential for savings.

Identify a project
manager and project
management group.
Agree process and
timeframe.
Identify and agree
financial and human
resource
commitments,
allocate budget.

Define likely scope

of contract
facilities, services,
O&M, contract
duration.
Select preferred
contract model and
sources of finance.
Risk evaluation and
value for money
assessment.

Select procurement
process. Typically
competitive
dialogue or
negotiated
procedure.
Prepare and issue
procurement
documentation.
Bid evaluation and
interviews.

Begin gathering
Baseline energy
records.

Decision Point

Decision Point

Decision Point

Are energy supply/

services companies
for your
organisation?

Scope suitable
for EPC?
Project viable?

If you proceed and

withdraw later, you
are likely to incur
fees. Proceed?

3-6 Months

FIG.9 EPC DEVELOPMENT PROCESS

A guide to Energy Performance Contracts and Guarantees

6 Mont

17

ESCO/Energy Supply Company Involved

No ESCO Involved

Detailed Analysis
and Negotiation

Implementation

Savings and
Performance

Contract Ends

ESCO undertakes
investment grade
survey.

Planning and design,

installation and
commissioning,
project
management.

Energy savings
achieved. Monitor
and verify results.

Savings accrue solely

to your organisation.

Negotiate contract
terms.
Finalise contract,
scope and price.

Insurance.

Award contract.

Operation and
maintenance.
Financier pays ESCO
for works
(guaranteed savings
contract).
Ongoing fee
payments to
financier and/or
ESCO.

Secure and Draw Down

Project Financing

Decision Point
Final decision.
Proceed?

ths

6-12 Months

5-20 Years

Rest of
Equipment Life

18
Contractual Considerations
Authority to Purchase
A public authority should confirm at the outset
that it has the necessary authority to enter into
any project. The State Authorities (Public Private
Partnership Arrangements) Act 2002 may be of
relevance.
Procurement Framework
The ESCO will need to be procured in compliance
with national and European public procurement
law and rules on state aid. The Competitive
Dialogue process may be appropriate for
complex EPCs, but involves a number of steps.
Where prior overall pricing is not possible or if no
acceptable tenders are submitted, the Negotiated
Procedure may provide an alternative.
Corporate Structure of Contracting Parties
If a tenderer is a consortium, a prime contractor
model could be used or consortium members
could execute the contract documents on a joint
and several liability basis. In the case of a project
involving multiple public authorities, the public
authorities can enter into the relevant contracts
on their own behalf or, alternatively, can create
a Special Purpose Vehicle (SPV, i.e. a company
specifically incorporated for this purpose) for the
purpose of the project which will enter into the
contracts. This approach would generally not be
necessary if there is a single public authority.
Contractual Structure
The Contract Documents may be based upon a
suite of different contracts for different stages/
parts of the project.
For instance:
The FIDIC Conditions of Contract for EPC/
Turnkey Projects (1st Edition 1999) are an
industry standard form of contract which the
industry is familiar with and which provide for
appropriate risk transfer for engineer, procure
and construct projects.
The separate HPAs for each public authority
provide each public authority with a greater
level of autonomy in managing (and paying
for) the ultimate deliverable and managing
their relationship with the ESCO in such
respect, whilst also simplifying the relationship
between the public authorities by making
them less interdependent operationally,

A guide to Energy Performance Contracts and Guarantees

as well as with the ESCO, in relation to the

project once the construction phase has
been completed.
The Facility
Public authorities need to consider in whom
ownership of the project facility should reside,
i.e. in the ESCO or the public authority (or, if there
are a number of public authorities, in some or all
of the public authorities). There are a variety of
factors which merit consideration in determining
when ownership should pass.
The requirements for hand back of the facility (i.e.
the condition in which it must be handed back)
at the end of the project term (whether this is the
term of the ESCO ownership or the term of the
ESCO supporting and maintaining the facility) will
also need to be considered.
These include, in no particular order:
the implications for third party financing;
landlord and tenant issues;
the structure and conditions of any relevant
grants;
tax/VAT implications;
desired level of control over the facility;
liability issues;
ESCO insolvency risks;
how to manage any anticipated expansion
of the facility to supply third parties;
insurance obligations;
implications for energy targets/credits;
balance sheet implications; and
the level of risk transfer.

Glossary

Energy Services Company (ESCO)

There are a variety of descriptions of what an
ESCO is, provided below, but the EU Energy
Services Directive offers a definition which is
often cited for this reason. A company may be,
or identify itself as, an ESCO, without necessarily
entering into Energy Performance Contracts. Or a
company may be an ESCO that enters into EPCs,
and may also offer other services, such as Energy
Surveys.
Traditionally an Energy Services Company was
associated with energy efficiency initiatives, with
an Energy Supply Company being associated
with heat, or heat and electricity, supply
contracts. However, this distinction, may no
longer be relevant as many companies offer both
energy supply and energy efficiency services.
EU Energy Services Directive and NEAP
An ESCO is a natural or legal person that delivers
energy services and/or other energy efficiency
improvement measures in a users facility or
premises, and accepts some degree of financial
risk in so doing. The payment for the services
delivered is based (either wholly or in part) on the
achievement of energy efficiency improvements
and on the meeting of the other agreed upon
performance criteria.
ESCOs around the World (1995 ed.)
An ESCO guarantees its energy savings
performance. Parallel organisations, such as
energy service providers, may offer the same
service, but do not offer the guaranteed results.
Energy Performance Contract (EPC)
There are a variety of descriptions of what an EPC
is, provided below, but the EU Energy Services
Directive offers a definition which is often cited
for this reason. The important thing, however, is
to understand the concept rather than cling to
a definition. In is worth noting, in particular, that
an EPC is concerned with energy efficiency, and
measures its performance by quantified energy
savings. This distinguishes from an Energy Supply
Contract (ESC), which delivers energy for an
agreed fee.

19

EU Energy Services Directive and Irish SI 542

An EPC is a contractual arrangement between
the beneficiary and the provider (normally an
energy services company) of an energy efficient
improvement measure, where investments in that
measure are paid for in relation to a contractually
agreed level of energy efficiency improvement.
EU ESCO Association
EPC is a long term contractual agreement where
the customer benefits from new or upgraded
energy equipment and the ESCOs remuneration
is directly tied to the savings achieved by the
reduced energy consumption. The cost of
investment is paid back from the savings, and
in case the ESCO fails to achieve that, they must
cover the difference between the actual and the
guaranteed costs.
Australasian Energy Performance Contracting
Association
EPC is when an energy services company is
engaged to improve the energy efficiency of
a facility, with the guaranteed energy savings
paying for the capital investment required to
implement the improvements EPC allows
facility owners and managers to upgrade ageing
and inefficient assets while recovering capital
required for the upgrade directly from the energy
savings agreed by the ESCO.
Institute for Building Efficiency
(Johnson Controls)
An EPC contains the following elements:
EPC improves building energy efficiency;
EPC reduces operating costs;
upfront investments for EPC are recuperated
over time through cost savings; and
structured project financing (optional) can
eliminate need for upfront investment by
the owner, while allowing the ESCO to fund
construction works and recognise revenue in
a timely fashion.

20

Third Party Financing (TPF)

An agency, other than the customer or the ESCO,
that provides the initial capital to fund the energy
efficiency investments. For instance, the financier
may be a private individual, a private equity
investment agency such as a venture capital fund
or an institutional investment fund, the financing
division of a large company, a government
investment fund, a utility, a bank or other lending
agency. The financier may view the capital being
supplied as equity, debt, a lease, etc. The financier
may supply the finance to either the ESCO or the
customer.

Measurement and Verification

The International Performance Measurement
and Verification Protocol (IPMVP), developed
by the Efficiency Valuation Organisation, is an
internationally referenced framework that is used
to measure energy or water savings. The EVO
definition of measurement and verification is
provided below.

A Best Practice Guide to Energy Performance Contracts,

Australasian Energy Performance Contracting Association,
2000.

Energy Performance Contracting in the European Union: Creating

Common Model Definitions, Processes and Contracts, Institute
for Building Efficiency (Johnson Controls), Mayer et al., 2010.

Energy Efficiency Portfolio Review and Practicioners Handbook,

World Bank Global Environment Facility, 2005.

Comprehensive Refurbishment of Buildings with Energy

Performance Contracting, Eurocontract.

ESCOs Around the World: Lessons Learned in 49 Countries, S.

Hansen et al., 2009.

Holistic Optimisation Leading to Integration of Sustainable

Technologies in Communities, Deliverable #10 Dundalk District
Heating, DG TREN/06/FP6EN/S07.70918/038344, 2011.

European Association of Energy Services Companies,

www.eu-esco.org.
International Performance Measurement and Verification
Protocol, EVO, 2009.

Measurement and Verification (M&V) is

the process of using measurement to reliably
determine actual saving created within an
individual facility by an energy management
program. Savings cannot be directly measured,
since the represent the absence of energy use.
Instead, savings are determined by comparing
measured use before and after implementation
of a project, making appropriate adjustments for
changes in conditions.

Building Energy Retrofit Program, Building Owners and

Managers Association International and the Clinton Climate
Initiative.

Project team
Alan Ryan, SEAI
Declan Meally, SEAI
Cian ORiordan, PowerTherm Solutions
Toni Mercer, SEAI

Sustainable Energy Authority of Ireland

Wilton Park House, Wilton Place
Dublin 2, Ireland

T. +353 1 8082100
F. +353 1 8082002

[email protected]
www.seai.ie

The Sustainable Energy Authority of Ireland

is partly financed by Irelands EU Structural Funds
Programme co-funded by the Irish Government
and the European Union.