Paid From Savings

Improvement work that lowers the energy consumption and carbon footprint of your business is a desirable goal, but implementation can be a complex affair with many obstacles, and often lack of funding delays further consideration, the result energy saving initiatives joins a long list of wishlist items to be done.

paid from savings, Hong Kong, HAESCO

Paid From Savings is simple scheme to help overcome the common obstacles, and get that energy improvement work done. The idea is best illustrated by an example, a business uses old lighting fittings, replacing with new fittings would lower the energy consumption by 50%, however there is no budget to pay for the capital cost.

An ESCO (a specialist energy firm) could change all the lighting fittings without any upfront capital cost, and for a fixed contract period your expenses remain unchanged.

esco-1

Before and After ESCo Contract, no energy cost increase or decrease

After the contract period ends, in this example, you the owner enjoy the 50% energy cost reduction.

How is the ESCO able to do this? During the contract period the owner pays the normal energy cost. However, in this case, the actual energy consumed equates to 50% lower cost, therefore the ESCO earns the difference every month. At the end of the contract period, and the investment is paid off, the owner enjoys lower energy bills for the remaining life of the installation.

esco-2

After the contract completed, the owner enjoys 100% of cost savings

Greater energy savings can be achieved when the whole development or building project is considered, because this allows for a wider range of upgrades, with different returns, to be combined under one contract.

Performance Contracting

Paid From Savings is also known as Performance Contracting, and with any contract the risks must be considered,  the owner must balance the advantages from guaranteed energy savings and ownership of the capital equipment installed at the end of the contract, with the potential problems, which I will mention later.

So a lighting project is a small example, consider the cost of replacing the central chiller plant in a commercial building, a major investment, that occurs perhaps once every 20 years! and the upfront capital cost is considerable.

For certain buildings an ESCO can replace the entire chiller plant without any upfront expenditure by the owner, and after the contract is complete, the owner keeps the new chiller plant!

Where secondary agreements for lighting and other energy savings are included, ultimately the owner has a building with significant future cost savings, which could be invested for other projects.

Pitfalls

It is simple right? well not quite, there are some pitfalls, and not every project is suitable for ESCO type contract. The most common type problem for all contracts is the uncertain elements, in the ESCO contract it often when the ESCO reimbursement is dependant on a number of variable factors, causing dispute.

The key point must be to control and mitigate the risk, most building owners and their lawyers don’t have the technical skill to review or interpret complex contracts where the currency is energy savings, fortunately there are firms that can help.

For projects with comfort cooling the weather is a variable, when the building energy consumption is used for summer cooling or winter heating, it varies day by day, and disputes may arise (unnecessarily I might add) often because the contract is silent regarding certain events.

Measurement and Verification (M&V)

Measurement and Verification or simply M&V is the term used with ESCO contracts, M&V is the process intended to validate the energy savings, typically an independent expert is engaged to verify the promised energy saving where delivered.

However, there is no free lunch, the cost of M&V alone can be significant, increasing the administration cost for the contract. Yet, many M&V issues are subjective because insufficient thought at the planning stage resulted in missed data which is then open to interpretation, and differing views.

The key to a successful project is minimising the risk for all parties, and to ensure from the outset that the improvements can be assessed, if necessary with a simple formula, that leaves no doubt or ambiguity, and that all parties unreservedly agree in advance.

Quasi-Utility Model

Another type of performance contract is a quasi-utility company model, where the ESCO provides a metered energy service, for example steam, and the building owner pays the agreed unit rate, in arrears, for actual energy consumed.

In this type model, the energy costs are not fixed or guaranteed ahead of time, and the owner needs to understand that the energy cost will vary, just like a typical utility bill.

The risks for the ESCO include under consumption – where the owner may not take sufficient energy at the agreed rate to repay the investment, therefore minimum purchase requirements, and the like, creep into agreements. Also the owner may claim its too expensive and attempt to obtain the energy from another source.

Conclusions

The ESCO model financing can deliver energy efficiency improvements, without upfront costs, however the risks need to be considered from day one, before any contract is signed.

References

  1. EMSD Overview of Energy Performance Contracting (PDF)
  2. EMSD Performance Contracting Approach for Energy Projects (PDF)
  3. EMSD Energy Performance Contracting (PDF)
  4. EMSD Energy Performance Contracting – Views on Consumers’ Aspects (PDF)
  5. EMSD Energy Efficiency Financing (PDF)
  6. EMSD Energy Efficiency Enablers, Barriers, Solutions: EU and US Perspectives (PDF)

 Further Reading

Asia ESCO Presentations 2010 conference
ESCO contracts and guarantees PDF (LINK)