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2 What is an Energy Performance Contract?

Energy Performance Contracting in general

Energy Performance Contracting (EPC) is when a contractor (an energy service company - ESCO) is engaged to improve the energy efficiency of your building, with guaranteed energy savings covering all (or part of) the investment required for the renovation works. Under this form of contract the ESCO examines your building, evaluates the level of energy savings, and then offers to implement the project. During the Energy Performance Contract period you will consume considerably less for energy. The beauty of an EPC is that the ESCO guarantees you the Energy Savings; therefore you can take this lower consumption for granted. If the savings are not reached, the ESCO will have to refund you for the missed part and take actions to fix the problem using its own funds.

At the same time the EPC will clearly show you the contracting rates that the ESCO will charge you. These rates, also called fees, are charged because the ESCOs needs to cover the investment costs of the renovation works, the financial costs of the project, and also needs remuneration for operating and maintaining the measures implemented in your building.

The key characteristics

The key characteristics of an Energy Performance Contracting are the following:

  • Turnkey service: The ESCO provides you all the services required to design and implement the deep renovation of your building, from the initial energy audit and engineering appraisals, to operation, maintenance, measurement and verification of the energy savings. All in one package;
  • No need for up‐front capital: the investment for the renovation of your building are repaid from the energy savings and related financial savings, so you do not need to up-front your money. The ESCO will arrange for the needed capital investment using available subsidies, financing from commercial banks and other specialized facilities or investors (Funds);
  • Risks are minimised: the ESCO assumes the contractually agreed performance risks of the project. This is a very important aspect. If costs estimates are not correct this risk is taken by the ESCO;
  • Guaranteed Energy Savings: The ESCO guarantees the achievement of the contractually agreed level of savings and is obliged to compensate savings shortfalls. The energy savings are determined with an agreed measurement and verification protocol for the full duration of the Energy Performance Contract.
  • Quality of performance and results: the methodology of Energy Performance Contracting is results‐driven ensuring quality of performance and results.

What will you get

What will you get in an Energy Performance Contract is described in the section “General scope of the agreement”. By signing an Energy Performance Contract, as proposed by handbook, you will hire a company that is able to organise engineering, procurement, supply, construction and installation, start-up, commissioning and financing for the renovation works of your building. Each of this step is an important phase of the project:

  • Engineering: deals with the preparation of all technical documentation and project design documents for the renovation of your building. This includes the building energy audit, civil engineering appraisals, the architectural design, and the technical design for heating, ventilation and domestic hot water systems. All these activities must be performed by certified professionals and chartered engineers;
  • Procurement and supply: deals with the selection of construction and installation companies and the purchase of equipment materials and the supply of services (like project supervision, coordination and management);
  • Construction and installation: deals with the actual construction and installation works; in this phase of the project the planned measures are implemented according to the project design;
  • Start-up and commissioning: these are the final stages of the project, where the installed equipment and systems are tested and fine-tuned (for example, pressure test for the space heating and domestic hot water systems). The project is commissioned to you providing a copy of the documentation and the exploitation statement from the municipal authority.
  • Financing: deals with setting up a plan for fully financing your building renovation project. Based on the scheme proposed by handbook, financing is 100% organised by the ESCO. In particular the ESCO takes care for the application to subsidies, deals with commercial banks for working capitals loans, and keeps the right to refinance the investment made in your building with long terms specialised facilities like the Latvian Baltic Energy Efficiency Facility (see "EPC financing. What should I know?" for more information on financing).

On top of this you get very important contractual guarantees for the full duration of the Energy Performance Contract:

  • Guaranteed energy savings: where the ESCO guarantees a certain level of energy savings compared to pre-agreed climate conditions and energy consumption of your building (baseline).
  • Guaranteed quality standard: the set of measures correspond to a deep renovation, where all necessary works are carried out on turnkey;
  • Guaranteed comfort standards: where the ESCO clearly indicates indoor temperature levels, domestic hot water supply temperature and suitable indoor air quality;
  • Guaranteed maintenance standards: a detailed maintenance plan is part of Energy Performance Contracting, which ensure that the measures carried out during the renovation project are properly operated and maintained for the full duration of the Energy Performance Contract;
  • Energy supply: where the ESCO facilitates sufficient and efficient energy supply to the building.

What will you pay

Before renovation

Today, before renovation, you already pay for several services on monthly basis. These services are very important and are needed for using, operating and maintaining your building. Every month you get an invoice from your House Maintenance Company or Cooperative, which includes expenses like administration, waste collection, emergency repairs and heating.

In one year period you will get 12 invoices. Each month the sum is different, mostly due to the payments for heating, which are very high in winter, lower in autumn and spring and zero in summer.

An Energy Performance Contract affects the way and amount that you will pay for:

  • heating,
  • domestic hot water and
  • circulation losses.

Also after a deep renovation your expenditure for emergency repairs will be drastically reduced! No more leaking roof, leaking pipes and so on. You can and should still keep an open house maintenance fund, where now you can collect money for future investments in your buildings (for example a new lift, a children play ground or a bicycle rack). On the other hand, still after renovation you will pay for administration, waste collection, water and canalisation and electricity for common area.

After renovation with an Energy Performance Contract

When you sign an Energy Performance Contract the ESCO will renovate the building and provide you the guarantees as described in "EPC offers. How do I evaluate them?". However, the ESCO also need to pay back the investment made for the renovation of your building and to get a fair remuneration for its services: this is what are called EPC contracting rates, which are articulated in specific Fees that will have to pay to the ESCO. In particular there are three Fees:

  • Energy Fee: this fee covers the costs for heating and circulation losses. The sum will now be much lower than before renovation because the ESCO has implemented a lot of works with the aim to reduce energy consumption. Most important, you also get a guarantee, so that the ESCO will refund you part of the Energy Fee if the promised savings are not reached. Every year energy saving are measured and verified.
  • Renovation Fee: this fee covers the costs of the renovation works, including for example engineering, construction, installation, project management and financing costs.
  • Operation and Maintenance Fee: this fee covers the costs which the ESCO will have for the operation and maintenance of the renovation works during the EPC contract period. For example replacement of filters for a new ventilation system, or a provision for repainting the façade.

In the proposed EPC there are also two important changes:

  • Domestic Hot Water: in the Energy Performance Contract domestic hot water is charged one to one to the costs which are simply necessary to heat water; whereas currently different methodologies are used in Latvia to share the costs between heating, domestic hot water and circulation losses. In other words in most of the cases domestic hot water will get cheaper for you.
  • Flat payments: likely you currently pay high bills in winter and lower bills in summer, although your salary tends to be the same all year around. An advantage of Energy Performance Contracting is that now the bills are all year around the same. A balance is calculated at the end of the year.

In one year period you will get 12 invoices, now all the same. The yearly overall cost before and after renovation have not notably changed. However, this is strongly linked to the investment costs needed for the renovation works of your building and from the energy tariff in your city. For building in very bad technical conditions, the Renovation Fee may further push the payments up.

On the other hand, currently energy tariffs are very low, due to very low oils and gas commodity price (April 2016). Implementing an Energy Performance Contract will protect you from the volatility and possible future sharp increase of energy prices.

Regarding the Fees in the Energy Performance Contract, please carefully note that the Renovation Fee is linked to the EURIBOR, which is a rate set by the central bank. This rate reflect the costs of money and is linked to the investment that was done in your buildings. The ESCO cannot affect this index in anyway. The Operational and Maintenance Fee is also reviewed on yearly basis. This review takes into account that salaries, and costs of spare parts also increase in time.

 

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