Description

An energy performance contract (EPC) is a contract where an array of services is agreed upon, and the provider of the services can guarantee that a minimum of energy savings or sustainability value will be achieved. An Energy Service Company (ESCo) implements a customized energy service package, consisting of planning, building, operation & maintenance, optimization, fuel purchase, (co-)financing and user behaviour. To construct complex infrastructure used by a Climate Project (such as Waste-to-Energy Projects), an EPC Contract between the local governments and the contractor pays the contractor to deliver a complete contract for a fixed price by a fixed date, reducing the risk of cost overruns and non-performing technology.

Instrument category

Public-private partnerships (PPP)

Implementation status

Moderate - tried and tested

Enabling conditions and success factors

• Appropriate energy market regulation must be in place.

Instrument benefits

• This model can be suitable for municipalities that lack the financial and technical capacities as it offers a “no risk, no investment” approach, where the municipality does not have to raise upfront costs unless it is the preferred option.
• Costs for maintenance are saved during the contractual period, and there is the guarantee that the ESCo – participating in the share of the saving – will keep the system at its best performance.
• This model can bring expertise and clarify the viability of the project, building market capacity.
• Smaller municipalities could connect with neighbouring cities with similar needs to engage a single ESCo that aggregates these similar projects to lower transaction costs and facilitates financing.

Challenges and risks to implementation

• Provided that the contractual length is long enough to reach payback for the ESCo (i.e. seven years) and includes maintenance services, the local government is committed to the ESCo.
• The model might not be applied in locations where an enabling environment is lacking, such as in the case of emerging countries. Municipalities might need to provide bank or state guarantees.

References

Case studies

Energy performance contract model for water loss reduction in Emfuleni, South Africa