Energy services achieve economical and environmental benefits. Renewable energy solutions such as biomass, geothermal, wind and solar energy are usually considered in the contracting approach. The energy service value chain shows two different basic models of energy contracting:
– Energy Supply Contracting (ESC); and
– Energy Performance Contracting (EPC).

The principal difference is that EPC goes beyond ESC. Whereas ESC is based on a business model that guarantees energy supply; EPC is a business model for energy savings. The goal is to avoid wasting energy and to invest the savings in energy efficiency.

ENERGY SUPPLY CONTRACTING (ESC) is the efficient supply of energy. The contracting partner provides products such as heat, chilling, compressed air or electricity. The subject of the contract is not the energy value, like for example litres of oil, but the utility value – billed in Euros per volume items of heat, steam or compressed air. Financing, engineering design, planning, constructing, operation and maintenance of energy production plants as well as management of energy distribution are often all included in the complete service package. The ESC is a service primarily used in the commercial and industrial sectors, however residential dwellings may also be included for reductions in primary energy use for a long period and accelerate the return on investment. Contracting is an extensive energy service, provided by an Energy Service Company (ESCO). The ESCO guarantees savings that cover all implied costs. It accepts the operational risks for contracts with durations generally above 5 years and normal time spans of 10-15 years. The ESCO typically offers customized energy contracting packages that contain planning, operation, and maintenance elements. In addition, it also manages energy purchasing and financing of the various projects. Example in a district heating scheme energy supply contract. The business model encompasses the entire process from the purchasing of fuel to the delivery and invoicing of energy. CHP plants and renewable energy solutions frequently are also included in energy supply contracts. The benefits of ESC are a significant boost in efficiency, clear and optimized operational costs, more supply assurance and the usage of the most recent safety standards. The customer no longer needs to worry about their energy supply concerns and, in addition there is an increase in environmental performance. The focus of the ESC service model is on the efficiency of the energy supply with the aim to bring the efficiency to its maximum while at the same time providing security of supply.

The application span of ENERGY PERFORMANCE CONTRACTING (EPC) involves the entire building – as one incorporated energy consuming unit. It is a type of long term contractual agreement where the customer benefits from new or upgraded energy equipment and the ESCO’s 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. More than a funding model, an EPC is a programme of practical engineered energy efficiency measures that are implemented in buildings to deliver real energy savings such as HVAC, lighting, controls and building fabric improvements. In addition, to ensure the building is used in the most efficient way, building occupants could receive training on energy efficiency practices. The intention is to keep the total energy consumption to a minimum – by way of demand side energy efficiency methods. To ensure promised energy savings have been achieved over the contract duration, a procedure termed “measurement and verification” is used. Adhering to an internationally recognized protocol such as the International Performance Measurement and Verification Protocol (IPMVP), customers can be assured that guaranteed savings have actually been delivered despite changes to the climate, the building and its use over time. The procedure is subject to the EPC contract, regulating the partnership between the ESCO and the customer. The contract regulates general issues such as property rights, usage of the systems and partnership duration. Furthermore it stipulates the amount and structure of the investment, its implementation, how it is controlled as well as the maintenance of the energy saving measures which have been taken. It particularly determines the extent and distribution of the annual savings. The key benefits include risk transfer, the ability to modernise a building’s energy infrastructure without necessarily having the funds and accessing external expertise. The key focus is on saving energy at the point of use first, before optimizing the supply of that energy.

There are a number of different ways of structuring a performance contract:

The most common is “GUARANTEED SAVINGS”, in which all the contractor’s costs (equipment, installation, mark-up, fees and so on) are repaid annually out of the savings as they accrue. The length of the contract (typically four to eight years) is usually chosen so that all costs are paid for out by the end of the contract period.

This method allows the addition of extra measures as the contract progresses, with the increased savings covering the higher costs.

In Spain, for instance, in the guaranteed savings model, the ESCO guarantees a certain level of energy savings and the client does not assume any performance risk. In this case, the customer is usually financed the project by banks or a financing agency. Then, ESCO can do more projects without getting highly leveraged.

It is a proper model if the country has a great banking structure and a good expertise in this type of projects, because the financial institutions are familiar with this type of projects. In this way, the confidence arises and the financial institutions provide directly funds procuring a good financing price.

The second type of contract is known as “SHARED SAVINGS”. In this arrangement, the business and the contractor agree to share the savings over the contract period according to an agreed formula. The actual cost of the measures is not included in the contract, and the business has no obligation to pay off those costs. In return, the performance contractor does not guarantee the savings. Contract terms are usually longer – up to 10 years – because it takes longer for the investment to be recovered, and the risks to the contractor are higher.

In the shared savings model, ESCO is responsible for whole project’s activity and the centralization of all the actions regarding the engineering, procurement, construction and funding. The owner does not have direct control over the implementation of the project (this player receives the project ready for operation). However, the final recipient and ESCO keep an exchange of “know-how” during the project life. ESCO is directly linked with third party financing and it takes over the loan. Then, small (in terms of invoicing) or new ESCOs are not able to enter this model for being too highly leveraged and unable to contract further debt for subsequent projects.

The third type is the “CHAUFFAGE” or full energy/environmental services contract. Here, a performance contractor effectively takes over the operation of a customer’s utility or production facilities as well as upgrading them, and often pays the customer’s utility bills as well. The business pays the contractor a regular fee equal to the utility bills before the project or some other negotiated fee. The complete management of a building or facility by a contracted third party in some European countries is more common.

Recently, in the framework of EU projects, advanced models of EPC contracts have been proposed. The following have been reported in the framework of the EESI (European Energy Service Initiative) project:

“EPC plus” – EPC with comprehensive refurbishment

EPC plus extends the service of the ESCO to comprehensive structural measures on the building shell like insulation or window replacement. These services are usually not part of the classical EPC because of excessively long pay-back periods. The contractual arrangement contains special regulation on financing. Usually the customer has to pay a share of the investment through a grant or by combination of EPC with subsidy programs. EPC plus is very suitable in buildings with high need for renovation.

The combination of both structural renovation and energetic optimization leads to high energy savings up to 50%. Examples have been developed in e.g. the Czech Republic and France.

“Integrated Energy Contracting (IEC)”

The Integrated Energy Contracting Model combines the objectives of reduction of energy demand through the implementation of energy efficiency measures and efficient supply of the remaining useful energy demand. The ESCO will take over implementation and operation of the energy service package at its’ own expenses and responsibility according to the project specific requirements set by the client. In return, the ESCO will get remuneration for the useful energy delivered (i.e. per kWh), depending on the actual consumption as well as flat rate service remuneration for operation & maintenance, including quality assurance.

IEC is a combination of elements of ESC and EPC. This model has mainly been used in Austria so far.

“EPC light” – Energy management with guaranteed elements

EPC light aims at achieving energy savings mainly through optimization and organizational measures with low or no investments in technical equipment. The ESCO acts as an external energy manager taking over the responsibility to operate and optimize the energy related installations (heat boilers, building automation, lighting control).

Since pay-back of high investments on hardware is not necessary in EPC light, the contract duration is short (2-3 years). In this model the energy savings are still guaranteed by the ESCO. This model is very interesting for customers with little capacity or few resources for sustainable energy management. The first EPC light pilot project was developed in Berlin.

“Green EPC” – EPC with a special focus on renewable technologies

Since climate protection is one of the major concerns when speaking about policy and motivation to energy saving measures, advanced EPC models with special focus on reduction of green house gas emissions are essential.

Models and examples with special focus on the implementation of primary energy savings and/or the technological focus on renewable energy technologies have been developed in Sweden, Germany and France.