Energy Performance Contract is a form of ‘creative financing’ for capital improvement, which allows funding energy upgrades from cost reductions.
Under an EPC arrangement an external organisation (ESCO) implements a project to deliver energy efficiency, or a renewable energy project, and uses the stream of income from the cost savings, or the renewable energy produced, to repay the costs of the project, including the costs of the investment.
Essentially the ESCO will not receive its payment unless the project delivers energy savings as expected.
EPC in a nutshell
The basic principle of Energy Performance Contracting is that energy efficiency investments are paid for [in whole or in part] over time by the value of energy savings achieved.
Key elements of any energy performance contract are:
- An external organization (ESCO) implements energy saving measures to improve energy efficiency of a facility and utilizes the stream of income from cost savings to pay for the investment.
- 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.