Energy Performance Contracting(EPC) for Energy Conservation Project Implementation

EPC is making its way into government's buildings but met with some bureaucratic hurdles from within the government.

First EPC Workshop by KeTTHA on 31 May 2011 at Shang Ri La Hotel Putrajaya for Public Universities

Now, while the bureaucracy issues findings its way towards a solution, let us have some basic understanding what is this EPC all about and why it could become significant in exploiting the potentials of energy cost reduction in government building facilities.

What is Energy Performance Contracting?

In simple terms,

EPC is a project approach that utilizes the energy savings and revenue gains to pay for the project cost.             

- Land-of-Sky Regional Council, USA.

Who can perform EPC project?

EPC is performed by an entity generally known as Energy Service Company (ESCO) which  Develop and implement turnkey, comprehensive energy efficiency projects. ESCOs offer performance-based contracts (i.e., contracts that tie the compensation of the ESCO to the energy savings generated by the project) as a significant part of their business.

ESCOs must also demonstrate the ability to provide the full range of services required for a comprehensive energy efficiency project covering:

• Energy Audit
• Consultancy
• Design of energy efficient systems
• Implementation Project Financing
• Implementation and Project Management
•  Construction management
• Energy performance monitoring and verification performance
• Testing and commissioning
• Operation and maintenance

The Second EPC Workshop by KeTTHA for Government Agencies on 22 June 2011 at KeTTHA Office

How to make EPC works?

To have a workable EPC implementation, the procurement process must suit the EPC business model and process flow and to have that the government officers and decision makers responsible to manage EPC must understand what is EPC and how it can work. EPC cannot be treated like a typical conventional procurement of products or services by the government. Some have tried using the typical tendering process but failed and one the reasons is... no ESCOs were interested due to impractical conditions and limitations. For example, a detailed energy audit it a costly exercise and no one would be willing to performed it with no certainty that they will be awarded the EPC contract.

Secondly, feasible EPC projects are only about installing new energy efficient equipment or installing energy saving devices and thirdly, the sharing from the achieved savings between the ESCO and the client must be from the actual and measured performance rather than from the calculated quantity when the proposal was made and agreed.

A full fledged EPC player in shared-savings model should have the capacity to perform the full scope works involved in the EPC itself.It is very crucial to gauge the commitment of the prospects from the beginning if they are really keen on EPC model to save energy costs at their facilities. Normally they are keen due the so called Zero Cost concept when actually the whole process is not really zero cost. Energy audit is a cost as well as the implementation and followed by the monitoring, measurement of energy performance to establish baselines and actual savings, operation and maintenance of affected energy using systems.

The beauty part of EPC from the building owners' point of view is there is actually Zero cost upfront especially in energy audit and investment for the implementation. They just need to pay back all the costs incurred in the whole process purely from the actual savings achieved from the energy saving measures implemented by ESCO.

In normal cases of EPC, it would take quite a long time to get everyone on the same page on EPC concept although all parties have indicated their interest from the start because in most cases too, the final decision is not with the technical personnel( as always).This lengthy  process and discussions to reach and agree with the contract's conditions with the ESCO and key decision makers at the client's side is to avoid future disputes especially when the payment to be made to the ESCO which will involve so many questions on the measurement and verification of savings.

In fact,  we also need to be very clear on the actual savings achieved's  definition. I came across facilities owners signed EPC contracts based on actual savings achieved but it is purely from theoretical calculations for certain period of time. In EPC, ESCOs should be paid or rewarded based on the actual performance and that actual performance must be based measured data from the agreed baselines which is also based on measured indicators at agreed operating conditions.

EPC is not just about a technical exercise which involves technical solutions and paying back from the savings achieved from it. To make it happen, one more important element is to gain the trust and confidence of the prospects that EPC will benefits them in more than just energy cost reduction.EPC could also be seen one way to let ESCO as the expert to perform the energy management tasks for the client and ESCO to play significant roles that will make them as a strategic partner rather than just as a service provider or product supplier.
With the average 5-7 years of typical EPC contract period, a lot to consider before it can be signed by both parties especially on the ESCO's side when so much risks at stake when investment made.

On top of that it is also crucial to determine the viability to invest under EPC. This is what happened few years ago when a government agency tried to implement EPC as a pilot project and later did not manage to attract any single ESCO to participate. Then they reviewed the contract period to make it more feasible but unfortunately the tendering process do not suit the EPC business model...still unclear what will happen next since they are still pursuing it until today.

To my knowledge and experiences, 3-5 years period is only suitable for certain measures at small or medium scale of investments...and it would not be a comprehensive solutions too if you we are talking about office buildings with typical operations in less than 12 hours daily.

Yes, the real challenge is how ESCO can recoup their investments and making profits at agreed period.This is actually the most tricky part of EPC and will lead to one big question..HOW CONFIDENT OF THE ESCO TO GUARANTEE THE PROJECTED SAVINGS FROM WHAT THEY PROPOSED TO THE CLIENT?...this type of question normally comes from the decision makers especially from financial controllers and also the possible financiers...the failure to convince them may end up with the big NO for them to proceed and even they agree to proceed...it will open to further disputes when actual performance to be verified...when invoice is sent to them to pay from the savings claimed by ESCO that has been achieved.

Most users prefer not have EPC financing to be in their balance sheet and in the same time, they need to be educated on long term benefits and risks on ESCOs when they invested through EPC shared saving mechanism.

To my knowledge, there are not many comprehensive contracts being implemented by ESCOs  in the current market even though  in the private sector. Most of them are focused on certain solutions such as HVAC and lighting for commercial buildings. There some EPC contracts involved technologies called as energy saving device where it is claimed to save energy when installed at certain points in the internal electricity distribution systems.

For government sector , more need to be done to educate different level of people in the administration and decision making.  Series of consultations, workshops, dialogues and discussions have been taken place for the past 2 years to promote EPC model which will also ease the financial burdens of the government in managing its utility costs and to source extra budgets to implement energy conservation measures.  At least MoF has accepted the idea and has been formalized through the creation of a new code for ESCO. Payment to ESCOs also is allowed to be made under EPC by utilizing existing payment codes for the expenditure and quite number of relevant people in JKR have started some initiatives  to move towards EPC for the purpose of implementing energy conservation project.  Now the focus must be more on the actual target groups which is the management or the owners of government buildings facilities itself.

The Malaysia Association of Energy Service Companuies(MAESCO) was invited by Energy Commission to  present a paper titled Energy  Performance Contracting at the Seminar on Energy Efficiency Initiatives for Government Buildings on 19^th December 2012 at Putra World Trade Centre. The seminar is aimed to create awareness and generate interests form the targeted audience who are  representatives  biggest users of electricity users among government buildings on energy conservation opportunities and options to implement energy conservation projects such as through EPC model. This is a good move by the regulator and MAESCO, which I am going to represent as the  speaker at the seminar, will continue to support this efforts especially to educate the users on EPC and how EPC would lead to win-win scenarios for public and business community in private sectors.

Letter of invitation from Energy Commission to MAESCO to present on EPC topic

I am looking forward to presenting at the seminar and to gauge more feedback and comments on the way forward to promote EPC in the public sector since the EPC market in this sector has been almost untapped.