Energy Performance Contracting (EPC) is a market based instrument for the implementation of energy efficiency in buildings. It is a contractual arrangement between a beneficiary (e.g. building owner or occupier) and a provider (usually an Energy Service Company (ESCO)) to improve a building's energy efficiency.
In an EPC project, an Energy Service Company (ESCO) provides its know-how and takes on the performance risk to ensure the proper implementation of energy efficiency measures but also the achievement of the estimated energy savings. The savings achieved are used to refinance the measures' investment cost.
No single definition for Energy Performance Contracting exists at the moment. The definition that the European Commission gives for Energy Performance Contracting (EPC) (as defined in Directive 2012/27/EU) is:
“contractual arrangement between the beneficiary and the provider of an energy efficiency improvement measure, verified and monitored during the whole term of the contract, where investments (work, supply or service) in that measure are paid for in relation to a contractually agreed level of energy efficiency improvement or other agreed energy performance criterion, such as financial saving”
Directive 2006/32/EC also defines energy service company (ESCO) as:
“a natural or legal person that delivers energy services and/or other energy efficiency improvement measures in a user's facility or premises, and accepts some degree of financial risk in so doing. The payment for the services delivered is based (either wholly or in part) on the achievement of energy efficiency improvements and on the meeting of the other agreed performance criteria.”
ESCOs offer the same services as Energy Service Provider Companies (ESPCs), but ESCOs activities differ in the following ways:
- ESCOs guarantee the energy savings
- The remuneration of ESCOs is directly tied to the energy savings achieved
- ESCOs retain an on-going operational role in M&V over the financing term
- ESCOs can provide a savings guarantee to finance, or assist in arranging financing for the operation of an energy system
The two major performance contracting models are:
- Shared savings: the cost savings are split for a pre-determined length of time in accordance with a pre-arranged percentage. This split depends on the cost of the project, the length of the contract and the risks taken by the ESCO and the consumer.
- Guaranteed savings: the ESCO guarantees a certain level of energy savings, protecting the client from any performance risk.
The market development of EPC in Europe varies from one country to another. The 2010 JRC report Energy Service Companies Market in Europe estimated that until there were 700-1040 active ESCO's in the EU that represented a market volume of 6.7-8.5 billion EUR. However, the market potential was estimated at 25 billion EUR. Although EPC market is well developed in some Member States its deployment in most MS is hampered for a number of reasons, the most important of which are:
- Lack of awareness from the demand side of the market for energy services
- Poor understanding of energy efficiency and EPC by financial institutions
- Small size of projects
- Incompatibility of legal and regulatory frameworks
- Low understanding of Measurement and Verification protocols
- Administrative hurdles
- Lack of motivation
- Limited government support
A status report about the current status of the energy services in Europe can be found here.
In light of the difficulties encountered in developing the ESCO/EPC market in Europe, the European Commission's Directorate-General for Energy has launched in 2013 an EPC campaign to promote and build capacity for EPC and ESCOs throughout Europe. The campaign will be implemented mainly through the organisation of capacity building workshops and webinars supported by ManagEnergy and the Covenant of Mayors, respectively. The EIB’s European PPP Expertise Centre (EPEC) is also supporting the EPC campaign.
Other EU funded projects like EUROCONTRACT and ChangeBest are also good sources of insight into the EPC challenges.