Issue 13

MEETING THE COST OF REDUCING CARBON

By Martin Whiteford, Partner, Anderson Strathern

If you are responsible for management of an existing estate in the public sector, you are likely to be currently juggling aggressive carbon reduction targets, concerns about long term energy cost stability, a limited and shrinking capital budget and ongoing maintenance needs.

What if there was an opportunity to address all of these needs that required no up-front capital commitment and a contractually guaranteed return on investment?

Energy performance contracts are slowly being adopted as a viable option in tackling these inter-related issues. They are underpinned by a simple contractual promise –that any savings generated by the project will pay for the costs of implementation.

An Energy Performance Contract (EPC) is a contractual and funding mechanism which provides energy efficiency measures to a building to improve its energy performance. Importantly, they are available to bodies with no capital budget to up-grade their estate or their energy infrastructure.

Any upfront capital investment is recouped through energy cost savings over a period of time, usually of between 7-20 years. The private sector contractor is generally termed an Energy Service Company (ESCO). The ESCO identifies and then guarantees energy savings with the private sector ESCO assuming technology and performance risk. The ESCO is paid out from the savings actually made with the public sector party continuing to pay at comparable levels to its existing energy bill until its repayment commitments to the ESCO are fulfilled.

The principal benefit of an EPC to the public sector is long term reduced energy costs through lower energy consumption. However, other benefits include lower maintenance costs, a more pleasant work environment, potential income generation through renewable incentives such as the Renewable Heat Incentive, increase in the value of the property and increased attractiveness to prospective tenants.

Energy efficiency retrofit may be suitable for any type of building. However, the success and suitability of an EPC often depends on having a building or set of buildings that can provide a sufficiently bankable payback.
They can work well for public sector organisations as they tend to own and occupy their own buildings, which can avoid having to make arrangements with tenants. Also, public sector sites are often large and concentrated such as a university campus - they have 24 hour heat demand and lots of different energy needs. This tends to result in good value for money in terms of the possible return on investment.

When reviewing the business case for a major energy efficiency retrofit project, public sector bodies should look beyond just the reduction in energy expenditure and should take consideration of backlog maintenance expenditure.

The private sector service provider would initially undertake a detailed audit of the estate. They then design and implement what are known as Energy Conservation Measures (ECMs) and guarantee the level of energy savings, offering a secured financial saving over the period of the agreement.

An Energy Performance Contract (EPC) is a contractual and funding mechanism …. available to bodies with no capital budget to up-grade their estate or their energy infrastructure.

Once the costs have been repaid the Authority should be able to keep the full savings generated from the improvements. The duration of the savings guarantee will typically last until the project costs have been covered by the savings.
Energy performance contracting is principally about savings. If you don’t understand the measurement and verification then you won’t understand the energy savings and in effect won’t understand the substance of the arrangement.

Generated energy is relatively straightforward to measure, but energy reduction can be more difficult. If your costs are 15% lower after the EPC it is important to understand whether this has come from the measures introduced or if it’s simply due to a mild winter. The savings baseline is therefore critical and will need to reflect a range of variable factors.

An increasing number of sources of finance are available within the private sector, supported by a growing awareness and confidence in the markets on the returns available from investment in energy efficiency projects. At a European level, over 70 financial organisations have committed to scale up their investment in energy efficiency projects.

Energy is typically the second highest overhead cost to the public sector after staffing, EPCs presents an intriguing opportunity- rather than losing valuable resources such as front-line staff through cutting costs, energy cost reductions can in fact bring added benefits. Cutting energy spend releases finances to improve services. It is one of the few cost pressures on the public sector whereby a cost reduction can lead to tangible benefits for staff and other stake holders.

The principal benefit of an EPC to the public sector is long term reduced energy costs through lower energy consumption.

The pressure for organisations to reduce energy consumption, improve internal environments and manage costs is not going away. Doing nothing will not be an option. The public sector can either invest in estates now or deal with substantial ongoing reactive maintenance costs.

EPCs can have a potentially dramatic impact on an organisation with an aging and inefficient estate. Transformational EPC projects can help deliver not only a hugely improved environment but also a cultural shift in the way organisations manage energy.

The UK Government has now issued a model form of energy performance contract to promote uptake and standardisation. The energy efficiency industry itself is rolling out contract models that seek to dismantle barriers to growth of the sector. Whether the combined weight of government measures and industry initiatives will boost the energy efficiency contracting sector remains to be seen – but greater government engagement is an important positive step forward.

By Martin Whiteford, Partner, Anderson Strathern

Issue 13

PREVIOUS ISSUES

Looking for a previous issue? Use the menu below to select an issue.