Energy Performance Contracts

An Energy Performance Contract (EPC) is an agreement between a business and a service provider, where the service provider agrees to deliver energy savings to the business.

If energy savings are not achieved, the service provider pays the shortfall to the customer.

An EPC may be a good fit if your business:

  • has energy consumption high enough for a third-party contractor to consider the project viable (typically an annual electricity consumption of less than 1GWh is not considered viable)
  • has large, complex sites or is considering numerous energy efficiency measures or high-cost investments 
  • would like to outsource the designing, implementation and verification of energy savings to a third-party.

Projects with EPCs typically involve the replacing of old equipment and installing of new energy efficient equipment and controls that will deliver both energy and cost savings.  

Depending on agreement, payments can either be made periodically over a term (where typically finance is involved) or pay up front as equipment is installed.  

How it works

An EPC is entered into by an owner or lessee of a premises (customer) and a third-party Energy Services Company (ESCO).

  • An ESCO is typically funded by a bank or financier and provides a guarantee for energy savings by implementing energy efficiency measures on the premises
  • The customer makes regular payments (either directly to the financier or via the ESCO) provided energy and cost savings are delivered over the agreed term. If no savings result from the upgrade, the ESCO will pay for the shortfall
  • At the end of the term, the customer either assumes ownership of the equipment or makes an upfront capital payment as equipment is installed and the ESCO verifies the savings over the term of the contract.  

An EPC is not itself a financing solution, but it can be backed by financing, which the ESCO provides or arranges for.   

A good place to start is the Energy Efficiency Council’s list of members that have experience in Energy Performance Contracting.

Suitability

An EPC will typically last between four and ten years, meaning a project often needs to be large enough with a longer lead time to warrant such an arrangement.  

Properties with a high-energy use profile such as hospitals, universities or manufacturing plants would be best suited for an EPC. Note that a long-term lease or ownership of the property is also ideal for an EPC to be viable. 

Projects with EPCs typically involve the replacing of old equipment and installing of new energy efficient equipment and controls that will deliver both energy and cost savings.  

Advantages of EPCs

  • Capital or security not needed upfront. The customer may not be required to make any up-front payments if the ESCO provides direct financing
  • Potential for positive cash flows. In most cases the guaranteed savings will exceed the loan repayments
  • Financial risk is shifted to the supplier. As the savings are guaranteed by the ESCO, the customer is not liable for any of the financial risk should the implemented measure not deliver savings
  • Project management is outsourced. As the ESCO typical manages the whole process (including sourcing of finance) the business can focus on its core operations. 

Disadvantages of EPCs

  • Contracts are complex. Due to the ESCO taking on the risk, paperwork and negotiations can be lengthy
  • Ownership or longer-term tenancy of a premises is required. EPCs typically require longer terms to make them viable for ESCOs;  
  • Larger projects are preferred. As ESCOs take on the risk for the design, implementation and verification there is a tendency to only look for larger project sizes and put a minimum limit on energy consumption or value of investment
  • Costs are higher compared to self-implementation. As the ESCO takes on the project risk and co-ordination of the project there will be higher margins on the supply of equipment than if the customer were to source themselves. 

More Information  

For further information on how businesses can save on energy costs visit the Victorian Energy Saver website.