EPC CONCEPTS and BUSINESS CASES Session 1: EnPC- INTRANS Project and the basic concept of Energy Performance Contracting (EPC) EPC CONCEPTS and BUSINESS CASES Miodrag Gluščević, SKGO, Serbia National Roadshow Event Jelgava, Latvia - 18 October 2016

Contents of the Presentation: Definitions Basic concept of EPC Advantages of EPC for the public building owner ESCOs EPC business models Economic assessment of EPC projects Calculation of the economic basics of EPC projects Main stages of an EPC project Practical examples of EPC in public buildings

EPC Definitions … a contractual arrangement between the beneficiary and the provider (normally an ESCO) of an energy efficiency improvement measure, where investments in that measure are paid for in relation to a contractually agreed level of energy efficiency improvement. a form of ‘creative financing’ for capital improvement which allows funding energy upgrades from cost reductions. the procurement of works and services on the basis of net present value of future energy savings. … a turnkey service, which provides customers with a comprehensive set of energy efficiency, renewable energy and distributed generation measures and is accompanied with guarantees that the savings produced will be sufficient to finance the full cost of the project. EU Energy Services Directive Joint Research Centre-Institute for Energy and Transport European Bank for Reconstruction and Development Environmental Protection Agency

EPC concept Actual energy cost Continuous energy cost savings of the public building owner (20-40 %) Saved energy cost used for the repayment of ESCO costs (contracting fees) End of EPC contract (investment paid back) ESCO investment in EE measures (20-40% guaranteed energy savings) Investment in EE measures (20-40% energy savings) Energy cost prior to EE investment Actual energy cost Energy cost after EE investment Source: GIZ time EPC contract period

Advantages of EPC for the public building owner Major advantages of EPC compared to traditional owner-directed ways of project implementation are: (source of arguments : Transparense 2011) The building owner does not use own funds and transfers its investment risk to the ESCO. EPC improves energy efficiency and thus also increases operating reliability and security of supply, while energy costs and environmental pollution are reduced. The ESCO's technical know-how and professional energy management are used. The building owner t is relieved of essential planning and operating work. More time remains for its own core tasks. Value, productivity and comfort of buildings are enhanced. The full set of services like e.g. planning, financing, construction, operation, and maintenance may be covered from one source, thus reducing the number of interfaces and transaction cost. Additional services such as user motivation and trainings can be included in the scope of EPC. Contract elements assign commercial and technical risks to the ESCO´s to a large extent. Authorities doing EPC on a regular basis appreciate also the model's flexibility, combining compulsory measures or other special requirements with EPC.

Energy Service Companies (ESCOs) An Energy Service Company (ESCO) implements a customized energy service package, consisting of planning, building, operation & maintenance, optimization, (co-) financing and user behaviour. The contract between ESCO and building owner contains guarantees for cost savings and takes over financial and technical risks of implementation and operation for the entire project duration of typically 5 to 15 years. The EPC service or main parts of it is paid by realized energy cost savings. Source: EESI 2010

EPC business models Guaranteed energy savings (compared to baseline) No investment (prior to investment stage) Planned investments

Specific features of EPC business models Scope of investment Energy savings achieved Contract duration State of building and planned investment Design and planning of the EPC project Installation and operation of equipment and facilities EPC light Only equipment and operating costs Typically 10-20 % In most cases 2-3 years All public buildings with energy saving potentials Building owners or local facilitators ESCO EPC basic Investments only in fast-paying energy saving measures Typically 20-60% In most cases 5-15 years The building still serves its purposed, but energy systems installed and used in the building are outdated and inefficient Building owners or local facilitators ESCO EPC plus Investments in comprehensive rehabilitation (deep renovation) of buildings including non-energy related measures Ideally >70% Often >15 years Building does no longer serve its (current or future) purpose. Building and installed energy systems are outdated and/or dysfunctional, deep renovation is planned Building owners or local facilitators in cooperation with contracted architects, and engineers ESCO

Selection of EPC business models

Economic assessment of EPC projects Net present value (NPV) method comparing total life cycle cost and savings Annuity method comparing equivalent annual cost and savings Discounting all project cost and savings expected during the entire life cycle of the project to the moment of project start. Comparing NPVs of total life cycle cost and savings. If the ESCO’s cost of an EPC project are going to be paid completely from future savings, the NPV of total project life cycle cost must not exceed the NPV of future savings accumulated during contract duration. Calculating the equivalent annual cost of the project based on the annuity of initial cost (preparation, planning, investment etc.) plus annual implementation cost. Comparing equivalent annual cost and guaranteed savings. If the ESCO’s total cost of an EPC project are going to be paid completely from future savings, the equivalent annual cost must not exceed the average annual future savings during contract duration.

Calculation of the economic basics of EPC projects An Excel based demonstration tool for the calculation of economic basics of EPC projects is provided by the EnPC-INTRANS project.

Main stages of an EPC project Source of the underlying chart: Transparense.eu

Example of EPC projects in public buildings Pool of public buildings in the city of Moravska Trebova (Czech Republic) Complex of five municipal buildings Two primary schools Three administrative buildings Measures Installation of new efficient heat sources Installation of IRC system (heat consumption is controlled in each room individually) Savings in lighting Efficient equipment for water consumption Facts Contract duration: 10 years Investments: 430,000 EUR Initial energy costs (baseline): 420,000 EUR/y Guaranteed savings: 80,000 EUR/y Guaranteed savings: 19% Reduction of CO2 emissions: 285 t/y Source of information: Transparense.eu

Miodrag Gluščević Head of the Department for Communal services, Urban Planning and Environment miodrag.gluscevic@skgo.org +381648703311 Standing Conference of Towns and Municipalities - National Association of Local Authorities in Serbia Makedonska st. 22/VIII, Belgrade, Serbia +381113223446 +381113221215 www.skgo.org