Benefitting from energy-performance contracts

ESTA, Native-Hue, CHP, district heating, energy performance contract
An increasing profile of energy-service companies (ESCOs) providing energy-performance contracting in the UK — John Field

John Field explains how energy performance contracting can unlock investment and reduce the risk associated with delivering the improvements necessary to reduce energy demand and cost in the built environment.

There is an increasing profile of energy-service companies (ESCOs) providing energy-performance contracting in the UK. This results from a series of successful projects and the sector's billing by the EU and the UK Government as a major route to meeting environmental targets. What attracts customers and legislators is that it provides number of features often critically missing from larger energy project plans.

• Project evaluation and decision expertise.

• Dedicated investment finance.

• Performance guarantees, bringing reduced performance risk.

• Project management expertise.

• On-going measurement and verification.

In the UK energy-performance contracting has existed for three decades and is now emerging from being a promising Cinderella sector to a £1 billion-a-year industry, so it is interesting to look at how this sector is moving forward and which aspects make it fully realise its potential.

In some cases where there is a single technology like combined heat and power, an energy-performance-contract approach can be straightforward. Such applications have progressed well historically. For example, it was used by Watt in the 18th century to fund and install the replacement of less-efficient steam engines or animal horse power by efficient steam engines on a shared-savings basis.

Where one is talking about a wider range of measures or larger-scale projects, there is more involvement at the set-up phase. Such projects have tended to be successful in sectors where such contract procedures are familiar — mainly public sector and, especially, the health sector. These markets have long timescales and good credit ratings but often a lack of capital funding.

In the private sector there are shorter time horizons with less durable credit, and there can be problems with the availability of project-management expertise and finance. There is also an issue getting and retaining the attention of the company board for non-core issues; private-sector organisations increasingly avoid non-core activities which could be outsourced to free the company for more profitable activities.

The regeneration of King’s Cross in London incudes 2 km of district heating and 4 MW(e) of CHP.

There has been substantial progress spurred by public sector frameworks such as RE:FIT and the Carbon & Energy Fund (CEF), which provides contract templates, technical support, verification guidance, pre-qualified contractor panels and an on-going support role.

Nottinghamshire Healthcare Trust's Rampton Hospital has a £5 million upgrade contract with Cofely using the CEF's framework, contract templates and performance guarantee approach, funded jointly by the Green Investment Bank and SGEF.

Moving some way towards the private sector, the substantial King’s Cross transformation project includes a range of energy services and innovations by the energy services company Metropolitan King’s Cross Ltd working with Vital Energi, producing lower bills for residents and 50% carbon savings.

In the commercial sector an early example was provided by Emstar (subsequently AHS Emstar, then Dalkia and now Veolia) with a group-wide energy-performance-contract operation for the DeVere hotel group. Improvement measures across many hotels included boiler upgrades, CHP, controls and loft insulation.

So what will pick out the projects that go ahead? The market experience to date suggests the following four points.

1. Simplification of what is presented to customers at the sales and contract stages. This may seem like a contradiction because the process is normally not inherently simple. However, other sectors have overcome this and subjugated the complexity. Ideally the arrangement is contractual-fit-and-forget, meaning that the contractor takes responsibility for all management, verification and reporting in a trusting relationship — so the board is receiving genuine timely updates and not having to instigate cross-checks. At the contract work-up stage, expert professionals are involved, but after sign-up the contract should run itself without the lawyers.

2. Clarity on risk. While it is often suggested that risk is offloaded onto the ESCO contractor, this normally refers to the construction and performance risk as specified in the contract. The benefit to the customer is that residual risks are set down in a reviewable way in the contract, which the customer has to accept with its limitations. In successful sales efforts, this whole process is explained openly and not glossed over.

The £5 million upgrade of Rampton Hospital included Cofely installing CHP and biomass plant and improving the site’s heat mains.

3. Trust. Currently the way to establish trust for the customer in the absence of previous projects with the services provider is via the frameworks — which have panel providers and project experience. Verification of savings will be de-risked by the correct specification of technical best practice standards such as the International Performance Measurement and Verification Protocol (IPMVP). A wider way forward will be codes of practice from trade groups or, possibly, Government.

4. Standard forms of contract. Although used successfully by the frameworks in their identified sectors, generic contract forms must allow for variations by sector and application and can be unwieldy. DECC state in their June 2014 Guide to ESOS that they are preparing a model energy-performance contract with associated guidance, but this is likely to remain an opportunity in promising but unfulfilled sectors.

The energy-performance-contracting sector has a large number of successful projects completed and on-going. It now has the support of the Government's ESOS legislation and the EU's Energy Efficiency Directive. There is a body of established service providers and successful framework operators operating in sectors where the approach has now become established.

The next step for the industry is to expand from its home ground into all parts of the economy by providing simple, clear and trusted services. This remains a challenge and a substantial opportunity at the level of frameworks, trade groups, ESCOs and supporting technical and contractual service providers.

John Field is chair of the Energy Performance Contracting Group of ESTA and director of Native-Hue.

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