The basic concept of Energy Performance Contracting (EPC) is explained on pages 18-23 in the GIZ ESCO Guide (published in 2013) as follows:
In an energy performance contracting (EPC) arrangement, the Energy Service Company (ESCO) is responsible for optimising building services systems and system operations in existing buildings across all branches of construction and maintenance. The main service provided by the ESCo is a guaranteed level of savings over a defined period of time.
The guaranteed energy cost savings are the basis for calculating a constant annual remunera-tion to the ESCo – the contracting fee, which also contains the profit margin for the ESCo.
This concept is illustrated in the following Chart:
Before a tender is made, an energy cost baseline is determined for the building (or building pool) or facility. This is usually based on the energy consumption of the calendar year prior to commencement of the EPC , which is often also compared to the two preceding years in order to eliminate extreme climatic influences, usage fluctuations, etc. The evaluated baseline data is climate adjusted on the basis of mild or hot days (annual degree days).
Proceeding from the energy cost baseline, the ESCO guarantees an annual energy cost savings (in EUR, calculated on a fixed price Basis with the energy prices of the reference year) to the customer over the entire contract period. A fixed proportion of these guaranteed savings is set as the contracting fee, which the ESCo receives from the client to finance the investment, maintain the installations and attain a profit margin.
In order to verify the annual energy savings, incurred energy consumption costs are converted into the reference year basis and then compared to the baseline during EPC bill audits. For the sake of ensuring this comparability, energy supply bills received by the client need to be adjusted for the following factors:
- deviations from the reference year in climatic conditions (annual degree days);
- changes in energy prices compared to the reference year (energy bills received by the customer must always be converted into the energy prices of the reference year);
- changes in building/facility usage compared to the reference year (insofar as these may cause energy consumption changes).
If the difference between the adjusted energy cost savings and the guaranteed cost savings is zero, the ESCO is exactly within the performance parameters of its contract. If the difference is greater than zero, contract over-performance sets in (savings are greater than guaranteed); in this case, the extra savings can be shared among the ESCO and the client. If the difference is negative, the ESCO has not achieved its savings goal and must reimburse the customer with the resulting difference.
If energy prices rise, the energy cost savings of the customer increase (energy saved multiplied by energy Price increases). This delivers additional budgetary benefit for the customer.
Contractually agreed one-off payments at the beginning (e.g. investment or building cost contributions) or at the end of the contract term (redemption sum) are also possible. With this solution, higher investment costs do not necessarily lead to higher contracting fees or longer contract durations.