Energy Performance Contract (EPC)

DEFINITION: A low-risk method of financing and delivering energy efficiency improvements and renewable projects for businesses that lack the funds, technical experience and man power needed for such projects. The EPC is formed between the client and an external organisation (ESCO), with the upgrades funded through cost reductions.

 

More detail:

What is an Energy Performance Contract (EPC)?

An EPC is a low-risk method of financing and delivering energy efficiency improvements and renewable projects for businesses that lack the funds, technical experience and man power needed for such projects.

How does an EPC work?

The EPC is formed between the client and an external organisation (ESCO). The energy upgrades are funded through cost reductions. The income from the cost savings, or the renewable energy produced, is used to repay the costs of the project, including the costs of the investment. An EPC guarantees a return equal to the cost of investment for the client with the percentage of future savings accrued by the client dependent on the type of EPC in place.

As responsibility for covering the cost of the initial investment falls to the ESCO through performance of installed generation or efficiency schemes, EPCs are seen as fairly low-risk.

What are the benefits of an EPC?

  • Financial Benefits
  • Guaranteed energy savings
  • Reduction in backlog maintenance levels, maintenance costs and other running costs
  • Reduction in CRC Scheme costs
  • Creating the opportunity for renewable energy generation and income from the Feed In-Tariff and Renewable Heat Incentive schemes
  • Reducing the impact of future energy price rises through significantly reducing energy use

 

Wider benefits

Delivering CO2 reductions and helping to achieve corporate CO2 reduction targets

Improving the building environment and comfort for occupants through upgraded and more efficient heating and cooling systems. An important benefit, as a growing body of evidence suggests, is that improved building environments can improve productivity and reduce absenteeism

Creating a safer environment through improved lighting, reduced equipment failures and better building management systems to help identify issues

Investment in buildings and green technologies to help generate local jobs and improve local skills

What are the performance targets of EPCs?

Performance targets can be based on CO2 savings, energy savings and generation of a certain kWh level of renewable energy per annum. The targets can vary depending on the type of EPC.

What are the different types of EPC available?

Shared savings

Under a shared savings contract the customer takes over some of the performance risk of the installed measure, so will not be responsible for the initial investment risk. The ESCO therefore assumes both performance and credit risks, securing the loan against its share of anticipated energy cost savings.

The cost savings under a shared savings scheme are split for a pre-determined length of time in accordance with a pre-arranged percentage: there is no 'standard' split as this depends on the cost of the project, the length of the contract and the risks taken by the ESCO and the consumer.

Guaranteed savings

Under a guaranteed savings contract the ESCO guarantees a certain level of energy savings thereby removing an element of performance risk for the customer, but will not finance the project. Financing for such schemes are generally provided by banks or financing agencies.

If the savings are not enough to cover the initial investment then the ESCO has to cover the difference. If savings exceed the guaranteed level, then the customer pays an agreed upon percentage of the savings to the ESCO. Usually the contract also contains a proviso that the guarantee is only good, i.e. the value of the energy saved will be enough to meet the customer debt obligation, provided that the price of energy does not go below a stipulated floor price.

Chauffage

A common contract in Europe is the 'chauffage' contract, where an ESCO takes over complete responsibility for the provision to the client of an agreed set of energy services and provides in effect an extreme form of energy management outsourcing. The ESCO takes on the responsibility for providing the agreed level of energy service for lower than the current bill or for providing improved level of service for the same bill. The more efficiently and cheaply it can do this, the greater its earnings.

Chauffage contracts are typically very long (20-30 years) and the ESCO provides all the associated maintenance and operation during the contract.

A BOOT model may involve an ESCO designing, building, financing, owning and operating the equipment for a defined period of time and then transferring this ownership across to the client.

Related items

How to produce an engaging sustainability report: Seven steps to success

Sustainability reporting has evolved from a niche practice to a mainstream aspect of corporate governance. The modern sustainability report is a vital tool to ENGAGE with shareholders, employees, stakeholders and, increasingly, consumers.

UK charitable foundations provide more than £4bn of funding every year 

Comic Relief among charities pledging to end fossil fuel investments

Comic Relief, Power to Change, and Guy's and St Thomas' Charity are the latest organisations that have committed to end all fossil fuel investment and adopt a new ethical approach to investing, after joining the Funder Commitment on Climate Change.

30 Under 30: The 2020 Playbook for Sustainability and Energy Professionals

Produced as part of edie's 30 Under 30 initiative, this Playbook offers practical advice on how sustainability and energy professionals can embody 'excellence' in 2020.

The pledge will cover all 11 of Lloyds Banking Group's brands

Lloyds Banking Group to halve carbon emissions of investments by 2030

Lloyd's Banking Group has pledged to halve the carbon emissions generated by projects it finances by 2030, in support of the UK's 2050 net-zero target.

The much-anticipated fund was unveiled on Tuesday 

EU unveils €100bn fund for 'just' low-carbon transition - which excludes nuclear

The EU's regional policy Commissioner Elisa Ferreira revealed on Tuesday (14 January) details of the €100 billion Just Transition Mechanism, a key financial component of the European Green Deal that should make the bloc climate neutral by 2050.

Image: Creative Britain, Open Government Licence 1.0

Chancellor vows to prioritise the environment as Budget date set

Chancellor Sajid Javid has confirmed that the UK's next Budget will be held on 11 March, promising fresh spending across the nation's green economy.

Image: Frankie Fouganthin / CC-BY-4.0

Earthshot Prize: Royals aim to spur 'decade of action to repair planet'

The Duke and Duchess of Cambridge have partnered with Sir David Attenborough to launch the 'Earthshot Prize' - a new fund for individuals and organisations working to restore the environment.

Organisations set to benefit from the donations include The Rivers Trust, The Carbon Literacy Project and Friends of the Earth 

Patagonia's Black Friday campaign raises $20m for environmental causes

Outdoor clothing company Patagonia's Black Friday fundraiser for environmental organisations has hit its $10m (£7.6m) target in just 17 days - meaning the firm will now donate $10m of its own to these causes.

8 steps for overcoming the behavioural change challenge

During the SPARK 2.0 event, energy and sustainability professionals discussed the barriers to behaviour change and how businesses could harness the wider awareness of the climate strikes to engage all staff members on the need to manage energy use.

Images: UNClimateChange Flickr

America's Pledge and Europe's Green Deal: What happened on days 8 & 9 of COP25?

COP25 - the UN's annual two-week-long climate summit - has entered its second week in Madrid. Here, edie rounds up all the key news and views from the last few days of the event.

The Cerrado region, which once covered a quarter of Brazil, loses an area the size of London every two months

Tesco commits £10m to combat deforestation from soy production in Brazil

Tesco has committed £10m over the next five years to fund a new initiative to transition to producing deforestation-free soy in the Cerrado region in Brazil.

New report reveals surge in employee engagement on energy issues

EXCLUSIVE: The UK's declaration of a climate emergency combined with the recent climate strikes and protests has fuelled a surge in awareness of energy issues among employees across the country, according to the latest Business Energy Barometer conducted by edie.

edie energy managers' survey reveals ESOS 'not worthwhile'

The latest Business Barometer of energy managers for the final quarter of 2019 has revealed the challenges and opportunities ahead of 2020, with many outlining ESOS as a key challenge.

The new policy will cut €2bn (£1.7bn) of yearly investments to fossil fuel projects

European Investment Bank to end financial support for fossil fuels by 2021

The European Investment Bank (EIB) has unveiled a new energy lending policy that will stop all financing for fossil fuel projects at the end of 2021 and unlock €1trn in sustainable development over the next decade.

BCAM is calling for banks to set clear, timebound strategies for restrictions and phase-outs for financing fossil fuels and deforestation

Superficial progress: Global banks failing to deliver time-bound climate strategies

A new report has accused the banking sector of superficial progress when it comes to climate commitments, noting that uptake in low-carbon services, green bonds and reporting standards isn't being matched by demands to decarbonise portfolios.

To gain a place in the programme, startups will have to show Google their potential to help create a low-carbon, resource-efficient, more socially equal world. Image: Google

Google launches incubator for SDG-aligned startups

Google has this week launched a new "accelerator" programme for startups, aimed at supporting new firms striving to drive progress against one or more of the UN's Sustainable Development Goals (SDGs).

Webinar: Climate activism: Redefining business engagement to help reach net-zero

Following 12 months of heightened climate awareness driven by the climate strikes that have occupied cities across the globe, businesses are no longer expected to merely operate within the planetary boundaries. Instead, an era is arising where corporates must reflect their role in society through their actions, beliefs and demands.

Streamlined Energy and Carbon Reporting: edie's state of the nation report

Following the introduction of Streamlined Energy and Carbon Reporting (SECR), this new report looks at how energy and sustainability managers are getting to grips with the new compliance issue - and what the future looks like for reporting.

The campaign officially launched on Tuesday (22 October). Image: Hubbub

Food giants team up to fund Edinburgh's first on-street recycling infrastructure

On-street recycling infrastructure for food and drinks packaging has been installed in Edinburgh for the first time, as part of a campaign run by charity Hubbub and backed by businesses including McDonald's, Costa Coffee and Nestle.

The report calls for more powers for local authorities on green buildings and the use of council and business rates to meet clean growth objectives

Report: Local areas to miss net-zero goals without Government support

Government needs to incentivise and support local funding and devolved powers in order to move the UK's local areas to a net-zero carbon economy, a new report has claimed.

In the UK, a Green New Deal was first put forward by the Green Party, calling for a 50% cut in emissions within a decade

Mayors Khan and Street call for Green New Deal to empower regions on climate action

London Mayor Sadiq Khan and Conservative Mayor of the West Midlands, Andy Street, have called on the UK Government to introduce a Green New Deal that devolves power to enable regions to create a fair and just transition to a net-zero economy.

The green bond was led by Morgan Stanley, which launched a dedicated plastics financing platform earlier this year

PepsiCo prices $1bn green bond to assist with plastics phase-out

PepsiCo has priced its first ever green bond at $1bn, which will be used to fund initiatives to reduce plastic content in packaging, improve supply chain engagement and management and boost water stewardship.

(L-R): BlackRock fund manager Evy Hambro; Ellen MacArthur Foundation chief executive Andrew Morlet; BlackRock fund manager Sumana Manohar and The Ellen MacArthur Foundation’s executive lead for plastics, fashion and finance, Rob Opsomer. 

BlackRock launches its first dedicated circular economy investment fund

The world's largest asset management firm, BlackRock, has launched its first investment fund dedicated to accelerating the global development of a circular economy.

Mission Possible: Achieving a net-zero carbon future for manufacturing

As the movement towards net-zero carbon takes hold across the commercial sector, this fresh insight report looks at how manufacturing companies are driving forward their own goals.

Pictured: Logging operations in Pomio, New Britain, Papa New Guinea, to make way for agri-food. Image: Fabio Erdos / Panos 

UK banks 'pouring billions into fossil fuels and deforestation', despite green pledges

UK banks have allocated almost £150bn of funding for fossil fuel projects since the start of 2016 and continue to collectively hold 146 investment pots in firms driving significant levels of rainforest deforestation.

Mission Possible: Achieving net-zero carbon in Utilities

Following the UK's world-leading commitment to reach net- zero emissions by 2050, this insight report investigates how the utilities sector can radically reduce carbon whilst enabling and empowering its customers to do the same.

Image: Parliament Live

September Spending Round: Javid promises green 'infrastructure revolution'

Sajid Javid has committed to helping the Government fund a green "infrastructure revolution" during his first solo Commons speech since becoming Chancellor of the Exchequer.

Since the London ULEZ launched in April, the number of non-compliant vehicles travelling through the capital daily has decreased by one-quarter. Image: City Hall 

City-based Clean Air Zones 'would boost UK economy by £6.5bn'

By implementing designated Clean Air Zones in which polluting vehicles are fined to travel, UK cities could collectively reap economic benefits of £6.5bn.

The charities argue that more funding is needed to decarbonise transport, the build environment and heavy industry in particular

UK funding to tackle climate crisis 'must double', Government warned

Britain's biggest environmental groups have warned the government that funding to tackle the climate emergency must be more than double next year to avoid an even greater cost from catastrophic ecological breakdown in the future.

More than 36,000 Lucozade Sport Oohos were sampled at the 2019 Virgin Media London Marathon

Edible drinks bottles backed by Government funding

Oohos, the edible, plastic-free packaging capsules trialled by companies such as Lucozade Ribena Suntory, have received more than £300,000 in Government funding that will help boost daily manufacturing outputs.

The funding pot is being jointly contributed to by Sky and the Government's Innovate UK arm

Biodegradable bottles and plastic-free microbeads: The 10 innovations backed by Sky Ocean Ventures

Sky's Ocean Ventures arm has selected 10 innovations - all designed to combat marine plastics pollution - to receive a share of a £6m impact investment fund.

edie Explains: Corporate Power Purchase Agreements (CPPAs)

What are Corporate Power Purchase Agreements (CPPAs) in the context of renewable energy? Which organisations are most suited to adopting CPPAs, and what are the business benefits of doing so?

Coal-fired power plant in South Africa

UK's overseas energy aid spending on fossil fuels spirals to £4.6bn

Over the last seven years, the UK has spent 60% of its overseas support for energy investment in developing countries on fossil fuels, with more than £4.6bn spent on climate-wrecking projects.

These stories exemplify how businesses and governments across the world are ramping up efforts in all areas of sustainable development

Coors' plastic-free packaging and solar-powered trains: The sustainability success stories of the week

As part of our Mission Possible campaign, edie brings you this weekly round-up of five of the best sustainability success stories of the week from across the globe.

Thomas noted that businesses needed to get better at providing relevant data to investors. Image: GFI

What does the Green Finance Strategy mean for business?

Following the launch of the UK Government's Green Finance Strategy, the chief executive of the Green Finance Institute has outlined how climate disclosure, policy signals and a robust business case for sustainability will transform how corporates engage with the finance community.

Eight reasons why green finance is becoming mainstream

Halfway through London Climate Action Week and it seems that sustainable finance is the hot topic. Here, edie explores the key drivers behind why green finance is growing from a niche interest to a business-critical concern.

Emergency response Q&A: How can business accelerate towards net-zero emissions?

The UK has declared a climate emergency and the Government has set a legally binding target for net-zero carbon emissions by 2050. This one-hour webinar takes the form of a live Q&A session with a range of climate policy and business energy experts to explore how businesses should respond to the situation.

One of Arriva's electric bus models 

Arriva inks telematics deal to slash bus emissions

European passenger transport company Arriva will install TomTom telematics systems in up to 15,000 buses, in a move that could reduce carbon emissions by 72,000 tonnes each year.

It is the first in a series of speeches by the shadow chancellor

Private sector must be forced to invest in 'green revolution', says Labour

Labour will back measures deterring investment in fossil fuels as part of a new drive to stop the financial sector from funding global heating, John McDonnell will reveal this week.

edie Explains: ISO 50001

This updated ISO 50001 guide, produced in association with edie's supporting partner Centrica Business Solutions, provides an in-depth summary of the ISO 50001 Standard which can be used by an organisation to establish and maintain a continuous level of energy performance improvements.

The budget proposals were unveiled on Wednesday (5 June)

Climate becomes top priority in EU's 2020 budget

The European Commission proposed on Wednesday (5 June) a budget worth €168.3bn for the bloc in 2020, aimed at promoting a more competitive European economy and solidarity and security in the EU. This is the last budget under the 2014-2020 fiscal period and put climate change at the top of the agenda.

DFID currently has a £1.1bn annual budget for foreign climate initiatives

UK 'to double' aid support for climate challenges in developing nations

The UK's International Development Secretary Rory Stewart has revealed plans to double the amount of foreign aid spent on climate-related projects to over the next five years.

Business Energy Barometer: April-May 2019

edie's brand-new Business Energy Barometer report maps out the key energy drivers, challenges and opportunities facing UK businesses, based on an in-depth survey of energy managers across the country.

Webinar: Ambition into action: Scaling-up your energy and resources strategy

This one-hour webinar will hear from the leading businesses and experts that are reaching the ‘climate turning point' by scaling-up efforts to drastically reduce energy and resource use through net-zero targets and strategies.

Walmart hopes the move will encourage greater disclosure and innovation from suppliers. Pictured: Solar arrays operated by Walmart China

Walmart partners with HSBC to launch green finance programme for suppliers

As part of a partnership with HSBC, US-based retail giant Walmart has developed a green finance initiative that rewards suppliers for setting, meeting or exceeding ambitious sustainability aims.

The World Bank has argued that the study “paints a distorted picture of [its] energy sector work”

The World Bank accused of dodging 'no-coal' pledge by funnelling billions of dollars into fossil fuels

A large-scale study on hundreds of active energy projects commissioned by The World Bank Group has concluded that the body is currently financing $21bn of fossil fuel projects, compared to $7bn in the renewables sector.

At least 10 large-scale schemes will be chosen as winners, meaning that Starbucks will funnel a minimum of £500,000 into the initiative

Starbucks and Hubbub launch joint fund championing coffee cup recycling programmes

Environmental charity Hubbub has today (11 April) launched a new funding initiative aimed at helping local authorities and other organisations launch or scale-up coffee cup recycling schemes, after receiving funding to launch the scheme from Starbucks.

Accelerating the rEVolution: 7 business innovations in e-mobility

This insight report, produced in partnership with UK Power Networks Services, investigates some of the game-changing developments which are driving e- mobility and accelerating the sector forward into the next decade.

edie Explains: Streamlined Energy and Carbon Reporting (SECR)

What is the Streamlined Energy and Carbon Reporting (SECR) framework? What do businesses need to know about this new piece of legislation? And what compliance issues will arise from the new framework? This free edie Explains guide gives you everything you need to know.

More than £2.5m each has been offered for clean bus tech to the top bidding local authorities

Fresh £25m round of clean bus funding for local authorities

New funding from Government has been offered to 14 local authorities as part of the Clean Bus Technology Fund.

Grants of between £20,000 and £100,000 will be awarded from the new fund. Image: CC BY 2.0/Taz 

Government unveils fresh funding for business fight against food waste

The UK Government has announced a new £1.15m funding pot for businesses and non-profits aiming to reduce food waste in households and supply chains through behaviour change.

The Catapult is looking for smart, digitally connected heating and cooling solutions that use data to deliver services

Energy Catapult launches SME support for low carbon heating and cooling

A new programme has been launched by the government's Energy Systems Catapult centre to assist small and medium sized businesses (SME) develop low carbon heating and cooling.

BlackRock steps up ESG drive with six new low-carbon funds

The world's largest asset manager BlackRock has launched new exchange-traded funds (ETFs) that screen out exposure to "controversial" sectors, improve environmental social and governance (ESG) scores and offer a reduced carbon emissions intensity of 30%.

The RAC though said that its own findings suggested the UK was “still some distance” from the “tipping point” where consumers would buy electric vehicles as their first choice

Government urged to rethink road taxation policy to spur EV uptake

Motoring tax needs a rethink if it is going to be fit for the twenty first century and the increase in electric vehicles (EVs), according to the British Vehicle Rental and Leasing Association (BVRLA).

The Lords also said climate change should be included in the OEP’s remit

Lords raise concerns over environmental protections under "no deal" Brexit

A Lords committee has written to Environment Secretary Michael Gove to raise concerns about the protection of environmental standards after Brexit.