Instrument Overview
An Energy Performance Contract (EPC) is a contract where an array of services is agreed upon, and the provider of the services can guarantee that a minimum of energy savings or sustainability value will be achieved. Not to be mistaken for engineering, procurement, and construction contracts used in infrastructure delivery - energy performance contracts focus on guaranteed energy savings and operational efficiency, not just building infrastructure. An Energy Service Company (ESCo) implements a customized energy service package, consisting of planning, building, operation & maintenance, optimisation, fuel purchase, (co-)financing and user behaviour to guarantee measurable energy savings. EPC contracts are an important (contractual) tool in the energy transition and are structured to optimise costs, reduce GHG, and enhance the value of assets to citizens and the environment.
Why it matters for cities
Energy Performance Contracts (EPCs) offer cities a powerful tool to meet climate goals, reduce energy consumption, and upgrade infrastructure — all with limited financial risk. By shifting the performance and investment burden to specialized Energy Service Companies (ESCos), cities can implement complex energy-saving projects without requiring large upfront capital. This is particularly valuable for municipalities with tight budgets or limited in-house technical capacity.
Key features
- The energy performance contract is based on a commitment to results rather than means. Specifically, the service provider (or energy operator) commits to achieving a defined level of energy savings over the term of the contract. This guarantee is the cornerstone of the EPC: if the objectives are not met, the service provider may be required to financially compensate for the difference. The essence of the EPC is a results-based guarantee.
- Performance monitoring and measurement. Throughout the contract, consumption is analysed and compared to a reference situation (called the “base year”) to assess actual gains.
- The EPC can include a wide range of services: energy improvement work, technical equipment management, maintenance, and usage management. It is adapted to each situation based on needs, the type of building/infrastructure/asset, and the objectives set.
- The contract generally extends over several years (5 to 10 years) to ensure a return on investment and ensure the long-term benefits. The EPC thus provides a secure contractual framework for financing and managing a long-term energy efficiency strategy.
- The savings (incl. financial) gained through the several measures of the EPC are typically used to repay the ESCo, creating a self-financing mechanism.
- contracts often follow either a shared savings model—where cost savings are split between the municipality and ESCo - or a guaranteed savings model, where the ESCo guarantees a minimum level of savings and absorbs the shortfall if that target is not met.
How It Works
The implementation of an energy performance contract follows a multi-step process:
- Initial energy audit: This analyses existing consumption, identifies potential sources of savings, and defines a baseline situation.
- Development of specifications: This specifies the performance objectives, the planned work, the service provider’s commitments, and the monitoring procedures.
- Call for tenders and contracting: The project owner selects a service provider (ESCO) with whom the EPC is signed.
- Contract length and financing terms are typically tailored to project payback time
- Implementation of actions: Work, technical adjustments, and user training, if necessary.
- Performance monitoring and verification: Results are regularly measured and compared to contractual objectives.
Benefits & Challenges for Cities
Benefits
- This model can be suitable for municipalities that lack the financial and technical capacities as it offers a “no risk, no investment” approach, where the municipality does not have to raise upfront costs unless it is the preferred option.
- Costs for maintenance are saved during the contractual period, and there is the guarantee that the ESCo – participating in the share of the saving – will keep the system at its best performance.
- This model can bring expertise and clarify the viability of the project, building market capacity.
- Smaller municipalities could connect with neighbouring cities with similar needs to engage a single ESCo that aggregates these similar projects to lower transaction costs and facilitates financing.
Challenges
- Provided that the contractual length is long enough to reach payback for the ESCo (i.e. seven years) and includes maintenance services, the local government is committed to the ESCo.
- The model might not be applied in locations where an enabling environment is lacking, such as in the case of emerging countries. Municipalities might need to provide bank or state guarantees.
Use Cases
EPC in Elverum Municipality, Norway
The Energy Performance Contracting project (EPC) in Elverum municipality was initiated in 2009 by an intermunicipal project called “Energy efficiency in municipal building in Sør-Østerdal” consisting of 5 municipalities in Hedmark County aiming to reach new and challenging municipal energy- and climate targets. Elverum was the largest of the five and started the EPC project ahead of the four others to gain experience and make it easier for the four smaller municipalities to follow suit. The cooperating parties also got support via an international project called “ENSAMB” focusing on Energy Saving in Municipal Buildings in Small Communities in Rural Districts.
Elverum implemented more than 300 energy efficiency measures in 38 municipal buildings. They have also reached the guaranteed savings so far. The municipal project leader is positive to the EPC concept and claim that neither the large amount of energy saving measures, the guaranteed savings nor reaching the municipal energy- and climate targets would have been possible without EPC.
The main goal of the EPC project in Elverum municipality is cost and energy saving, increased comfort and renewal of technical equipment and systems using energy performance contracting as a tool. The contract-based guarantee was perceived as important or even crucial in the decision-making process.
The contract was made between Elverum municipality, the customer and the Siemens, the EPC provider in 2012. Both tender, negotiations and the contract agreements were facilitated by an EPC consultant (Siv. Ing. Kjell Gurigard AS).
One of the most important success factors was the fact that the contract covered all 300 measures that was implemented in a relatively short time period. The municipality invested 40 MNOK in 38 buildings, 95 000 m2 with an estimated saving of 4,3 GWh with a payback time of 9 years. The contracted guarantee ensured little risk for the municipality and safeguarded the investment. They reported large energy- and costs savings from day one and increased standard on technical equipment and systems. Some of the measures also reduced the need for planned maintenance and hence freed budgeted funds. A more unexpected advantage was the increased competence on energy efficiency and own technical equipment and installations by own municipal personnel. This came because of the involvement in the project and training given by the EPC supplier.
The main challenges were having enough resources for the follow up and involvement in the project in the municipality – both in the energy analyses phase and during implementation of measures. Own involvement and ownership were a success factor, but it proved to be more time consuming than first anticipated.
When to Use It
Energy Performance Contract (EPC)s are best used when there is an appropriate energy market regulation in place.
References
- Energy Performance Contract (EPC) | D-Carbonize
- EPC in Elverum Municipality, Norway - Effect4buildings
- https://citiesclimatefinance.org/financial-instruments/instruments/energy_performance_contract_epc