Unlocking Energy Efficiency
By Nick Keegan, EEVS Insight
You either love energy performance contracts or hate them. But they are growing in popularity and have yet to meet their full potential.
The Government’s Clean Growth Strategy highlights the importance of ‘building confidence’ in energy services to ‘unlocking business energy efficiency’ and driving vital third-party finance into projects. But what are the barriers and how, as a sector can we foster the right approach and solutions? Energy efficiency has been around as long as energy itself, yet the sector’s general malaise to implement anything other than lighting retrofits with short payback periods 1 continues to create the need for a trusted Energy Performance Contracting sector, able to draw together project teams and assist in up-selling more holistic solutions to an organisation’s board through enthusiastic energy managers.
Over the years Energy Performance Contracting has seen continued interest from investors, service providers and policymakers, though it has developed somewhat of a ‘Marmite’ reputation: Those that love it highlight the model’s attractiveness to organisations looking to focus on their core business, as it outsources the identification, implementation, financing and operation of energy saving measures, while offering the opportunity to incentivise performance and transfer risk through guarantees and gain shares. On the other hand, those that hate EPC say it is too complicated and too expensive as a result of considerable project development and financing costs.
Complicated and expensive are perhaps terms considered by the love side that equate to being comprehensive in scope. Undeniably, it allows clients to bring in deeper energy saving measures that do not generate a sufficiently attractive return on investment on their own. This, in turn, builds deal sizes large enough to interest third-party financiers, thereby offering to reduce the scenarios of crucial energy saving opportunities being quashed by a lack of capital availability.
Wherever you stand on the debate however, Energy Performance Contracting has enjoyed strong growth in the UK public sector recently. It is, though, far from meeting its full potential or establishing a foothold in the industrial and commercial sector, held back by a lack of trust, complexity and high transaction costs due to considerable market diversity.
Third-party financing options
It also appears that while a wide range of third-party financing options are in play, most projects use client capital or debt and there are indications that the nirvana of widespread ‘pay-as-you-save’ EPC is being hampered by poor affordability of third- party finance and confusion about whether investments can be taken off the client’s balance sheet. This is further complicated by silos where financiers and investors are having trouble identifying projects for investment, but at the same time technology providers are having difficulty finding finance for projects.
So what is the answer? More joined-up policy and regulation could be the key to influencing and encouraging more to be done. Fundamentally perhaps, education, collaboration and an assurance programme for investment is required to break down initial barriers to greater success.
But it’s not just the UK working on this issue. Funded by the EU’s Horizon 2020 research and innovation programme, the QualitEE2 project aims to investigate and develop the opportunity for specific quality assurance of energy efficiency services to break down the barriers. As well as increasing trust, it is thought a quality assurance scheme could drive standardisation, reducing complexity and transaction costs, while also improving finance affordability and perhaps alleviating some of the concerns cited by the ‘hate’ side of the debate! The project has published a draft set of quality criteria, against which energy efficiency services such as energy performance contracts can be evaluated. The next challenge is to implement these within functioning national assurance schemes.
Bringing stakeholders together to discuss and develop such a framework is an important next step to consolidate what has been a fragmented approach. In ESTA’s Energy Performance Contracting group (EPCg) we have been doing just that over the past four years. We have held annual seminars and quarterly group forums, and we now have members from all stakeholder backgrounds including finance, local Government, global solutions providers, SME technology providers, energy management and professional services consultants taking part.
The QualitEE project is a key initiative for the group and we are currently running a series of market consultation events to gather feedback on a proposed quality assurance scheme for energy performance contracting in the UK. We are also looking at how this potential scheme could work in conjunction with the Investor Confidence Project’s (ICP) established Investor Ready Energy Efficiency TM certification. ICP was developed in response to the same barriers as mentioned above but focusses on certifying the quality of a particular project rather than an EPC contractor’s service. ICP is designed to meet the needs of the whole energy efficiency market regardless of which contract structure has been used so the two schemes are considered complimentary. The aim in looking at a possible combination of ICP and QualitEE is to maximise the quality of service delivery and project outcomes whilst keeping transaction costs and certification fees to an absolute minimum.
This article first appeared in Energy in Buildings & Industry magazine, February 2019 edition
Nick Keegan, Senior Consultant at EEVS Insight, is a leading expert on measurement and verification, delivering independent services for EPC projects and professional training. Nick leads EEVS involvement in the QualitEE project. He is a Certified Measurement & Verification Professional and sits as Chair of the UK Energy Services and Technology Association (ESTA) Energy Performance Contracting group.