b) Guaranteed vs Savings Schemes

Energy Performance Contracts (EPCs) are contracts that allow municipalities to implement a wide range of energy efficiency interventions through innovative financing mechanisms. EPCs have the potential to move municipalities from pilot scale implementation (e.g through the EEDSM program) to large scale implementation throughout all municipal building and facilities. EPCs can be implemented through guaranteed savings schemes or shared savings schemes.
  • The guaranteed savings scheme entails the client paying the ESCO for the energy efficiency interventions when the installation is done but also requires a financial guarantee from the service provider against the achievement of the projected savings. Should the savings not be achieved, the client uses the guarantee to reimburse the difference between actual savings and projected savings. 
  • In a shared savings scheme, the ESCO raises the investment capital required and the cost savings are split between the client and the service provider. There is no predefined percentage split for any shared savings scheme and the percentage split is determined by the client and ESCO involved.

Guaranteed Savings Schemes

In a guaranteed savings scheme, the municipality provides the upfront investment for the energy efficiency interventions and the ESCO is required to financially guarantee that the energy savings projected for the intervention will be achieved. In other words, if the agreed savings are not achieved, the ESCO is required to reimburse the municipality the difference between the actual savings and agreed savings.

For the guaranteed savings scheme, municipalities are therefore responsible for raising the finance for the interventions either from internal sources, donor funding or debt. The ESCO, on the other hand, is responsible for the entire performance risk.

Shared Savings Schemes

Under a shared savings scheme the ESCO finances the energy efficiency interventions and is paid back by the client out of the energy efficiency savings. Thus, when a shared savings scheme has been identified as an attractive option for the municipality to implement energy efficiency in their buildings, municipalities benefit from energy cost savings without using municipal finances to implement the project.

Since energy efficiency interventions can be costly, ESCOs will typically secure credit to finance the energy efficiency interventions. As a result, in a shared savings scheme the ESCO will bear both the performance and credit risk.

Under a shared savings scheme, the client benefits from the energy cost savings at the outset of the performance obligation period as the ESCO is paid a portion of the savings according to a contracted and pre-arranged percentage and the client retains a portion of the savings. There is no standard percentage split because it is dependent on the project cost and contract length.

The main advantage of a shared savings scheme for a South African municipality is that the municipality does not have to raise the funds to finance the energy efficiency interventions as that is the responsibility of the ESCO. Since funds for energy efficiency initiatives are limited, the use of shared savings schemes can extend the total number of energy efficiency interventions that a municipality can implement. This of particular benefit in cases where the energy efficiency measures are expensive to implement.

The following table summarises the key differences between Guaranteed Savings and Shared Savings schemes

 

Conventional energy efficiency contracts

Guaranteed savings contract

Shared savings contract

Less than three years

Shared savings contract

More than three years

Contract

Standard contract

Contract that allows for two stages: an auditing stage and an intervention stage.

Standard Contract

Additional requirement to adhere to Section 33 of the Municipal Financial Management Act.   

Finance

Financed by the municipality through existing funds, donor funding or debt.

Financed by the municipality through existing funds, donor funding or debt.

Financed by the ESCO through existing funds or debt.

Financed by the ESCO through existing funds or debt.

Cost

Cost of installation

Maintenance costs are likely to be accounted separately

Monitoring & verification may not be implemented and so no cost incurred

Cost of debt if debt incurred

Cost of installation

Cost of maintenance

Cost of monitoring & verification

Cost of performance guarantee

Cost of debt if debt incurred

Cost of installation

Cost of maintenance

Cost of monitoring & verification

Cost of financing by the ESCO

Cost of installation

Cost of maintenance

Cost of monitoring & verification

Cost of financing by the ESCO

Likely achievement of savings

Monitoring & verification not always included   so savings may not be monitored.   ESCOs provide warranties on the equipment but not the energy savings performance so savings not guaranteed.

Savings guaranteed. If savings not achieved the municipality is paid the difference by the ESCO.

If savings not achieved the ESCO loses money as only paid out of the savings. Consequently the ESCO is incentivised to deliver the savings.

If savings not achieved the ESCO loses money as only paid out of the savings.  Consequently the ESCO is incentivised to deliver the savings.

Maintenance

Implemented systems need to be maintained by the municipality.

Implemented systems need to be maintained by ESCO. Potential for confusion between the maintenance responsibilities of the ESCO and municipality exists.

Implemented systems need to be maintained by ESCO. Potential for confusion between the   maintenance responsibilities of the ESCO and municipality exists.

Implemented systems need to be maintained by ESCO. Potential for confusion between the maintenance responsibilities of the ESCO and municipality exists. This confusion can be exacerbated for very lengthy contracts.

Technical Expertise required by municipality

Municipality requires the technical capacity to identify appropriate energy efficiency interventions and to maintain interventions.

Municipality requires the technical capacity to oversee work of the contractor.  Training of municipal staff to take over maintenance at contract end can be incorporated in contract.

Municipality requires the technical capacity to oversee work of the contractor.  Training of municipal staff to take over maintenance at contract end can be incorporated in contract.

Municipality requires the technical capacity to oversee work of the contractor.  Training of municipal staff to take over maintenance at contract end can be incorporated in contract.



Click on the links below for more information on EPCs.