ENERGY PERFORMANCE CONTRACTING AS A VIABLE STRATEGY FOR BIG SCALE ENERGY
EFFICIENCY RETROFITTING PROJECTS IMPLEMENTATION
NATIONAL WORKSHOP
FOR BUILDING SECTOR ENERGY EFFICIENCY PROJECT
By
ZAINI ABDUL WAHAB
EnMS Expert,UNIDO
Committee Member,MAESCO
25th February 2016
OUTLINE
OVERVIEW OF ENERGY EFFICIENCY POTENTIALS
INTRODUCTION TO ENERGY SERVICE AND ESCO
HOW EPC WORKS?
POTENTIALS AREAS FOR EPC PROJECTS
SUCCESS STORIES
THE WAY FORWARD
TOWARDS ENERGY EFFICIENT SCENARIO :NEW POLICY
Economically viable efficiency measures can halve energy demand growth to 2035
Source: IEA
GLOBAL EE POTENTIALS
EE potential used by sector in the New Policies Scenario
2/3 of the economic potential to improve EE remains untapped in the period to 2035
Source: IEA
SEA: INVESTMENT POTENTIALS (US$MIL.)
The total market size = US$6.7 billion;
Industrial = US$2.9 billion(44%)
Commercial = US$3.7 billion(56%)
source: www.reexasia.com
Biggest potentials in the industrial
sector
ESCO INDUSTRY SIZE ESTIMATES BY SELECTED COUNTRY
Source: Lawrence Berkeley National Laboratory , National Association
of Energy Service Companies, USA September 2013
ESCO INDUSTRY IN THE US…
Source: Lawrence Berkeley National Laboratory , National Association
of Energy Service Companies, USA September 2013
EXISTING PROGRAMS FOR EE INVESTMENTS BY THE GOVERNMENT OF MALAYSIA
• 2011-present
• PEMANDU-KeTTHA - Energy Commission
EPC Program for government buildings
• 2014-present
• MIGHT-MAESCO-Melaka Green Tech Corp.
EPC Program for private sectors in Melaka
• 2010-2016
• JKR(BSEEP Project Team)-UNDP
Building Sector Energy Efficiency Project: EE
Demonstration Projects
• 2012-(2016-2017)
• KeTTHA-ST-SEDA-MGTC
Energy auditing, retrofitting projects for demonstration for government buildings
Delayed until today due to
unavailability of the
mechanism to pay ESCOs
Delayed until today due to the
lack of national level EE policy &
regulatory framework
TRADITIONAL VS. INTEGRATED ENERGY SERVICE MODEL
Traditional Integrated Energy Services Model
Source: Government Property Group ,Integrated Energy Efficiency Retrofits and
Energy Performance Contracting ,Australia,2011
WHAT IS ESCO?
An Energy Service Company(ESCO)Develop and implement turnkey, comprehensive EE projects
ESCOs offer performance-based contracts (i.e., contracts that tie thecompensation of the ESCO to the energy savings generated by the project) as asignificant part of their business
To ensure credentials, ESCOs must demonstrate the technical & managerialcompetencies to design & implement projects involving multiple technologies : LightingMotors & DrivesHeating & steam systemsHVAC SystemsControl SystemsMaximum Demand ControlsBuilding Envelope Improvements…at building/industrial facilities
SCOPES OF SERVICE BY ESCO IN EPC PROJECTS
Built-in scopes: Project Funding & Financing Options
Engineering & Economic Feasibility Studies
Project Design, Engineering & Permitting
Project Construction
Project Commissioning
Operation, spare parts & Maintenance
Performance measurements & monitoring
Energy performance reporting
Value
added/additional
scopes
Consultancy &
Advisory
Regulatory
Compliance
Standards & Ratings
OPTIONS TO IMPLEMENT ENERGY SAVING MEASURES
• Management Directives
• Implementation of EMS -to ensure sustainability of energy cost reduction initiatives
MEASURES
With LOW/
NO COST
Minimal Cost
Savings
• Priorities of budget -core business/operations
• Investment risks
• Limited human resources & expertise
MEASURES WITH HIGH
COST
Significant Cost Savings
Expert
assistance &
investment
from ESCO
In-house
initiatives
FUNDING OPTIONS?
LOAN
CONVENTIONAL
PROCUREMENT
ENERGY
PERFORMANCE
CONTRACTING
Performance
Guarantee Model
GRANTSENERGY PERFORMANCE
CONTRACTING
Shared Saving Model
PUBLIC PRIVATE PARTNERSHIP
INTERNAL
EXTERNAL EXTERNAL & BY THIRD
PARTIES
ENERGY PERFORMANCE
CONTRACTING
Special Purpose Vehicle
WHAT IS ENERGY PERFORMANCE CONTRACTING(EPC)?
“Energy Performance Contracting is when an ESCO isengaged to improve the energy efficiency of a facility, withthe guaranteed energy savings paying for the capitalinvestment required to implement improvements”
EPC…
Implementation of energy saving projects is through direct investment bythe company or the energy service company (ESCO)
“Zero " up front cost to the facilities owner that have been identified ashaving great potential for energy cost savings
The returns from the investments will be used to pay back the ESCO onlyfrom the actual energy savings achieved from the implementation of energyconservation measures by ESCO according on performance based contractwith conditions agreed by both parties.
WHO CAN USE THE EPC MECHANISM?:
GOVERNMENT SECTOR
For buildings that are owned or used by the government in the electricity bills paid by the federal
government, conditions applied are:
The ESCO must be registered with the Ministry of Finance under the code 222 801: Green Technology Services where ESCO also required to be registered as registered with the Energy Commission before by the Ministry of Finance in the government's e-procurement system;
The agency shall ensure the implementation of EPC spending does not involve any additional expense but it must provide savings to the government.
For government agencies under the authority of the state or that have autonomy in their financial management as statutory bodies & some public institutions of higher education, the concept of EPC is up to the procedures & regulations that must be adhered to by the organization, respectively.
WHO CAN USE THE EPC MECHANISM?: PRIVATE SECTOR
Up to the financial procedures adopted by the respective company
Payment procedure & conditions in the EPC contract documents will subject to agreement between the company & the ESCO.
FUNDING OPTIONS FOR HIGH COST ENERGY SAVING MEASURES IMPLEMENTATION
Standard purchase with internal funding
or
External funding:
Loans
Energy Performance Contracting(EPC) Model with no upfront costs from the facilities owner
BENEFITS: EPC –SHARED SAVING MODEL VS. CONVENTIONAL PURCHASE
ItemEPC-Shared Saving
ModelNormal Purchase
Technical Expertise ESCO ESCO
Implementation(design, installation, testing &
commissioning)ESCO ESCO
Funding Source ESCO OWNER
Sharing of returns %At agreed % &
conditions100% to OWNER
Technical & Investment Risks ESCO OWNER
Energy Performance Maintenance & monitoring
works and risksESCO OWNER
OPTIONS FOR EPC MODEL
1. GUARANTEED
SAVING
• The loan goes on the client’s balance sheet
2. SHARED
SAVING
• The loan goes on ESCO’s balance sheet
3. Through a Special Purpose
Vehicle(SPV) created specially
for the purpose
ALL ARE PERFORMANCE GUARANTEED!
Owner’s Share(10-30%)
ESCO’s share(70-90%)(Loan & interest, O&M, spare parts, insurance, profit & etc)
EPC contract periodBEFORE
BaselineDetailed
Energy Audit 100% saving enjoyed
by owner
After EPC contract
period
Energy bill
saved
Develop EnMS & in-house capacity building
Implement EnMS & sustain saving
YEAR
EN
ER
GY
BIL
L
Implement EPC Project
SHARED SAVING MODEL
“ZERO Upfront Cost” to the owner
GUARANTEED SAVING MODEL
FACILITIES
OWNERESCOBANK
Project Design&
Implementation
Project
FeesLoan
Repayment
SHARED SAVING & GUARANTEED SAVING
GUARANTEED SAVING MODEL
Facilities owner takes out “normal” loan (will appear on balance sheet)
ESCO guarantees loan can be repaid with savings
ESCO pays the difference if minimum savings not achieved
Main advantage:
ESCO can undertake more
projects
SHARED SAVING MODEL
Facilities owner does not take loan (will not appear on balance sheet)
ESCO finances project: takes performance & credit risk
Facilities owner pays higher % to ESCO
Main advantage:
Independent from owner’s borrowing capacity
DIRECT APPOINTMENT OR OPEN TENDER?
THE KEY DIFFERENCE FROM THE NORMAL PROJECT TENDER
PROCESS
To PREQUALIFY AND SELECT THE CAPABLE
ESCO/STRATEGIC PARTNER and NOT TO OBTAIN
AND COMPARE THE BEST PRICE/DETAILED
INVESTMENT PROPOSALS from the start
STAGE 1:PREPARATIONDEFINE & CONFIRM COMMITMENT
CONFIRM THE NEED
CREATE VISION, BUILD INTERNAL BUY-IN TO EPC PROCESS
GOAL SETTING • Clear goals to guide the process
• Determine metrics for success
• Clear investment criteria
• Quantifiable
• To make conversations with external service providers(ESCOs) & internal financial decision makers more smooth on “what is considered as a “successful” proposal
STAGE 1:PREPARATIONDEFINE & CONFIRM CRITERIA
KEY CRITERIA
• Hurdle rate-minimum IRR/ROI required
• SPP vs LCC
• Other cash flow/OE reduction requirements
• Desired outcomes-rating,certifications,awards & etc
• Desired enhanced benefits in building functionality-improved comfort &controlling capabilities
• Quantity of energy to be reduced
Requirements that will be part of the project scope that guides the ESCO to incorporate into
the EPC contract document
Don’t have to specify the total project cost-focus on financial & environmental outputs
Let the ESCO to challenge themselves to meet the desired goals of the owner.
STAGE 1:PREPARATIONDEFINE & CONFIRM CRITERIA
CONSIDER POTENTIAL FUNDING STRATEGIES• Self funding
• Third party-loan/lease
• ESCO –financing as part of scope of services
SELECTION OF PROJECT SITE(S)• Higher annual energy costs that normal facilities with ESOs
• Outdated system/equipment or near the end of their useful life
• Relative consistent energy using patterns in several years(3-5),stabilized occupancy
• Access to several energy bills/records
• Assets that are already planned for major capital improvements
• Larger facilities with complex systems
STAGE 1:PREPARATIONDEFINE & CONFIRM COMMITMENT &
CRITERIARESPONSIBILITIES OF THE OWNER
• Ensure the goal setting with decision makers occurs before the commencing of project• Understand their criteria for approval and important metrics and outcomes
• Assign project manager-oversee the EE project and as the key point throughout the process
• Create a project-dedicated –cross functional team to enable timely decision making(finance,legal, procurement,operations,engineering & other key decision makers)
• Compile key facilities information• Energy consumption-copies of monthly energy bills(1-3 years)
• Drawings
• List of major energy using system/equipment with basic energy information(rated power,operatinghours,types of control & etc)
• Existing and planned ESMs
STAGE 2:DEVELOPMENTSELECT ESCO & ASSESS OPPORTUNITY
Experiences in EPC Projects /Track
Records in energy services
Financial Strengths
Management capacity in
energy services
Technical Competency &
Expertise
ESCO
Ability to secure
financing & ensure
sustainable
operations
• TO CREATE A STRATEGIC PARTNERSHIP
• TO BE CHOSEN TO BE INVOLVED IN THE PROJECT DEVELOPMENT STAGE
ESCO SELECTION PROCESS
Release RFP/RFQ
Review responses
Interview shortlisted ESCOos
Select team & sign letter of intent with the ESCO
INFORMATION IN RFP/RFQ
To assemble the ESCO team
To prepare for the selection process
Key information Project goals & investment criteria
Site information(summary)
Procurement process & timeline
Project team requirements-competency, skills & organizational structure
Expected response contents & format
Evaluation process & criteria
Project development process & expected timeline
APPOINTMENT OF THE ESCOAppointment to implement EPC projects
Approval to conduct detailed energy audit at ESCO’s own costs
Access to information and selected facilities
Commitment to sign EPC contract subject to the findings of detailed energy audit by the ESCO
DETERMINE METHOD OF FUNDING
THE APPOINTMENT OF ESCO MEANS A COMMITMENT TO IMPLEMENT THEPROJECT
TO CONFIRM THE COMMITMENT OF THE FUND SOURCING METHOD & FUNDINGPARTY
• Owner(internal/external); or
• ESCO
WALK-AWAY FEE IF THE OWNER/ESCO UNABLE TO SECURE THE FUND FORPROJECT IMPLEMENTATION
CONDUCT INVESTMENT GRADE ENERGY AUDIT
With agreed document to implement findings if feasible technically & financially
To follow owner-defined investment criteria for energy saving measure recommendations
Site constraints
Expected deliverables
Ownership of the work
Owner & ESCO commitment in the audit process
Detailed audit schedule
Details of walk-away fee
DELIVERABLE OF INVESTMENT GRADE ENERGY AUDIT
Transparent energy baseline data & analysis
Total energy saving potentials with detailed breakdown of minimum guaranteed performance and cost for each energy saving measure identified & proposed
Detailed investment costs to cover• Equipment & installation• O&M• Spare parts
M&V Plan
Detailed investment proposals• Minimum guaranteed energy cost
savings
• ROI/IRR
• Options of funding(Normal procurement/EPC)
• EPC Shared saving• sharing % by each party• Contract period• Draft EPC contract
KEY ELEMENTS IN EPC CONTRACT DOCUMENT(1)
What is guaranteed?
The minimum amount of savings expected to be achieved
The method, report formatting and formula for calculating shared savings will be paid to the ESCO
Conditions to be applied if savings achieved are less than guaranteed by the ESCO
KEY ELEMENTS IN EPC CONTRACT DOCUMENT(2)
The cost savings measurement with significant changes of operations at the facilities
The responsibilities of building owners and the ESCO throughout the contract period
Maintenance, use & modification/ removal of the equipment that was installed by the ESCO by the facilities owner
If the equipment installed by the ESCO is lost or damaged
Guarantee of losses and liabilities by ESCO to the facilities owner
STAGE 3: IMPLEMENTATION
EXECUTE THE EPC CONTRACT
IMPLEMENT FINAL PROJECT SCOPES
COMMISSION ALL INSTALLED & IMPROVED EQUIPMENT FOR IMPACTED SYSTEM
STAFF TRAINING & UPDATING OF O&M DOCUMENTS
STAGE 4: MEASUREMENT & VERIFICATION
MONITOR POST-RETROFIT
PERFORMANCE
IMPLEMENT PREVENTIVE
MAINTENANCE PLAN & TAKE NECESSARY
CORRECTIVE ACTION
MEASUREMENT & VERIFICATION OF ACTUAL SAVING ACHIEVED
Energy saving measurement for verification• baseline data/performance indicator• measuring type & point
Require energy metering
“The long term success of energy management projects is often hampered by the inability of the project partners to agree on an accurate, successful M&V plan.….. M&V protocol discusses procedures that, when implemented, help buyers, sellers and financiers of energy projects to agree on an M&V plan and quantify savings from energy conservation measure (ECM) projects.” - (IPMVP, Volume I, March 2002)
FACTORS SHOULD BE CONSIDERED FOR M&V IN EPC CONTRACT TO REDUCE DISPUTE
• Commitment from Client
• Factors Affecting Savings Performance
• Evaluating Savings Uncertainty
• Minimum Operating Conditions
• Energy Prices
• Verification by a Third Party
• Baseline Adjustments (Non-Routine)
• Balancing Uncertainty and Cost
SUMMARY OF A WORKABLE EPC BUSINESS PROCESS FLOW : DIRECT APPOINTMENT/OPEN TENDER
The owner confirmed
the EPC needs
Prepare EPC basic info,
Objectives & Targets
Prequalification Of ESCOs
Issue RFP to qualified ESCOs
Evaluate
Preliminary
Proposals from
ESCOs
Appoint the ESCO
ESCO conduct detailed energy audit & present detailed EPC investment proposal
EPC Contractual
Terms Negotiation
Sign EPC Contract
Implement EPC Project
Measurement & Verification of Actual Saving
Achieved
Monthly reporting & payment to
ESCO
KEY FEATURES & SUCCESS FACTORS IN EPC
Energy Cost savings based on
ACTUAL & MEASURED data-
before & afterCAPABLE ESCO
COMPREHENSIVE EPC Contract
Document
TRUST & TRANPARENCY in
strategic partnership to
reduce business costs
UNDERSTANDING of the how
EPC works & it long term
benefits by facilities owners
Commitment to get FASTER results!
WHERE TO INVEST?
SYSTEM/
EQUIPMENT
OPTIMIZATION
NEW & ENERGY EFFICIENT
DESIGNS & OPERATIONAL
FEATURES
RETROFITTING FOR
ENERGY EFFICIENT
TECHNOLOGIES
RENEWABLE ENERGY
OPTIONS
Pumps (25% - 35%)
Chiller (20% - 25%) AHU/FCU (25% - 35%)
Cooling Tower(15% - 20%
WHERE TO SAVE ENERGY ?... AIR CONDITIONING SYSTEMS
POTENTIAL EPC PROJECTS FOR ENERGY EFFICIENT LIGHTING TECHNOLOGIES
• Savings at 40-60% from lighting system
Energy Saving Micro Ballast and HP Fluorescent T8-28 watts LED Fluorescent Tubes LED Down Light
LED Ceiling LightHigh Performance LED Street
Light LED Spot/Flood Light
MALAYSIA’S EPC CASE STUDY : WAREHOUSE FACILITIES
Application Areas:
- Fluorescent Lamps
- High bay Lighting -
HID After Installation:20,000 pcs x 26W/1000
Before Installation:20,000 pcs x 45W/1000
Total annual Saving = 42.2%
= 3,283,200 kWh,
= RM 920,000 Source: MAESCO member
MALAYSIA’S EPC CASE STUDY : INTEGRATED SHOPPING
COMPLEX FACILITIES
Areas of Conservation Implementation:
1) Transformers (MSB)
2) Cooling System – Chillers, C/Tower, AHUs, CHW & CDW Pumps
3) Lighting System – Internal, External & Parking
4) Peak Demand Control
Total Actual Saving Achieved
= RM 1,495,000/year
Total Proposed Saving
= RM 905,000/yearSource: MAESCO member
CHALLENGES OF ENERGY PERFORMANCE CONTRACTING(1)
• Facility owner participate in establishing the energy baselineEnergy Baseline Development
• The facility owner agree on the definitions and methodology
for making any future adjustments to the energy baseline
and should be A part of the contract.
Energy Baseline Adjustment
• The allowance of operational savings is generally
discouraged.Operational Savings
• Should be avoided/used minimally.Stipulated Savings
• ESCOs inflated the interest rate of funds borrowed for
additional profits.
• Facility owners may check/arrange their own financing at
lower rates.
Excessive Finance Charges
CHALLENGES OF ENERGY PERFORMANCE CONTRACTING(2)
• Some ESCOs have required that the preventive maintenance on facilities also be outsourced to that ESCO
Required Maintenance Agreements
• off-site control must be avoidedLack of Local Facilities
Control
• Savings should be calculated on an annual basis and stand alone on that basis
Terms of Savings Reconciliation Versus Budget
Cycle
• the use of a project manager or a third party verifier by the client is highly recommended
Quality Control
• Transparency in the overall costs involved(technologies, )&M, interest rates, IRR, profits and etc.)
Owners request unreasonable amount of
shared saving %
RECOMMENDED SUPPORT MEASURES FOR EPC IN MALAYSIA
FINANCING
Sustainable
Funding Sources
Revolving Fund
/Low Interest Loans
Assessment Criteria For Energy
Services/Energy Efficiency Solutions
TECHNICAL ASSESSMENT
Competent & Independent
Parties
Transparency In Assessment Criteria
ACTUAL ENERGY PERFORMANCE
M&V
Competent & Independent
Parties
Recognition Of M&V Services
FISCAL INCENTIVES
GOVERNMENT AGENCIES,FINANCIAL
INSTITUTIONS, PROFESSIONAL BODIES
UNITED STATES
• Federal, State, and local governments in the US invested over $21 billion inEPC since 1997
• The US Federal Government’s 2009 economic stimulus package included anadditional $3.1 billion for efficiency in existing federal government buildings
• Federal and State governments have passed specific laws to facilitate EPCand accept up to 15-20 year payback periods.
• Research in the US indicated that EPCs have delivered general benefit tocost ratios of 1.6 to 1, with higher 2.1 to 1 ratios for EPCs in health facilities.
EUROPEAN PLATFORM FOR THE PROMOTION OF EPC
• Development of manuals on additional models and support-EPC + White Certification
• Quality Standards
• Comprehensive Refurbishment & link to Facility Management
• Norms /Certification
• Financing
• Intensive dialogue with market actors -Building owners - Financial sector - ESCOs
• Capacity building & Increased awareness, know-how & exchange
• Over 100 events organised and attended, 2,000 participants with about 60 are new EPC experts
• Pilot projects
• Over 360 buildings screened
• 30 more concrete projects received further support
• 17 resulted in concrete EPC projects
• About 1 million square meters
• Energy cost baseline of almost 10 million Euros/year
• Estimated energy savings between 10% and over 25%
AUSTRALIA’S STRATEGY
Source: Government Property Group ,Integrated Energy Efficiency Retrofits and
Energy Performance Contracting ,Australia,2011
AUSTRALIA -QUEENSLAND GOVERNMENT
• The Strategic Energy Efficiency Policy for Queensland Government Buildings -to reduce their energy consumption by 5 % below 2005-06 levels by 2010, and 20 % by 2015.
• Shares some key features with the Victorian program - the use of EPC and facilitation by a single department, the Department of Public Works.
• The Department of Public Works has so far invested over $20 million in improving the energy efficiency of 25 of the sites that it owns
• Has reduced its energy use in those buildings by 18 megawatt hours per year
BARRIERS TO ESCOS IN DEVELOPING COUNTRIES
Most independent ESCOs have a small capital base
New Concept among Fis
Lack of expertise among FIs
Smaller compare to other investment
Immaturity of the EE market in developing countries – economicgrowth/profits only form spending/sales
THE WAY FORWARD….The potentials in Malaysia is still relatively “UNTAPPED”
EPC is a proven EFFECTIVE model for faster ENERGY EFFICIENCY implementation for MORE ENERGY EFFICIENT facilities-implementation process must match the ESCOs business model
ESCOs must have/develop competency & capability to ensure successful EPC projects implementation
The commitment and mandates to government agencies to get faster energy saving results!- with timeline & support measures
More successful EPC projects are required to attract more attention of building owners & banks/investors