ENERGY PERFORMANCE CONTRACTS (EPC)
Turkey enacted the Energy Efficiency Law in 2007. The objectives of this law are listed as effective use of energy, prevention of waste, easing the burden of energy costs on the economy and increasing efficiency for the protection of the environment.
The concept of energy efficiency is defined in Article 3/1-k of the Law. According to this definition, energy efficiency is the reduction of energy consumption without reducing the standard of living and service quality in buildings and the quality or quantity of production in industry.
Energy performance contracts are defined in the Energy Efficiency Law No. 5627: “A contract based on the principle of guaranteeing the energy savings to be achieved after the implementation project and paying the expenditures made with the savings that will occur as a result of the implementation.”
The public/private sector can apply for this contract. However, regardless of the sector, energy service companies always constitute the contractor side of energy performance contracts. (The abbreviation ESCO is used for these companies in international practice, referred to as ‘energy efficiency consultancy companies’ in our legislation.)
The ESCO bears some or all of the initial capital costs and the project owner reimburses the ESCO within a certain period of time from the resulting utility cost savings. After the contract ends, the project owner achieves ongoing savings in energy, GHG emissions and utility costs.
Energy Performance Contracts are especially preferred for the implementation of energy efficiency projects in buildings, facilities or industrial enterprises with high energy consumption. Energy Performance Contracts take a holistic approach to address energy management opportunities. Examples of energy saving measures include the installation of low-flow faucets with sensors and automatic shut-off.
KEY FEATURES
1) Usually Energy Performance Contracting Projects involve an Energy Service Company (ESCO)
2) InEPS, the energy saving guarantee is an important element. The ESCO commits to achieve a certain amount of energy savings. If this saving is not achieved, the ESCO has to cover the difference.
3) The cost of EPS projects is usually covered by the energy savings from energy efficiency projects. In this way, the project does not require a large initial capital investment.
4)The performance risk of energy efficiency projects is assumed by the ESCO. Project owners do not bear the risk of project failure as energy savings are guaranteed.
5) EPSs are usually long-term contracts. Energy savings are monitored throughout the contract period and guaranteed savings are achieved.
6)Various energy efficiency measures can be taken within the scope of EPS projects. These measures may include energy efficient lighting, upgrading of heating and cooling systems, building insulation, automation systems and renewable energy systems.
ENERGY PERFORMANCE CONTRACTS ORGANIZED BY THE PUBLIC SECTOR
In Turkey, the Decree on the Procedures and Principles Regarding Energy Performance Contracts in Public Sector (“Decree”) has entered into force. The legal basis of the Decree is Additional Article 1 of the Law stating that public administrations may conclude energy performance contracts. The aforementioned additional article states that the Public Procurement Law will not apply to the tenders of public administrations within the scope of these projects (except for the penalty and prohibition provisions).
Article 5 of the Decree sets out the basic principles to be applied in the procurement process and introduces certain thresholds. According to Article 5/2 of the Decree, the investment value must be at least two million Turkish Liras and the simple payback period must be at least two years.
The maximum term for the contract is fifteen years according to Article 7/2 of the Decree.
Public administrations should act in accordance with the Law and secondary legislation when concluding Energy Performance Contracts, and the project phases should be organized in accordance with the legislation, such as the provisions of Article 6 and Article 8 of the relevant Decree (General procedures and principles regarding the tender process and implementation period, monitoring period and savings verification activities).
SCOPE OF SERVICES FOR ENERGY PERFORMANCE CONTRACTS
1) Self-financing
2) Savings Guarantee
3) Simplicity
4) Energy Engineering
5) Measurement and verification
INVESTMENT MODELS
1) ESCO MODEL: ESCO companies draw the legal framework of the project by making EPS with customers, the aim is to increase energy efficiency. According to the legislation, an authorization certificate is required to carry out this service. According to Article 4/1-t of the Energy Efficiency Law, companies can obtain an authorization certificate from the General Directorate of Electrical Power Resources Survey and Development Administration to carry out training, survey, consultancy and implementation activities. Universities and professional chambers may obtain authorization certificates from the General Directorate General of Electrical Power Resources Survey and Development Administration with the approval of the Energy Efficiency Coordination Board to carry out training, authorization and monitoring activities.
2) BUILD-OPERATE-TRANSFER MODEL
EPS PROCESS
1) Preliminary Study (Preparatory Studies)
2) EPS Contract
3) Project Management and Implementation
4) Guaranteed Savings
Advantages of these contracts:
1) Project financing is outsourced.
2) In the ESCO model, the ESCO manages the whole process (turnkey)
3) ESCO assumes the performance guarantee of the project.
4) Repayment of the financing used is made with the savings achieved
5) Energy costs are reduced
6) Competitiveness of the business increases
7) Risk management is undertaken by the ESCO Company
8) Greenhouse gas emissions and carbon footprint are reduced
9) There is minimal risk for the business.
Since the ESCO assumes the technical and performance risk of the project in the EPS model, the project is feasible without allocating significant resources for public administrations or the private sector. In fact, the repayment of this investment is made on the amount saved, and when the repayment is completed, the profit arising from the savings remains on the project owner, i.e. the administration or the private company.
Shared Savings Model
1) ESCO bears the financial burden for the project.
2) ESCO transfers the investment costs to the project to increase efficiency.
3) As savings are realized after the measures are implemented, the ESCO receives a share of the savings.
-This model is advantageous for local governments because the project owner (the administration) does not pay anything upfront and the repayment is based on the project profit.
Guaranteed Savings Model
1) The financing burden is on the project owner (administration/private firm) The project owner provides the amount of investment in the project from the beginning and collects the returns on this investment as the savings envisaged in the project. The project owner does not bear the risk of under-realization of savings, but can take a share of savings that are realized more than expected.
2) The ESCO bears the technical risk and project performance risk.
-This model is preferred for projects with financially developing ESCOs as it may not be possible for ESCOs with insufficient financial resources to provide the financing burden from the beginning.
***“Chauffage” model is a common model used in Europe. It is usually established for a long term of twenty to thirty years. The ESCO provides all relevant maintenance and operation for the duration of the contract. The ESCO takes responsibility for reducing the agreed level of energy service to a lower cost than the current cost or, if it remains at the same cost, to provide a better level of service. The more efficiently and cheaply it can do this, the higher its profit.