Energy Supply Contracts
Energy Supply Contracts (ESC) are one of the most widely used contract types in the energy services sector. These contracts are a model offered by energy service companies (ESCOs) to ensure the supply of energy to energy consumers. ESCs are often implemented to improve energy efficiency and reduce energy costs.
Energy Supply Contracts (ESCs) offer energy consumers significant benefits such as cost savings, risk management, increased efficiency and sustainable energy supply. ESCs are implemented through ESCOs specialized in energy management and have a wide range of applications in various sectors. ESC models help energy consumers reduce energy costs and increase energy efficiency, while transferring technical and financial risks to ESCOs. Since ESCs are based on the fact that the reduction in energy demand through savings ensures the investment cost and profitability of the ESCO, they are long-term depending on the size of the investment. In practices around the world, contracts are concluded for 10 to 15 years. The target audience of the ESC model is public buildings, industrial facilities, commercial buildings and large residences. The commercial viability of the investment requires the project to be above a certain size. One of the most important obstacles of the ESC Model is the lack of legislation. The current Regulation on Increasing Efficiency in the Use of Energy Resources and Energy and other energy legislation do not provide solutions for the ESC model. In addition, banks do not look favorably on the project financing support that ESCOs will need to implement the model. On the other hand, fluctuations in the national and world economy make it difficult to sign and finance 5-10-15 year contracts. The lack of strong financial structures of Turkish industrial companies that will want to implement the ESC model increases the risk that ESCOs will not get a return on their investment.
What is the basis of the payment received by the ESCO?
The ESCO first prices the energy it provides per MWh. The ESCO’s energy price throughout the contract is calculated based on the statistically used oil price (TOE – Tons of Oil Equivalent). Thus, the risk on the final energy price remains with the ESCO’s customer. However, various measures are taken to prevent the ESCO from selling more energy than needed.
The second item in the price is the service charge. This item covers maintenance and repair, insurance, personnel and management costs. This fee is usually updated on an annual basis throughout the duration of the contract.
The third item is the investment cost if the ESCO has financed the necessary equipment and machinery.
- Key Features of ESC
-Property
a) The ownership of the energy supply facilities belongs to the ESCO.
b) ESCO is responsible for the operation and maintenance of the energy supply facilities.
-Pricing
- a) The customer pays a fee based on the amount of energy delivered (kWh). This fee is calculated according to the formula and tariffs determined during the contract period.
-Types of Energy Supply:
- a) ESCs generally cover energy types such as electricity, heating, cooling and steam.
- b) Energy sources may include natural gas, biomass, solar energy, wind energy and other renewable energy sources.
- How an ESC Works
-Installation and Start-up:
a) The ESCO installs and commissions the energy supply system. These systems may include power generation plants, heating and cooling systems or other energy supply equipment.
b) Installation costs are usually covered by the ESCO and the customer does not make any initial capital investment.
-Energy Generation and Supply:
a) The ESCO manages the energy production and ensures a continuous supply of energy to the energy consumer.
b) The energy supply system is optimized according to customer needs and efficiency measures are implemented.
-Maintenance and Monitoring:
a) The ESCO ensures maintenance and monitoring of the energy supply system. This guarantees efficient and uninterrupted operation of the system.
b) Continuous monitoring is important to detect anomalies in energy consumption and take necessary corrective measures.
- Advantages of ESC
*Cost Savings:
– Customers reduce the costs of their energy supply systems as they do not make an initial capital investment.
– ESCOs reduce energy costs through measures to increase energy efficiency.
*Risk Management:
– Since the ESCO owns and operates the energy supply systems, customers transfer technical and financial risks to the ESCO.
– ESCOs can provide protection against fluctuations in energy prices.
*Efficiency and Sustainability:
– ESCOs continuously optimize energy supply systems and increase energy efficiency.
– The use of renewable energy sources reduces environmental impacts and ensures sustainable energy supply.
*Focus:
– Customers can focus on their core business activities and delegate energy management to a specialized ESCO.
– ESCOs specialized in energy management provide technical knowledge and support to customers.
- Application Areas of ESC
ESCs can be used in a variety of industries and applications:
*Industrial Plants:
– Manufacturing plants are large energy consumers and energy efficiency can be improved through ESCs.
**Commercial Buildings:
– Commercial buildings such as office buildings, shopping centers, hotels and hospitals can reduce energy costs with ESCs.
*Public Buildings:
– Municipalities, schools and public service buildings can improve energy efficiency and achieve budget savings through ESCs.
*Residential Sector:
– Large residential complexes and apartment buildings can manage energy costs and improve energy efficiency with ESCs.
- ESC Contract Process
*Energy Audit:
– At the start of the ESC, the ESCO conducts a detailed energy audit to analyze energy consumption profiles.
– This audit is necessary to identify energy saving potentials and design the energy supply system.
*Contract Preparation:
– Based on the audit results, the ESCO and the customer negotiate and determine the terms of the energy supply contract.
– The contract includes energy supply quantities, pricing structure, maintenance and operation responsibilities.
*Installation and Commissioning:
– Once the contract is signed, the ESCO installs and commissions the energy supply system.
– The installation process is planned to minimize the impact on customer operations.
*Monitoring and Reporting:
– The ESCO monitors energy consumption and provides regular reports to the customer.
– The reports show energy savings and system performance.
About the types of EPC and ESC contracts
- Energy Services “basic contractual models”
The traditional approach is that a municipality in need of new or retrofitted energy systems makes the investment itself and has control over installation and operation. This applies to street lighting, buildings, sports fields, tunnels, hospitals, etc. When energy efficiency measures are implemented, the municipality benefits directly from cost reductions. However, the municipality must have its own capital or access to credit and bear all economic risks, such as poor quality of installations, technology risks or equipment damage.
With an Energy Performance Contract (EPC), specialized companies, “Energy Service Companies” (ESCOs), experienced in efficiency, energy systems installation, operation and maintenance, can offer energy services based on two main concepts: Energy Supply or Energy Performance Contracting. In both cases, the ESCO improves the delivery of energy to the customer, thus increasing energy efficiency, and assumes most of the risks associated with this investment.
In countries where EPC markets are more developed, the ownership, operation and maintenance of the facility is often organized in a similar way. “Classic” Energy Services are provided by
Energy Supply Contracts (ESC)
Ownership of energy supply facilities: ESCO
Operation and maintenance of energy supply facilities: ESCO
◦ The customer pays a fee per kWh delivered, which is calculated by the contract formula
Energy Performance Contracting (EPC)
- Energy supply is not included in the contract (contracted directly with an energy supplier)
- The owner of the facility can be ESCO or Customer
- ESCO assumes responsibility for operation and maintenance
- The customer pays a fee calculated according to the previous situation and the energy efficiency improvements specified in the contract
In both cases, the public end-users who are ESCO customers do not need significant technical knowledge within their own management, as the operation is completely delegated to an external expert. Moreover, in “classical models”, the service provider also bears the operational risk and all or most of the energy savings achieved during the contract period go to the service provider.
In the case of ESC, the entire installed or renovated facility to supply the energy is financed by the ESCO, with its own or external funds, and generates revenue by selling energy at a set price.
In the case of EPC, the service provider finances the energy efficiency investment with its own or external funds and finances it through the reduction in the energy bill through the fee charged to the customer.
DIFFERENCES BETWEEN EPC AND ESC
In energy performance contracts:
- Energy supply is not covered by the contract, it is provided by a separate supply company.
- The customer or ESCO owns the facility.
- The customer pays a fee calculated according to the difference between before and after the contract.
In energy supply contracts,
- ESCO owns the energy supply facility.
- ESCO maintains and repairs the energy supply facility.
- The customer pays a price in MWH or KWH as shown in the contract.