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

WHAT IS ENERGY SERVICE?

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 FOR FUNDING EE PROJECTS IMPLEMENTATION

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

THROUGH A SPV

THE EPC PROCESS

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

ENERGY PERFORMANCE CONTRACTING PROCESS

THE PROCESS FLOW

Sign EPC

ContractSelect ESCO

Payment

To ESCO

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

SIGN 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 AND HOW TO SAVE?

POTENTIAL ENERGY SAVING OPPORTUNITIES FROM THE DETAILED

ENERGY AUDIT

WHERE TO INVEST?

SYSTEM/

EQUIPMENT

OPTIMIZATION

NEW & ENERGY EFFICIENT

DESIGNS & OPERATIONAL

FEATURES

RETROFITTING FOR

ENERGY EFFICIENT

TECHNOLOGIES

RENEWABLE ENERGY

OPTIONS

WHERE TO SAVE ENERGY?...MANUFACTURING FACILITIES

Source: Energy Conservation Centre of Japan,

2011

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

SUCCESS STORIES OF EPC PROGRAM IMPLEMENTATION

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

ESCO FUND IN THAILAND

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

THANK YOU!

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