6008 Development of Guidelines Sample Documents and ... · 2016-05-21 4 7 1. EPC CONCEPT 8 WHAT IS...

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Preparation of Guidelines for EPC Contracting for ESCOs and Case Study Development – COMPONENT I

TURKISH MINISTRY OF ENERGY AND NATURAL RESOURCES

Ankara, May 25, 2016

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CONSULTANT

Pierre Langlois, EngineerCertified Measurement and Verification Professional (CMVP)

President, Econoler

[email protected]

160 rue Saint-Paul, Suite 200

Quebec City, QC G1K 3W1

Canada

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TASK 3DEVELOPMENT OF GUIDELINES, SAMPLE DOCUMENTS AND CONTRACTS

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OBJECTIVES OF THE TASK

› Help market players develop EPC with guidelines

› Develop simplified standardized ESCO contracts

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CONTENT

Guidelines1. EPC concept

2. EPC procurement mechanisms and implementation steps

3. Financing mechanisms: EPC, contractual and negotiation elements

4. Measurement and verification of savings

5. Operation and maintenance, capacity building

Contracts1. Verified Savings

2. Guarantee Savings

3. Leasing

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GUIDELINES

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1. EPC CONCEPT

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WHAT IS AN EPC?

EPC:

› An EPC is a contract between two parties—the beneficiary and the service provider.

› An EPC defines the terms of the contract.

› In most cases, compensation for the services provided by the ESCO is based on the level of energy savings or the reduction in energy expenditures after project completion.

› The EPC is time bound and has a typical duration ranging from 5 years to over 20 years.

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GENERAL CONTENTS OF AN EPC

EPCs comprise the following elements:

› Identification of parties bound by contract with their contact information;

› Energy usage and records data;› Energy or cost savings guarantees and payment terms for

the payment of the ESCO;› Description of the project or services to be implemented by

the ESCO; › Hands-on training by the ESCO, if necessary;› Ownership of the equipment and property rights;› M&V of energy or cost savings;› Dispute resolution mechanisms.

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ENERGY SERVICE COMPANY (ESCO)

An ESCO is a company specialized in developing and implementing measures aimed at reducing energy consumption in facilities by identifying and implementing EE measures and measuring and verifying the results achieved. In order to perform these activities, the ESCO signs a contract called an EPC with their clients.

Essential elements of an ESCO:

› Provision of integrated solutions;

› Relationship between payments and performance.

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Operational Principles of an ESCOBarriers:

› Lack of sufficient management expertise or time;› Lack of certainty as to whether the resources devoted to

EE will actually yield financial benefits;› Difficulty in securing the necessary financing.

Innovative elements:

› Project development supported by a third party;› Performance guarantees;› Implementation that uses the regular annual operational

budget;› Adapted financing (possibly off-balance-sheet financing).

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Integrated SolutionsTraditional Approach ESCO Approach

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Main ESCO Services› Energy auditing: identifying the potential for energy cost

savings;› Project design and implementation: responsible for project

design, hardware specifications, procurement and installation, also oversees the operation of the new equipment.

› Financing: - Traditional financing- Third-party financing

› Measurement and verification of savings› Energy management

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Types of ESCOs

› Independent ESCO: not owned by an electric or gas utility, an equipment/control manufacturer or an energy supply company.

› Equipment manufacturer: owned by an equipment or control manufacturer.

› Utility company: owned by electric or gas utility companies.

› Other energy/engineering companies: owned by international oil or gas companies, non-regulated energy suppliers or large engineering firms.

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Advantages of Working with an ESCO› Outsourcing energy management to dedicated technical

experts (turnkey solutions).› Having a single-source provider and facility improvements

with guaranteed performance.› Dealing with expert firms and outsourcing of non-core

activities to focus on business.› Access to alternative sources for project funding and budget

relief.› Developing tailored solutions for specific needs.› Taking over risk and financing/investment.› Proposing performance-based solutions.› Guaranteed performance based on solid M&V procedures.

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ADVANTAGES OF AN EPC

› Technical risk management – The ESCO ensures that: - the project will perform as it is designed;

- the equipment installed operates properly and is well maintained.

› Project financing and benefits: EPC projects can be financed through energy savings.

› Guaranteed savings: ESCOs are responsible for ensuring that the claimed savings are obtained over the contractual period.

› Expertise from previous work experience.

› Environment: EE is one of the key solutions to mitigate climate change.

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2. EPC PROCUREMENT MECHANISMS AND IMPLEMENTATION STEPS

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INITIAL PROJECT DEVELOPMENT PHASE

Tendering Process

› Step 1: Request for Proposal (RFP)- List of facilities under investigation;- Asset management issues for the facilities in question;- Projects already identified;- Funding restrictions/requirements;- Proposed work phases;- Maximum contract duration (if applicable);- Maintenance and operational requirements; - Selection criteria (financial merit, technical merit, implementation

approach, O&M approach, project management approach, training and awareness-raising approach, performance measurement and verification approach);

- Financial targets.

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Tendering Process

› Step 2: Proposal preparation by ESCOs (identification and qualification of the ESCOs able and willing to offer proposals for the project):- access to the facilities; - time with staff.

› Step 3: RFP Evaluation and ESCO Selection:- SME creates a best-case scenario and chooses the closest fit to

this scenario based on expertise, technical, the performance contracting approach and pricing.

- Cost is not the main driver for the selection; detailed project costing is carried out after the IGA.

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Spontaneous Process

› Step 1: Letter of Intent (optional)- Objectives: Reaching a common understanding regarding the

client’s objectives and concerns about the proposed potential

project and securing the client’s commitment to participating in

and supporting the sales process according to a set schedule.

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Spontaneous ProcessStep 2: The Walk-through Audit Stage

› Objectives:- Gaining insights into the range of facility equipment/systems and

their ages, conditions, and operating conditions/factors, and to listen to the operating personnel’s concerns and experiences with the operation.

- Collecting data to support a preliminary budget analysis of the project, including the range of probable retrofits and corresponding energy savings to support a preliminary cost estimate.

- Communicating to the client the overall scope of the project, and demonstrating the ESCO’s ability to address the client’s critical issues and the importance of the project for the client.

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Spontaneous Process

› Step 3: Preparation of Investment-Grade Audit (IGA) Agreement- Includes a preliminary financial plan and references to the WTA,

submitted at the same time as the WTA presentation.- The IGA agreement generally states that the ESCO shall

undertake an IGA at a specified cost. If the results of the IGA fail to confirm the predictions of the preliminary proposal, the SME has no obligation to pay for the IGA.

- Objectives: Securing the commitment and authorization from the client for the ESCO to proceed with the IGA. If the preliminary findings in the preliminary proposal are confirmed, actions can be taken in a timely fashion to develop an EPC.

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PROJECT DESIGN AND IMPLEMENTATION PHASE

IGA Preparation

ECM Identification and Design

› Completion of an IGA: from a few weeks to a few months

› Mutual and continuous dialogue between the SME and the ESCO is essential

› As the EE measures and strategies are developed, the ESCO should check the following items with the SME:- Final operational savings estimates (and potential sharing);- Final energy savings estimates;- Final EE measures and strategies to be implemented.

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IGA Preparation

› Measurement and Verification Plan: a fundamental part of the IGA

› Risk Analysis: conducted at the same time as the IGA

› Financial Analysis and Funding Scheme Preparation: based on the ESCO’s appreciation of the best ECM package that fits the SME’s expectations and based on the identified risk

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IGA Preparation

› Presentation of the IGA, Final Financial Plan and IGA Acceptance: the main topics to be presented and discussed are the following:- Contract terms;

- Verified savings or guaranteed savings;

- Floor and ceiling price for energy by source;

- Financing conditions and parameters;

- Invoicing;

- Ownership;

- Additional services, maintenance and energy management.

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EPC Contract Negotiation and Signature

At this stage the following items are finalized:

› project scope and list of measures;

› guaranteed savings;

› project timetable;

› exact costs associated with the entire project;

› method for M&V energy savings;

› financing arrangements.

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Project Design Finalization and Implementation

› To avoid unnecessary upfront costs and reduce commercial risk: Most ESCOs will not have finished all final engineering designs upon completion of the IGA and prior to signing the EPC.

› The ESCO will take on the role of project manager by:- ensuring that the specifications and drawings have been properly

prepared;- inviting qualified contractors to bid (where necessary);- supervising and managing the installation process.

› A detailed program work chart should be prepared; all activities should be coordinated with the SME.

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Project Commissioning

› Performed by the ESCO, but it is strongly recommended that the SME’s operational staff also participate.

› Well documented and scheduled according to the SME’s and ESCO’s requirements.

› An ideal opportunity to train the operational staff on the detailed aspects of each of the ECMs.

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Savings Measurement, Verification and Reporting

› The ESCO evaluates the energy savings and compares them with the forecasted levels in the proposals.

› The ESCO prepares a report as per the M&V Plan and determines the monetary value of the savings.

› The cost recovery phase continues until the entire investment has been recovered or until the contract expires.

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3. FINANCING MECHANISMS: EPC, CONTRACTUAL AND NEGOTIATION ELEMENTS

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SHARED SAVINGS

› Applicable where SME is not willing to bear the borrowing risk or has limited borrowing capacity.

› Variations:- First-Out Model: ESCO is paid 100% of the energy savings- Any other possible variations agreed with the SME for the initial

investment proposal.

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GUARANTEED SAVINGS

ESCOs prefer the guaranteed-savings structure because:

› The Lender is more skilled in credit assessment.› It keeps the ESCO’s own balance sheet clear of project debt.› It provides the lowest interest cost on the debt service.› It encourages the SME to solve ongoing project issues.

It is more difficult to sell because it requires the SME to incur a liability and to rely solely on the ESCO’s savings guarantee.

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VERIFIED SAVINGS

› Applicable in a context where the SME is willing to invest in cases where part of the investment is spread over a 12-month verification period and in cases where the savings are verified for every payment term.

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COMPARATIVE ANALYSIS OF MODELS

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LEASE CONTRACT MODEL

› Leasing is a process by which a firm can obtain the use of a certain fixed asset for which it must pay a series of periodic, contractual and tax-deductible payments.

› The main advantages are the following:- Leasing is less capital intensive than purchasing.

- Capital assets may fluctuate in value.

- Depreciation of capital assets has a different tax and financial reporting treatment than ordinary business expenses.

- Tax benefits: Depending on the SME’s specific tax situation, this lease feature can significantly lower the total cost of equipment.

- Maintenance: Under the terms of a full-service lease, the ESCO is responsible for all maintenance associated with the leased equipment.

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4. MEASUREMENT AND VERIFICATION OF SAVINGS

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MEASUREMENT AND VERIFICATION OF SAVINGS

1. Allocating Project Risks and Responsibilities

2. Developing a Project-Specific M&V Plan

3. Defining the Baseline

4. Installing and Commissioning Equipment and Systems

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5. Conducting Post-Installation Verification Activities › The post-installation report includes the following:

- Project description;- Detailed list of installed equipment;- Details of any changes between the final proposal and as-built

conditions, including any changes to the estimated energy savings;

- Documentation of all post-installation verification activities and performance measurements conducted;

- Performance verification (how performance criteria were met);- Documentation of construction-period savings (if any);- Status of rebates or incentives (if any);- Expected savings for the first year.

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6. Performing Regular-Interval M&V Activities

› Annual reports must typically include the following:- Results from/documentation of performance measurements and

inspections;- Verified savings for the year (energy, energy costs, O&M costs,

etc.);- Comparison of verified savings with the guaranteed amounts;- Details of all analyses and savings calculations, including

commodity rates used and any baseline adjustments performed;- Summary of operations and maintenance activities conducted;- Details of any performance or O&M issues that require attention.

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6. OPERATION AND MAINTENANCE AND CAPACITY BUILDING

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OPERATION AND MAINTENANCE AND CAPACITY BUILDING

› The O&M responsibilities must be fully described in the contract.

› ESCOs can be in charge of:- the entire O&M of the system;- following up on and verifying O&M activities.

› ESCOs can also provide ongoing energy management and training services to industrial clients throughout the contract period.

› ESCOs can finally provide customized training and capacity building through industrial energy management programs to help SME staff monitor energy consumption, and put in place the required tools and structures.

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CONTRACTS

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1. VERIFIED SAVINGS

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VERIFIED-SAVINGS EPC

› Clause 1: Terms of contract

› Clause 2: Contract documents:- Clauses 1 - 19

- Appendix 1: General Conditions, Clauses A1 – A14

- Schedules 1 to 14

- Detailed Energy Audit

› Clause 3: Energy Audit Report – This clause regulates payments for the audit (Schedule 5), premises/systems (Schedule 2) and provided data

› Clause 4: Planning

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› Clause 5: Verified Saving Payments- Detailed Energy Audit provides the Measurement and Verification

(M&V) Plan.- Down payment: The Customer pays 50% of the total cost of the

project within 10 days following the work acceptance date.- Monthly settlements: The Customer pays monthly settlements for

12 months starting on the work acceptance date (Schedule 5).

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VERIFIED-SAVING EPC› Clause 5

- Excess Savings: The ESCO shall be entitled to a share of the excess energy Savings for each month.

- ESCO’s risk from increased costs: Energy savings for each month will be calculated based on the fixed tariff rates for energy and water consumption.

- The ESCO provides the customer with the following: payment claim, share of the total energy savings for a month, monthly energy audit report (up to 30 business days).

- The ESCO shall be liable to pay any applicable taxes, duties and fees in connection with the execution of the contract ;

- The customer shall be paid within 30 business days (payment claim).

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VERIFIED-SAVING EPC

› Clause 6: Expert Determination – This clause regulates differences related to technical matters and selection, and to the work of the expert.

› Clause 7: Notices – Contact information of the ESCO and the Customer

› Clause 8: Representatives

› Clause 9: Assignment and Subcontracting

› Clause 10: Amendment

› Clause 11: Entire Agreement

› Clause 12: Confidentiality

› Clause 13: Changes in the law

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› Clause 14: Force Majeure

› Clause 15: Suspension – No payment until the 15th

business day after due date prompts notice for suspension and 10 business days for payment. If a suspension occurs, ESCO shall be entitled to an adjustment to its percentage share.

› Clause 16: Termination- Notice of default- Customer’s termination rights – Written notice in the case where

the ESCO breaks of any of the terms and fails to provide a detailed remediation plan within 10 business days; where the ESCO fails to pay to the Customer an outstanding undisputed sum within 30 business days; when a prolonged force majeure event or an insolvency event occurs.

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VERIFIED-SAVING EPC

› Clause 16:- ESCO’s termination rights – Written notice in the case where the

Customer breaks of any of the terms and fails to provide a detailed remediation plan within 10 business days; where the Customer fails to pay within 20 days; when a prolonged force majeure event occurs; when works are suspended for 90 days; when an insolvency event occurs.

- Consequences of Termination – The Customer shall pay, within 90 days of the termination date, all outstanding amounts to the ESCO (if the foregoing calculation results in a negative amount, the ESCO shall pay), and the ESCO shall promptly leave the premises in a clean and tidy manner and return any documents and information provided.

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VERIFIED-SAVING EPC

› Clause 17: Dispute Resolution

› Clause 18: Governing Law and Dispute Resolution;

› Clause 19: Counterparts

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VERIFIED-SAVING EPC

› Appendix 1: General Conditions- Coordination- Access- Permits and approvals- ESCO’s general obligations- Equipment- Emergencies- Customer’s general obligations- Compliances- Contract variations- Work acceptance- Hazardous materials- Notice of material changes- Standards of comfort- Insurance

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VERIFIED-SAVING EPC

› Schedules:- SCHEDULE 1 – PREMISES

- SCHEDULE 2 – ENERGY SAVINGS

- SCHEDULE 3 – PERMITS, LICENSES AND APPROVALS TO BE MAINTAINED BY CUSTOMER

- SCHEDULE 4 – PRELIMINARY PLANNING

- SCHEDULE 5 – CONTRACT PRICE AND PAYMENT

- SCHEDULE 6 – M&V PLAN

- SCHEDULE 7 – CUSTOMER'S OPERATION AND (IF APPLICABLE) MAINTENANCE OBLIGATIONS

- SCHEDULE 8 – ESCO'S MAINTENANCE OBLIGATIONS

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VERIFIED-SAVING EPC

› Schedules:- SCHEDULE 9 – FACILITY MANAGEMENT CHECKLIST- SCHEDULE 10 – INSURANCES- SCHEDULE 11 – EXPERTS- SCHEDULE 12 – PARTIES' REPRESENTATIVES- SCHEDULE 13 – MATERIAL CHANGES- SCHEDULE 14 – DEFINITION

› Detailed energy Audit

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2. GUARANTEED SAVINGS

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DIFFERENCES BETWEEN VERIFIED-SAVINGS AND GUARANTEED-SAVINGS EPC

Verified-Savings EPC Guaranteed-Savings EPC

Clause 5 Clause 5

Clause 8: Representatives, missing in guaranteed-savings EPC

Clause 6: Payments, missing in verified-savings EPC

Schedules Schedules

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GUARANTEED-SAVINGS EPC

› Clause 5: Energy Savings Guarantee- M&V Plan: With the Detailed Energy Audit, the ESCO should

provide a measurement and verification (M&V) plan.

- The ESCO agrees and guarantees that it shall deliver the energy savings for each guarantee year.

- Within 20 Business Days after the end of each guarantee year, the ESCO shall send a report to the Customer detailing the energy savings for that guarantee year.

- Excess energy savings may only be applied once and only for the subsequent guarantee year.

- Where the energy savings for a guarantee year are less than the guaranteed energy savings for that guarantee year, the ESCO shall pay the difference within 20 business days.

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GUARANTEED-SAVINGS EPC

› Clause 6: Payments- The Customer shall pay the contract price and maintenance fee

to the ESCO.

- The contract price may be adjusted.

- The ESCO shall be liable to pay any applicable taxes, duties and fees in connection with the performance of the contract.

- The Customer shall pay the ESCO the amount referred to in the payment claim submitted by the ESCO within 30 business days.

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GUARANTEED-SAVING EPC

› Schedules:- SCHEDULE 1 – PREMISES

- SCHEDULE 2 – ENERGY AUDIT REPORT

- SCHEDULE 3 – PERMITS, LICENSES AND APPROVALS TO BE MAINTAINED BY CUSTOMER

- SCHEDULE 4 – PRELIMINARY PLANNING

- SCHEDULE 5 – CONTRACT PRICE AND PAYMENT

- SCHEDULE 6 – M&V PLAN: BASELINE ENERGY CONSUMPTION, BASELINE UNIT RATES AND BASELINE ENERGY COST

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GUARANTEED-SAVING EPC

› Schedules:- SCHEDULE 7 – CUSTOMER'S OPERATION AND (IF

APPLICABLE) MAINTENANCE OBLIGATIONS

- SCHEDULE 8 – ESCO'S MAINTENANCE OBLIGATIONS

- SCHEDULE 9 – FACILITY MANAGEMENT CHECKLIST

- SCHEDULE 10 – INSURANCES

- SCHEDULE 11 – EXPERTS

- SCHEDULE 12 – PARTIES' REPRESENTATIVES

- SCHEDULE 13 – MATERIAL CHANGES

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2. LEASE CONTRACT

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LEASE CONTRACT

› Clause 1: Lease

› Clause 2: Equipment

› Clause 3: Period

› Clause 4: Rental

› Clause 5: Warranties

› Clause 6: Title, Identification, Ownership of Equipment

› Clause 7: Indemnity

› Clause 8: Use and Inspection

› Clause 9: Repairs, Loss and Damage

› Clause 10: Insurance

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LEASE CONTRACT

› Clause 11: Further Assurance

› Clause 12: Purchase Options

› Clause 13: Events of Default

› Clause 14: Remedies

› Clause 15: Waiver

› Clause 16: Notices

› Clause 17: Termination

› Clause 18: Captions in the Agreement

› Clause 19: Arbitration

› Clause 20: Governing Law and Dispute Resolution

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LEASE CONTRACT

› Schedules:- Schedule 1: Equipment Lease Schedule

- Schedule 2: Payment Schedule

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6008 Development of Guidelines Sample Documents and ... · 2016-05-21 4 7 1. EPC CONCEPT 8 WHAT IS...

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