Produced in Association with


SERIES 21 / Module 09 Energy as a Service


average in approximately four years but many can pay back in significantly less. The industry continues to find more opportunities, as technologies and approaches develop and improve, and as we better understand how energy performance can be optimised for better service. More end-users, in recent years,


have been looking towards energy service models to help fast-track energy efficiency projects, clear maintenance backlogs, replace old assets and/or to install embedded energy supply infrastructure. Good practice is to target energy conservation and efficiency measures first in line with the Energy Hierarchy. This change in approach has been led by the public sector, but more private sector companies are beginning to follow suit. The opportunity for energy service


models is to help optimise energy performance for a wide range of different types of organisations. If they get this right, these strategies can help drive value beyond just energy through, for example, delivering better customer service, better security of supply, better system resilience, reducing overall service costs, improved environmental impact and better organisational reputations.


Cost and energy savings Back in the 1880s, when pioneers likes Thomas Edison marketed new electric products, the propositions were about supplying a service. When procuring a new service,


to make the best value decision, a consumer needs to optimise across all their objectives, including across both the capital cost of equipment and operational costs. This is the value of energy as a service and it is this approach that incentivises reducing energy consumption and cost. As a simple illustration, Table 1


shows example costs for a range of different fridge freezer models, all rated at the same service level, considering capital and running cost and combining them in equal terms in the form of a total service life cost (ignoring discount rates/inflation). In simple terms, there are two


approaches to procurement: 1. Buy the product: energy use is


usually invisible at time of purchase so our decision is based on capital cost alone – we tend to buy the cheapest, the G model.


Produced in Association with Table 1: illustrative costs and energy savings for a range of fridge freezer options


basis, bringing together specialist sub-contractors depending on the specific project requirements; they are often offered by existing facilities management, engineering or energy management specialists. As such, energy expertise


requirements, life cycle cost analysis and technical, performance and/ or financial risk exposure can be transferred by the client to an ESCO so the approach has the potential to overcome the awareness and risk barriers associated with traditional approaches to procurement. ESCO provision through EPCs in the


UK has been steadily growing and is now worth more than the €100m a year value stated in 2018.


2. Buy the service: if total service


cost (say over 10 years) was packaged up in one sum – we are more likely to buy the most economic option, the C model; this costs 19% less in total cost and 52% less in energy consumption. Unfortunately, most of us still


generally procure using the first approach. The desire of both developers and construction clients, for example, to keep product project costs down generally overrules. Many projects still don’t forecast operational energy use and cost. Consequently, there’s a general lack of awareness of the benefits of more efficient options. Enhanced energy efficiency measures are seen as discretionary and so they can be engineered out as service value isn’t properly understood. These awareness barriers mean that customers end up paying the cost of inefficiency over the service life. Energy service pricing models


are based on selling the customer an end service for a periodic fee, e.g. based on a monthly cost. These can take into account other monetary equivalent value such as from reduced


Figure 1: typical financial model for EPC


maintenance costs or improved service levels. For many energy services, energy consumption tends to account for a large proportion of total cost so this model opens up the opportunity to reduce energy service cost (and so increase the value of the service) by targeting avoidable waste and enhancing energy service productivity. When considering energy as a


service, a consumer would therefore naturally switch to another energy service option if it would deliver better service at reduced cost (the Win Win). According to ESTA’s Energy Services


Contracting Booklet, an ESCO is an Energy Services Company that offers a turnkey service to the client to identify, implement, operate and maintain energy cost saving or revenue generation measures in the form of an energy performance contract (EPC) or energy supply contract (ESC) depending on the scope of services3. This may be for a whole building/


facility or for a proportion of the energy services. ESCOs typically operate on an agnostic technology or solution


Common EPC models There are two common EPC models in the UK that can either be used separately or in combination. 1. Guaranteed performance


model – typically based on an upfront capital payment and/or a regular service fee in return for implementation of new assets and/ or energy-saving measures, with a guaranteed minimum level of energy cost savings and revenues. This is the main approach used in the UK; it’s the basis for programmes such as Refit, the Scottish non-domestic energy efficiency framework, etc. Financed projects allow clients to avoid up front capital cost, in preference for a monthly positive cash flow. The guarantee means the provider covers any shortfall below the guaranteed level such that the project’s financial performance is always maintained. 2. Shared savings model – the


provider is paid based on a percentage share of delivered cost savings and/or revenues. Even though more popular in Europe, in the UK this is generally used in combination with a guaranteed performance model with shared savings providing a bonus level for any over performance, such as for the Carbon and Energy Fund framework for the NHS/public sector. Figure 1 shows a typical finance


model for an EPC illustrating how guaranteed cost savings and revenue pay for the cost of the service. In most cases, the contract term is set to exceed the payback period of the investment. On average, typical UK EPC projects


have a capital outlay of €1-5m and a contract length of 5-10 years (20%


18


EIBI | APRIL 2024


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