The Energy Performance Contract: A Sustainable Investment To Fast Track Energy Efficiency?

Author:Ms Nora Wouters and Mathieu Raedts
Profession:Dentons
 
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An ambitious target of energy consumption

As part of the clean energy for all Europeans' package, Directive 2018/2002 of 11 December 2018 on Energy Efficiency1 contains an ambitious target of at least a 32.5% reduction in energy consumption by 2030.

This poses a significant challenge for all Member States, as substantial investments will be needed, especially to enhance the energy performance of existing buildings. This is particularly true for Belgium, as the real estate stock is characterised by a high proportion of old buildings (more than 70% of residential buildings has been built before 1981).

In this regard, the Energy Performance Contracting (EPC) is a valuable instrument that has been in existence for a few years. Under such a contract, an energy service company (ESCO) implements a project to deliver energy efficiency and uses the income from the cost savings as payment.

In other words, the contractor bears the costs of the energy improvements, and is paid back from the value of the energy saving for over a contractual period, typically between 5 and 10 years, that should allow for a cost-effective investment. The owner of the building will be able to capture the benefits of energy savings after the pays-back period without having to undertake upfront capital expenses. Therefore, the Energy Performance Contract both accelerates the energy transition and eliminates challenges related to funding.

The chance for the EPC to live-up to its potential?

Many energy service companies offer EPC and several examples of successful projects confirm the relevancy of this approach. Investors in the EU also see a great opportunity in EPC. They consider it a profitable and sustainable placement due to the guaranteed income generated by the net difference between the previous and the current energy bill. However, the EPC has not yet reached its full potential.

A lack of understanding of the mechanism probably explains why EPC are not fully exploited by many public entities. Model contracts, exchange of best practice and guidelines should help stimulate demand2, but there is clearly a need for an extra push.

Aware of the need to provide more visibility and clarity on the mechanism, on 7 June 2019 the European Commission released a recommendation reminding the Members States that they are required to support the public sector by providing model contracts for energy performance contracting3. The revised directive on energy efficiency4 stresses the...

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