Energy Performance Contracting – ‘Five steps to success’
As evidenced by three decades of successful delivery in the United States, Energy Performance Contracts (EPCs) can be an effective way to reduce operating costs, reduce asset liabilities and achieve improved environmental performance of buildings.
While EPCs have potential to become an important part of the contracting landscape for building retrofits in Australia, they can also be tricky contracts that challenge conventional procurement paradigms.
As referenced in AECOM’s 2014 Blue Book, EPCs have been described as “a financial solution to a technical problem” and, as such, there are issues to consider before investing in an EPC. AECOMs Ed Brown, Associate Director and Ian Dixon, Applied Research and Sustainability Team Lead provide “Five Steps to Success”:
1.0 Define the long term strategic asset priorities
Often we see investments that are made without truly understanding the problem that is being addressed. Focus effort on the areas that will really benefit your organisation in the long term.
2.0 Understand your assets
Know the location, age, performance, condition and criticality of all your assets. The more you know, the more you can guide the Energy Services Company (ESCO) and align the areas targeted to your long-term priorities.
3.0 Finance constraints
Conversations with your finance team are important to understand what constraints you might face. For many public bodies, debt is often not an option, whereas Universities have very different borrowing abilities (dependent upon their cash position). But the devil can be in the detail so it’s important to understand the full tax and accounting implications of debt funding an EPC.
4.0 Procurement choice
EPCs may feel like an attractive option but may not be the appropriate vehicle for the asset upgrade; a broader procurement assessment should be undertaken. In addition to EPCs, it’s worth thinking about the pros and cons of:
- “doing nothing” - what would the future look like if asset reinvestment continued in the same manner (often like-for-like replacement) with the same budget?
- “the traditional approach” - how easy would it be to procure all the necessary works using a traditional design and build approach?
- “other options” - there are now plenty of ways to structure reinvestment. For energy generation options, explore full off-balance sheet options structured around a power purchase agreement. To avoid the capital burden there are leasing options for items of major plant. There are now specialist providers (especially lighting) offering off-balance sheet solutions with various financial structures underneath them - including the provision of finance themselves.
5.0 The Business Case
A good business case ensures the investment is fully tested and will deliver explicit gains. The stronger and clearer the benefits case, the better the investment. Conversely, if it looks tentative now then it probably won’t get better with time. The business case is therefore more than just a tool to convince the executive and secure funding to get going. It’s a structured process to identify the priority outcomes and to test the investment before making the contractual and financial commitment.
EPCs can be great, but they’re not projects to take on lightly. The more time spent in the up-front stage will probably return benefits ten-fold during delivery. Be creative, be cautious, and be diligent.
About AECOM’s Blue Book
AECOM’s annual Blue Book has examined market trends across the Australian and New Zealand construction sectors for 16 years.
The 2014 International Edition of the Blue Book is the first to also include construction data, insights and global comparisons of industry issues from AECOM’s Europe, Americas, Asia, Middle East and Africa businesses.
Six disruptive trends emerging across the Australian construction sector have the potential to create far-reaching economic benefits:
Building Resilient Places – understanding the benefits of an integrated approach to infrastructure and the natural environment.
Enhancing User Experiences – making productive use of city spaces; extending engagement with end-users beyond the physical asset and transforming precincts to enable higher revenues and prolong asset lifecycles.
Innovative Construction – leveraging new advanced construction techniques including pre-fabricated timber and materials to improve the economic viability of ambitious projects.
Restructuring Labour – rebalancing the workforce towards higher productivity tasks; greater adoption of new collaborative processes and tools; driving efficiency gains through global workflows while improving retention of local knowledge.
Alternative Financing – seeking higher private sector engagement to overcome shortfalls in public funding projections; financing mechanisms that bring forward investment to see immediate returns; reducing lifecycle risk through the uptake of collaborative procurement models.
Technology Reshaping Industry – capture and analysis of data to allow evidence-based decision making and a transformation in how built assets are delivered and operated; addressing the behavioural element behind collaboration tools.
For more information, please contact:
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