WITHIN THE SCOPE OF ENERGY EFFICIENCY, ENERGY SUPPLY AND PERFORMANCE CONTRACTS

WITHIN THE SCOPE OF ENERGY EFFICIENCY

ENERGY SUPPLY AND PERFORMANCE CONTRACTS

 

Energy is continuously needed in all areas of daily life, especially in the production industry. In this context, it has become a necessity with the developing technology to reduce the production costs of electrical energy, which is mostly dependent on oil and natural gas, or to increase the efficiency of energy. Within the scope of energy efficiency, Energy Supply Contracts and Energy Performance Contracts are frequently encountered in practice. Both types of Contracts serve the purpose of increasing energy efficiency and reducing the cost of energy consumption in terms of companies, public institutions, in short, energy consumers.   It is possible to receive support from Energy Efficiency Consultancy Companies ("ESCO") which guarantee a certain savings on the client’s energy bill by assuming techinal and credit risk within the scope of both Energy Supply Contracts and Energy Performance Contracts.   Within the scope of this article, firstly Energy Performance Contracts and then Energy Supply Contracts will be discussed with the relevant legislation and ESCO connections, and in the last stage, a comparison of the two types of Contracts will be included.

 

1. A.    Energy Performance Contracts

 

Energy Performance Contracts ("EPC") are a financing mechanism based on the repayment of the initial investment costs of energy efficiency or renewable energy projects with the savings to be achieved in the following years.  Financing mechanisms such as EPC are used especially in the public and private sectors to reduce energy consumption, increase sustainability and reduce environmental impacts. With EPC, facility owners can reduce their financial risks by increasing their energy efficiency.

 

Within the scope of the Energy Efficiency Law No. 5627 ("Law") adopted in 2007, EPC is defined as "a contract based on guaranteeing the energy savings to be achieved after the implementation project and paying the expenditures made with the savings that will occur as a result of the implementation".

 

        i.            EPC to be concluded by the Public Sector

 

Within the scope of the Law, the Presidency of the Republic issued the "Decree on the Procedures and Principles Regarding the Energy Performance Contracts in Public Sector" ("Presidential Decree") and following the Decree, the Ministry of Energy and Natural Resources prepared and published the "Communiqué on the Implementation of Energy Performance Contracts in Public Sector" ("Communiqué").

 

The procedures and principles of the EPC regulated by the Law, the Presidential Decree and the Communiqué and the Energy Performance Contracts that only public administrations within the scope of general government and other public and organisations ("Administration") may enter into are discussed.

 

The EPCs signed between the parties basically aim to ensure energy efficiency in the enterprises and the project undertaken for this purpose is planned to be financed from energy savings.

 

In this context, in the EPCs to be concluded with the Administration, the two parties are the Administration as the service recipient, which can be explained as "public administrations or other public institutions and organisations within the scope of general government aiming to save energy", and ESCOs as the contractor bidding for the tender to be held for the signing of the Contract.

 

Article 5 of the Presidential Decree imposes certain limitations on the tenders to be organised. Article 5/2 of the Presidential Decree stipulates that the investment value must be at least two million Turkish Liras and the simple payback period must be at least two years. Within the scope of the Presidential Decree, energy efficiency measures with a simple payback period of less than 2 years will not be considered within the scope of the energy performance contract. As per Article 7/2 of the Presidential Decree, the maximum term for the contract is determined as fifteen years.

 

Pursuant to Article Annex-1 of the Law, it is stated that the Public Procurement Law No. 4734 shall not be applicable to the tenders to be made by public administrations within the scope of EPC, except for the penalty and prohibition provisions.

 

Since there is no restriction in the regulations in the legislation, it is possible to conclude a contract that includes energy efficiency measures in any area with energy saving potential such as buildings, vehicles, facilities, plants, power plants, lighting, water pumping stations, energy transmission and distribution lines, etc. belonging to the Administration or allocated to the Administration.

 

With the EPC to be concluded by the public sector, capital can be created for the financing of energy efficiency projects by using the cost reductions obtained as a result of increasing energy efficiency in buildings, facilities, vehicles and similar movable and immovable properties that are owned by the public and for which there is no demolition, relocation or disposal decision or plan. The contractor, who is obliged to provide services within the scope of EPC, will cover the service fee from the savings provided in the invoices. With the EPC provided to public institutions with the Law, public institutions will be able to improve inefficient energy production systems in buildings, facilities, vehicles and similar movables and immovables without any initial investment.

 

Pursuant to the Contract concluded within the scope of the explained scope, ESCO is under the obligation to provide the total energy savings promised and guaranteed to the other party, the Administration, within the scope of the project prepared by ESCO. In order to determine whether the total energy savings promised and guaranteed by ESCO has been achieved, a Savings Verification Report is prepared and submitted to the Administration at certain intervals.

 

If the rate of 70% is not exceeded, free system improvement service will be provided by ESCO without any payment by the Administration. If the rate of 70% is exceeded, the Administration will pay ESCO the amount exceeding 70%. In the event that 70% of the energy savings committed by ESCO for three consecutive periods cannot be exceeded, the Administration has the right to terminate the Contract.

 

      ii.            EPC and Private Sector Investments

 

It was discussed at the beginning of this article that EPCs are one of the most effective projects in the field of energy efficiency. In addition to public administrations within the scope of general government and other public and organisations, it is also possible for factories, industries, SMEs and small operators in the private sector to benefit from EPC projects. As will be explained in detail below, one of the three common models of EPC is preferred by private law legal entities other than public legal entities and real persons depending on the size of the enterprise. 

 

Within the scope of this project, ESCOs alleviate the burden of the Customer/Service Receiving Companies by undertaking the financing burden depending on the technical risks of the project and the type of project, and since the project service fee payment is paid over the amount saved, savings are provided without imposing an extra burden on the Customer Companies.

 

Following the completion of the service fee payment by the customer / service recipient in accordance with the EPC provisions made between the parties, the profit arising from the savings continues to be reflected as extra profit to the companies receiving the service. At this point, it should be noted that ESCOs also offer profit/savings guarantee to their customers.

 

There are three basic models of EPC which are widely used. These models are:

a)      Guaranteed

b)      Shared

c)      Leasing (Non-Investment)

 

However, it should be noted that among these three models, Guaranteed and Shared models are mostly encountered in practice.

 

• Lease (Non-Investment) EPC Model         : In the relevant model, the entire profit from the savings during the contract period will belong to the ESCO. Against the risk of not achieving any savings, in cases where savings cannot be achieved, the loss is also imposed on ESCO. In the event that savings are achieved at a rate higher than the savings rate specified and promised in the contract, the amount of savings exceeded will belong to the ESCO during the contract period and will belong to the Service Receiving Company as of the end of the contract period.

 

• Guaranteed EPC Model                             : Within the framework of the guaranteed model, a certain level of savings guarantee is offered by the ESCO to the Customer Company within the scope of EPC. With the guarantee, the Customer is protected against performance risk. Unlike the Leasing Model, the Customer earns the entire amount of the savings itself and ESCO is paid on a yearly basis in the plan determined during the Contract period.

 

In case the promised savings amount is exceeded, the entire savings will be received by the Customer. In case of failure to achieve any savings within the scope of the project, a penalty payment will be made by ESCO to the Client Company.

 

The financing in the relevant projects is generally covered by the Customer. Due to the fact that the financing risk is attributed to the Customer, in the related projects, EPC is generally established between Customer Companies with high creditworthiness, in other words, large-scale enterprises and ESCOs.

 

• Shared EPC Model                                      : Within the scope of Shared EPC Models, the Customer and ESCO share the amount saved. Similar to the Guaranteed EPC Model, in cases where savings are not realised, penalty payments are made by ESCO to the Customer. In case the promised savings amount is exceeded, the extra savings will be shared between the Customer and ESCO.

 

Financing in related projects is generally provided by ESCO. In other words, ESCO bears both the financing and performance risk itself. For this reason, the Shared EPC Model Project is generally used in investments by companies with various restrictions in terms of access to financial resources.

 

1. B.     Energy Supply Contracts

 

Energy Supply Contracts ("ESC") can be explained as the agreements made with an energy supplier in order to supply electricity, natural gas or other energy resources to meet the energy needs of a facility or enterprise. With ESC, energy supply stability is aimed. ESC is applied by enterprises as it makes energy costs predictable and is seen as a means of increasing energy efficiency and achieving sustainability goals.

 

Due to the fact that electrical energy is characterised as a commodity, the provisions of the Sales Contract and general provisions are applied in ESC s. In the ESC, which imposes an obligation on both parties, the parties have the obligation to deliver the goods and pay the price in return for the goods. In parallel with the elements of Sales Contracts in ESCs, there are two mutual parties, the Seller and the Buyer. In these Contracts, the seller can only be capital companies that have been granted a supply licence by the Energy Market Regulatory Authority ("EMRA"), in other words, the ESCO, which has just been defined, while the Buyer ("Customer") party is defined as the non-eligible consumer, which is defined as "a natural or legal person who can only purchase electrical energy from the incumbent supply company" or "a natural or legal person who has the right to choose his supplier due to the consumption of more than the amount of electrical energy determined by EMRA".

 

In ESC projects, in addition to ensuring energy efficiency as in the EPC Model, the energy such as electricity, gas, steam required by the Customer Company / Enterprises is also provided directly by ESCO. The fact that the responsibility of energy supply is in the ESCO eliminates the necessity of employing personnel for energy supply to the Customers and ensures that the Customer is protected from all technical and economic risks that may occur in the energy generation process.

 

In order to ensure energy supply as well as efficiency, ESCO provides the entire project financing, engineering, construction services and planning processes required during the installation, installation and production phase of the energy generation facility to the Customers. The ownership of the generation facility may belong to ESCO after the completion of the project contract period, or it may be transferred to the Customer with the provisions included in the ESC.

 

Although it is taken into consideration that the duration of the Contract envisaged under the ESC will vary depending on the size of the projects, agreements for the provision of electricity supply are generally concluded between the parties for a period of 10 to 15 years.

 

There are also significant differences between the ESC and the EPS in terms of the price to be paid by the Customer to the ESCO. The consideration to be paid by the Customer under the ESC can be considered in three different categories. Firstly, a payment will be made by the Customer in return for the energy provided by the ESCO. At this point, the determination of the price will be the pricing per MWh of the energy provided. Secondly, a service fee is planned to be paid by the Customer. The service fee in question may be determined in detail by the parties under the Agreement. Generally, it is expected that the service fees will be updated within the scope of 6-month periods or annual periods. Finally, if the ESCO has financed the necessary equipment and machinery to the Customer, these expense items must also be covered by the Customer.

 

The termination of the Agreement may be due to the death of one of the parties or the termination of its legal personality, as well as in cases of impossibility, due to the expiration of the term of the Agreement with the written agreement of the parties, or by termination for just cause.

 

1. C.    Differences between EPCs and ESCs.

 

Within the framework of the issues endeavoured to be explained above and the relevant legislation, it can be stated that the energy supply in the EPCs, is provided by a different third supply company that is not covered by the EPC. Within the scope of EPCs, the ownership of the relevant facility may belong to the Customer / Service Receiver or ESCO. The service fee to be paid by the customer/service recipient within the scope of the EPC will be calculated and determined between the parties at a rate based on the amount saved.

 

Within the scope of the ESCs, an energy supply is the subject of the Contract and the energy supply facility is owned by ESCO without exception. ESCO is fully responsible for the maintenance and repair, insurance, personnel and management expenses of the relevant supply facility. The service fee to be paid by the customer/service recipient shall be calculated over MWh or kWh as shown and agreed in the Contract.

 

It is possible to say that the most distinguishing feature of the two types of Contracts is their focal purpose. While ESCs focus on providing energy supply in order to meet the energy needs and maintain the activities of the business, EPCs include and focus on investments made to increase energy efficiency and achieve energy savings. In other words, the most obvious difference between the ESC and EPC Models is whether the responsibility of energy supply can also be attributed to the ESCO or not.