Answer by Alejandro Morell (Creara)
Financial and economic aspects tend to be quite intricate when developing EPC projects.
Listed below are some critical considerations that any ESCO contract must thoughtfully examine:
Duration of the contract
EPC are medium-long term contracts, subject to an investment return period (pay back), which will constitute an important indicator of the project attractiveness. The Duration of an ESCO contract depends largely on the investment financing amount, the amortization period for each technology/measure and agreement on sharing of the savings.
In addition, client and ESCO have to agree an effective date for the EPC commencement, criteria for automatic renewal and the period of notice to end the project or to renew it.
The share of savings is at the cornerstone of any ESCO project.
Ultimately, repayment of the costs of an ESCO project rely upon the achievement of targeted efficiency gains. However, the attribution of risks and benefits (or losses) are determined by the type of ESCO model chosen and the percentage of sharing (if any) agreed to.
Under a shared savings contract, the savings are split for a pre-determined length of time in accordance with a pre-arranged percentage.
In a second stage, another key factor to be defined in an ESCO contract is the calculation method for establishing these savings. Very often, parties resort to widely used protocols to put a Measurement and Verification (M&V) plan in place.
Assumption of risks
Closely related to the saving and the sharing percentages is the risk allocation among parties. There are different types of risks, for example:
- Credit and investment risk: depending on the ESCO model selected, this risk is assumed by the client or by the ESCO. In a guaranteed savings model, the investment risk is on client’s side. In case of shared savings model, the ESCO makes the investment and assumes the risk.
- Energy prices changes risk: the ESCO assumes the risk of energy prices variation during the contract period. This risk is analyzed by the ESCO in the risk assessment for the financial model.