Proposed program by MAESCO at a state level in Malaysia for faster results to reduce energy costs through strategic partnership between government and private sectors and facilities owners and ESCOs.
Practical approach with the state government with some interventions and supports from agencies from the federal government.
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Energy efficiency implementation program for state level in Malaysia
1. By
ZAINI ABDUL WAHAB
Committee Member (Strategic Initiatives)
MAESCO
2014
2. ENERGY SERVICES INDUSTRY AND EPC
SUCCESS STORIES FOR ENERGY COST
REDUCTION
EPC IMPLEMENTATION FOR BUILDING
FACILITIES
WHERE AND HOW TO SAVE?-Potential
energy saving opportunities from detailed
energy audit
What’s Next and The Way Forward…
3.
4. Source: Lawrence Berkeley National Laboratory , National Association
of Energy Service Companies, USA September 2013
5. Source: Lawrence Berkeley National Laboratory , National Association
of Energy Service Companies, USA September 2013
6. Source: Lawrence Berkeley National Laboratory , National Association
of Energy Service Companies, USA September 2013
7. Clearly, the industrial and
commercial sector s offers much
higher savings potential Source: www.reexasia.com
9. Source: Government Property Group ,Integrated Energy Efficiency Retrofits and
Energy Performance Contracting ,Australia,2011
10. Greener
Government
Buildings Program in
2009.
Aimed to save $1
billion in energy &
maintenance costs
in 25 year
To reduce emissions
from government
buildings by 20% by
2020.
A simple government-wide protocol for the
EPC process
Loans for agencies to implement energy
efficiency upgrades
Establishing a facilitation unit in the
Department of Treasury and Finance
A mandate for all agencies to implement
energy efficiency upgrades at sites
accounting for 20% of agency energy use by
2012 and 90% by 2018.
Commenced with a trial EPC covering 16
office buildings, and is now being rolled out
across agencies
$160 million in 4 years
Decisions on additional funding to complete
the program will be made in coming years.
11. The Strategic Energy Efficiency Policy for Queensland
Government Buildings - to reduce their energy
consumption by 5 % below 2005-06 levels by 2010,
and 20 % by 2015.
Shares some key features with the Victorian program
- the use of EPC and facilitation by a single
department, the Department of Public Works.
The Department of Public Works has so far invested
over $20 million in improving the energy efficiency of
25 of the sites that it owns, and has reduced its
energy use in those buildings by 18 megawatt hours
per year.6
12. Federal, State, and local governments in the US
invested over $21 billion in EPC since 1997.
The US Federal Government’s 2009 economic
stimulus package included an additional $3.1 billion
for efficiency in existing federal government buildings
Federal and State governments have passed specific
laws to facilitate EPC and accept up to 15-20 year
payback periods.
Research in the US indicated that EPCs have
delivered general benefit to cost ratios of 1.6 to 1,
with higher 2.1 to 1 ratios for EPCs in health facilities.
13. Development of manuals on
additional models and
support-EPC + White
Certification
› Quality Standards
› Comprehensive
Refurbishment & link to
Facility Management
› Norms /Certification
› Financing
Intensive dialogue with market
actors - Building owners -
Financial sector - ESCOs
Capacity building & Increased
awareness, know-how &
exchange
› Over 100 events organised
and attended, 2,000
participants with about 60 are
new EPC experts.
Pilot projects
› Over 360 buildings screened
› 30 more concrete projects
received further support
› 17 resulted in concrete EPC
projects
› About 1 million square meters
› Energy cost baseline of almost
10 million Euros/year
› Estimated energy savings
between 10% and over 25%
14.
15. Malaysia’s EPC case study : Warehouse
Facilities
Application Areas:
- Fluorescent Lamps
- High bay Lighting -
HID After Installation:
20,000 pcs x 26W/1000
Before Installation:
20,000 pcs x 45W/1000 Total annual Saving = 42.2%
= 3,283,200 kWh,
= RM 920,000
Source: MAESCO member
16. Malaysia’s EPC case study : Integrated
Shopping Complex Facilities
Areas of Conservation Implementation:
1) Transformers (MSB)
2) Cooling System – Chillers, C/Tower, AHUs, CHW & CDW Pumps
3) Lighting System – Internal, External & Parking
4) Peak Demand Control
Total Actual Saving Achieved
= RM 1,495,000/year
Total Proposed Saving
Source: MAESCO member = RM 905,000/year
21. Options To REDUCE Energy Costs For Businesses
ENERGY
EFFICIENCY
IMPROVEMENT
PROGRAM
Sustainable Energy
Management
Awareness Program
Capacity Building –
Training & Development
HRDF refundable
programs
Measurement &
Verification (M&V) Internal/3rd Parties
Adoption of Energy
Management System
(ISO50001)
Internal/Consultant
Energy Saving Project
Energy Auditing
Internal Budget
EPC Model
Full/matching grant –
with commitment to
implement
Energy Saving Projects
Implementation
EPC model
Standard
Procurement
SUPPORT
MEASURES
by the
government
22. Source: Government Property Group ,Integrated Energy Efficiency Retrofits and
Energy Performance Contracting ,Australia,2011
23. Traditional Integrated Energy Services Model
Source: Government Property Group ,Integrated Energy Efficiency Retrofits and
Energy Performance Contracting ,Australia,2011
24. “Energy Performance Contracting is
when an ESCO is engaged to improve
the energy efficiency of a facility, with
the guaranteed energy savings paying
for the capital investment required to
implement improvements”
26. Finance energy saving
improvements with no upfront
capital
Invest savings achieved into
other projects
ESCO to identify Energy
Saving projects
ESCO guarantee Energy
savings - the remuneration of
ESCOs is directly tied to the
actual energy savings achieved
Energy saving is shared between
ESCO & the building owneras per
agreed terms & payment
schedule with a single-source
responsibility
ESCO supplies, installs, maintains
& retain an on-going operational
role in measuring & verifying the
savings over the contractual
terms.
Use future energy ,cut operating
cost, be more competitive &
improved comfort & productivity
from upgraded systems
Positive environmental impacts &
reduced environmental footprint
27. Item
EPC-Shared
Saving Model
Cash
Purchase
Technical Expertise ESCO ESCO
Implementation(design, installation,
ESCO ESCO
testing & commissioning)
Funding Source ESCO OWNER
Sharing of returns %
At agreed % &
conditions
100% to
OWNER
Technical & Investment Risks ESCO OWNER
Energy Performance Maintenance &
monitoring works and risks
ESCO OWNER
28. Savings based on actual & measured
energy performance data with permanent
measuring equipment
Capable ESCO- Technically & Financially
Comprehensive EPC Contract document
Understanding of the how EPC works & it
long term benefits by facilities owners
29. 1. GUARANTEED SAVING
Model
• The loan goes on the
client’s balance sheet
2. SHARED SAVING
Model
• The loan goes on
ESCO’s balance sheet
In all above, ESCO provides a guarantee of the project’s
technical performance and satisfaction of contracted
specifications with the client
31. Owner’s Share(10-30%)
ESCO’s share(70-90%)
(Loan & interest, O&M, spare
parts, insurance, profit & etc)
BEFORE EPC contract period
Baseline
Detailed
Energy
Energy Audit 100% saving
enjoyed
by owner
bill
saved
After EPC contract
period
Develop EnMS & in-house
capacity building
Implement EnMS & sustain
saving
YEAR
ENERGY BILL
Implement
EPC Project
32. GUARANTEED SAVING
Facilities owner takes out
“normal” loan
(will appear on balance sheet)
ESCO guarantees loan can
be repaid with savings
ESCO pays difference if
minimum savings not met
Main advantage:
ESCO can undertake more
projects
SHARED SAVING
Facilities owner does not
take loan (will not appear on
balance sheet)
ESCO finances project:
takes performance & credit
risk
Facilities owner pays higher
% to ESCO
Main advantage:
Independent of Facilities
owner ’s borrowing
capacity
33.
34. Experiences in EPC
Projects /Track
Records in energy
services
Financial
Strengths
Management
capacity in
energy services
Technical
Competency &
Expertise
ESCO
To secure
financing &
ensure
sustainable
operations
MAESCO WILL ASSIST IN THE SELECTION OF ITS
MEMBERS
37. Energy Saving Micro Ballast
and HP Fluorescent T8-28
watts
LED Fluorescent Tubes LED Down Light
LED Ceiling Light High Performance
LED Street Light
LED Spot/Flood
Light
Savings at 40-60% from lighting system
38. EPC Contract
Negotiation &
Signing
Install Data
Logger/
permanent sub-meters
Collect energy
data to
establish
energy
baseline values
Improve &
optimize
energy
consumption
with energy
saving
measures
Measure &
monitor actual
energy savings
achieved
against agreed
baseline values
39. Measurement & Verification of Actual Electricity
Consumption Reduction Achieved
(7.8 – 4.7)/7.8
(8.0 – 4.6)/8.0
Saving = 42.5%
Saving = 40%
Source: MAESCO member
40. Commitment from Client
Factors Affecting Savings Performance
Evaluating Savings Uncertainty
Minimum Operating Conditions
Energy Prices
Verification by a Third Party
Baseline Adjustments (Non-Routine)
Balancing Uncertainty and Cost
41. What is guaranteed?
› The minimum amount of savings expected to
be achieved
› The method, report formatting and formula
for calculating shared savings will be paid to
the ESCO;
› Conditions to be applied if savings achieved
are less than guaranteed by the ESCO.
42. The cost savings measurement with significant changes of
operations at the facilities.
The responsibilities of building owners and the ESCO
throughout the contract period.
Maintenance, use and modification/ removal of the
equipment that was installed by the ESCO by the facilities
owner.
If the equipment installed by the ESCO is lost or damaged
Guarantee of losses and liabilities by ESCO to the facilities
owner.
43. •Facility owner participate in establishing the energy
baseline,
Energy Baseline
Development
• The facility owner agree on the definitions and
methodology for making any future adjustments to the
energy baseline and should be A part of the contract.
Energy Baseline
Adjustment
•The allowance of operational savings is generally
discouraged.
Operational
Savings
Stipulated Savings •Should be avoided/used minimally.
•ESCOs inflated the interest rate of funds borrowed for
additional profits.
•Facility owners may check/arrange their own financing
at lower rates.
Excessive Finance
Charges
44. •Some ESCOs have required that the preventive
maintenance on facilities also be outsourced to
that ESCO
Required
Maintenance
Agreements
•off-site control must be avoided.
Lack of Local Facilities
Control
•Savings should be calculated on an annual basis
and stand alone on that basis.
Terms of Savings
Reconciliation Versus
Budget Cycle
•the use of a project manager or a third party verifier
by the client is highly recommended. Quality Control
•Transparency in the overall costs
involved(technologies, )&M, interest rates, IRR,
profits and etc.)
Owners request
unreasonable amount
of shared saving %
45.
46. ENERGY EFFICIENT BUILDINGS – PROPOSED PROCESS FLOW
STAGE 1 - PREPARATORY
(2-3 weeks)
STAGE 2 - AUDIT
(2 -3 Months)
STAGE 3 - RETROFIT
(3-6 months)
STAGE 4 – O&M
(5-7 years)
Building
Owner
Program
Manager
ESCO
1.Initial
Briefing
2.Obtain
Initial Info
• Intro on EE Bldgs
• Form 1 to fill up
3.Workshop
On EE
4A. Apply for
BSEEP Fund
4B.Engage with
Other Funders
5. Evaluate,
select & appoint
ESCO
6.Energy
Audit
8.Present
Audit Report
Yes
Yes
7.Prepare
Energy Audit
Report
9.Prep are
Draft EPC
Contract
10.Nego
11.Sign
EPC
Contract
12.Implement
EPC Works
Performance Monitoring &
Verification
Yes
Monthly
Payment to ESCO
• Implementation process
• Contract principles
• Top mgmt. participation
• Form 2 to fill up
Funding
Yes
Assistance/Advisory
on M&V
Monitoring, Operation &
Maintenance based on
contractual conditions
47. A
Standardized
Government
Guidelines
A Lead
Agency
A source of
Capital
Mandates &
set targets on
agencies
Commitment to get faster results!
48. FINANCING
Sustainable
Funding Sources
Revolving Fund
/Low Interest Loans
Assessment Criteria
For Energy
Services/Energy
Efficiency Solutions
TECHNICAL
ASSESSMENT
Competent &
Independent
Parties
Transparency In
Assessment Criteria
ACTUAL ENERGY
PERFORMANCE
M&V
Competent &
Independent
Parties
Recognition Of
M&V Services
FISCAL
INCENTIVES
GOVERNMENT AGENCIES,FINANCIAL
INSTITUTIONS, PROFESSIONAL BODIES
49. The potentials in Malaysia is still relatively
“UNTAPPED”.EPC is a proven workable model for
faster EE implementation!
Interested parties must have the same understanding
& goals on how to make EPC works – WIN-WIN &
LONG TERM ENERGY COST SAVINGS!
ESCOs must have/develop competency & capability
to ensure successful EPC projects implementation
More successful EPC projects are required to attract
more attention of building owners & banks/investors
Notas del editor
Recommendation 1: A Government-wide protocol
Administration costs will be substantially lower if there is a single protocol that all agencies follow to improve their energy efficiency. This protocol needs to establish:
How agencies engage with ESCOs to undertake energy efficiency improvements
Using an accreditation system for ESCOs that ensures that ESCOs have sufficient expertise to implement and maintain an energy efficiency upgrade. The Energy Efficiency Council is currently developing a national accreditation scheme that should come into operation in 2011.
Systems to provide loans to agencies to undertake energy efficiency upgrades in their built assets.
Monitoring/verification systems. These systems are critical to the success of a program in which a number of factors can influence energy savings (e.g. changes in staff numbers). It is strongly recommended that governments adopt the International Performance Measurement and Verification Protocol (IPMVP), which includes protocols to address these issues.
Recommendation 2: A lead agency
There are substantial economies of scale to be derived from having a single, expert unit within Government that assists other agencies in undertaking energy efficiency upgrades. For example, EPC contracts are relatively complex and ensuring that they are right in the first place is critical to their success.
The lead agency should generally be a central agency that has a whole of government focus and possibly an existing role in strategically managing government buildings. Appropriate agencies include Public Works, Treasury and Finance and Premier and Cabinet.
Recommendation 3: A source of capital
Agencies often lack access to sufficient available capital funding to pay for the upfront costs of energy efficiency upgrades. As agencies will not know how much capital is required until they have undertaken a Detailed Facility Study, cyclical budget processes are not ideal for energy efficiency retrofits. In particular, ESCO’s subsidise detailed facility studies, which means that if an agency commissions a Detailed Facility Study, but does not secure funding to implement the retrofit, the ESCO will make a substantial loss.
The most cost effective solution is for a government to set up a simple process where an agency is guaranteed access to capital for an integrated energy service contract (e.g. EPC) if the Detailed Facility Study demonstrates that the project will meet a certain return on investment threshold. In the Victorian Government the threshold is 12 per cent.
Various arrangements have been put in place by governments to provide investment funding for energy efficiency works, including:
The Victorian Government uses Section 37 of the Victorian Financial Management Act, which allows loans for self-funding projects.
The Queensland Government has established a loan arrangement with Queensland Treasury Corporation for the funding of EPC.
The NSW and ACT governments have established revolving funds.
US governments allow agencies to directly borrow capital from the private sector to fund EPCs.
Loan repayments are normally made directly to Treasury or the private sector source of capital. Ongoing savings are normally kept by the agency, with Treasury applying an expected efficiency improvement dividend on all agencies, irrespective of whether they have undertaken the efficiency upgrade or not.
Recommendation 4: Mandates on agencies
Agencies generally focus on only those performance measures against which they are rated. As a result, they often put a low priority on matters such as energy efficiency. Experience demonstrates that governments need to place mandates onto agencies if they want to achieve government-wide energy saving goals.
Victoria has taken the approach to place a mandate on agencies’ inputs (e.g. implement EPCs across a targeted percentage of sites by 2020), rather than agencies’ outputs (e.g. achieve energy savings of 20% by 2020). The choice of target will depend on government's priorities. Output targets will give more certainty about energy and greenhouse savings. Input targets will generally deliver the best economic results, and although they may deliver more energy and greenhouse savings there will be less certainty about the scale of energy reductions.
A government-wide energy efficiency upgrade process would deliver the following financial benefits:
Direct cost savings from reduced energy use
Avoided future costs through reduced exposure to electricity price rises
The diagram below shows a hypothetical energy efficiency project and illustrates the benefits that accrue over time through investment in energy efficiency initiatives.
The upper curve shows the business-as-usual (BAU) case which shows the cost of supplying energy to a certain facility. In this scenario, costs are increasing over time in line with current forecasts of growth in energy consumption and increases in energy tariffs. At the start of year 1, an energy efficiency contract project is implemented, cutting the site’s energy consumption by 30 per cent.
Hypothetical Scenario – energy efficiency costs and savings
For illustrative purposes only, it is assumed that the capital cost of the energy efficiency contract is $10 million, with 30 per cent savings on energy costs guaranteed by the ESCO over a payback period of 7 years (i.e. direct cost savings delivered by the project accumulate to the value of the initial expenditure over seven years).
In this example there is a cost saving of $1.43 million every year to the customer through reduced energy use, which accumulates to $10 million over the seven year payback period. Energy savings are guaranteed under the project at the current energy price (i.e. year 1 prices). These savings are reflected in the blue area of the chart as the ‘loan repayments’, as the energy savings are used to pay back the initial investment required to undertake the project. Once the loan has been repaid, these funds are then available for other purposes.
The green area represents the net recurrent annual savings realised beyond the payback period for the project, as energy use for the facility will theoretically remain at the reduced level (i.e. at 70 per cent of the BAU cost) in perpetuity.
Both the blue and green areas refer to a ‘real’ cost saving to government (i.e. money that can be used by the customer for other purposes). The white area directly below the BAU line represents the costs
Traditional methods
The traditional way to deliver energy efficiency upgrades (on the left) generally involves:
A government agency procures an energy audit from an engineering consultant or specialist auditing firm.
If the audit identifies significant opportunities, the government agency then seeks funding from central agencies. The project often stalls at this point.
If the agency secures funds, they then hire contractors to undertake or project manage the works. Once the works are implemented the project ends.
Integrated Energy Services Model
The Integrated Energy Services process (right) instead focuses government effort on developing a whole-of-government protocol and selecting a lead contractor:
The government establishes a whole-of-government protocol for energy efficiency upgrades. This includes establishing access to capital for energy efficiency upgrades that meet a pre-determined return on investment (ROI) target, typically between 7 and 15 per cent per annum.
An agency seeks expressions of interest (EOIs) from energy service companies (ESCOs) covering their competencies and previous experience
The agency selects three ESCOs to undertake an initial, and free, assessment of energy efficiency opportunities (a ‘Request for Proposal’ (RFP)). Based on these assessments, the agency selects a preferred ESCO.
The successful ESCO undertakes a detailed assessment of energy efficiency opportunities (a ‘Detailed Facility Study’) and presents the agency with a set of measures that they guarantee will deliver a certain level of energy savings.
If the agency agrees to proceed, the ESCO implements the energy efficiency upgrade and may provide ongoing management of these measures. Alternatively, the ESCO may assist the agency to hire subcontractors to implement the upgrade and help the agency develop a management plan.
The ESCO or an independent auditor will monitor and verify the energy savings. This provides a level of surety of actual performance outcomes.
Ideally, the contractor and agency form a close partnership with a shared goal to maximise ongoing energy and cost savings. There are a number of options within this type of Integrated Energy Services model, including Energy Performance Contracting (EPC). EPC has the additional benefit of ongoing maintenance and guaranteed energy saving results, with the ESCO underwriting shortfalls in savings if the project does not achieve the agreed objectives. However, in some cases other forms of integrated provider contract may be more suitable (see p6).
To highlight the potentials to improve asset’s operational & energy performance to increase profitability for service providers and/or facilities owners
Challenges of Energy Performance Contracting
• Energy Baseline Development
It is crucial that the facility owner participate in establishing the energy baseline, instead
of the contractor establishing the baseline on his own.
• Energy Baseline Adjustment
It is also important the facility owner agree on the definitions and methodology for
making any future adjustments to the energy baseline. This should be a part of the
contract.
• Operational Savings
Operational savings include those savings that are not derived from energy reduction.
They can be labor or material savings that result from the implementation of a particular
energy conservation measure. For instance, if a school has new lights installed in all
classrooms, no labor or materials will be necessary in these areas for replacing lamps or
ballast for some time. In some cases, especially in the claim of labor, the savings may
never be realized unless a staff position is eliminated. The allowance of operational
savings is generally discouraged.
• Stipulated Savings
Savings, not measured, that are established in the contract (often lighting changeouts) are
usually to the contractor’s advantage. Usually, run times and published efficiencies of
equipment are set and may not actually occur. Stipulated savings should be used
minimally.
• Excessive Finance Charges
There have been instances where ESCOs inflated the interest rate on the funds borrowed
to generate additional profits. Facility owners should check the rates against local banks
or other national institutions to make sure they are competitive. Facility owners may be
able to arrange their own financing at lower rates.
• Required Maintenance Agreements
Some ESCOs have required that the preventive maintenance on facilities also be
outsourced to that ESCO. As such, they tie the maintenance agreement to the guarantee
agreement. These maintenance agreements may be very expensive in relation to the
value of services provided and can provide a major source of profit to the contractor.
• Lack of Local Facilities Control
There have been occasions where the contractors have required off-site control (often out
of state) of the buildings, requiring telephone calls to change schedules and remote
sensing and control in the hands of control center. While this practice has become rare
with improved computer technology, it must be avoided.
• Terms of Savings Reconciliation Versus Budget Cycle
Some standard ESCO performance contracts are written to allow the contractor to carry
over savings that occur in early years to offset losses in later years. Savings should be
calculated on an annual basis and stand alone on that basis.
• Quality Control
Very little is more important than a solid contract, rigidly enforced. The use of a project
manager or a third party verifier by the client is highly recommended.
Challenges of Energy Performance Contracting
• Energy Baseline Development
It is crucial that the facility owner participate in establishing the energy baseline, instead
of the contractor establishing the baseline on his own.
• Energy Baseline Adjustment
It is also important the facility owner agree on the definitions and methodology for
making any future adjustments to the energy baseline. This should be a part of the
contract.
• Operational Savings
Operational savings include those savings that are not derived from energy reduction.
They can be labor or material savings that result from the implementation of a particular
energy conservation measure. For instance, if a school has new lights installed in all
classrooms, no labor or materials will be necessary in these areas for replacing lamps or
ballast for some time. In some cases, especially in the claim of labor, the savings may
never be realized unless a staff position is eliminated. The allowance of operational
savings is generally discouraged.
• Stipulated Savings
Savings, not measured, that are established in the contract (often lighting changeouts) are
usually to the contractor’s advantage. Usually, run times and published efficiencies of
equipment are set and may not actually occur. Stipulated savings should be used
minimally.
• Excessive Finance Charges
There have been instances where ESCOs inflated the interest rate on the funds borrowed
to generate additional profits. Facility owners should check the rates against local banks
or other national institutions to make sure they are competitive. Facility owners may be
able to arrange their own financing at lower rates.
• Required Maintenance Agreements
Some ESCOs have required that the preventive maintenance on facilities also be
outsourced to that ESCO. As such, they tie the maintenance agreement to the guarantee
agreement. These maintenance agreements may be very expensive in relation to the
value of services provided and can provide a major source of profit to the contractor.
• Lack of Local Facilities Control
There have been occasions where the contractors have required off-site control (often out
of state) of the buildings, requiring telephone calls to change schedules and remote
sensing and control in the hands of control center. While this practice has become rare
with improved computer technology, it must be avoided.
• Terms of Savings Reconciliation Versus Budget Cycle
Some standard ESCO performance contracts are written to allow the contractor to carry
over savings that occur in early years to offset losses in later years. Savings should be
calculated on an annual basis and stand alone on that basis.
• Quality Control
Very little is more important than a solid contract, rigidly enforced. The use of a project
manager or a third party verifier by the client is highly recommended.
Recommendation 1: A Government-wide protocol
Administration costs will be substantially lower if there is a single protocol that all agencies follow to improve their energy efficiency. This protocol needs to establish:
How agencies engage with ESCOs to undertake energy efficiency improvements
Using an accreditation system for ESCOs that ensures that ESCOs have sufficient expertise to implement and maintain an energy efficiency upgrade. The Energy Efficiency Council is currently developing a national accreditation scheme that should come into operation in 2011.
Systems to provide loans to agencies to undertake energy efficiency upgrades in their built assets.
Monitoring/verification systems. These systems are critical to the success of a program in which a number of factors can influence energy savings (e.g. changes in staff numbers). It is strongly recommended that governments adopt the International Performance Measurement and Verification Protocol (IPMVP), which includes protocols to address these issues.
Recommendation 2: A lead agency
There are substantial economies of scale to be derived from having a single, expert unit within Government that assists other agencies in undertaking energy efficiency upgrades. For example, EPC contracts are relatively complex and ensuring that they are right in the first place is critical to their success.
The lead agency should generally be a central agency that has a whole of government focus and possibly an existing role in strategically managing government buildings. Appropriate agencies include Public Works, Treasury and Finance and Premier and Cabinet.
Recommendation 3: A source of capital
Agencies often lack access to sufficient available capital funding to pay for the upfront costs of energy efficiency upgrades. As agencies will not know how much capital is required until they have undertaken a Detailed Facility Study, cyclical budget processes are not ideal for energy efficiency retrofits. In particular, ESCO’s subsidise detailed facility studies, which means that if an agency commissions a Detailed Facility Study, but does not secure funding to implement the retrofit, the ESCO will make a substantial loss.
The most cost effective solution is for a government to set up a simple process where an agency is guaranteed access to capital for an integrated energy service contract (e.g. EPC) if the Detailed Facility Study demonstrates that the project will meet a certain return on investment threshold. In the Victorian Government the threshold is 12 per cent.
Various arrangements have been put in place by governments to provide investment funding for energy efficiency works, including:
The Victorian Government uses Section 37 of the Victorian Financial Management Act, which allows loans for self-funding projects.
The Queensland Government has established a loan arrangement with Queensland Treasury Corporation for the funding of EPC.
The NSW and ACT governments have established revolving funds.
US governments allow agencies to directly borrow capital from the private sector to fund EPCs.
Loan repayments are normally made directly to Treasury or the private sector source of capital. Ongoing savings are normally kept by the agency, with Treasury applying an expected efficiency improvement dividend on all agencies, irrespective of whether they have undertaken the efficiency upgrade or not.
Recommendation 4: Mandates on agencies
Agencies generally focus on only those performance measures against which they are rated. As a result, they often put a low priority on matters such as energy efficiency. Experience demonstrates that governments need to place mandates onto agencies if they want to achieve government-wide energy saving goals.
Victoria has taken the approach to place a mandate on agencies’ inputs (e.g. implement EPCs across a targeted percentage of sites by 2020), rather than agencies’ outputs (e.g. achieve energy savings of 20% by 2020). The choice of target will depend on government's priorities. Output targets will give more certainty about energy and greenhouse savings. Input targets will generally deliver the best economic results, and although they may deliver more energy and greenhouse savings there will be less certainty about the scale of energy reductions.