EPC contracts: structure, do‘s and don‘ts

Reinhard Ungerböck, Grazer Energieagentur

… to be broken

… to be followed (Roman right: Pacta sunt servanda)

… are not necessary in the ideal case, only if there are different perceptions

The contract should anticipatorily regulate those potential problems

Gives a guideline through the EPC-project for one-time-purchasers

Contracts exist…

EPC-contract

Use a standard contract for all bidders

Target: use a standard contract for all projects – as far as

possible

Please do not re-invent the wheel: use existing model

documents

Contract components (among others)

Module „implementation phase“

Module „guarantee phase“

Duties and responsibilities of all contract parties (performance limits!)

Prices and modus for price adjustment

Modus for M&V

Start and end date (!)conditions for termination of contract

Property of equipment

a good EPC-contract is well-structured and provides a guideline for the CLIENT ( one-time-

buyers) through the project

1. preamble

2. implementation phase

3. guarantee (or O&M) phase

4. other legal issues

5. Annexes

Structure of contracts

source: Mega Pixel / shuterstock.com

source: Marcos Mesa Sam Wordley / shuterstock.com

elements of contracts

preamble: demonstrating basic consensus

subject and purpose of the contract, aims of the contractual partners

objects of the contract

create trust: code of conduct CoC(Transparense)

acting persons and dispatches

project managers on both sides

addresses

source: Alexandra-Dikaya / shuterstock.com

source: Monkey Business Images / shuterstock.com

elements of contracts

involvement of 3rd parties

subcontractors

obligation of ESCO to inform client about all sub-contractors

baseline

total consumption or just tackled parts connected with M&V

corrective factors (climate, occupation,…)

source: Sergey Nivens / shuterstock.com

source: keingrammfett / EESI2020

elements of contracts

savings prognosis/guarantee

level of performance guarantee: whole facility?

certain appliances?

method of approval of savingsyearly audits

one-time-M&V

calculatory (only in certain cases)

regulations in case of under/overperformance

symetric risk: 50:50 for both cases

save side: 100:0 for underperformance, 50:50 for overfullfillment

source: keingrammfett / EESI2020

source: keingrammfett / EESI2020

elements of contracts

Duration, termination of contract

Transfer of ownershipafter implementation?

at the end of guarantee phase?

Status of equipment at the end of the contract

refer to standards

Residual value at the end of the contract?

or can it be at the end of its lifetime?

What are acceptable reasons for early termination of contract, and how to proceed in this case?

loss of profit (ESCOs side)

performance and functionality risk (CLIENT’s side)

source: El Lobo / shuterstock.com

source: Nomad Soul / shuterstock.com

elements of contracts

Prices and their adjustments

Separation between (re-)investment, O&M, overhead

Use of suitable indices for each price componentCAPEX: e.g. Euribor

O&M: combination of indices for goods and labor

Risk Allocation

Gerhard Bucar, Reinhard Ungerböck

Interests betweencontracting parties

13

ESCO interest

• Minimal risk

• High transparency

• Close, high quality and long

lasting partnership with the

customer

• Maximum service share

Customer demand

• comprehensive, transparent and

unconditional warranty

• low costs

• interesting financing

• A responsible contact person

compromise

in terms of competition and customer satisfaction:

Risk surcharges are to be kept low

that is opposite:

every risk must be assessed and taken into account

or be excluded

Principle: the contractor should, if possible, only bear risks he can influence

Objectives of riskmanagement

risk: energy price change

Energy prices for gas, electricity, etc. are largely

uninfluenceable for the contractor.

Price gliding at EPC equals lottery

solution:

Performance measurement based on energy

consumption (kWh)

the imputed energy prices for the savings are kept

constant over the whole contract period

risk: user behavior

Room temperature fluctuation:

Agreement of comfort parameters

Measurement of internal temperatures

Adjustment of the baseline in case of deviation from the agreed

parameters

Alternative 1: Technical fixation of the interior temperatures

(acceptance by the customer?)

Alternative 2: User motivation and user participation

or obligatory as accompanying measure

Alternative 3: Risk surcharges

risk: user behavior

airing behaviour :

Situation in which windows are tilted or open when the

heating is turned on

technical solution: window contact switch

Installation effort, question of acceptance

Alternative 1: User motivation and user participation

or obligatory as accompanying measure

Alternative 2: Risk surcharges