Use of Energy Performance Contracting by Municipalities in South Africa

30 Pages·2016·1.06 MB·English

Use of Energy Performance
Contracting by Municipalities in
South Africa
A tool to enhance implementation of energy efficiency in
municipal buildings

SACN Programme: Sustainable Cities
Document Type: SACN Report
Document Status: Final
Date: June 2016

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Joburg Metro Building, 16 floor, 158 Loveday Street, Braamfontein 2017
Tel: [phone] | Fax: [phone] | email:
CONTENTS
Table of Figures iii
Table of Tables iii
Acronyms 1
Acknowledgements 1
1. Introduction 2
1.1 Home Page 2
2. What are EPCs? 3
2.1 Background to EPCs 3
2.2 Types of EPCs 3
2.3 When should an EPC be used? 3
2.4 EPC Decision Steps 4
Step 1 - Electricity Baseline 4
Step 2 - Assess Availability of Capital 4
Step 3 - Assess Availability of Debt 5
Step 4 - Assess Technical Capacity 5
2.5 Guaranteed vs Savings Schemes 5
2.5.1 Guaranteed Savings Schemes 5
2.5.2 Shared Savings Schemes 5
2.5.3 Cape Town EPC Procurement Experience 6
2.6 EPCs and the MFMA 1
2.7 Tips for using EPCs 0
2.8 Energy Performance Certificates 1
2.8.1 SANS 1544 1
3. How do I Implement an EPC? 2
3.1 How do I conduct M&V? 2
3.1.1 SANS 50010 3
3.1.2 M&V Procurement 4
3.2 How do I establish a baseline? 4
II
3.2.1 Baseline Establishment Options 5
3.3 How do I implement an Energy Management System? 5
3.3.1 Technical Considerations for an Energy Management System 7
3.4 How do I select an ESCO? 11
3.4.1 Benefits of independent accreditation: 11
3.4.2 Measurement and Verification body 11
4. Resources 12
5. About the EPC online portal 12
6. Annexure: List of Templates, Tools & Information 13

Table of Figures
Figure 1:Click on the above for more information on EPCs ..........................................................................3
Figure 2: Energy Performance Contract Tree ...............................................................................................4
Figure 3: Image of an Energy Performance Certificate issued in terms of SANA 1544 ...............................1
Figure 4: South African National Standard certificate .................................................................. 3
Figure 5: Energy Management System .......................................................................................... 6

Table of Tables
Table 1: Summary of the key differences between Gauranteed Savings and Shared Savings
Schemes ........................................................................................................................................... 1
Table 2: MFMA Steps and requirements (Procurement of Energy Efficiency Measures in
Municipal Buildings by Shared Savings EPC: DFIC 2016 ........................................................... 1
Table 3:Baseline Establishment table .............................................................................................. 5
III
Acronyms

DANIDA Danish International Development Agency
DPW Department of Public Works
EEDSM Energy Efficiency Demand Side Management Programme
EPC Energy Performance Contract
ESCOs Energy Services Companies
HVAC Heating Ventilation and Air -conditioning Systems
GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit
IDC Industrial Development Corporation
MFMA Municipal Finance Management Act 56 of 2003
SACN South African Cities Network
SALGA South African Local Government Association

Acknowledgements

This report prepared by Urban Earth, was commissioned by the South African Cities Network
(SACN) with support from the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) and
South African Local Government Association (SALGA).

We would like to express our appreciation to Ms Sumaya Mahomed of City of Cape Town, Ms Mbali
Govuzela and Ms Susanna Godehart of eThekwini Municipality for their time and insights into using
Energy Performance Contracting within municipalities.

Website Report – EPCs in Municipal Buildings
1. Introduction

This report provides a summary of the information that is available on the project website
http://www.energycontractsupport.org/. The report and website are deliverables from the project “The
use of energy performance contracting by municipalities in South Africa to enhance implementation
of energy efficiency in municipal buildings”.
1.1 Home Page

Energy Performance Contracts

Welcome to the Energy Performance Contract (EPC) online portal (website). The aim of this website
is to provide government officials with resources to implement EPCs in South Africa.

Find out how Energy Find out how to implement Find examples of energy related
Performance Contracts (EPC) Energy Performance Contracts tenders and resources to help
work and the options available to with Energy Performance
establish a usage baseline for Contracts
energy contracts

This website has been developed by the South African Cities Network (SACN) with support
from Deutsche Gesellschaft für Internationale (GIZ) and the South African Local Government
Association (SALGA)

The website is a work in progress and is constantly updated as new information becomes available.

Website Report – EPCs in Municipal Buildings
2. What are EPCs?

EPCs are a particular type of contract used in energy retrofit projects. EPCs are different from
standard contracts in that they link the payments to the contractors with savings achieved through
the implementation of the EPC. The cost of investment into the energy efficiency project is paid back
through the generated saving. Watch the presentation below for an overview of EPCs.

“The key advantage of Energy Performance Contracts is that they allow municipalities to move from
pilot scale implementation of energy efficiency to large scale, municipal wide implementation”

2.1 Background to EPCs
EPCs emerged in the 1990s as one of the tools to deliver energy savings. Specifically, they are
contracts that link the payments to the contractors of the EPCs with savings achieved through the
implementation of the energy savings measures included in the EPC. The cost of investment into the
energy efficiency project is paid back through the generated savings. This is different from a
conventional energy efficiency contract where the contractor is only required to guarantee the
equipment they install but is not required to guarantee that the energy efficiency savings will be
achieved through the installation of the equipment.

In an EPC, an external organisation, referred to as an Energy Service Company (ESCO),
implements an energy efficiency project and the client uses the income generated from the energy
savings to repay the investment and associated project costs. An EPC therefore transfers the
technical risks from the client to the ESCO as the ESCO is required to provide an energy efficiency
performance guarantee. The savings achieved from an EPC should offset the cost of financing,
installing, maintenance and monitoring & evaluation of the energy efficiency interventions. The future
savings should therefore be greater than the sum of these combined costs.

2.2 Types of EPCs
There are many types of EPCs that vary from complete ownership and management by the ESCO
(Turnkey solutions) to varying degrees of ownership by the customer and ESCO. In a complete
turnkey solution, the ESCO provides the financing for the technology exchange, implements and
owns the technology for a period of time and then transfers the technology to the client at a time in
the future. In the Guaranteed Savings model, the client provides the financing for the intervention,
but the ESCO guarantees energy savings over a period of time. If these savings are not met, then
the ESCO pays penalties to the client. While with the Shared Savings model, the ESCO can provide
all or some of the financing and the cost of savings are shared between the ESCO and the client.

The main benefit of using EPCs is that the risk of achieving savings is transferred from the customer
to the ESCO and the number of facilities that can be retrofitted is greatly increased.

FIGURE 1: CLICK ON THE ABOVE FOR MORE INFORMATION ON EPCS

2.3 When should an EPC be used?

The flow chart below can be used to help identify if an EPC should be used by a municipality and
whether Guaranteed Savings or Shares Savings Schemes should be followed.

Website Report – EPCs in Municipal Buildings
FIGURE 2: ENERGY PERFORMANCE CONTRACT TREE

2.4 EPC Decision Steps

Step 1 - Electricity Baseline

In order to implement an EPC, it is necessary to have reliable, accurate and detailed energy
consumption baseline information in place. This can be achieved by including the baseline as
requirement of the Monitoring and Verification (M&V) team. This requirement is explained in more
detail in the section “How do I establish a baseline?”, but in summary you can require the M&V team
to comply with SANS 50010 and this will ensure that adequate metering takes place. Alternatively, a
baseline can be established by installing metering equipment in the buildings that you are intending
to implement the EPC through. The baseline should ideally include hourly consumption data for at
least 2 months but preferably 12 months. This will take into account seasonal fluctuations in energy
consumption (e.g. in summer there may be increased costs due to higher use of air-conditioning).
More information on establishing a baseline can be found here.

Step 2 - Assess Availability of Capital

Once your baseline is in place, you should be able to determine the number of buildings and facilities
you would like to include in the EPC. In order to clearly assess the potential capital requirements, it is
necessary to conduct a preliminary audit of the identified buildings and facilities. The main purpose
of this audit is to determine the number of potential retrofits that will be required. In some
municipalities, asset registers are available for each building which can list all the potential fittings
(e.g. lights, air-conditioners, water heaters, etc...). In the event that asset registers do not exist, then
walk through audits where these fittings are counted need to be conducted. It is then necessary to
calculate the potential cost of the retrofit per fitting, per facility and for the entire program.

Once the capital costs are known it will be necessary to secure funding in the municipal Medium
Term Expenditure and Revenue Framework (MTERF). This will typically be done over a 3year
period. If it is not possible to secure funding through the municipal MTREF or other grant funding
sources, then it is necessary to consider funding the intervention through debt financing.

Website Report – EPCs in Municipal Buildings
Step 3 - Assess Availability of Debt

It is important to assess whether your municipality can access debt financing, as this will most likely
reduce the overall cost of the EPC. This is because municipalities can typically leverage debt
financing at preferential rates or rates that are more competitive than the private sector. Loans can
be secured through institutions such as the Development Bank of Southern Africa or even
commercial banks. Typically, loans will require very detailed business plans with clearly defined pay-
back periods. More details on funding options have been included in the section “How do I finance
an EPC?”

Step 4 - Assess Technical Capacity

If it is possible to secure financing, it is important to assess the level of capacity available to
implement an energy efficiency program that includes a bulk of the buildings managed by the
municipality? EPCs can assist with capacity constraints by providing expertise through the
implementing ESCO. ESCOs typically have a very detailed understanding of technology options and
can provide technical insights not necessarily considered by municipal officials.

It is important to note though that there will always be a need for in-house technical capacity within
the municipality to ensure that the Energy Efficiency contracts are implemented correctly. In the
event that a municipality has access to capital financing and there is sufficient internal capacity, it is
unlikely that there is a benefit to EPCs. There will be additional costs associated with EPCs that
would be better used on building internal capacity. However, in the event that there is a lack of
capacity or a lack of capital financing, the municipality should consider an EPC.

2.5 Guaranteed vs Savings Schemes

EPCs are contracts that allow municipalities to implement a wide range of energy efficiency
interventions through innovative financing mechanisms. EPCs have the potential to move
municipalities from pilot scale implementation (e.g. through the EEDSM program) to large scale
implementation throughout all municipal building and facilities. EPCs can be implemented through
guaranteed savings schemes or shared savings schemes.

The guaranteed savings scheme entails the client paying the ESCO for the energy efficiency
interventions when the installation is done but also requires a financial guarantee from the service
provider against the achievement of the projected savings. Should the savings not be achieved, the
client uses the guarantee to reimburse the difference between actual savings and projected savings.

In a shared savings scheme, the ESCO raises the investment capital required and the cost savings
are split between the client and the service provider. There is no predefined percentage split for any
shared savings scheme and the percentage split is determined by the client and ESCO involved.

2.5.1 Guaranteed Savings Schemes

In a guaranteed savings scheme, the municipality provides the upfront investment for the energy
efficiency interventions and the ESCO is required to financially guarantee that the energy savings
projected for the intervention will be achieved. In other words, if the agreed savings are not achieved,
the ESCO is required to reimburse the municipality the difference between the actual savings and
agreed savings.

For the guaranteed savings scheme, municipalities are therefore responsible for raising the finance
for the interventions either from internal sources, donor funding or debt. The ESCO, on the other
hand, is responsible for the entire performance risk.

2.5.2 Shared Savings Schemes

Under a shared savings scheme the ESCO finances the energy efficiency interventions and is paid
back by the client out of the energy efficiency savings. Thus, when a shared savings scheme has
Website Report – EPCs in Municipal Buildings
been identified as an attractive option for the municipality to implement energy efficiency in their
buildings, municipalities benefit from energy cost savings without using municipal finances to
implement the project. Since energy efficiency interventions can be costly, ESCOs will typically
secure credit to finance the energy efficiency interventions. As a result, in a shared savings scheme
the ESCO will bear both the performance and credit risk.

Under a shared savings scheme, the client benefits from the energy cost savings at the outset of the
performance obligation period as the ESCO is paid a portion of the savings according to a contracted
and pre-arranged percentage and the client retains a portion of the savings. There is no standard
percentage split because it is dependent on the project cost and contract length.

The main advantage of a shared savings scheme for a South African municipality is that the
municipality does not have to raise the funds to finance the energy efficiency interventions as that is
the responsibility of the ESCO. Since funds for energy efficiency initiatives are limited, the use of
shared savings schemes can extend the total number of energy efficiency interventions that a
municipality can implement. This of particular benefit in cases where the energy efficiency measures
are expensive to implement.

2.5.3 Cape Town EPC Procurement Experience

The City of Cape Town has conducted a number of EPCs. The lessons from these projects have
been captured in this case study. The section below is an excerpt from this case study, which
summarises the procurement process that the city has follow in implementing these projects.

a) Introduction

The City of Cape Town first initiated energy performance contracting in 2009 with the issuing of an
EPC tender for four municipal buildings to be retrofitted for full energy efficiency. This first
performance contract was funded through the Danish International Development Agency’s (DANIDA)
Urban Environmental Management Programme (UEMP). In 2011, the City of Cape Town issued a
second EPC tender for a further fourteen municipal buildings, which was funded by the National
Department of Energy’s EEDSM programme. This performance contract was limited to lights,
occupancy sensors and smart meters. In 2013, a third tender was issued for a further twelve building
complexes, also funded through the EEDSM. These twelve buildings will receive full energy
efficiency retrofits once the tender award process is complete.

Over the four years that the City of Cape Town has been engaging with energy performance
contracting, it has refined its approach considerably. This Case Study explores the most recent
(2013) model being used by the City in this regard.

To ensure that the municipality complies with the financial controls laid out in the Municipal Financial
Management Act (No 56 of 2003) (MFMA) the process of procuring a service provider for an EPC is
conducted in two stages. These are described in the following sections.

b) Stage One: Contracting a service provider and completing detailed audits

Stage one of the tender process involves securing a service provider to undertake detailed audits of
each of the buildings for which energy efficiency measures are to be implemented in terms of the
contract. The service provider is paid to undertake these detailed audits. The purpose of the first
stage is to identify, through the audits, a suite of energy efficiency interventions that can be
implemented in the various buildings along with the pay-back periods for these interventions.
To initiate Stage One, the City of Cape Town issues a tender calling for “Provision of a service
provider for detailed audits and energy efficiency interventions at council building complexes”. The
tender requests bidders to quote on the following key items:
Website Report – EPCs in Municipal Buildings
1. The cost of detailed energy audits of the identified buildings.
2. The mark-up percentage the bidder would impose on cost of materials, labour and disposal
for the implementation of the selected energy efficiency interventions. Since bidders would
need to complete a detailed audit of each of the buildings in order to identify and accurately
cost all the possible energy efficiency interventions, the bidders are not asked in Stage One
to provide a full cost estimate for energy efficiency interventions.
3. Extra-over normal fees and disbursements, including items like the procurement of an
occupational health and safety professional, printing and copying, travel expenses,
behaviour change and capacity building programme and accessing Eskom’s Integrated
Demand-side Management Funding.
4. Evaluation of the cost effectiveness of the intervention taking into account both the costs of
implementing the intervention and the ongoing maintenance costs of the intervention.

Once responses have been received from interested bidders, a detailed review of all the responsive
bids is completed by a Bid Evaluation Committee (BEC) convened specifically for the tender. The
recommendation of the BEC is then referred to the central Bid Adjudication Committee (BAC) of the
City of Cape Town. Once the BAC has made a final decision, the preferred bidder / service provider
is appointed.
On receiving a formal appointment, the winning service provider proceeds to undertake detailed
energy audits of each of the buildings identified in the tender to establish a baseline for energy use
and to identifying energy efficiency interventions that can be implemented. Using the results of the
audit as a basis, the service provider then proposes a suite of energy efficiency interventions for
each of the buildings. The following details must be provided for each proposed intervention:
1. The cost of the intervention. This includes the cost of materials, labour, disposal of materials
and service provider mark-up.
2. The amount of energy in kWh that will be saved through implementing the intervention.
3. The pay-back period of the intervention.
4. A Stage Two: Implementation of interventions and performance guarantee.

c) Stage Two of the process involves the implementation of the energy efficiency
interventions and the ongoing evaluation of the success of the interventions.

Stage Two is initiated with the selection of a preferred suite of interventions by the City of Cape
Town. Using the results of the detailed building audits, relevant municipal staff select a sub-set of
interventions that are deemed most cost effective for each building. The service provider then
implements the selected interventions in the various buildings concerned and is paid for the
implementation of these interventions.
Once the interventions are in place and the service provider has been paid for the completed
interventions, the performance guarantee period starts. The service provider is required to manage
and maintain the installations and to guarantee performance for the entire pay-back period of the
interventions. For example, if it is anticipated that it will take 5 years for the City of Cape Town to
recoup the costs of the interventions through energy savings, the guarantee period will be 5 years.
For ease of management the guarantee is managed in twelve month cycles.
The first twelve month cycle is initiated within fourteen days of completing the installation of the
interventions. At this point the service provider is required to lodge a performance guarantee with the
City of Cape Town in the form of a bank guaranteed cheque. The performance guarantee must be
for the amount of money that the service provider predicted the interventions would save the
municipality over a twelve month period.
Website Report – EPCs in Municipal Buildings