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Energy Performance Contracting as a Mechanism to Fulfill the Loss Reduction Targets of DABS (Adapted

Wais Alemi, Staff Blogger, Afghanistan

Energy Performance Contracting is a study of the topic relevant to energy conservation policies. EPC means the packaging together of both technical aid and necessary funding for energy cost saving investments by an outside company. Using in way where the cost saving pays for the investment. This line of work can be used for the loss reduction program the currently DABS has under way.

Energy Performance Contracting (EPC) is a form of creative financing for capital improvement which allows funding energy upgrades from cost reductions. Under an EPC arrangement, an external organization (Energy Service Company - ESCO) implements a project to deliver energy efficiency, or a renewable energy project, and uses the stream of income from the cost savings or the renewable energy produced to repay the costs of the project (including the costs of the investment). Essentially, the ESCO will not receive its payment unless the project delivers energy savings as expected.

Due to fast-growing energy-efficient technologies, a great potential of savings has been explored within the existing facilities that fuel the growth of the current economy. In Europe, the energy efficiency potential is assessed to be 7.5% of the total energy use. Buildings, responsible for 40% of the energy consumption and 36% of the carbon emissions worldwide, are targeted as the sector with the largest energy efficiency margin. According to the U.S. Energy Information Administration, nearly 75% of commercial buildings in the United States are over 20 years old and are constrained by aging infrastructure and inadequate operating resources. Thus, the energy efficiency of buildings plays an important role in achieving environmental goals. However, a wide gap exists between the technologies available and those implemented. In order to address these situations, Energy Performance Contracting (EPC) has been adopted as one of the most common contracting models for existing buildings. In the past two decades, the EPC market has shown a remarkable growth trend matched with the incremental energy demand and potential for energy and other efficiencies. On average, 20% of revenue growth has been achieved annually by the Energy Service Companies (ESCOs).

The approach is based on the transfer of technical risks from the client to the ESCO based on performance guarantees given by the ESCO. In EPC ESCO remuneration is based on demonstrated performance; a measure of performance is the level of energy savings or energy service. EPC is a means to deliver infrastructure improvements to facilities that lack energy engineering skills, manpower or management time, capital funding, understanding of risk, or technology information.

An important difference between guaranteed and shared savings models is that in the former case the performance guarantee is the level of energy saved, while in the latter this is the cost of energy saved.

Under a guaranteed savings contract the ESCO takes over the entire performance and design risk; for this reason it is unlikely to be willing to further assume credit risk.

A situation where savings exceed expectations should be taken into account in a shared savings contract. This setting may create an adversarial relationship between the ESCO and customer, whereby the ESCO may attempts to ‘lowball’ the savings estimate and then receive more from the ‘excess savings’.

Furthermore, to avoid the risk of energy price changes, it is possible to stipulate in the contract a single energy price. In this situation the customer and the ESCO agree on the value of the service upfront and neither side gains from changes in energy prices: if the actual prices are lower than the stipulated floor value, then the consumer has a windfall profit, which compensates the lower return of the project; conversely if the actual prices are higher than the stipulated ceiling, then the return on the project is higher than projected, but the consumer pays no more for the project. In effect this variation sets performance in physical terms with fixed energy prices, which makes the approach resemble guaranteed savings approach.

The shared savings concept is a good introductory model in developing markets because customers assume no financial risk. From ESCO’s perspective the shared savings approach has the added value of the financing service. However, tssthis model tends to create barriers for small companies; small ESCOs that implement projects based on shared savings rapidly become too highly leveraged and unable to contract further debt for subsequent projects. Shared savings concept therefore may limit long-term market growth and competition between ESCOs and between financing institutions: for instance, small and/or new ESCOs with no previous experience in borrowing and few own resources are unlikely to enter the market if such agreements dominate. It focuses the attention on projects with short payback times (‘cream skimming’).

Given the broad literature in disposal for EPC and further that energy companies paid from the energy saving they generate of the energy saving and the methodology has been practiced in a wide variety of setting under different mechanism. Here we propose that the loss reduction targets be aimed for EPC where a company takes over the loss reduction of the DABS and therefore with the gain from the energy savings that happen the company initially takes off the investment they put in the systems and then these saving acrue to DABS finances.

This has no observable drawback and given experience of the author, loss reduction can be a dauting and never ending target and with the skill set the a power company can bring in with their investment and the model of EPC the targets could be achieved.

As to conclude first part of the paper should serve as a premise that this a doable task and we should pave the way ahead for such a venture to take place so as to reduce the millions of dollars DABS makes losses and turns the grid advanced and make profit out of the scheme in the long run.

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