Financial issues
Question: An ESCO specialised in HVAC admitted that they wouldn't be competitive anymore if they were to combine HVAC-measures with building envelope measures (i.e. roof insulation, windows replacement, etc.) although these building envelope measures seem pretty straightforward. Is this a common view, and is it justified?
Answer: There is space for both type of projects on the market, but if the ESCO business is to expand and be a serious component in national energy efficiency strategies, both HVAC and building envelope need to be addressed. However, having that said, projects also including building envelope must normally be calculated and handled with differently from a financial point of view. While HVAC measures often is looked at in more of a pay-off perspective, building envelope measures normally needs to be looked at in more of a depreciation perspective, and that needs to be agreed with the customer.
Question: Can an EPC facilitator be paid by the government but once the contract is signed (about 1 year later) this investment is paid by both the ESCO and the government?
Answer: Technically, this is certainly possible. In this case, the project facilitation costs are included as a mandatory investment at project start into the tender. The bidders then have to include this investment into their calculation.
Question: Is there usually a clause in the contract between the client and the ESCO that stipulates that the ESCO has to pay the EPC facilitator cost?
Answer: This is just a simple sentence stating that the ESCO has to pay a certain amount until a certain point in time after contract signature. It generally is preferable for the ESCO to pay this amount to the client, who then transfers it to the facilitator; because otherwise the facilitator needs to become a contractual party of the ESCO contract.
Question: When an EPC is established with a Public Building, who is borrowing the money from the bank? Is it the ESCO or the Public Building? In case it is the Public Building, how is the loan securitised?
Answer: Using the Czech Republic as an illustrative example, when the customer is from the public sector, usually the borrower is the ESCO (the EPC provider). In that case, to securitise the loan, the bank only needs proof of the signature of the EPC contract. No other security is required for the debt. However, the financing of the EPC project is not a mandatory part of the project. Therefore the customer would be a borrower too.
Question: Are there specific assurances for EPCs contracts? If so, who offers them?
Answer: Using the Czech Republic as an illustrative example, during the procurement procedure the ESCO negotiates with banks the conditions of the contract and gets the best offer from a bank in the tender. When an ESCO wins the procurement procedure, the content of the contract from the tender is in the phase of finalisation. And banks which are already in the phase of negotiation on the tenders can provide assurance (promise) that the signature of the prospective contract will be acceptable and sufficient for the loan. After the signature of the contract, the assurance (promise) of the bank is confirmed to the ESCO and also to the customer. Following this, the installation of the energy efficient measures are financed.
Question: When are the costs of an EPC paid?
Answer: They must only be paid after the signature of the contract between the ESCO and the customer.
------------------------------------------------------------------------------------------------
Do payments under energy performance contracts qualify as public debt for the city or not?
Germany/BEA: this depends on the federal state, but for most cities this is irrelevant as their indebtedness tolerance is high
Slovenia/JSI: this depends on the legal approach used (public procurement or public private partnership), when public private partnership is used (mainly concessions) the public debt is not an issue at the moment (this strongly depends on the Ministry of Finance interpretation, few years ago EPC contracts qualified as public debt/lease).
Bulgaria/BSREC: Yes, this is public debt and this is a barrier to EPC, as the debt limits are not high.
Belgium/Factor4: in theory, according to ESA 95, EPC should increase public debt, but we think that ESA 95 in practice will not be applied on the level of cities/municipalities
Lithuania/LEI: EPC in Lithuania has not started until now, so Lithuania has no experience in this field
Norway/NEE: In Norway debt in municipalities has not been a big issue, although many municipalities have very poor finances and are on the "ROBEK list" (means they cannot take up new loans and that their economy is controlled centrally). One of the municipalities we did an EPC projects for were on this list, but after discussions with the county officials the project was cleared.
Most Norwegian municipalities choose to finance the EPC projects internally as they get the best conditions. The state bank (Kommunalbanken) has a system for "green interest rates" to provide special loans for energy efficiency/climate measures.
Austria/e7: In general, these issues are still uncertain in Austria. In practically all public sector EPC projects the involved public authorities are working around these issues finding some case-by-case solutions, but no general rules apply yet. As far as I know there are no activities ongoing in Austria to clarify the EPC-related accounting and budgetary rules – although Article 18 of the EED would require this. Not clearly defined yet. At the federal level, there is the opinion that contracts with a duration below 10 years do not qualify as public debt – but I am not sure if this is really true.
Sweden/IVL: Not an issue in Sweden (public debt is low).
In case such payments are considered public debt and the cities indebtedness level is high, are there any special provisions or exemptions for EPCs (e.g. a provision that allows an indebted city to enter an EPC contract despite its debt level)?
Germany/BEA: See above.
Slovenia/JSI: According to ESA accounting standard it seems to me that the EPC contracts should always be a debt. However, we are solving that as described above, public private partnership and mainly concessions, even combining cohesion funding (grant) and upfront concession payment by the ESCo to the client at the very beginning of the EPC project – the municipality is then investor out of own financing sources (no debt).
Bulgaria (BSREC): No such provisions.
Belgium (Factor 4): same as Germany.
Austria (e7): There are no specific provisions in this context.
Sweden (IVL): Not an issue in Sweden (public debt is low).
How is the city’s share of the energy costs savings (i.e. the budget relief resulting from an EPC contract) reflected in the city’s budget and in the accounting system? Is it seen as revenue?
Germany (BEA): cities have separated budgets and can reallocate the savings amount from the budget for energy to any other budget, it is not considered revenue but just budget reallocation.
Slovenia (JSI): It is seen as revenue (konto 4021/402199).
Bulgaria/BSREC): The city’s share of cost savings is reflected as reduced operational expenditures. The savings could be re-allocated and used elsewhere.
Belgium/Factor4: energy cost saving are reflected in reduced energy costs, not as an energy cost saving.
Austria/e7: The situation is similar to the one in Germany. The potential of reallocation between budget buckets depends quite a lot on the administrative staff – there is no general rule on that.
Sweden/IVL: After the investment (EPC projects are considered investments) has been depreciated, a cost-saving occur (however, not before the investment has been fully depreciated).
What budgetary and accounting changes were necessary to reflect the EPC contractual relationship when EPC was introduced to your country? Are payments under an energy performance contract considered operational expenses?
Germany/BEA: no relevant changes were necessary because the contract model was adapted to the requirements of the household. For larger project volumes only a permit from the financial authority is required. A line of costs for contracting fee payments was added to the other energy costs, i.e. the ESCO payment is simply considered another energy cost, just like electricity, gas and heating.
Slovenia/JSI: We are just using the existing legislation – no changes or adjustments in terms of the EPC were performed, which is a problem. Payments under an energy performance contract are considered operational (material) expenses - konto 402 (konto 4022 – energy expenses).
Bulgaria/BSREC: No budgeting and accounting changes were necessary. Payments under EPC are considered operational expenses.
Belgium/Factor4: the projects are still not realised.
Austria/e7: no specific changes in accounting were necessary, just some flexibility in handling the applicable rules.
Sweden/IVL: EPC projects are considered as investments.
