Context
The City of Paris has used Energy Performance Contracts (EPCs) to refurbish 240 schools in two phases, with a third phase now underway. The refurbishments, tailored to each school, include window renovations and the installation of LED lighting, sensors, insulation and new boiler systems.
Phase 1 EPC for 20 years.
Phase 2 EPC for 15 years.
Phase 3 EPC for 6 years.
Stakeholders involved
- Commissioner: City of Paris
- Contractor: Nov’ecoles (ESCO)
- Financier: European Investment Bank through the European Local Energy Assistance (ELENA) programme
Problem
- The Parisian building sector accounts for 64% of the city’s energy consumption. Schools are extremely energy intensive due to old infrastructure.
- The City of Paris’s Climate Action Plan, therefore, aims to reduce the energy consumption of municipal buildings by 60% as part of an overall strategy to achieve carbon neutrality by 2050.
- The high initial upfront costs associated with the installation and retrofitting of energy saving infrastructure act as a deterrence to the uptake of such technologies.
Innovation
- EPCs are an innovative form of contracting using a pay-for-performance mechanism in which the city government strikes an EPC agreement with an energy service company (ESCO), committing the ESCO to financing an energy-efficiency project with a performance guarantee.
- Allows governments and other building owners to repay their investments from realised energy savings over a set period of time.
- If the project underperforms and the agreed energy savings are not achieved, the ESCO pays the difference in cost borne by the government authority.
- This performance driven model is different to the price driven model seen in traditional contracting.
Results and impact
- Successful financing: The first phase of the project was largely financed through lenders. The European Local Energy Assistance (ELENA) programme, covered 90% of the costs of project preparation and follow-up. The EPC signed in 2011 with ESCO Nov’ecoles financing the upfront costs of the retrofit work - an investment of EUR28 million (USD43 million), which was paid when the works were completed and project performance verified.
- Successful first and second phase: The 100 schools in the first phase achieved a 33-38% reduction in energy consumption from 2004 levels, saving around 2,300 tCO2 annually and exceeding the original 30% goal. The results of the second phase are still being calculated. A third phase is in progress and will involve another 40 schools to be upgraded.
- A scaled program reduced costs: The costs of subsequent projects in the second and third phases were typically lower as the City of Paris paid upfront costs of the refurbishments without borrowing or seeking external funding. Lessons learnt from the first and second phases have been applied to phase three which has reduced the cost and complexity of procurement.
- Widespread applications: Because of the programme’s success, the City of Paris is now using EPCs to carry out energy efficiency refurbishments of its public swimming pools and is looking to extend the programme further.
Key lessons learnt
- Innovative performance contracting: The methodology of EPC differs from traditional contracting, which is invariably price-driven. Performance contracting is results-driven as the risks of underperformance are transferred to ESCOs.
- Guaranteed performance: The EPCs involved a guarantee by the ESCO that the savings will be achieved. As the ESCOs are to bear the financial consequences of underperformance, they are incentivised to deliver on the contractual energy saving guarantees. The ESCOs have the expertise and means to deliver on these guarantees as the onus of project design, feasibility studies, implementation of retrofits works, ongoing maintenance, and data monitoring resides with them.
- Setting precise energy consumption baseline: To accurately assess performance, it is imperative for ESCOs to conduct thorough baseline studies to collect good baseline data for later comparison. Feasibility studies are also crucial to establish which schools will actually benefit from the upgrades.
- Funded by cash flow: As the government is paying an ongoing performance fee over a long period of time rather than an upfront cost of upgrades, the EPC has allowed repayment of initial investment through cash flows from energy savings rather than initial capital expenditure. The project has become self-funded rather than debt-funded.