Construction 2020 and energy performance contracting
22 May 2014
Author: Hugh Cummins, BA, BAI, MIEI, associate solicitor (Projects, Construction and Energy Unit), Philip Lee Solicitors
The Government launched its Construction 2020 strategy on 14 May 2014. The document is subtitled ‘A Strategy for a New, Renewed Construction Sector’ and its purpose is the setting out of a “focused programme of action to deliver a strong, sustainable, well financed, competitive and innovative approach to construction and housing, building to the highest standards, at realistic levels with consumer protection at its heart”.
The strategy has generally been met with a favourable reception and the Construction Industry Federation has described it as a “very welcome initiative”. However, there has also been a notable air of caution from some quarters, due to the fact that much of the rhetoric in the strategy refers to matters to be “looked at” or “examined”. There is concern that whilst the general aims of the strategy are to be lauded, there is no hard governance or implementation strategy for many of the objectives included within it.
However, the strategy does identify the majority of the significant problems that have impacted on the construction sector since the economic downturn in Ireland from 2008 onwards. Further, its primary goal – the creation of 60,000 jobs by 2020 – is to be applauded, considering the impact that the recession has had in relation to the number of construction workers on the live register.
CONSTRUCTION 2020 AND ENERGY EFFICIENCY
The Construction 2020 strategy document is broken into a number of broad elements, identifying areas where recovery and growth can be achieved in the Irish construction industry. Section 5 of the strategy, entitled ‘Energy Efficiency and Sustainability’, reiterates the fact that the Government is committed to improving energy efficiency in Ireland and recognises energy efficiency as “an important aspect of the construction sector”.
This has associated benefits relating to climate, energy, health, local government and education. The strategy recognises that energy-retrofitting works are particularly job intensive and have the potential to create a significant number of jobs in the construction industry in Ireland.
Section 5 of the Construction 2020 is itself broken down into three headings:
- Residential; and
- Sustainability and Conservation.
The commercial element (including public sector) is clearly where the biggest opportunities to maximise energy efficiency will arise. The associated action items contained in the Construction 2020 plan for supporting energy efficiency in the commercial and public sectors can be summarised as follows:
- Review the National Energy Services Framework and update as required;
- Continuous support of exemplar projects through the Sustainable Energy Authority of Ireland (SEAI) and the Department of Communications, Energy and Natural Resources’ (DCENR) National Energy Services Framework; and
- Publish a report on public-sector energy usage.
NATIONAL ENERGY SERVICES FRAMEWORK
These action points clearly highlight the importance of SEAI/DCENR’s National Energy Services Framework, which has been set up to develop the energy performance contracting (EPC) market in the non-domestic sector in Ireland. Under the EPC model, the client pays its contractor or energy services company (ESCO) from the energy savings achieved by the latter when measured against the client’s baseline or historic energy consumption. The ESCO will guarantee a minimum level of savings to the client and is obliged to reimburse the client for any shortfall.
All savings achieved by the ESCO above the guaranteed level are retained by it to cover its costs, expenses and profit up to a point known as the shared savings threshold – above this threshold of savings, the client and the ESCO share any savings achieved in a pre-agreed ratio.
Either party can finance an EPC project and this will impact on the guarantee and shared savings threshold levels. Given that the client is only paying the ESCO from the savings achieved, this is a very attractive model to public sector bodies that are unable to borrow.
SEAI/DCENR’s framework includes an EPC Handbook that provides template EPC documentation, associated procurement documentation as well as step-by-step guidance documentation for the implementation of energy efficiency projects in the public sector (which may also be adopted for the private sector). The exemplar projects referred to are being used to test SEAI/DCENR’s framework and kick-start the nascent EPC market in Ireland.
The projects are divided between both the public and private sectors and include a mix of retrofitting projects as well as some local energy supply projects.
EUROPEAN ENERGY DIRECTIVES
The National Energy Services Framework is in turn being driven by European Union Directives, in particular the Energy Efficiency Directive (2012/27/EU) and the Energy Performance of Buildings Directive (Recast) (2010/31/EU).
The Energy Efficiency Directive has, amongst other things, set targets of:
(a) 20% energy efficiency by 2020;
(b) 3% of total floor area of government building stock to be renovated annually;
(c) 1.5% energy savings through the Energy Efficiency Obligation Scheme.
The Energy Performance of Buildings Directive has imposed obligations on the design and construction of buildings to the lowest cost over the economic life of the building. Whilst this may result in higher upfront construction costs, the overriding target is the reduction in lifecycle costs of buildings (which includes energy costs).
The Energy Efficiency Obligation Scheme referred to above has recently been implemented in Ireland through the European Union (Energy Efficiency Obligation Scheme) Regulations 2014 (SI 131 of 2014). Each member state is obliged to set up such a scheme to ensure that energy distributors and/or retail energy sales companies designated as ‘obligated parties’ achieve cumulative end use energy savings equivalent to 1.5% of their annual energy sales to final customers by volume averaged over the preceding three years.
Obligated parties are permitted to count towards their obligation-certified energy savings achieved by energy service providers or other third parties once the obligated party can demonstrate a ‘demonstrably material’ contribution to such savings. This will therefore result in obligated parties becoming increasingly involved in EPC projects.
The Energy Efficiency Directive also explicitly promotes the use of EPC as a key mechanism in achieving the targets set by the Directive. The European Commission has estimated that there could be up to five million jobs created by the initiatives set out in the European Directives. Commission documents estimate that the impact of the Directives will require at least €65 billion to be spent each year between now and 2020, although Commission officials estimate that the figure is likely to be substantially higher.
It is worth considering this in the context of the Government’s Construction 2020 strategy’s overall target of the creation of 60,000 construction jobs by 2020 – on the face of it, there is no reason why a substantial proportion of this could not be met through EPC and retrofitting of buildings alone. It is clear, therefore, that given the national targets imposed by the Directives, there are huge opportunities in the EPC sector.
FINANCE FOR PROJECTS
One of the primary barriers preventing many projects from getting out of the starting blocks in recent years has been the lack of available finance. The well-documented banking crisis has left the private sector in chaos and the public sector unable to borrow.
As mentioned above, the EPC model is effectively ‘no cost’ to the public-sector client, as it is only obliged to pay its ESCO out of the energy savings achieved by the latter. On the ESCO side, there is now an abundance of finance for EPC projects being made available through national energy efficiency funds and various European instruments, as well as the European Investment Bank.
In Ireland, the Energy Efficiency Fund of €70 million was formally launched on 8 May and will be managed by Sustainable Development Capital (Ireland) Ltd with the express purpose of developing the market for energy efficiency projects in Ireland. AIB has also launched a €100 million euro fund for energy efficiency and this is a further indication that banks and investment funds are clearly targeting the energy-efficiency sector as a growth market.
The message therefore from both Government’s Construction 2020 and Europe is clear. We must move towards a smarter, more energy-efficient society and the public sector is to lead the way in this regard – the private sector will soon follow. Achieving the targets set out in the Construction 2020 strategy and the EU Directives will have the added benefits of job creation, increasing security of supply as well as reducing the damage to the environment caused by high carbon emissions.
There is money available and this is a once-in-a-lifetime opportunity not to be missed. Ireland is in an excellent position to become a world leader in the field of EPC and energy efficiency retrofitting. Now is the time for contractors and consultants to up-skill and create partnerships and joint ventures to provide the bundles of energy efficiency measures, which will be sought by the public sector in order to achieve its mandatory energy efficiency targets.
Engineers Ireland/Philip Lee Workshop on EPC
Engineers Ireland and Philip Lee are holding a day-long workshop in Clyde Road on Wednesday, 28 May entitled ‘The ABC of EPC: How to capitalise on Energy Performance Contracts (EPC) and Local Energy Supply Contracts (LESC)’. The workshop will be opened by the Minister for Energy, Communications & Natural Resources Pat Rabbitte TD and includes speakers across all elements of EPC and LESC including technical, financial and legal.
The aim of the workshop is to explain the nature of the performance guarantees that form part of the contracts and how to control the associated risks. It will also provide participants with a firm grounding in all aspects of EPC/LESC contracts including legal, finance, risk management and regulatory issues/drivers to ensure they are adequately prepared for this new and rapidly evolving market opportunity.
Hugh Cummins (BA, BAI, MIEI) is an associate solicitor in the Projects, Construction and Energy unit of Philip Lee Solicitors in Dublin. He is an engineering graduate from Trinity College Dublin and is a member of both Engineers Ireland and the Law Society of Ireland. Cummins was heavily involved in the drafting and development of the EPC contractual and procurement documentation comprising SEAI’s National Energy Efficiency Framework and regularly advises both public and private sector clients on contractual structures in implementing EPC projects. Email: email@example.com://www.engineersjournal.ie/2014/05/22/construction-2020-and-energy-performance-contracting/http://www.engineersjournal.ie/wp-content/uploads/2014/05/Efficien-1024x1024.jpghttp://www.engineersjournal.ie/wp-content/uploads/2014/05/Efficien-300x300.jpgCivilconstruction,Construction Industry Federation,energy,government,SEAI