Win-Win For A Greener World: Energy Performance Contracts

This article was published on 16 November 2021. The legislation may have changed since then; please check the current rules and authority decisions.

We are living in an era in which energy market is redesigned in a way radical changes are happening in energy storage, production, and consumption habits based on renewable and hydrocarbon resources 1 . Impediments to a sustainable future resulted in the policymakers working for a greener world. In this regard, renewable energy investments gained global momentum. In this article, we will be focusing more on the consumption.

It should always be remembered that reducing energy consumption is as important as increasing energy production. Herein, energy efficiency plays a crucial role. Developing and focusing on energy efficiency is a sustainable way of responding to the growing energy use around the world. Energy efficiency is a broad concept that complements national strategic objectives such as ensuring energy supply security, reducing risks arising from external dependency, making energy costs sustainable, increasing the effectiveness of combating climate change and protecting the environment 2 . We can achieve energy efficiency by increasing the use of domestic resources to generate electricity as well as using renewable energy resources.

Developments in energy efficiency usually necessitates not only significant investments but also incentives on the part of the government. However, the idea of energy efficiency requires the public sector, private sector and non-governmental organizations to act with a participatory approach. In this article, we will analyze the legal framework of the subject, the concept of energy efficiency contracts, the rights and obligations of the parties and finally, the legal issues that might arise out of these contracts.

I. The Legal Framework

Energy Efficiency Law is the primary source within the Turkish legal framework regarding the energy efficiency. It covers the principles and procedures to be applied in the production, transmission, distribution and consumption stages of energy to i) increase and support energy efficiency in industrial enterprises, buildings, electrical power generation facilities, transmission and distribution networks and transportation, ii) develop energy awareness throughout society, iii) increase the use of renewable energy resources. Energy Efficiency Law defines the term "energy efficiency" as "reduction in energy consumption without causing a decrease in living standards and service quality in buildings and production quality and quantity in industrial enterprises". In this context, the secondary legal resources regarding energy efficiency are as follows:

• Regulation on Increasing Efficiency in the Use of Energy Resources and Energy
• Regulation on Procedures and Principles for Increasing Energy Efficiency in Transportation
• Energy Performance Regulation in Buildings
• Energy Efficiency Inspection Regulation

Within the framework of the Energy Efficiency Law, a system consisting of the Ministry of Energy and Natural Resources (" Ministry "), the General Directorate of Energy Affairs (" General Directorate "), authorized institutions and energy efficiency consulting companies 3 (" ECC ") have been established regarding activities related to energy efficiency. ECCs that have been given authorization certificates carry out energy efficiency services.

In accordance with the Energy Efficiency Law, the "Decision on the Procedures and Principles Regarding the Energy Performance Contracts in the Public" was published by the Presidency. As of 15 April of 2021, Communiqué on the Implementation of Energy Performance Contracts in the Public Sector entered into force. The purpose of the Communiqué is to determine the procedures within the scope of energy performance contracts (" EPC ") to be concluded by public administrations in order to reduce their energy consumption or energy expenditures. Moreover, a standard EPC between a government agency and a contractor is included in the Communiqué. The standard contract consists of certain parts including but not limited to the timeline of the project, force majeure clauses, contract price, warranties, penal clause, change in the project clause, implementation and monitoring periods, guarantees, malfunction cases and so on.

Building owners and the entities that want to benefit from the incentives would be required to cooperate with an ECC in order to form an EPC. As a result of the legal developments in Turkey we have mentioned, these contracts have gained importance. Since there are not many examples of the execution of EPCs, we would like to shed light on the issue.

II. Energy Efficiency Incentives

The government supports energy efficiency projects. Such incentives are as follows 4 :

• Productivity Increasing Project (VAP) Supports: Projects with a total investment cost of 5 million Turkish Liras, excluding VAT, are supported, with a maximum of 30% of the project cost as a grant.
• Voluntary Agreement Supports: 30% of the energy expenditure of the year the agreement was made is covered in cash as support, provided that it does not exceed 1 million Turkish Liras.
• 5th Region Incentives: Incentives to be benefited are value added tax exemption, customs duty exemption, tax reduction, employer's insurance premium support, interest support and investment location allocation.

III. Energy Performance Contracts

In contrast to different terminologies used for EPCs such as energy savings contracts or energy efficiency contracts, we use energy performance contracts in order to be consistent and not to cause any confusion. As per the Energy Efficiency Law, EPCs are defined as " the contracts based on the principle of guaranteeing the energy savings to be achieved after the implementation project and paying the expenditures with the savings that will occur as a result of the implementation " in Energy Efficiency Law. A standard EPC covers measurement, construction and implementation phases of an energy efficiency project.

Although brand new energy-efficient buildings can be constructed, the current buildings will maintain to have a fair share of the energy consumption rate. As stated before, acceleration in renewable energy, development necessitates hefty investments. In this regard, there are some obstacles for energy-efficiency investments such as "high investment costs for installing and/or replacing materials and equipment with more efficient ones" and "long payback periods" 5 . Despite the possibility of compelling energy, efficiency improvement by investing in various energy-efficiency measures it might be very costly. This is exactly where the mentality of energy performance contracts come in because savings in energy costs as a result of the use of energy efficiently can subsidize the initial investments. Therefore, EPC has a nature of financing mechanism based on the repayment of the initial investment costs of energy efficiency or renewable energy projects with savings to be made in the following years.

IV. Parties to the Energy Performance Contracts

EPCs are concluded between an energy user and an ECC in order to " finance energy efficiency investments by using the future energy savings that will result from these investments " 6 . The energy service companies act as the developer, installer and financer of comprehensive, performance-based projects with generally a 5- to 10-year duration to improve the energy efficiency of facilities owned or operated by a customer. The responsibilities given to ECCs are as follows:

• Training, certification, carrying out survey and consultancy activities within the framework of service agreements made with industrial enterprises, building owners or their managements,
• Preparing the project for the implementation of the measures determined by the energy efficiency study,
• Carrying out the renovations in line with the project
• Guaranteeing the amount of energy savings
• Submitting an annual report to the institution they are authorized to

In order to fulfill the requirements of the energy-efficiency implementations, ECCs arrange energy related services, including but not limited to, "power generation, energy supply, energy infrastructures, conservation, design and implementation of energy saving projects" . These services, naturally, depend on and subject to the type and characteristics of the contract.

If ECC cannot fulfill its commitment regarding the guaranteed amount of energy saving, it is announced on the internet by the authorized institution. The guaranteed amount of energy saving is calculated through measurements made before and after the implementation of the EPC. The measurements are made in the presence of the representatives of the industrial enterprise and the authorized institution.

On the other side of the EPCs, there are different types of energy users. The possible clients of ECCs are as follows:

• Public administrations and other public institutions and organizations
• Buildings and independent units
• Those who want to take advantage of the incentives
• Those who want to implement energy efficiency project voluntarily

V. Types of Energy Performance Contracts

In the energy-saving business models, ECCs offer making full or partial energy-efficiency investments for a client (the energy user) in return for a service fee and a fraction of the energy cost savings for a fixed time period. Moreover, ECCs can provide certain guaranties and targets related to the energy efficiency in terms of savings that is promised to be achieved as a result of the investments. In this regard, energy performance contracts are generally classified into two types 7 :

• Guaranteed savings contract: where the energy user bear no risk but the energy service company takes the risk of not reaching to the expected savings ratio. Customers are generally responsible for financing the capital on their own.
• Shared savings contract: where the energy service company is responsible for the investment in return for part of the energy savings. This type is more energy user friendly because the energy service company carries both the performance and credit risk.

Apart from these two, there are other plentiful alternative ways to shape an EPC. Therefore, it is not easy to categorize all of them. However, two other types can be mentioned here. In the 'chauffage' contract, ECC takes full responsibility and the client is promised a prompt saving relative to its current bill 8 . Another type is the Build-Own-Operate-Transfer (BOOT) contract in which ECC design, build, finance, own and operate the equipment for a fixed period and then pass the ownership to the client 9 .

VI. Legal Conflicts Arises from EPC

As exemplified above, economic risk allocation depends on the type of the performance contract and therefore the obligations of the contractual parties and legal risk will depend on the provisions within the contract. In this regard, the legal conflicts arising from the EPC are generally reflections of the law of contracts, such as breach of contract and early termination.

There are other scenarios that are most likely to affect the contract and therefore have a potential to create legal conflicts. Those should be considered during the formation phase of the contract. For instance;

• How would the change in the energy source affect the faith of the contract? If the energy source is altered, both the cost and the use of energy unit might change. This has the possibility of affecting the guarantees made by ECC.
• What would happen if electricity prices increase more than the expected? The energy efficiency contracts are designed for a certain period of time and the risks associated with the incremental prices of electrical energy is taken into account. However, an unexpected change, other than force majeure clauses, might create another expense item. This would naturally result in a legal conflict when parties to the contract cannot fulfill their promises.
• Is it possible to change the ownership of the building in question during the contract term? The parties entered into agreement have reciprocal obligations to one another. The transmissibility of the contract depends on the terms of each contract.
• Who is responsible for the replacement of damaged parts of the building that is directly/indirectly affecting the energy performance? The damages affecting the energy performance would have unexpected results on the obligations of the parties. The notification requirement on the energy user might play a leading role in answering this question.

To sum up, these are the questions that need to be answered before the contract in order to avoid possible future conflicts.

Another legal conflict that may arise from EPC is related to the measurement and verification of savings. The measurement and verification of savings are fundamental determinants on whether the EPC contract is fulfilled. The method of measurement must be settled beforehand. Lack of standards and independent reviewers would hinder the reciprocal obligations of the parties. As per applicable Turkish law:

• TS ISO 50006 Standard for energy basic levels and energy performance indicators
• International Measurement and Verification Protocol
• TS ISO 50015 Standard for measurement and verification of energy performance of organizations

are foreseen to verify and report the energy savings achieved as a result of the implementation of energy efficiency measures.

VII. Conclusion

Although there are numerous legal instruments to regulate and even mandate energy efficiency, the so-called field application is not that common. Energy performance contracts have the great potential to decrease energy consumption in buildings and to achieve energy efficiency.

The novelty of the regulations regarding the public buildings is considered to be a big step towards not only decreasing the foreign dependency but also global climate goals. The complex nature of the contractual framework should not create an obstacle for the energy users to fulfill their obligations under the legal provisions. In the not-too-distant future, most of the private-sector players will shift towards outsourcing the energy saving service. Moreover, new alternative ways of financing energy-efficiency investments are expected to increase as the number of the energy efficiency projects increase.

Footnotes

1. National Energy Efficiency Action Plan (NEEAP) 2017-2023, Republic of Turkey Ministry of Energy and Natural Resources, p. iv, https://enerji.enerji.gov.tr//Media/Dizin/EVCED/tr/EnerjiVerimlili%C4%9Fi/UlusalEnerjiVerimlili%C4%9FiEylemPlan%C4%B1/Belgeler/NEEAP.pdf , accessed on 01.10.2021.

2. High Planning Council: Energy Efficiency Strategy Document, p. 1 https://www.resmigazete.gov.tr/eskiler/2012/02/20120225-7.htm accessed on 01.10.2021.

3. There are 54 energy service companies that have been given authorization certificates: https://evcedyetkilendirme.enerji.gov.tr//verimlilik/y_yetki_b_a_d_sirketler.aspx accessed on 24.10.2021.

4. https://enerji.gov.tr/evced-enerji-verimliligi-destekleri-destekler-hakkinda accessed on 24.10.2021.

5. Barış Tan, "Design of Balanced Energy Savings Performance Contracts", International Journal of Production Research , Vol. 58, No. 5, 1401–1424.

6. Ibid.

7. https://e3p.jrc.ec.europa.eu/articles/energy-performance-contracting accessed on 24.10.2021.

8. Ibid.

9. Ibid.