The Energy Performance Contract

08 Mar 2021

The value of energy efficiency is protected, in general, in our legal system by the Legislative Decree No. 102/2014, as amended by Legislative Decree 14 July 2020, No. 73, as implementation of the EU Directive No. 2012/27/EU as amended by the Directive No. 2018/2002/EU.

The Italian set of rules has two main purposes:

  • establish a framework of provisions for the promotion and improvement of energy efficiency in order to achieve the national energy saving target […] and for the implementation of the European principle that gives leading importance to the energy efficiency (art. 1 par. 1);
  • state provisions aimed at removing obstacles in the energy market and at overcoming the market deficiencies that restrain an efficient supply and use of energy (art. 1, par. 2).

With such purposes, the Decree 102/2014 provides rules related to the efficiency in energy supply, the efficiency in energy use, as well as some horizontal rules.

Indeed, among the issues regulated by Decree 102/2014, there are:

  • the mandatory energy efficiency target and the Energy Efficiency National Fund;
  • the improvement of  energy efficiency in public bodies’ buildings;
  • energy audits, energy transformation and distribution and others measure for the promotion of energy efficiency;
  • penalties.

What is the Energy Performance Contract ?
Decree 102/2014 provides for the definition, among others, of the Energy Performance Contract (“EPC”).

Article 2, par. 2, letter n) of such Decree defines EPC as a contractual agreement between a beneficiary and a provider of an energy efficiency improvement measure, verified and monitored during the hole duration of the contract, where investments (work, supply or services) in such measure are paid for in relation to the contractually agreed level of energy efficiency improvement or in relation to other agreed energy performance criteria, such as financial savings.

The key principle of the contract defined above is the fact that the investments taken for the improvement of energy efficiency are paid for directly in relation to the results obtained (usually in terms of energy costs saving).

In light of that, the beneficiary (being a public or private entity) that wishes to invest in the energy efficiency improvement of its plants can do so, knowing that the provider of energy efficiency improvement measure (Energy Service Company - ESCO) will be paid by the profits obtained by the improvement itself. In addition to that, the beneficiary shall rely on the ESCO’s expertise in conducting the improvement and on the assumption of risks by the ESCO itself.

Moreover, depending on the type of EPC chosen, the beneficiary may rely on financial support granted either by the ESCO itself or by a financial institution.
Indeed, in application of the general contractual structure described above, the EPC can be, usually, grouped in two main contractual schemes:

  • a bilateral contract in which the parties are the beneficiary and the energy services provider;
  • a trilateral contract in which in addition to the beneficiary and the ESCO, a financial institution that takes the financial risk of the operation is involved.

As far as the contents of the EPC, Annex 8 to the Legislative Decree 102/2014 lists a series of minimum elements that shall be included in the energy performance contracts entered into by public bodies or in the related tender specifications. However, in our system a precise discipline of the energy performance contract is lacking. In light of that, the EPC still has atypical features considering that, besides the abovementioned minimum elements, the contractual terms are to be are to be determined by parties’ autonomy.

EPC types
Around the general principle of the remuneration of the investment for the energy efficiency improvement by the its own profits,
different types of EPC developed. Such types differ in relation to several elements, among which, allocation of risks and financial coverage.
Among the main types, we mention:

  • First out: the ESCO undertakes the initial investment (also through third parties investors) and the entire saving obtained is used for paying back the investment and for paying the ESCO. At the expiration of the contract, all savings obtained through the energy efficiency improvement, as well as the ownership of the plant built by the ESCO, are transferred to the beneficiary.
  • Shared Savings: the ESCO undertakes the investment costs and the savings obtained are divided among the beneficiary and the ESCO itself, in light of the percentage and the timing contractually agreed upon by the parties. Also in this case, the ESCO owns the plant until the expiration of the contract and, after that moment, it is transferred to the beneficiary.
  • Guaranteed savings: the beneficiary undertakes the investment (on its own or through a financial institution) and the ESCO guarantees a minimum energy saving agreed upon by the parties, taking the technical risk of the operation. The beneficiary owns the plant from the beginning and a fee is paid to the ESCO for the management and maintenance of the plant itself.

Closing remarks
The energy performance contract is a valuable instrument for obtaining an energy efficiency improvement of the plants with the incentive of the payment of the operation by the profits (usually in terms of savings) of the operation itself.
Nevertheless, a legal instrument with high potential as the energy performance contract, still needs a thorough technical and legal precautionary analysis in order to assess the specific needs of the beneficiary in light of its business.

This article
- does not cover every aspect of the topics with which it deals;
- is for general informational purposes only and is not intended to constitute legal advice or a legal opinion and should not be considered as doing so.

For any further information concerning the contents of this article, please contact the author.

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