Application and risk assessment of the energy performance contracting model in energy conservation of public buildings

EPC, also known as contract energy management, is a concept that originated in the 1970s as a new type of market-based energy efficiency mechanism, and its related terminology is very diverse.

EPC has been applied for >40 years. It refers to a contract between an ESCO and the energy-using unit, which aims to save energy for the energy-using unit. The energy-using unit shall pay the service fee to the ESCO. EPC has achieved the goal of energy conservation for energy-using units.

In general, it is represented by the following definition of the British Energy Industry Exchange: “The contractual management of certain aspects of a customer’s energy use, transferring some risk from the customer to the contractor (usually based on the provision of a recognized level of service), with the key feature being the transfer of technical risk associated with equipment performance from the customer to the contractor”.

A more precise definition is that of the World Energy Efficiency Organization: “energy savings to the customer at a cost that depends on the amount of energy saved”. The term “energy savings” refers to improvements in energy efficiency. At the core of this concept is the Energy Efficiency Compact, which includes the following: (1) a full range of services including feasibility analysis, design, engineering, structural management, installation, operation, maintenance and financing; (2) compensation based on measured results; and (3) transfer of major technical, financial and operational risks to the contractor. China defines World Energy Efficiency Association as “an energy efficiency investment approach that uses reduced energy costs to cover the full cost of an energy efficiency project”.

The EPC engineering model is an internationally highly recognised and adopted model. As early as the 80s of the past century, i.e., the 1980s, China selected some pilot projects to try the EPC engineering contracting model. After >30 years of development, this model has been gradually recognised and applied to projects of a certain scale, long duration and considerable technical complexity. In housing construction, municipalities and large infrastructure projects, it should take no more than 6 years to promote the application of the EPC engineering contracting model. This is a new way of contracting and project organisation in the construction industry.

Scholars have carried out rich exploration on the application of EPC in the risk assessment of public buildings. The United States, Germany and France have corresponding policies in the energy conservation of buildings. In 1970, the U.S. Department of Energy began to implement a series of energy-saving incentives for buildings and equipment. Germany has also been focussing on the energy conservation of buildings for 40 years. France has achieved significant results in the energy-saving renovation of buildings. In the above-mentioned Western countries, the main measures taken by ESCOs are as follows: promoting information diffusion [16], providing financial institutions with rich channels to develop capital source services; guiding the formulation of model contract for regulatory measurement, inspection standards and the International Performance Measurement and Verification Protocol (IPMVP); taking the lead in building government office buildings; and establishing a third-party financing network to promote mutual exchange, information diffusion, investment promotion and market penetration. To establish an equipment-leasing structure, most research references have pointed out that energy-saving services in buildings should be developed through the EPC model, and mechanism innovation should be adopted to promote energy-saving renovation and achieve energy conservation and emission reduction.

The traditional model keeps design and construction separate. Therefore, in the current market, general contracting cannot be fully integrated either. The EPC on behalf of design companies is beneficial to the construction project as a whole, which is especially true for design. Wang [10] summarised the contribution of the EPC model to the government’s energy conservation, especially emphasising that the government can strengthen analysis in fiscal and financial affairs, taxation and other aspects, in addition to providing policy support in these aspects. Huang [4] put forward the dilemma that China’s energy-saving services in buildings face when implementing the EPC model.

Wang [13] analysed the organisation and functioning of ESCOs that provide technical support for energy-saving services in buildings and government-entrusted supervision.

The overall literature also shows the achievements made in the research on energy-saving services in buildings under the EPC model. However, research on the development of public buildings under the EPC model is still at the initial stage, and there is still lack of sufficient theoretical research on the main issues, such as policy application, financing models, contract management and quality management. Relevant government departments, representatives of energy-saving enterprises and scholars have introduced the advanced experience and development of energy-saving services in the United States, Europe, Japan and other countries to China through international conferences and papers. Especially, research on the design of the EPC mechanism and the methods of development of energy-saving services for buildings are still underdeveloped.

The author attempts to expand the existing research results and analyse the hidden risks in the implementation of China’s EPC projects in public buildings. Combining the characteristics of public building projects and the EPC model, the author conducts an objective analysis and system integration of the risk factors affecting EPC projects and thereafter builds a risk control system for EPC public building projects.

The main difficulty in cost control is in the construction phase, and the main means of control is contractual measures.

The main reason why the “construction”-oriented EPC management model is still in an advantageous position today is that the construction company has a strong advantage in two of the three phases of the EPC project, except for the design capability, which accounts for an absolute proportion of the total cost of the construction project (Table 1). The EPC model is a mature cost-control model for the leading construction companies. This can be achieved by using mainly contractual measures in the accounting phase.

Risk analysis is one of the important tasks in the implementation of EPC projects and also the key part to achieve the benefit sharing for ESCOs. The EPC mechanism provides an objective overview of the uncertainty of the whole project and it can capture the risks of the project during the negotiation, implementation and operational phases, including the risks during the project implementation and the risks posed by EPC [14].

According to the characteristics and operations of the projects, the main factors affecting the risk allocation of EPC projects are as follows:

The ultimate goal of EPC’s application of risk management in public building projects is to achieve the best quality and most reasonable risk allocation scheme. Therefore, the author puts forward the above hypotheses based on the risk allocation of EPC projects: the risks undertaken by public building projects need to be capped. The comprehensive risks borne by the project are matched with the rewards ultimately obtained.

This study adapted the internal reliability test method, and Cronbach’s alpha coefficient was used to test the scale items. A low alpha coefficient indicates low reliability of the tested factors, and vice versa. SPSS18.0 software was applied to analyse the data, and the final results showed that the Cronbach’s coefficients of controlling the risks of reliability, contract operation, finance, market and other external environmental, energy-saving technology and income acquisition were all >0.76, with the overall Cronbach’s coefficient of the scale being >0.957. As for the risk scale of the public building projects, the overall α value of the items tested by Cronbach’s α coefficient was 0.892, which was >0.7. The analysis showed that the two scales had high reliability and stability.

Risks exist for both energy-saving customers and energy-saving services. From the perspective of contract energy management companies, this paper classified the risks of the EPC project into the following aspects.

There is a highly positive correlation between the project risk and the contract energy management risk, and the above influencing factors are analysed according to the ESCO’s requirements on the contract energy management risk to be achieved [7]. By using the analytic hierarchy process (AHP) to obtain the distribution proportion of specific indicators, it is proposed to establish the target satisfaction model of impact factors so as to find the impact degree of contract energy management risks [12].

It was assumed that there were n influencing factors including m problems. The relative importance of the influencing factor was w_i(i = 1,L,n), ∑i=1nwi=1 \sum \nolimits_{i = 1}^n{w_i} = 1 , w_i was used to evaluate these influencing factors by establishing a hierarchy model and using AHP. Due to the interaction between various factors, it was assumed that the degree of correlation between various problems was c_j(j = 1,L,m). Therefore, the SPSS software could calculate w_i and c_j. Furthermore, the satisfaction degree of the solutions to each problem can be obtained by the Delphi method (Huang and Du, 2011), which was recorded as b_j(j = 1,L,m). Finally, the improvement degree of influencing factors was as follows: (1) αi=wi∑j=1maijbj/cj {\alpha _i} = {w_i}\sum\limits_{j = 1}^m {{a_{ij}}{b_j}/{c_j}}

Table 2 was formed by using the data for houses of good quality by applying SPSS software.

The improvement degree α_j of each influencing factor was calculated by using the influencing factor model and the results are shown in Table 3.

The proportion of each kind of risk is different in the process of contract energy management project. On analysis of the data model [8], significant positive effects were observed on public building project risks by controlling the risks of reliability contract operation, finance, market and other external environmental, energy-saving technology and income acquisition, which in turn verifies the assumptions a₁, a₂, a₃, a₄, a₅ and a₆. The author believes that in the operation of EPC in public building projects, the greatest risk that the ESCOs have faced is the risk of income acquisition. In the early development stage of EPC in the public building projects, the risk of the energy-saving system is relatively small. Accurate energy-saving calculation and scientific selection of energy-saving performance evaluation methods play an important role in reducing the risk of earning profits for the ESCOs.

Energy saving is the application of appropriate steps to save and try to not waste energy as much as possible; so, how is one to evaluate the energy-saving potential? Energy-saving potential refers to the part that uses less energy or saves energy. As for the companies, they should not only design public building projects with the same quantity and quality as before but, at the same time, reduce energy consumption as much as possible. This paper analysed the information index system of economy, energy management and environment and then applied the scientific assessment methods of the energy efficiency potential to carry out a detailed pre-analysis of energy-saving projects, so as to determine the energy-saving performance index of the ESCOs and form an energy-saving transformation scheme.

The development of contract energy management in our country is still in the primary stages. It is very important to evaluate the energy-saving plan in the early stages of the construction and development of public building projects. Therefore, our first choice of an appropriate energy-saving plan should be technically reliable and economically reasonable. As for reducing the cost barriers of public buildings contract energy management, it is necessary to carry out optimal design [2]. Through investigation, it is found that the level of formulating energy-saving schemes for public building projects in China is relatively low in both theory and practice.

At present, most ESCOs in China have neither been established for a long time nor participated in many projects. The overall management level of the set companies is backward, and the data collection process of the risk evaluation index system is complicated [15]. The existing risk assessment system for EPC in Chinese public building projects is still at the primary stage. It is necessary to establish a risk evaluation index system for EPC projects, which can effectively identify and control the risks of EPC projects and contribute to the success of EPC projects and green buildings.

The process of risk analysis and evaluation is the crucial link in the risk management process of public building projects. In the operation process of the projects, high investment, long construction period and susceptibility to external factors can bring risks to the projects, which requires ESCOs with outstanding comprehensive strength and strong management capability [6]. In this case, the ESCOs need to gain the trust of customers in the project and enhance their own management capability by establishing enterprise reputation.

Elements of a contract energy management programme include energy use diagnosis, energy consumption benchmarking, energy efficiency measures, quantified energy savings targets, ways to share energy savings benefits, and measurement and verification programmes. Such elements also need to be defined in writing by contract with the owner. The energy consumption benchmark is determined based on the energy consumption status of the energy-using unit or energy-using equipment or link within a certain time period of the implementation of the energy management contract. Energy consumption benchmark determination, measurement and verification can be entrusted to a third-party organisation approved by both parties to the contract for supervision and audit.

The energy-saving operation of public building projects should establish mutually beneficial and mutually trusted cooperation through signing management contracts between EPCs and energy-using agencies. Besides, the contracts should specify the rights, obligations and risk sharing of both parties, including with suppliers of energy-saving equipment, guarantee companies, commercial banks and so on. Furthermore, the ESCOs should understand and analyse the operating conditions of public building projects and carry out effective management. All these measures can be regarded as the main restraint methods for both parties to control and avoid risks. According to the current situation of contract energy management, it is necessary to continuously improve the formulation of various specific risk articles in the contract.

The interest of the client is to get excellent energy-saving equipment and long-term energy savings and environmental benefits with no or less investment, while the ESCO wants to earn profit from the success of the project. Many cases have proven that sincere cooperation between both parties is most important, and that the ESCO’s quality service and the client’s close cooperation during the whole project are the guarantee of project success.

The elements of the contract energy management project include energy use condition diagnosis, energy consumption benchmarking and verification programme, and so on, which can be entrusted to a third-party organisation approved by both parties to the contract for supervision and audit.

The success of the EPC project depends on the final completion of the energy-saving target, which requires measurement and evaluation of the energy-saving effect of the contract energy management project during the operation of the EPC project. However, this work should be carried out by a third-party evaluation organisation in order to achieve a fair, objective and impartial result, whose evaluation of the energy-saving effect will be more professional. Compared with the ESCOs and the energy-saving customers, the third-party evaluation organisation has more obvious advantages in carrying out measurement and evaluation, thus effectively avoiding risks caused by measurement errors of the energy-saving effect.