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EPC Methodology and Contract template

The EPC methodology for public sector 

The EPC methodology primarily reflects The EPC Concept and also legislative changes (came into force from 1. February 2019).

The EPC methodology is structured as follows: (1) the system of energy services in Slovakia and opportunities for its use in the public sector, (2) the system for analyzing the requirements for increasing the energy efficiency of public buildings, the system of technical assistance aimed at increasing the energy efficiency of public-owned buildings and the identification of suitable EPC projects, (3) description of the process and life cycle of EPC arrangements, (4) an overview of the key rights and obligations related to the EPC contract, (5) accounting aspects related to EPC, (6) description of the basic legal aspects of EPC and (7) specification of the tax aspects.

For illustration, the MoF has prepared the EPC case study, which is a simple description of the use of a Template contract (the case is focused on municipality interested in modernizing its building using EPC model).

The EPC Contract template 

In addition to the methodology, MoF has decided to prepare the EPC contract template for the public sector. The contract is officially published on the MoE website and was updated on February 11, 2020.

The model contract was officially consulted with Eurostat. According to the Eurostat, there is no provision in the model contract that would lead to an immediate classification of the EPC asset on balance sheet for government.  However, the definition of certain important matters will only occur with the implementation of the template into a specific contract/project. MoF’ve actively cooperated with the international law firm White & Case in preparation of this contract.

EPCs have many similar characteristics to PPP projects (Public Private Partnership). The basic common feature is cooperation between the public and private sector. EPCs should be recorded off-balance sheet for the government (when the Eurostat’s conditions are met). This means that such projects do not affect the Maastricht debt calculated by the ESA 2010 methodology.

Contracts to deliver energy efficiency improvements through substantial refurbishment, renovation or upgrade of existing infrastructure could, in some circumstances, be interpreted as falling within the scope of Eurostat’s rules on PPPs. This is because rules on PPPs are stated to apply where the amount of capital expenditure in the refurbishment of an existing asset represents 50% or more of the value of the asset after completion of the Works.

The decision to prepare template contract arose from the experience of PPP projects, in which case, Eurostat asses contracts individually and decides whether or not these projects will be recorded on the government balance sheet. The benefit of such a model contract is that all public entities can use it as the materials for public procurement of ESCO. Thanks to the model contract, public entities (especially smaller entities, i.e. municipalities) with limited own capacities won't have to prepare the full contract in line with Eurostat rules individually. They should only use model contract and adjust relevant parts according to their specific conditions. 

For a better understanding of the payment mechanism based on the model contract, the MoF prepared an informative document about the payment mechanism.

The EPC Contract template - update - February 11, 2020

After the official publishing of the model contract, bank institutions contacted us consulted with us some of the provisions of the contract that would help banks to provide better funding for such types of projects. Based on the analysis, the MoF decided to update some provisions in the contract. The changes were officially consulted with The Statistical Office of the Slovak Republic and Eurostat. The updated version of the contract was officially published on the MoE website on February 11, 2020.

For a better understanding of the changes in the model contract, the MoF prepared an informative document with explanations in track changes.

Basic Principles of the EPC template Contract 

  • Contract length: 8+ years
  • ESCOs are paid from achieved savings: risks associated with failure to achieve the guaranteed savings is fully with ESCOs (no energy savings = no EPC payments)
  • ESCO is responsible for technical design and financing
    • Other measures of a non-energy nature must be separate - best in a separate contract
    • Possibility to split the retrofit project to: EPC and standard works contract procured in a single procurement
  • Public entities can participate in the financing of investments
    • the amount of the guaranteed savings must be equal/higher than the total of the EPC payment and any “non-refundable” government financing
    • ESIF funding provided in the form of a grant or loan is considered neutral (Eurostat view)
  • The public entity becomes the legal owner of the constructed improvements and installations
    • In the case of early termination of the EPC Contract, ESCO is entitled to receive compensation, the amount of which depends on the reasons for the early termination. Compensation may be one-off or split to installments
  • Building owner/manager has the right to dispose of its property
    • This includes the transfer of the building or modification of its use, etc.
  • ESCO can produce and sell energy and higher energy savings are shared
    • Savings of energy may be achieved through renewable energy production
    • ESCO is entitled to at least 2/3 of extra savings
  • ESCO may assign its entitlement to the EPC Payments to a financial institution (factoring/forfeiting) - not more than 80% of the amount of the EPC Payments