Energy performance contracting is set to become increasingly common in Australia, an expert at one of the world’s leading architecture and construction service practices says.
AECOM associate director – Property Consulting Ed Brown says momentum toward energy performance contracts (EPCs) – a procurement mechanism which allows energy upgrades to be funded from future cost savings – was increasing amid a growing conversation about the need to maximise use of existing assets.
“Investing for energy and carbon savings versus investing in asset renewals presents a difficult choice for many organisations,” he said.
“In a market where development of new infrastructure is less feasible, we’re seeing organisations starting to question how they reinvest in what they've got; they’re becoming much more interested in how to invest in a smart way.”
Barely known in Australia five years ago, EPCs differ significantly from the traditional design/build model of building upgrades or refurbishments, in which architects and builders are engaged on a contract model and the project risk remains with the client.
Instead, an external Energy Performance Contracting Organisation (EPCO) assumes responsibility for scoping, designing and delivering efficiency upgrades or renewable energy projects and receives payment contingent upon future energy cost savings which are specified in the contract agreement are realised.
Such arrangements took off through the Victorian Government’s Greener Government Buildings Program and are now being used in New South Wales and in institutional settings such as RMITs $98 million Sustainable Urban Precincts Program – albeit with the Victorian GGB program currently under review.
Brown said it is crucial to appreciate the differing dynamics between the client controlled design/build type of arrangements against the EPC model, where the contractor assumes a significant degree of project control.
He added that it is critical for clients to ensure procurement processes are designed in such a way that they themselves retain control and that their benefits remain at the forefront – a particularly important point as benefits to clients often extend beyond contracted cost savings to considerations such as reduced maintenance costs associated with the asset upgrade or renewal which results from the program.
“Sometimes it may be more cost effective for the EPCO to go and replace XYZ, but the client may derive particular operating benefits from also adding A, B and C onto that list,” Brown said. “The balancing of these things is a fine art and in scoping it is really important to see where the costs and benefits marry up to provide both the EPCO and the client with a good return.”
Brown also said important lessons can be learned from early EPCs in Australia as well as overseas from experience, including the need for clients to ensure adequate levels of skills and resources are made available in the initial stages of framing the agreement, and that they subject a document known as the Detailed Facility Study. That document is prepared after an audit and review of the asset and contains comprehensive information about costs and propositions to appropriate scrutiny - often a challenging area as this is typically a complex document, but a necessary step in order to prevent misunderstandings and disputes down the track.
Moreover, the long-term nature of EPCs (some contracts stretch up to eight or nine years) means the adversarial approach which typifies much of traditional building and construction in Australia does not work with this type of arrangement. Instead, collaboration and cooperation are essential.
“We connect a lot with our US colleagues and that’s the overarching feedback they give us,” Brown said.
“(Successful EPCs) are all based upon client and contractor working together to find the most effective solutions. If those two parties start to fall apart and retreat back into contracting 101, you lose a lot of the value and generally get the minimum outcome you could possibly get, which is not the reason for doing it.”