I have been an energy efficiency consultant for over 12 years assisting companies obtain more than 3.5 billion Rand in tax allowances and energy savings. During this time, performance contracts and their victims have fascinated me.
What is a Performance Contract?
Sometimes in resource efficiency projects, project owners contract an energy services company (EsCo) to implement a project and they agree that the contractor will be paid a percentage of the savings achieved by the project. This seems like a win-win, the contractor gets work, and the project owner doesn't have to risk capital expenditure on a project. But often, both parties run into potholes down the road because the contract was not properly thought out and not properly implemented. This is mainly because Measurement and Verification (M&V) was not considered. I will explain the pitfalls both parties run into once the project has been implemented below.
A Project Owner Gets Burned
A recurring story I come across in resource efficiency projects is where a facility/project owner hires a contractor to carry out an energy efficiency retrofit of their facilities or a water efficiency project. They agree to do this under performance contracting terms, where savings obtained are split between the client and the contractor and the contractor themselves comes up with a baseline for energy or water consumption. However, down the line, the client finds themselves paying out more money than they deem fair because they've either not seen the savings translated into a practical energy consumption reduction or more common is that the operating conditions of the facility change such as a facility becoming redundant due to COVID, resulting in a significant energy or water consumption reduction that is not linked to the project. The client finds themselves paying millions of Rand to the contractor but because of how the original performance contract was set up they must keep paying the money.
A Contractor Signs Up for Their Own Demise
Another scenario I have met is one where a contractor signed a performance contract with a big company to implement energy efficiency measures in their facilities. The performance contract required the contractor to achieve year on year energy saving of 10% otherwise they would incur penalties. Sure enough, for the first year, the contractor exceeded the 10% but in the proceeding years they could not meet this mark and started paying penalties to the point of bankruptcy.
all these stakeholders require assurance about the resource efficiency savings proposed for any given project. They should engage the services of a M&V service provider before signing off on any contract. Failure to do this will lead to some tough lessons and recriminations down the line.
M&V: An Easily Available Solution
A solution to both the problems mentioned above is to include Measurement and Verification (M&V) in the project planning phase. M&V is a scientific process for quantifying impacts from resource efficiency projects, namely, energy, water and carbon emissions. It is an integral part of any project reporting cycle, and it is codified in the IPMVP guideline, and internationally recognised standard SANS 50010. In South Africa, M&V is required for the Section 12L energy efficiency tax incentive and the Section 12I Industria Investment tax incentive.
M&V requires the development of a baseline model, which represents the normal operating conditions of the facility/machinery to be upgraded before the implementation of an efficiency project. Energy or water savings are quantified through baseline adjustment. In the first case, a non-routine adjustment would have been made to account for the facility being redundant due to COVID and the client would have avoided paying any extra money. In the case of the contractor agreeing to an unrealistic target, M&V would have helped the contractor to estimate the potential energy savings and help them realise that the contract conditions were unrealistic. One thing to note is that with most resource efficiency projects, the initial intervention based on a significant technological change, will lead to a significant improvement in resource efficiency and produce large savings. Thereafter, the improvements are marginal and tend to cost more to achieve.
In summary, South Africa is a more mature environment for resource efficiency projects (for energy, water, and carbon). There are energy services companies (EsCos) with the ability to implement efficiency projects, project owners who are willing to take a chance on EsCos and lenders such as banks who are keen to fund sustainability projects. However, all these stakeholders need assurance about the resource efficiency savings proposed for any given project. They should engage the services of a M&V service provider before signing off on any contract. Failure to do this will lead to some tough lessons and recriminations down the line.
Ölinga is a SANAS accredited inspection body for M&V (Accreditation number: EEMV0019) and has experience in applying M&V to different industrial sectors. Find out more at https://www.oelinga.com/measurementandverification or contact Zadok Olinga at zadok@oelinga.com
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