Not all EPCs are the same
Marcus Brodin, commercial director at Future Energy Solutions (FES), explains why, when it comes to benefitting from light emitting diode (LED) lighting, an energy performance contract (EPC) from an experienced solutions provider can offer a number of advantages over traditional procurement models.
Organisations face significant challenges in reducing energy costs and achieving carbon reduction targets. As a result, a number of technologies are now considered vital in meeting these objectives and one of the most popular is light emitting diode (LED) based lighting. In fact, it is no exaggeration to state that this technology has created a seismic change not seen since gas lamp manufacturers witnessed the introduction of the carbon filament lamp. So much so that according to WinterGreen Research, the LED lighting market will grow by 45 per cent per year until 2019 and be worth $42bn by 2019.
Commercial investment in this technology is usually done in one of three ways – buying and installing it outright, using a finance platform, or agreeing an energy performance contract (EPC) with a energy performance solutions provider. As most businesses don't have the requisite skills, knowledge and experience to make informed purchasing decisions and install and maintain an LED lighting systems, it is the latter of these options that is becoming increasingly popular – and for good reason.
It should be pointed out that although EPCs have existed for some while, there is a growing level of differentiation between what’s available. An EPC is a partnership between the customer and service provider and the contract should guarantee that the measures implemented will generate sufficient savings to pay for the project. All additional savings gained after the contract ends should also accrue solely to the customer.
With no upfront investment, they can be created off balance sheet, with all equipment, installation and maintenance costs factored in from the outset. By guaranteeing the savings, EPCs ensure projects deliver the agreed rate of return – reducing the risks for customers. It is therefore no surprise that they are growing in popularity, a fact that is well illustrated in the USA, where the EPCs market has grown from $2.6bn to $6.2bn over the last 10 years.
However, the perception that EPCs are ‘too good to be true’ has a certain amount of truth to it in some situations, as not all EPCs are the same. Despite some bold promises being made, increased competition between service providers means that customers must demonstrate extreme caution and vigilance when scrutinising any proposals.
The most important factor concerns the products used and the old adage ‘you get what you pay for’ should be kept in mind. Production costs have fallen dramatically in the last few years and some solutions are now considerably cheaper than others, as are the components used to make them. This can result in premature luminaire failure, poor lumen output, low lm/W and inefficient design.
A lack of recognised and enforced standards has also resulted in a dramatic variation in the quality of products currently on the market. The vast majority of low cost and poor quality LED lighting products originate in China and although the country is beginning to address this issue, buyers should still beware. According to Lux Research, China’s LED lighting market will more than double to $7.4bn by 2017, meaning that a significant number of the estimated 5,000 manufacturers there are undercutting their rivals by using low quality components. LED luminaires sold on the European market should, by law, carry the CE mark, which is a statement by the manufacturer that the product complies with all the relevant EU legislation, including product safety standards and directives.
It is imperative to make sure that the company providing the EPC is able to demonstrate a proven track record in achieving the kinds of savings claimed. Although this will form part of an overall due diligence strategy, examples and case studies of previous projects should always be requested. An experienced EPC provider will also be able to provide full photometric and electrical data, as well as conformance certificates to ensure that the products specified and installed will provide the full benefits of any investment.
Even amongst facilities managers that are convinced about the advantages of EPCs, questions can often arise about whether the financial case stacks up. When analysing return on investment (ROI), there can be a danger of relying on precedents and existing metrics that might not be suitable in relation to an EPC. For example, comparing the case for the DIY approach and an EPC is rarely carried out on an ‘apples for apples’ basis. Maintenance costs are usually not often factored in, neither are reliability rates, warranties, key performance indicators (KPIs), finance and delivery.
Another common concern is that EPCs are inherently long-term and complex agreements. They need to be long-term – typically around six to ten years – to ensure savings exceed payments. They also need to take account of all the changes that can occur over the long-term, including variations in energy use caused by known factors, and how wholesale energy prices can fluctuate. Leading service providers will counter this by offering an EPC that allows them to be remunerated through the cost reduction in energy bills that customer experiences. The financial difference is then split between the two parties as a profit share agreement..
With everyone trying to lower the amount of money they spend on energy, while at the same time reducing carbon emissions, LED lighting is the right technology at the right time. And while EPCs offer a highly attractive way to invest in the technology and reap the rewards – both operational and financial – choosing the right energy performance solutions provider is the only way to get the best possible returns.
For further information please contact Marcus Brodin on +44 (0) 207 908 3921 or marcus.brodin@feslighting.co.uk