Contracts to retrofit government buildings once payment mechanism worked out
RM1 billion from MAESCO members to fund EPC retrofits
The sun is rising for energy services companies in Malaysia. With the Malaysian government planning to retrofit its vast facilities with more energy efficient systems – as part of it Sustainability via Energy Efficiency (SAVE) programme – the market for energy efficiency professionals looks like it may become a supplier’s market.
Malaysia Association of Energy Services Companies (MAESCO) president Zulkifli Zahari and his colleagues in energy services are straining to hear the word “Go!” from the government, which incidentally also has plans for an Energy Efficiency Act in 2013.
Energy services companies provide audit and consultancy on how buildings can improve their energy efficiency, but the business model that will take off is the Energy Performance Contracting (EPC) model.
“Unlike traditional contracting which tends to be price-driven, the EPC company is performance-driven. It provides not just consultancy, but it also finances the proposed fittings, installs them, and does the monitoring,” says Zulkifli.
The EPC company then gets its returns from the savings, the ratio of which is negotiated. It can range from 90% (EPC): 10% (client) to 70% (EPC): 10% (client) with the contract period ranging from five to ten years. “The concept of EPC is the ESCOs are paid through savings, and they must provide a guarantee of savings,” he says.
The “no-cost upfront proposition” appeals to the Malaysian government, which would find it tough to fund the retrofit of its 20,000 buildings or facilities. Its top energy users, 128 of them including hospitals, public universities and ministries, use more than RM587 million worth of electricity a year based on last year’s tariff. This realisation has caused some sense of urgency. Actually, the government has seen what energy efficient retrofits can do. It retrofitted the Ministry of Finance and the Economic Planning Unit and is seeing 10% savings.
The Ministry of Energy, Green Technology and Water conducted energy audits at various government agencies and found that energy-efficiency retrofits save millions. The upfront cost, however, is high.
The EPC route works well for:
• Clients with tight budgets
• Clients with aging and inefficient buildings and equipment
The win-win situation is quite clear in the Malaysian case. The government agencies get their retrofits without massive upfront cost. They save electricity and the heads of agencies meet their energy-efficiency key performance indicators. On the other side, the ESCOs who take the financial risks practise their trade and make money. In fact, ESCOs love energy-inefficient buildings because the more inefficient they are, the bigger savings and the faster the return on investment. That said, for organisations that have the budget, the outright purchase model (client buys the equipment and pays the ESCOs a consultancy fee) is better for the client, who reaps the total savings after the pay-back period, without sharing them with the EPC company.
Zulkifli says MAESCO members have collectively pledged more than RM1 billion to undertake EPC contracts. In terms of funding, banks are not as forthcoming as they might be. Some smaller MAESCO members are looking at the Green Technology Financing Scheme (GTFS) for financial support, whereby the government subsidises 2% of the bank interest rate and underwrites 60% of loan via the Credit Guarantee Corporation Malaysia. However, a GTFS certificate is no guarantee of getting a loan.
Zulkifli says MAESCO is also facilitating the registration of ESCOs, together with the Public Works Department and the ministry, preparing for the government’s upcoming projects. Details being noted include ESCOs’ paid-up capital, expertise, experience and whether they intend to take up EPC. A company must register with the Ministry of Finance before it can carry out work for the government, but right now there is no category for ESCOs. That is being sorted out. Apparently, there is greater interest in MAESCO these days, as membership may now be the pathway to business.
MAESCO is also collaborating with the Energy Commission to train energy managers. There are only 140 registered energy managers in Malaysia, in sharp contrast to the 1,500 facilities that require energy managers to assess their efficiency levels. These 1,500 are facilities that use more than 3 million kWh over six consecutive months. The power utility companies are obliged under the Efficient Management of Electrical Energy Regulations 2008 to report them to the Energy Commission who can then direct them to have their efficiency evaluated.
MAESCO, representing 50-plus members, meets with the ministry regularly, even as issues such as payment mechanisms for EPC companies are being sorted out. Zulkifli says EPC for government buildings cannot start until the existing payment mechanism is amended by the Ministry of Finance to allow ESCOs to be paid for electricity savings.