Road to Energy Efficiency in Public Buildings: Communique on the Implementation of EPC’s

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In our country, significant steps have been taken recently to increase energy efficiency, to reduce energy costs, and to protect the environment. One of these steps is to increase energy efficiency by saving energy used in public buildings. Various regulations have come into force regarding public administrations, as well as other public institutions and organizations (“Administration”) to form energy performance contracts (“EPC”) with contractor companies in order to reduce their energy consumption or energy costs.

The general framework for the EPC, whose foundations are laid out in Energy Efficiency Law Numbered 5627 (“Law”), was established with the Resolution on the Procedures and Principles Regarding the Energy Performance Contracts in Public Administrations (“Resolution”). Subsequently, the Communiqué on the Implementation of Energy Performance Contracts in the Public (“Communiqué”) was issued based on the relevant Resolution. With this Communiqué, which entered into force after being published in the Official Gazette dated 15.04.2021 and numbered 31455, a sub-regulation was introduced for EPCs. The main issues regulated in the Communiqué are briefly discussed in this article.

Introduction

In our country, significant steps have been taken recently to increase energy efficiency, to reduce energy costs, and to protect the environment. One of these steps is to increase energy efficiency by saving energy used in public buildings. Various regulations have come into force regarding public administrations, as well as other public institutions and organizations (“Administration”) to form energy performance contracts (“EPC”) with contractor companies in order to reduce their energy consumption or energy costs. The general framework for the EPC, whose foundations are laid out in Energy Efficiency Law Numbered 5627 (“Law”), was established with the Resolution on the Procedures and Principles Regarding the Energy Performance Contracts in Public Administrations (“Resolution”). Subsequently, the Communiqué on the Implementation of Energy Performance Contracts in the Public (“Communiqué”) was issued based on the relevant Resolution. With this Communiqué, which entered into force after being published in the Official Gazette dated 15.04.2021 and numbered 31455, a sub-regulation was introduced for EPCs. The main issues regulated in the Communiqué are briefly discussed in this article.

The Purpose of the Communiqué: Details for the Implementation of EPCs are Regulated

An EPC is defined in the Law, Resolution and Communiqué as a contract based on the guarantee of the energy savings to be achieved following the implementation project, and the payment of expenditures with the savings that will occur as a result of such implementation. Energy saving means reduction of energy consumption or losses without reducing the quality and quantity of service and production. EPCs are also defined as a financing mechanism based on the reimbursement of the implementation project costs, with the savings to be realized in the following years. Details regarding the implementation of an EPC were explained with the Communiqué, the draft survey report, specification, and EPC templates were formed as an annex to the Communiqué.

Tender Process

The implementation of EPCs for buildings that are publicly owned, do not have a demolition, relocation or disposal plan, facilities, tools and similar movable and immovables, and publicly carried out services are based on the tender procedure. Comprehensive regulations were introduced regarding the tenders to be held through this Communiqué, and the general procedures and principles determined in the Resolution on the tender process were detailed.

The sealed bid method shall apply to the tenders within the scope of the Communiqué. The tender offer evaluation commission examines the required criteria in the tender documents. The bid with the highest net present value (“NPV”)[1] among the bids is deemed to be the most appropriate, as a result of the examination made by the tender offer evaluation commission.

The conditions sought for participation in tenders for the implementation of an EPC are listed as follows; i) the value of the investment within the scope of an EPC cannot be less than 2.000.000 TRY, ii) the savings guarantee cannot be less than 10% of the total annual energy consumption of the implementation area and 20% for each energy efficiency measure to be applied in any final energy consumption area, iii) the share to be given to Administration in non-building implementation areas cannot be less than 10% of the annual savings during the contract period remaining from the commencement date of saving. In addition, energy efficiency measures with a simple payback period of less than 2 years will not be considered within the scope of the EPC.

Administrations wishing to conclude an EPC must first prepare a survey report or have it prepared by energy efficiency consultancy companies who are authorized by the Ministry of Energy and Natural Resources (“Ministry”). The survey report is the final report that includes studies determining energy saving potentials calculated within the scope of studies, aimed at increasing energy efficiency, and the energy efficiency measures for the recovery of these potentials through measurement, calculation and market research. The format of the survey report was determined through the Communiqué (Annex-1 of the Communiqué). Thus, the survey reports shall be prepared in accordance with the format attached to the Communiqué.

For the purposes of the Communiqué, detailed regulations cover preparation of the tender documents, and announcement of the tender. The legal person bidders shall determine their offers by carrying out all necessary studies for the purpose of signing the EPC. The bidders cannot bid for tenders by forming a consortium. Also, the bidders shall present their analysis in order to evaluate the effect of each energy efficiency measure in their offers, and calculate how much net benefit (NPV account in TRY) is to be realized by the Administration. The EPC period offered by the bidders cannot exceed the period specified in the specification, and in any event, no more than15 years.

In order for the tender to be finalized, at least two bids that are deemed valid by the tender offer evaluation commission must be received; otherwise, the tender will be canceled. As a result of the examination made by the tender offer evaluation commission, the bid with the highest NPV in terms of net benefit to be provided to Administration from amongst the bids that are deemed to be appropriate will be accepted as the most appropriate bid. If the NPVs are equal, the bid with the shortest contract period is considered as the most suitable one. Following the receipt and evaluation of the bids, the Administration signs the EPC following the submission of the performance bond and other required documents with the most suitable first bidder.

One of the most important issues brought by the Communiqué is the inclusion of the tender specification and EPC draft in the Annexes of the Communiqué (Annex-2 and Annex-3 of the Communiqué). The EPC implementation was clarified with these draft regulations.

Implementation Period and Acceptance of the Project

The implementation period starts upon the signing of the EPC. Following the signature, an implementation control commission is assigned by the Administration. This commission is responsible for the construction of the project in accordance with the EPC, acceptance of the project in accordance with the EPC at the end of the implementation period, and the works and procedures to be carried out during the monitoring period. The contractor who won the tender, and signed the EPC with the Administration, will implement the project, and the contractor will bear the burden of all costs.

Upon completion of the project implemented by the contractor, the Administration shall be informed with an official letter, and the acceptance process begins. Within this period, the implementation control commission makes the necessary checks and tests. If the project is accepted by the implementation control commission, an acceptance certificate is issued and, upon signing of the acceptance certificate by the parties, the ownership of the equipment passes to the Administration, and the monitoring period begins. There can be no encumbrances on the investments nor on the equipment used within the scope of the project.

Monitoring Period, Savings Verification Activities and Payments

The period that starts from the date of the implementation of project is accepted by the implementation control commission and continues throughout the EPC period is called the monitoring period. During this period, the contractor prepares a savings verification report at the end of each 12-month period, defined from the beginning of the period or at the end of the progress billing periods, as has been determined under the EPC. It is included in Annex-2 of the Communiqué in the savings verification report draft.

Upon approval of the savings verification report by the implementation control commission, the contractor will be paid in accordance with the provisions of the EPC. However, if the savings verification report is not approved, the process and reconciliation methods to be followed between the Administration and the contractor are explained in the Communiqué.

The contractor must provide at least 70% of the savings guarantee committed over the total of all implementation areas at the end of each 12-month period in which the monitoring period begins. If the approved savings amount is less than this rate, no payment will be made to the contractor, and the contractor will make the necessary improvements, including revisions to the project, provided that it does not impose a financial burden on the Administration. In the event that the contractor removes the deficiencies in the savings performance, and the amount of approved savings in the next period is realized above 70% of the savings guarantee, the payments that have not been made in the previous period or periods shall be made from the approved savings amount in the relevant period.

During the monitoring period, in the event that the amount of approved savings for consecutive 12-month periods remains less than 70% of the savings guarantee for three periods, the EPC shall be terminated by the Administration, and the guarantee shall be recorded as revenue. In this case, the contractor cannot make a claim from the Administration for damages, loss or the like, due to termination.

Conclusion

It is foreseen that the Communiqué, which regulates technical and legal issues regarding EPC implementation in the public sector, in detail, and its Annexes that include the EPC draft, specification draft, survey report and savings verification report formats, and which are considered as the basis in tenders, will make the implementation easier and more specific. Obviously, it is always possible to introduce new regulations or changes to the secondary legislation regarding the practice of EPCs. Regulations and studies show that EPC implementations will become widespread in order to increase energy efficiency and decrease energy consumption/expenses in the public sector. Considering the energy efficiency targets of the Ministry, it seems that the latter will focus on energy efficiency projects in the public sector in the upcoming periods. Considering the Public Buildings Energy Efficiency Project in Turkey,[2] which is planned to be carried out for energy savings in public buildings utilizing the EPC method, it is thought that the public bodies will aim to play a leading role in energy efficiency.


(Authored by Ecem Susoy Uygun and first published by Erdem & Erdem on April 2021)

[1]It is defined as the difference obtained by deducting the present value of project expenses from the present value of the income generated during the economic life of the relevant investment.

[2]See. https://kamuenerji.csb.gov.tr/proje-hakkinda-genel-bilgi-i-96445 (Last access date: 21.04.2021)

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