Glossary

Glossary of Energy Contracting

ConceptDefinition
ESCO A natural or legal person who delivers energy services in form of Energy Performance Contracting (EPC) whose main feature is guarantee of savings (restricted definition with respect to EPC used in Transparense).
Energy Performance Contract (EPC) Contractual arrangement between the beneficiary and the provider of an energy efficiency improvement measure, verified and monitored during the whole term of the contract, where investments (work, supply or service) in that measure are paid for in relation to a contractually agreed level of energy efficiency improvement or other agreed energy performance criterion, such as financial savings (as defined in Energy Efficiency Directive 2012/27/EU - EED). In addition, „guaranteed savings“ are listed among the minimum items to be included in EPC model contracts (defined by Annex XIII of EED) as follows: „Guaranteed savings to be achieved by implementing the measures of the contract.“
Shared Savings model The ESCO organises the financing of the total upfront capital cost of the project and is totally responsible for repaying the lender, therefore assuming performance, credit and energy price risks. The client pays the ESCO a pre-determined percentage of its achieved cost savings from the project.
Guaranteed Savings model The client finances the project and makes periodic debt service payments to the lender, therefore assuming credit risk. The ESCO guarantees energy saving performance to the client and therefore carries the performance risk. The value of energy saved is guaranteed to meet the client’s debt service obligation down to a stipulated floor price. Any savings exceeding the guaranteed level are split between the ESCO and the client. If savings are below the guaranteed level, the ESCO covers the shortfall.
On-Balance sheet
(Debt financing)
Situation in which investors lend a certain amount of money on credit in exchange for repayment plus interest. The most common EE financial product is a loan directly to the client (owner of the premises) or to the ESCO – this is known as third-party financing.
On-Balance sheet
(Equity financing)
Situation in which investors lend a given amount of money in exchange for a stake in a project. The most common example of equity financing is private equity. With respect to energy efficiency businesses, equity investment can take the form of an ESCO issuing additional shares in the company's common ownership.
On-Balance sheet
(Mezzanine Financing)
Mezzanine financing is a hybrid form of financing that combines debt and equity financing. In most cases, debt will be ranked as a preferred equity share. Mezzanine debt financing is thus riskier than traditional debt‐financing but also more rewarding; it is associated with a higher yield. Mezzanine financing also allows a lender to convert debt capital into ownership or equity interest in the company if the loan is not paid back on time and in full.
Off-Balance sheet
(Project Financing)
Project finance (PF), by contrast to balance sheet financing (loans, debt and equity), bases its collateral on a project’s cash flow expectations, not on individuals or institutions’ creditworthiness. It is off‐balance sheet financing. A typical PF is divided between debt and equity financing.
Off-Balance sheet
(Leasing)
Leasing is the energy market’s common way of dealing with initial cost barriers. It is a way of obtaining the right to use an asset. Finance leasing can be used for EE equipment, even when the equipment lacks collateral value. Leasing companies, often bank subsidiaries, have experience with vendor finance programs and other forms of equipment finance that are analogous to EE. Leasing is the most common form of equipment manufacturers' vendor financing, which is often applied in the case of CHP equipment. Leasing is often done as part of a SPV.
Special Purpose Vehicle (SPV)
Special Purpose Entity (SPE)
A firm or other legal entity established to perform some narrowly-defined or temporary purpose, which facilitates off-balance sheet financing of projects. A standard approach is to form a SPV/SPE and place assets and liabilities on its balance sheet. The investors accomplish the purpose for which an SPV /SPE has been set up – for example implementing a large EE project – without having to carry any of the associated assets or liabilities on their own balance sheet.
ROI (Return on Investment) A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.
return on investment = (gain from investment - cost of investment) / cost of investment
Monitoring & Targeting (M&T) Monitoring & Targeting is a cost-saving management technique, designed to detect and diagnose wasteful use of energy, water, and other consumable resources through the use of detailed metering and dedicated software.

 

source: transparense EU project



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