To overcome internal differences, programmes must be tailored on a case-by-case basis
COMPLEX ISSUE
Pay-for-performance programmes can be complex, making them difficult to establish and be effective
REGULATORY CASE
The role of regulators is essential in setting up a country’s programme
KEY QUOTE
Pay-for-performance programmes have the potential to become the great enablers of demand-side measures and infrastructure planning based on the “Efficiency First” principle
Today, buildings account for 40% of energy consumption in the EU. Reaching the bloc’s new climate goals requires the building sector to cut its greenhouse gas (GHG) emissions by 60% before 2030. As a result, in the next ten years, the annual energy renovation rate in Europe should at least double from its current stubborn low of 1-1.4%. Among the 13 proposals of the European Commission’s Fit-for-55 package, unveiled in July 2021, was an amendment to the Energy Efficiency Directive (EED) to set a more ambitious binding annual target for the reduction of final energy consumption from 32.5% to 36% compared to project energy use in 2030. One tool to help reduce the level of energy consumption is Pay-for-Performance programmes (P4P) that reward the efficiency of implemented measures. “P4P programmes have the potential to become the great enablers of demand-side measures and infrastructure planning based on the “Efficiency First” principle, both of which figure highly in the newly proposed legislative texts of the Fit-for-55 package,” says Filippos Anagnostopoulos at the Institute for European Energy and Climate Policy, an independent research foundation. 
“In most energy efficiency programmes, the deemed savings approach means that remuneration for energy efficiency measures is based on an assumption of what they will deliver,” says Anagnostopoulos. “This misalignment of incentives means that installers of energy efficiency measures might not pay due regard to whether they actually lead to the anticipated energy savings,” he adds. With P4P, the performance risk is appropriately borne by the private sector which is responsible for implementing energy efficiency measures, instead of by programme funders—often governments—who have little control over the quality of the works, or would need to spend significantly more resources checking on quality.
PERFORMANCE MODELS In a P4P scheme, a public authority or a utility is willing to pay to support energy-saving projects. Project developers, end-users or aggregators receive payments that are proportional to the amount of energy saved by their project. The energy consumption of the project site is then metered and compared against a baseline to track the reduction in energy consumption. Consumers engage directly with the programme manager or an aggregator. They receive payments or benefits for the actual energy saved, even though this depends on different setups. Another model is currently being tested by the Ambience H2020 project, which is looking to combine flexibility and demand response with energy efficiency measures. Buildings can be equipped with active control systems, which can help consumers become active participants in demand response and energy efficiency programmes. This brings increased awareness of energy spending, how the building functions and the connection to the wider energy system.
REGULATORY ROLE P4P programmes are already well-established in the United States. In California and New York state, pilot schemes collect data from fleets of houses to aggregate the energy savings. In Washington DC, the Sustainable Energy Utility runs a Pay-for-Performance programme for large commercial buildings. Financial rewards are provided to building owners, or their chosen third-party contractors, for the achievement of energy savings one year after the installation of measures. “Very often the private sector brings innovation by designing the right offer to consumers and rolling out data analytics across a portfolio of buildings to calculate energy savings,” says Marion Santini of the Regulatory Assistance Project (RAP). “Regulators play a critical role in setting up P4P schemes. Most P4P schemes to date were put in place in the context of energy efficiency obligation schemes, where utilities have a commitment to deliver energy savings,” she adds. In Europe, Germany developed the Energy Savings Meter (ESM) programme aimed to leverage digitalisation for the benefit of energy efficiency improvements. Public funding is provided to businesses promoting digitally-enabled energy efficiency solutions to their customers. The level of funding will eventually depend on the amount of energy saved by the companies’ customers.
EFFECTIVE IMPLEMENTATION Pay-for-performance programmes can be effective if they are established in the right way. This complexity is one reason why they are difficult to implement. “The concept is more complex than just selling stuff, so it needs a good explanation on what the concept can and cannot do,” says Thomas Boermans from E.ON, a German power company. To advance such services “good examples and specifically further development of digital tools that accompany the process [are needed] to make it transparent and easy to handle,” he adds. According to RAP’s Santini, a main barrier to the adoption of P4P is the incentive structure. “Conditioning incentives on the use of metered energy data is not a common practice in the EU, outside of the industrial energy efficiency space,” she says. Indeed, many European energy efficiency programmes deliver subsidies for the installation of equipment. This provides an incentive for the private sector to install as many equipment pieces as possible, without necessarily ensuring high quality installation and maintenance. P4P schemes redirect the incentives to obtaining as many energy savings as possible, which should in principle result in a higher quality of installation and persistent energy savings. “Legislation like the EED could trigger the piloting of P4P schemes in the buildings sector”, Santini says. New laws could mandate that a proportion of member states’ EED energy savings obligations is delivered using metered savings methodologies, a prerequisite to putting in place P4P schemes. “A better focus on measurement, verification and evaluation of energy efficiency policies can also help promote P4P schemes”, she adds. 
DEFINITION CONFUSION A survey by the QualitEE project identified the complexity of the concept of energy performance contracting, plus a lack of information, a lack of trust in the ESCO system, administrative barriers in the public sector, high costs of project development and procurement, low customer demand, low energy prices, policy uncertainty, lack of support from the government and raising affordable finance. One particular problem seems to be a certain confusion about terminology. To combat this, the European Commission has now coined two acronyms to distinguish between an EPC (Energy Performance Certificate: a standardisation meant to grade a building’s level of energy efficiency) and an EnPC (Energy Performance Contract/Contracting: a business model). As an umbrella term, EnPC refers to models where the energy efficiency renovations are paid for over time through energy savings. So the upfront costs are not taken on by the building owner but by the contractor or a third-party investor. The owner, who continues to pay the same amount on energy as they did previously, eventually gets to benefit from increased energy efficiency and comfort. A large portion of the bills goes to the contractor to pay back the upfront costs of the project. Depending on the type of measures the payback time varies from three years to 20 years. In some forms of EnPC, like a shared savings model, the owner receives a share of the savings straight off. In public models, the end client needs to provide a certain percentage of the upfront costs to quality. Caroline Milne at the Buildings Performance Institute Europe (BPIE), a think tank, says “a key barrier to the uptake of Energy Performance Contracts (EnPCs), particularly in the private sector, is the ‘landlord-tenant’ dilemma, whereby the owner and the user of the building have split incentives for undertaking energy renovations”. Here also, a metered savings approach could help in overcoming this issue, since both parties would be aware of the economic impact and make decisions based on that. CASE-BY-CASE BASIS Anagnostopoulos coordinates the SENSEI project, an EU-backed initiative which aims to kickstart easier energy efficiency upgrades in buildings. To overcome barriers and make use of opportunities for P4P schemes, SENSEI carried out a survey to support P4P schemes’ adaptability under different policy scenarios in Europe. The project analysed 11 P4P programmes, mostly from North America, that have shown potential in decreasing system costs, deferring investments and lowering emissions. Almost all have been conducted in the context of regulatory-led energy efficiency obligation schemes and have mostly targeted non-residential buildings. However, the research shows that adoption by the residential sector is increasingly enabled through the roll-out of smart meters and the development of energy efficiency aggregators. Anagnostopoulos believes that “to be adopted in the EU, P4P programmes must be tailored to national and local circumstances”. First of all, ministries and regulatory authorities would need to be willing—or obliged—to explore P4P solutions, start small and learn from experience, while including all stakeholders of the value chain. “To ensure quality, it is important to support the smart meter rollout and to focus on precise measurement rules”, he says. With the enabling regulatory environment in place, network operators prepare simple open calls for demand-side measures and receive bids from energy efficiency aggregators. These types of calls are familiar to ESCOs and align with the existing market, helping improve the quality of measures. Milne thinks that the EU directives’ revisions within the Fit for 55 package should provide ample opportunity “to boost the playing field for energy services”. At a local level, “member states should ensure to use their national recovery and resilience plans to earmark funds for qualified ESCOs to administer EnPCs”, Milne insists. “They should utilise InvestEU funds to provide guarantees for ESCOs, in line with InvestEU programme objectives of de-risking projects by providing guarantees to help leverage private finance, thus boosting building renovations.” •
TEXT Emanuela Barbiroglio