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Energy efficiency implementation program for state level in Malaysia
The document discusses the implementation and benefits of Energy Performance Contracting (EPC) in reducing energy costs for government and commercial buildings. It highlights various case studies, procedures, and successful models that demonstrate significant energy savings and emphasizes the necessity for building owners and Energy Service Companies (ESCOs) to collaborate effectively. The content also outlines financing options and technical requirements for successful EPC projects in Malaysia and other regions.
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Energy efficiency implementation program for state level in Malaysia
- 1. By ZAINI ABDULWAHAB Committee Member (Strategic Initiatives) MAESCO 2014
- 2. ENERGY SERVICESINDUSTRY AND EPC SUCCESS STORIES FOR ENERGY COST REDUCTION EPC IMPLEMENTATION FOR BUILDING FACILITIES WHERE AND HOW TO SAVE?-Potential energy saving opportunities from detailed energy audit What’s Next and The Way Forward…
- 4. Source: Lawrence BerkeleyNational Laboratory , National Association of Energy Service Companies, USA September 2013
- 5. Source: Lawrence BerkeleyNational Laboratory , National Association of Energy Service Companies, USA September 2013
- 6. Source: Lawrence BerkeleyNational Laboratory , National Association of Energy Service Companies, USA September 2013
- 7. Clearly, the industrialand commercial sector s offers much higher savings potential Source: www.reexasia.com
- 8.
- 9. Source: Government PropertyGroup ,Integrated Energy Efficiency Retrofits and Energy Performance Contracting ,Australia,2011
- 10. Greener Government Buildings Program in 2009. Aimed to save $1 billion in energy & maintenance costs in 25 year To reduce emissions from government buildings by 20% by 2020. A simple government-wide protocol for the EPC process Loans for agencies to implement energy efficiency upgrades Establishing a facilitation unit in the Department of Treasury and Finance A mandate for all agencies to implement energy efficiency upgrades at sites accounting for 20% of agency energy use by 2012 and 90% by 2018. Commenced with a trial EPC covering 16 office buildings, and is now being rolled out across agencies $160 million in 4 years Decisions on additional funding to complete the program will be made in coming years.
- 11. The StrategicEnergy Efficiency Policy for Queensland Government Buildings - to reduce their energy consumption by 5 % below 2005-06 levels by 2010, and 20 % by 2015. Shares some key features with the Victorian program - the use of EPC and facilitation by a single department, the Department of Public Works. The Department of Public Works has so far invested over $20 million in improving the energy efficiency of 25 of the sites that it owns, and has reduced its energy use in those buildings by 18 megawatt hours per year.6
- 12. Federal, State,and local governments in the US invested over $21 billion in EPC since 1997. The US Federal Government’s 2009 economic stimulus package included an additional $3.1 billion for efficiency in existing federal government buildings Federal and State governments have passed specific laws to facilitate EPC and accept up to 15-20 year payback periods. Research in the US indicated that EPCs have delivered general benefit to cost ratios of 1.6 to 1, with higher 2.1 to 1 ratios for EPCs in health facilities.
- 13. Development ofmanuals on additional models and support-EPC + White Certification › Quality Standards › Comprehensive Refurbishment & link to Facility Management › Norms /Certification › Financing Intensive dialogue with market actors - Building owners - Financial sector - ESCOs Capacity building & Increased awareness, know-how & exchange › Over 100 events organised and attended, 2,000 participants with about 60 are new EPC experts. Pilot projects › Over 360 buildings screened › 30 more concrete projects received further support › 17 resulted in concrete EPC projects › About 1 million square meters › Energy cost baseline of almost 10 million Euros/year › Estimated energy savings between 10% and over 25%
- 15. Malaysia’s EPC casestudy : Warehouse Facilities Application Areas: - Fluorescent Lamps - High bay Lighting - HID After Installation: 20,000 pcs x 26W/1000 Before Installation: 20,000 pcs x 45W/1000 Total annual Saving = 42.2% = 3,283,200 kWh, = RM 920,000 Source: MAESCO member
- 16. Malaysia’s EPC casestudy : Integrated Shopping Complex Facilities Areas of Conservation Implementation: 1) Transformers (MSB) 2) Cooling System – Chillers, C/Tower, AHUs, CHW & CDW Pumps 3) Lighting System – Internal, External & Parking 4) Peak Demand Control Total Actual Saving Achieved = RM 1,495,000/year Total Proposed Saving Source: MAESCO member = RM 905,000/year
- 18. Commitment to getfaster results!
- 19. Energy Supply & Utilization
- 20. Source:The American Instituteof Architects,2010
- 21. Options To REDUCEEnergy Costs For Businesses ENERGY EFFICIENCY IMPROVEMENT PROGRAM Sustainable Energy Management Awareness Program Capacity Building – Training & Development HRDF refundable programs Measurement & Verification (M&V) Internal/3rd Parties Adoption of Energy Management System (ISO50001) Internal/Consultant Energy Saving Project Energy Auditing Internal Budget EPC Model Full/matching grant – with commitment to implement Energy Saving Projects Implementation EPC model Standard Procurement SUPPORT MEASURES by the government
- 22. Source: Government PropertyGroup ,Integrated Energy Efficiency Retrofits and Energy Performance Contracting ,Australia,2011
- 23. Traditional Integrated EnergyServices Model Source: Government Property Group ,Integrated Energy Efficiency Retrofits and Energy Performance Contracting ,Australia,2011
- 24. “Energy Performance Contractingis when an ESCO is engaged to improve the energy efficiency of a facility, with the guaranteed energy savings paying for the capital investment required to implement improvements”
- 25. Project Funding& Financing Options Engineering & Economic Feasibility Studies Project Design, Engineering & Permitting Project Construction Project Commissioning Operation, spare parts & Maintenance Performance measurements & monitoring Energy performance reporting
- 26. Finance energysaving improvements with no upfront capital Invest savings achieved into other projects ESCO to identify Energy Saving projects ESCO guarantee Energy savings - the remuneration of ESCOs is directly tied to the actual energy savings achieved Energy saving is shared between ESCO & the building owneras per agreed terms & payment schedule with a single-source responsibility ESCO supplies, installs, maintains & retain an on-going operational role in measuring & verifying the savings over the contractual terms. Use future energy ,cut operating cost, be more competitive & improved comfort & productivity from upgraded systems Positive environmental impacts & reduced environmental footprint
- 27. Item EPC-Shared SavingModel Cash Purchase Technical Expertise ESCO ESCO Implementation(design, installation, ESCO ESCO testing & commissioning) Funding Source ESCO OWNER Sharing of returns % At agreed % & conditions 100% to OWNER Technical & Investment Risks ESCO OWNER Energy Performance Maintenance & monitoring works and risks ESCO OWNER
- 28. Savings basedon actual & measured energy performance data with permanent measuring equipment Capable ESCO- Technically & Financially Comprehensive EPC Contract document Understanding of the how EPC works & it long term benefits by facilities owners
- 29. 1. GUARANTEED SAVING Model • The loan goes on the client’s balance sheet 2. SHARED SAVING Model • The loan goes on ESCO’s balance sheet In all above, ESCO provides a guarantee of the project’s technical performance and satisfaction of contracted specifications with the client
- 30. Loan Project Fees FACILITIES OWNER Agreed BANK ESCO Project Design& Implementation Repayment
- 31. Owner’s Share(10-30%) ESCO’sshare(70-90%) (Loan & interest, O&M, spare parts, insurance, profit & etc) BEFORE EPC contract period Baseline Detailed Energy Energy Audit 100% saving enjoyed by owner bill saved After EPC contract period Develop EnMS & in-house capacity building Implement EnMS & sustain saving YEAR ENERGY BILL Implement EPC Project
- 32. GUARANTEED SAVING Facilities owner takes out “normal” loan (will appear on balance sheet) ESCO guarantees loan can be repaid with savings ESCO pays difference if minimum savings not met Main advantage: ESCO can undertake more projects SHARED SAVING Facilities owner does not take loan (will not appear on balance sheet) ESCO finances project: takes performance & credit risk Facilities owner pays higher % to ESCO Main advantage: Independent of Facilities owner ’s borrowing capacity
- 34. Experiences in EPC Projects /Track Records in energy services Financial Strengths Management capacity in energy services Technical Competency & Expertise ESCO To secure financing & ensure sustainable operations MAESCO WILL ASSIST IN THE SELECTION OF ITS MEMBERS
- 36. SAVING POTENTIALS Pumps (25% - 35%) Chiller (20% - 25%) AHU/FCU (25% - 35%) Cooling Tower(15% - 20% Lighting System (40-60%) Source: MAESCO member
- 37. Energy Saving MicroBallast and HP Fluorescent T8-28 watts LED Fluorescent Tubes LED Down Light LED Ceiling Light High Performance LED Street Light LED Spot/Flood Light Savings at 40-60% from lighting system
- 38. EPC Contract Negotiation& Signing Install Data Logger/ permanent sub-meters Collect energy data to establish energy baseline values Improve & optimize energy consumption with energy saving measures Measure & monitor actual energy savings achieved against agreed baseline values
- 39. Measurement & Verificationof Actual Electricity Consumption Reduction Achieved (7.8 – 4.7)/7.8 (8.0 – 4.6)/8.0 Saving = 42.5% Saving = 40% Source: MAESCO member
- 40. Commitment fromClient Factors Affecting Savings Performance Evaluating Savings Uncertainty Minimum Operating Conditions Energy Prices Verification by a Third Party Baseline Adjustments (Non-Routine) Balancing Uncertainty and Cost
- 41. What isguaranteed? › The minimum amount of savings expected to be achieved › The method, report formatting and formula for calculating shared savings will be paid to the ESCO; › Conditions to be applied if savings achieved are less than guaranteed by the ESCO.
- 42. The costsavings measurement with significant changes of operations at the facilities. The responsibilities of building owners and the ESCO throughout the contract period. Maintenance, use and modification/ removal of the equipment that was installed by the ESCO by the facilities owner. If the equipment installed by the ESCO is lost or damaged Guarantee of losses and liabilities by ESCO to the facilities owner.
- 43. •Facility owner participatein establishing the energy baseline, Energy Baseline Development • The facility owner agree on the definitions and methodology for making any future adjustments to the energy baseline and should be A part of the contract. Energy Baseline Adjustment •The allowance of operational savings is generally discouraged. Operational Savings Stipulated Savings •Should be avoided/used minimally. •ESCOs inflated the interest rate of funds borrowed for additional profits. •Facility owners may check/arrange their own financing at lower rates. Excessive Finance Charges
- 44. •Some ESCOs haverequired that the preventive maintenance on facilities also be outsourced to that ESCO Required Maintenance Agreements •off-site control must be avoided. Lack of Local Facilities Control •Savings should be calculated on an annual basis and stand alone on that basis. Terms of Savings Reconciliation Versus Budget Cycle •the use of a project manager or a third party verifier by the client is highly recommended. Quality Control •Transparency in the overall costs involved(technologies, )&M, interest rates, IRR, profits and etc.) Owners request unreasonable amount of shared saving %
- 46. ENERGY EFFICIENT BUILDINGS– PROPOSED PROCESS FLOW STAGE 1 - PREPARATORY (2-3 weeks) STAGE 2 - AUDIT (2 -3 Months) STAGE 3 - RETROFIT (3-6 months) STAGE 4 – O&M (5-7 years) Building Owner Program Manager ESCO 1.Initial Briefing 2.Obtain Initial Info • Intro on EE Bldgs • Form 1 to fill up 3.Workshop On EE 4A. Apply for BSEEP Fund 4B.Engage with Other Funders 5. Evaluate, select & appoint ESCO 6.Energy Audit 8.Present Audit Report Yes Yes 7.Prepare Energy Audit Report 9.Prep are Draft EPC Contract 10.Nego 11.Sign EPC Contract 12.Implement EPC Works Performance Monitoring & Verification Yes Monthly Payment to ESCO • Implementation process • Contract principles • Top mgmt. participation • Form 2 to fill up Funding Yes Assistance/Advisory on M&V Monitoring, Operation & Maintenance based on contractual conditions
- 47. A Standardized Government Guidelines A Lead Agency A source of Capital Mandates & set targets on agencies Commitment to get faster results!
- 48. FINANCING Sustainable FundingSources Revolving Fund /Low Interest Loans Assessment Criteria For Energy Services/Energy Efficiency Solutions TECHNICAL ASSESSMENT Competent & Independent Parties Transparency In Assessment Criteria ACTUAL ENERGY PERFORMANCE M&V Competent & Independent Parties Recognition Of M&V Services FISCAL INCENTIVES GOVERNMENT AGENCIES,FINANCIAL INSTITUTIONS, PROFESSIONAL BODIES
- 49. The potentialsin Malaysia is still relatively “UNTAPPED”.EPC is a proven workable model for faster EE implementation! Interested parties must have the same understanding & goals on how to make EPC works – WIN-WIN & LONG TERM ENERGY COST SAVINGS! ESCOs must have/develop competency & capability to ensure successful EPC projects implementation More successful EPC projects are required to attract more attention of building owners & banks/investors
Editor's Notes
- #19 Recommendation 1: A Government-wide protocol Administration costs will be substantially lower if there is a single protocol that all agencies follow to improve their energy efficiency. This protocol needs to establish: How agencies engage with ESCOs to undertake energy efficiency improvements Using an accreditation system for ESCOs that ensures that ESCOs have sufficient expertise to implement and maintain an energy efficiency upgrade. The Energy Efficiency Council is currently developing a national accreditation scheme that should come into operation in 2011. Systems to provide loans to agencies to undertake energy efficiency upgrades in their built assets. Monitoring/verification systems. These systems are critical to the success of a program in which a number of factors can influence energy savings (e.g. changes in staff numbers). It is strongly recommended that governments adopt the International Performance Measurement and Verification Protocol (IPMVP), which includes protocols to address these issues. Recommendation 2: A lead agency There are substantial economies of scale to be derived from having a single, expert unit within Government that assists other agencies in undertaking energy efficiency upgrades. For example, EPC contracts are relatively complex and ensuring that they are right in the first place is critical to their success. The lead agency should generally be a central agency that has a whole of government focus and possibly an existing role in strategically managing government buildings. Appropriate agencies include Public Works, Treasury and Finance and Premier and Cabinet. Recommendation 3: A source of capital Agencies often lack access to sufficient available capital funding to pay for the upfront costs of energy efficiency upgrades. As agencies will not know how much capital is required until they have undertaken a Detailed Facility Study, cyclical budget processes are not ideal for energy efficiency retrofits. In particular, ESCO’s subsidise detailed facility studies, which means that if an agency commissions a Detailed Facility Study, but does not secure funding to implement the retrofit, the ESCO will make a substantial loss. The most cost effective solution is for a government to set up a simple process where an agency is guaranteed access to capital for an integrated energy service contract (e.g. EPC) if the Detailed Facility Study demonstrates that the project will meet a certain return on investment threshold. In the Victorian Government the threshold is 12 per cent. Various arrangements have been put in place by governments to provide investment funding for energy efficiency works, including: The Victorian Government uses Section 37 of the Victorian Financial Management Act, which allows loans for self-funding projects. The Queensland Government has established a loan arrangement with Queensland Treasury Corporation for the funding of EPC. The NSW and ACT governments have established revolving funds. US governments allow agencies to directly borrow capital from the private sector to fund EPCs. Loan repayments are normally made directly to Treasury or the private sector source of capital. Ongoing savings are normally kept by the agency, with Treasury applying an expected efficiency improvement dividend on all agencies, irrespective of whether they have undertaken the efficiency upgrade or not. Recommendation 4: Mandates on agencies Agencies generally focus on only those performance measures against which they are rated. As a result, they often put a low priority on matters such as energy efficiency. Experience demonstrates that governments need to place mandates onto agencies if they want to achieve government-wide energy saving goals. Victoria has taken the approach to place a mandate on agencies’ inputs (e.g. implement EPCs across a targeted percentage of sites by 2020), rather than agencies’ outputs (e.g. achieve energy savings of 20% by 2020). The choice of target will depend on government's priorities. Output targets will give more certainty about energy and greenhouse savings. Input targets will generally deliver the best economic results, and although they may deliver more energy and greenhouse savings there will be less certainty about the scale of energy reductions.
- #23 A government-wide energy efficiency upgrade process would deliver the following financial benefits: Direct cost savings from reduced energy use Avoided future costs through reduced exposure to electricity price rises The diagram below shows a hypothetical energy efficiency project and illustrates the benefits that accrue over time through investment in energy efficiency initiatives. The upper curve shows the business-as-usual (BAU) case which shows the cost of supplying energy to a certain facility. In this scenario, costs are increasing over time in line with current forecasts of growth in energy consumption and increases in energy tariffs. At the start of year 1, an energy efficiency contract project is implemented, cutting the site’s energy consumption by 30 per cent. Hypothetical Scenario – energy efficiency costs and savings For illustrative purposes only, it is assumed that the capital cost of the energy efficiency contract is $10 million, with 30 per cent savings on energy costs guaranteed by the ESCO over a payback period of 7 years (i.e. direct cost savings delivered by the project accumulate to the value of the initial expenditure over seven years). In this example there is a cost saving of $1.43 million every year to the customer through reduced energy use, which accumulates to $10 million over the seven year payback period. Energy savings are guaranteed under the project at the current energy price (i.e. year 1 prices). These savings are reflected in the blue area of the chart as the ‘loan repayments’, as the energy savings are used to pay back the initial investment required to undertake the project. Once the loan has been repaid, these funds are then available for other purposes. The green area represents the net recurrent annual savings realised beyond the payback period for the project, as energy use for the facility will theoretically remain at the reduced level (i.e. at 70 per cent of the BAU cost) in perpetuity. Both the blue and green areas refer to a ‘real’ cost saving to government (i.e. money that can be used by the customer for other purposes). The white area directly below the BAU line represents the costs
- #24 Traditional methods The traditional way to deliver energy efficiency upgrades (on the left) generally involves: A government agency procures an energy audit from an engineering consultant or specialist auditing firm. If the audit identifies significant opportunities, the government agency then seeks funding from central agencies. The project often stalls at this point. If the agency secures funds, they then hire contractors to undertake or project manage the works. Once the works are implemented the project ends. Integrated Energy Services Model The Integrated Energy Services process (right) instead focuses government effort on developing a whole-of-government protocol and selecting a lead contractor: The government establishes a whole-of-government protocol for energy efficiency upgrades. This includes establishing access to capital for energy efficiency upgrades that meet a pre-determined return on investment (ROI) target, typically between 7 and 15 per cent per annum. An agency seeks expressions of interest (EOIs) from energy service companies (ESCOs) covering their competencies and previous experience The agency selects three ESCOs to undertake an initial, and free, assessment of energy efficiency opportunities (a ‘Request for Proposal’ (RFP)). Based on these assessments, the agency selects a preferred ESCO. The successful ESCO undertakes a detailed assessment of energy efficiency opportunities (a ‘Detailed Facility Study’) and presents the agency with a set of measures that they guarantee will deliver a certain level of energy savings. If the agency agrees to proceed, the ESCO implements the energy efficiency upgrade and may provide ongoing management of these measures. Alternatively, the ESCO may assist the agency to hire subcontractors to implement the upgrade and help the agency develop a management plan. The ESCO or an independent auditor will monitor and verify the energy savings. This provides a level of surety of actual performance outcomes. Ideally, the contractor and agency form a close partnership with a shared goal to maximise ongoing energy and cost savings. There are a number of options within this type of Integrated Energy Services model, including Energy Performance Contracting (EPC). EPC has the additional benefit of ongoing maintenance and guaranteed energy saving results, with the ESCO underwriting shortfalls in savings if the project does not achieve the agreed objectives. However, in some cases other forms of integrated provider contract may be more suitable (see p6).
- #37 To highlight the potentials to improve asset’s operational & energy performance to increase profitability for service providers and/or facilities owners
- #44 Challenges of Energy Performance Contracting • Energy Baseline Development It is crucial that the facility owner participate in establishing the energy baseline, instead of the contractor establishing the baseline on his own. • Energy Baseline Adjustment It is also important the facility owner agree on the definitions and methodology for making any future adjustments to the energy baseline. This should be a part of the contract. • Operational Savings Operational savings include those savings that are not derived from energy reduction. They can be labor or material savings that result from the implementation of a particular energy conservation measure. For instance, if a school has new lights installed in all classrooms, no labor or materials will be necessary in these areas for replacing lamps or ballast for some time. In some cases, especially in the claim of labor, the savings may never be realized unless a staff position is eliminated. The allowance of operational savings is generally discouraged. • Stipulated Savings Savings, not measured, that are established in the contract (often lighting changeouts) are usually to the contractor’s advantage. Usually, run times and published efficiencies of equipment are set and may not actually occur. Stipulated savings should be used minimally. • Excessive Finance Charges There have been instances where ESCOs inflated the interest rate on the funds borrowed to generate additional profits. Facility owners should check the rates against local banks or other national institutions to make sure they are competitive. Facility owners may be able to arrange their own financing at lower rates. • Required Maintenance Agreements Some ESCOs have required that the preventive maintenance on facilities also be outsourced to that ESCO. As such, they tie the maintenance agreement to the guarantee agreement. These maintenance agreements may be very expensive in relation to the value of services provided and can provide a major source of profit to the contractor. • Lack of Local Facilities Control There have been occasions where the contractors have required off-site control (often out of state) of the buildings, requiring telephone calls to change schedules and remote sensing and control in the hands of control center. While this practice has become rare with improved computer technology, it must be avoided. • Terms of Savings Reconciliation Versus Budget Cycle Some standard ESCO performance contracts are written to allow the contractor to carry over savings that occur in early years to offset losses in later years. Savings should be calculated on an annual basis and stand alone on that basis. • Quality Control Very little is more important than a solid contract, rigidly enforced. The use of a project manager or a third party verifier by the client is highly recommended.
- #45 Challenges of Energy Performance Contracting • Energy Baseline Development It is crucial that the facility owner participate in establishing the energy baseline, instead of the contractor establishing the baseline on his own. • Energy Baseline Adjustment It is also important the facility owner agree on the definitions and methodology for making any future adjustments to the energy baseline. This should be a part of the contract. • Operational Savings Operational savings include those savings that are not derived from energy reduction. They can be labor or material savings that result from the implementation of a particular energy conservation measure. For instance, if a school has new lights installed in all classrooms, no labor or materials will be necessary in these areas for replacing lamps or ballast for some time. In some cases, especially in the claim of labor, the savings may never be realized unless a staff position is eliminated. The allowance of operational savings is generally discouraged. • Stipulated Savings Savings, not measured, that are established in the contract (often lighting changeouts) are usually to the contractor’s advantage. Usually, run times and published efficiencies of equipment are set and may not actually occur. Stipulated savings should be used minimally. • Excessive Finance Charges There have been instances where ESCOs inflated the interest rate on the funds borrowed to generate additional profits. Facility owners should check the rates against local banks or other national institutions to make sure they are competitive. Facility owners may be able to arrange their own financing at lower rates. • Required Maintenance Agreements Some ESCOs have required that the preventive maintenance on facilities also be outsourced to that ESCO. As such, they tie the maintenance agreement to the guarantee agreement. These maintenance agreements may be very expensive in relation to the value of services provided and can provide a major source of profit to the contractor. • Lack of Local Facilities Control There have been occasions where the contractors have required off-site control (often out of state) of the buildings, requiring telephone calls to change schedules and remote sensing and control in the hands of control center. While this practice has become rare with improved computer technology, it must be avoided. • Terms of Savings Reconciliation Versus Budget Cycle Some standard ESCO performance contracts are written to allow the contractor to carry over savings that occur in early years to offset losses in later years. Savings should be calculated on an annual basis and stand alone on that basis. • Quality Control Very little is more important than a solid contract, rigidly enforced. The use of a project manager or a third party verifier by the client is highly recommended.
- #48 Recommendation 1: A Government-wide protocol Administration costs will be substantially lower if there is a single protocol that all agencies follow to improve their energy efficiency. This protocol needs to establish: How agencies engage with ESCOs to undertake energy efficiency improvements Using an accreditation system for ESCOs that ensures that ESCOs have sufficient expertise to implement and maintain an energy efficiency upgrade. The Energy Efficiency Council is currently developing a national accreditation scheme that should come into operation in 2011. Systems to provide loans to agencies to undertake energy efficiency upgrades in their built assets. Monitoring/verification systems. These systems are critical to the success of a program in which a number of factors can influence energy savings (e.g. changes in staff numbers). It is strongly recommended that governments adopt the International Performance Measurement and Verification Protocol (IPMVP), which includes protocols to address these issues. Recommendation 2: A lead agency There are substantial economies of scale to be derived from having a single, expert unit within Government that assists other agencies in undertaking energy efficiency upgrades. For example, EPC contracts are relatively complex and ensuring that they are right in the first place is critical to their success. The lead agency should generally be a central agency that has a whole of government focus and possibly an existing role in strategically managing government buildings. Appropriate agencies include Public Works, Treasury and Finance and Premier and Cabinet. Recommendation 3: A source of capital Agencies often lack access to sufficient available capital funding to pay for the upfront costs of energy efficiency upgrades. As agencies will not know how much capital is required until they have undertaken a Detailed Facility Study, cyclical budget processes are not ideal for energy efficiency retrofits. In particular, ESCO’s subsidise detailed facility studies, which means that if an agency commissions a Detailed Facility Study, but does not secure funding to implement the retrofit, the ESCO will make a substantial loss. The most cost effective solution is for a government to set up a simple process where an agency is guaranteed access to capital for an integrated energy service contract (e.g. EPC) if the Detailed Facility Study demonstrates that the project will meet a certain return on investment threshold. In the Victorian Government the threshold is 12 per cent. Various arrangements have been put in place by governments to provide investment funding for energy efficiency works, including: The Victorian Government uses Section 37 of the Victorian Financial Management Act, which allows loans for self-funding projects. The Queensland Government has established a loan arrangement with Queensland Treasury Corporation for the funding of EPC. The NSW and ACT governments have established revolving funds. US governments allow agencies to directly borrow capital from the private sector to fund EPCs. Loan repayments are normally made directly to Treasury or the private sector source of capital. Ongoing savings are normally kept by the agency, with Treasury applying an expected efficiency improvement dividend on all agencies, irrespective of whether they have undertaken the efficiency upgrade or not. Recommendation 4: Mandates on agencies Agencies generally focus on only those performance measures against which they are rated. As a result, they often put a low priority on matters such as energy efficiency. Experience demonstrates that governments need to place mandates onto agencies if they want to achieve government-wide energy saving goals. Victoria has taken the approach to place a mandate on agencies’ inputs (e.g. implement EPCs across a targeted percentage of sites by 2020), rather than agencies’ outputs (e.g. achieve energy savings of 20% by 2020). The choice of target will depend on government's priorities. Output targets will give more certainty about energy and greenhouse savings. Input targets will generally deliver the best economic results, and although they may deliver more energy and greenhouse savings there will be less certainty about the scale of energy reductions.