Over recent years energy has become a key focus for businesses: energy costs are a significant and, especially over recent years, volatile item of operating expenditure. Businesses are also obliged to reduce carbon emissions towards net zero in 2050.
This article examines the opportunities that exist to simultaneously decarbonise, de-risk operating expenditure, and ultimately increase profitability.
Technology and its benefits
Various technologies offer the potential to reduce, or in part fix, energy costs and/or reduce carbon emissions, which are primarily installing:
- Roof-top 'behind the meter' solar as a 'plug and play' method of decarbonising electricity.
- Air and ground source heat pumps to increase energy efficiency, through the preferential coefficient of performance, which, when powered by low-carbon electricity, can significantly reduce the carbon intensity of heating as well as increase comfort levels within a building when combined with underfloor heating and/or air heat recovery systems.
- LED lighting, significantly reducing the electricity consumption associated with lighting, a prime example of the maxim 'the best energy is the energy you never use'.
- Electric vehicle charging points (EVCPs) in car parks to reduce scope 1, 2 and 3 carbon emissions.
Each of the above can be capital-intensive upgrades to a business which may not be immediately financeable through cash reserves of the business.
Whilst some businesses may choose to finance these upgrades through debt and simply pay a contractor to supply and install the technology under an installation contract, there is now a burgeoning supplier market which can provide finance without burdening the balance sheet of the business with further debt, which will often fall within one of the following contractual models:
- An 'Energy as a Service' or 'Efficiency as a Service' contract (EAAS), under which a contractor installs the technology for zero capital expenditures (CapEx) to the business, but is paid a monthly 'service fee' for a period of years for that technology being made available.
- A concession contract, more suited to the installation of EVCPs, where the contractor installs the technology for zero CapEx to the business, and the contractor takes a cut of the income derived from that asset for a period of years.
Standard terms and conditions
Installers of EAAS contracts, installation contracts and concession contracts will often seek to sell their product or service on the basis of their standard terms and conditions (T&Cs). Invariably T&Cs are contractor-friendly and as such we recommend that the T&Cs:
- Are considered carefully against each business structure and aims and objectives in order to ensure that a contract entered into under the T&Cs will deliver the outcomes sought by the business.
- Are reviewed to identify any 'off-market' provisions.
Commercial watch points
Whether the EAAS, installation or concession contract is entered into under the T&Cs or a bespoke contract, the following aspects demand particular scrutiny to ensure that the contract reflects the required outcomes for the business:
- Minimum offtake/minimum payment obligations: are these obligations tied to actual generation/use of the asset? If not, the business will pay for a service that is not actually receiving, and incentivises poor technical performance.
- Technical and service levels: do the payment obligation engage only when the asset has been shown to operate to the required specification, and does the price paid flex where there is underperformance, with a suitable remediation obligation?
- Pricing: there are many and various ways to define what price paid for the installation/service, each with a particular risk profile for the customer, including:
- Floating: a set discount against the price of electricity supplied by the customer’s 'licenced' (i.e. grid) supplier - the business remains subject to the volatility in grid prices, but the discount mitigates that volatility.
- Fixed: a fixed price for the term of the agreement, which may still be subject to indexation – the business is taking the risk that grid prices do not significantly fall during the term of the contract.
- Floor/ceiling: a price is set by reference to a floating price, but is set never to exceed a set price per kWh – the business eliminates the risk of peaks in grid prices, but will invariably need to trade the discount it receives against grid prices.
- Price reviews: indexation, market testing: does the indexation mechanism operate as intended and avoid 'double indexation'? Are price increases through indexation capped, or a deemed percentage increase in times of low inflation? Market testing is uncommon, particularly where there is a 'floating price', and there is a general move from the retail price index towards the consumer price index as the measure of inflation.
- Buy-out, payments on expiry and termination: particular care needs to be taken in ensuring that buy-out and expiry/termination payments are reasonable and incentivise each party to properly perform their obligations. Where the business has a right to 'buy-out' or an obligation to pay compensation on termination reflecting the value of the asset, the contract should require ownership of the asset to pass from the contractor to the business.
Wider points
If the business has offered its premises as security for a loan, or is a tenant of the facility, the consent of the lender and/or landlord will usually be required where the EAAS or concession contract involves the granting of a lease to the contractor. In that regard:
- The lender will want comfort that the arrangements do not impact negatively on its security, and often seek an undertaking for the professional fees incurs in establishing that fact.
- The landlord will want comfort that the arrangements do not impact negatively on the value of its property, and often seek an undertaking for the professional fees incurs in establishing that fact.
- In turn, consent may be required from any secured lender of the landlord, who will have similar concerns as the businesses’ lender, and require cover for its professional costs.
If the business has sub-let any part of the building which will benefit from a low-carbon electricity generating project, it should consider whether it's required to on-supply electricity within the terms of an exemption for an electricity supply licence. Alternatively, the business could (less usually) apply for and obtain an electricity supply licence, noting the criminal sanctions that apply to the supply of electricity without a licence or outside the terms of a supply exemption.
How can Ashfords help?
The potential complexities of EAAS or concession contracts should not be a barrier to a business seeking to reduce operating costs, increase efficiency and reduce carbon emissions.
Having advised on a number of EAAS and concession contracts, our team can assist by:
- Conducting high-level reviews of contractual documentation to:
- Ensure that the arrangement matches the aims and objectives of the business.
- Identify legal and commercial risks and 'off-market' provisions and offer solutions to mitigate or reduce those risks.
- Negotiate the terms of the contractual documentation.
- Advising on the electricity licensing regime.
- Assisting with the process of obtaining lender and landlord consents required.
For further information or advice, please contact our energy and resource management team.
