Energy-Performance contract and their conclusion in the state procurement process

21 October 2020




By Levan Mosakhlishvili — Associate Professor of Law at the Caucasus University and the Energy Ambassador of the EFIX project in Georgia. He is an author of 7 books, 23 articles and an author or co-author of 14 researches.


In 2017 Georgia joined Energy Community, after which with respect to implementation of Energy field legislation, terms of article 218 of associate agreement became applicable, according to which terms of the Energy Community Charter and amendments to the European Union legislation undertaken via the Charter have priority over the terms under the Associate Agreement energy field trading chapter.  In the annex XXV of the Associate Agreement a list of relevant EU Directives and Regulations is provided, to which approximation of legislation is obligatory for Georgia. In order to ensure the fulfillment of that obligation, the Parliament of Georgia adopted a “Law of Georgia on Energy Efficiency”, which is in full compliance with Energy Efficiency Directive 2012/27/EU of the European Council dated on 25 October 2012.


Fulfillment of the aims of the law will support the increase of energy efficiency in Georgia and therefore saving of electricity via economically and ecologically sound measures. In particular it will cause increase of energy efficiency in energy supply and final energy consumer sectors; regulation of increasing demand on energy resources and creation of economically and ecologically sound energy management practice; reducing energy resources import dependence, improving outside ecological and inside building climate conditions, which is one of the factors for protecting health, improving capacity for work and at the educational institutions improving teaching process and developing pupils.


One of the new institutes which was introduced via the new law is the energy performance contract. Energy performance contract is a contractual relationship between the provider and the receiver, which is being supervised and checked during the whole term of the contract and the invested amount in the works, services or goods is compensated by the contract agreed improvements and/or other energy agreed criteria, including financial savings. The article concerns the rules applied during energy performance contracts in public procurement and problems associated with it.


Kew words: energy efficiency, energy-performance contract, state procurement


“Association Agreement between the European Union and the European Atomic Energy Community and their Member States, of the one part, and Georgia, of the other part” (hereinafter – Association Agreement) envisages the approximation of Georgian legislation to the requirements of the European Union, which aim to create a competitive market in energy field. Annex XXV of the Association Agreement contains a list of EU directives and regulations approximation to which is obligatory for Georgia and which aim to create a competitive energy market. It is also noteworthy that in 2017 Georgia became a member state of Energy Community via the Protocol (hereinafter Protocol), which determined the timetable for the implementation of the relevant EU directives and regulations. Article 2 of the Protocol envisages approximation of the Georgian legislation to the EU Energy Efficiency directive 2012/27, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC. 


After becoming a member state of Energy Community, regarding the implementation of EU energy legislation, Article 218 of the Association Agreement became applicable (including footnote 31), according to which, in case Georgia becomes a member state of the Energy Charter, Energy Charter Treaty and amendments to the European Union legislation undertaken via the Charter have priority over the terms under the Associate Agreement energy field trading chapter. According to Article 3 and 5 of the Energy Charter Treaty, the competence of the Energy Community is to implement the EU energy governing legislation via the adapted form.


In order to fulfill that obligation, Parliament of Georgia adopted law of Georgia “On Energy efficiency”, which is in full compliance with the European Council 2012/27/EU Directive on Energy Efficiency”. 


Aim of the law is to support the increase of Energy Efficiency on the territory of Georgia and therefore saving energy via economically and ecologically appropriate means. For this reason, the law ensures the establishment of basic legal grounds for supporting and necessary means for the implementation for Energy Efficiency, which in turn also support to achieve the target for the Energy Saving.


Achieving these goals ensures the increase of the Energy Saving and fulfillment of obligations to the international organizations. Therefore, law of Georgia “On Energy Saving” envisages the increase of Energy Efficiency in the sectors of energy distribution and final consumer.


According to both Association Agreement and law of Georgia “On Energy Efficiency”, Georgia undertook obligation to carry out measures to develop energy services market, via introducing obligations for administrative bodies and also envisaging relevant energy efficiency rules and guiding principles, technical compliance and relevant competition in state procurement process. More specifically, Georgia undertook the obligation that monetary thresholds in state procurement for the purposes of implementing energy efficiency rules and guiding principles and carrying out procurement energy efficiently will take place no later than 21 March, 2022.


One of new instruments introduces via the new law is the energy performance contract, which shall be integrated in the state procurement field. In order for the state to approve the implementation of energt efficiency rules and guiding principles and their implementation in the practice, creation and approval of such action plan is required which will support the implementation of those messures.


One of new instruments introduces via the new law is the energy performance contract, which shall be integrated in the state procurement field. In order for the state to approve the implementation of energy efficiency rules and guiding principles and their implementation in the practice, creation and approval of such action plan is required which will support the implementation of those measures. However, before creating a plan, it is important to select a type of EPC Contract which fits the economic and legal framework of the state. For this reason, the lawmaker determined only the general principles, which shall be taken into account by the terms of the EPC Contract. Specifically, by the terms of the EPC Contract, the following terms shall be taken into account:


  1. Clear and transparent list of the energy efficiency measures to be carried out and their results;
  2. Guaranteed energy savings and their financial value which will be achieved by implementing the terms of the EPC Contract;
  3. Terms of calculating and confirming energy savings, periods during which they are confirmed to the previous periods, methodology of confirming energy savings, evidence to be submitted by each party, quality control and guarantees to be submitted by the investor;
  4. Provisions on the normalisation of energy consumption and the adjustment of the financial value of energy savings;
  5. The duration of the contract and the stages of implementation, and the terms and conditions of a warning notice;
  6. A clear and transparent list of the obligations of the parties to the contract and the potential risks of their fulfilment;
  7. Detailed information on the imposition of responsibility on the parties to the contract for a breach of the terms of the contract;
  8. The procedure for amending the terms of the EPC Contract.


This general terms are obligatory for both private and public EPC Contracts.


On the other hand, the procedures can be completely different regarding the sectors. It is especially important that the relevant procedures are determined in the public sector – for the public procurement contracting authorities, as they are acting in the field of public law and have to play an important role in achieving the national target mark for the energy savings.


In the public sector, the procurement procedure must be in compliance with the national public procurement legislation (based on the EU Public Sector Directive 2004/18/EC). The EPC contract is complex and usually include all three types of public contracts: Public supply contract, Public works contract and Public service contract.


For the EPC procurement above the threshold values defined by the Commission Regulation (EU) No 1336/2013, the negotiated procedure with prior publication of a contract notice is used for the following reasons:


  • single tenders (i.e. bids) can be adjusted during the negotiations with tenderers (i.e. Bidders) within the award procedure;
  • according to the Public Sector Directive, this type of award procedure can be used only in exceptional cases “when the nature of the works, supplies, or services or the risks attaching thereto do not permit prior overall pricing“.


The alternative ‐ open procedure – is not suitable for a complex design solution typical for EPC as within such procedure the content of particular tenders may not be adjusted after the submission of tenders,.


Utilization of the EPC method in the public sector should be commenced by consent of the building owner for the EPC project. From the perspective of ESCO, it is necessary to have a certain guarantee on the future manner of the utilization of the building or premises accepted by the owner who is authorized to approve future commitments of the client (contracting authority).


As the first step, the public procurement procedure has to be officially announced. This publication of a contract notice serves as preliminary notification to the potentially interested companies. The announcement should contain general information on the type of procurement as well as required qualifications of the potential applicants.


Second stage of EPC public procurement procedure is ESCOs ‘Expression of interest Prequalification.  In this stage, the companies react to the publication of a contract notice and express their interest in taking part in the procurement procedure.


They present the tenders and prove fulfillment of required prequalification criteria, which must be met by the ESCOs interested in tender submission.


Usually the following prequalification criteria are implemented:


  • Fundamental prequalification criteria (criminal convictions certificate of the responsible person).
  • Professional criteria (certificate evidencing entry in the Companies' Register, trade authorizations necessary for performing the public contract, potentially certificates issued by professional organizations, etc.).
  • Financial and economic and financial criteria (documents evidencing third‐party liability insurance, the applicant's turnover in the last accounting period, documents evidencing economic and financial situation of the company such as, e.g., the balance sheet, the profit and loss statement, etc.).
  • Technical criteria (a list of substantial analogous contracts concluded recently, a description of technical facilities available to the applicant, and other documents demonstrating the technical capabilities of the applicant such as quality certification (ISO 14000)).
  • These documents are checked and verified by the client (often represented by the facilitator). Only the applicants meeting all defined criteria are then invited to submit initial tender. 


Third stage of EPC public procurement procedure is Invitation to submit initial tenders & tender dossier release.  Usually, the public institutions as customers request the following components to be:


included in the energy services: detailed proposal of energy saving measures (ESM) including deep technical description;  procurement and instalment of the proposed measures;  financing of the investments (some customers may choose to co‐finance the project partly);  guarantee for installed equipment, including repairing of damaged components;  guaranteed energy savings and measurement & verification in agreed periods.


Another important guiding principle in the public procurement is the way evaluation methodology and criteria is established. In a regular case, the EPC Contract is signed by the legal entities under the private law, which is not a contracting authority under the public procurement rules. The evaluation methodology and criteria is created and checked by the mediator, which is carrying out the consultancy services to the EPC Client for the purposes of procurement; Therefore, it is important that taking into account the specifics of the public procurement evaluation methodology and criteria are set out based on the shared principles by one or more consultants, for example via the consultant selected via the consolidated tender.


As the evaluation criteria and their share shall be in the same benchmark for the each procurement considering the model of financing they shall be specified in each tender documentation. Public authorities that take part in the current public procurement procedures, considering their current resources, lack the capacity to determine either financial, quantitative (for example the saving of energy or emissions) and quality criteria (for example energy management level, quality of technological equipment, etc.).


Considering the abovementioned, correct implementation of these procedures as well as signing the EPC Contract later shall be taken into account via the entire public procurement system of the state, considering that Georgia has undertaken the obligation to carry out energy efficiency policy on the buildings that are under possession of administrative bodies. Specifically, every year, Government of Georgia shall ensure renewal of at least 1% of the total space under the control of administrative bodies that require either heating or conditioning in via achieving minimal energy requirements set out by the Georgian legislation and ensure the implementation of energy management system in the building that are in possession of the administrative bodies.


Before implementing EPC Contracts and their integration into the public procurement field, Georgia at first shall create EPC Market development strategy, which shall include the means to overcome the already existing barriers, spread of existing information and know-how; support of EPC transparency and trust; implementation of EPC in public sector.


For both public and private sectors, one of the main weaknesses of EPC is the fact that it is a complex contract, which determines the basic consumption. Additionally, it requires the existence of procedures within either private or public entity which will be necessary for the conclusion of the contract. Therefore, it is important to carry out the relevant trainings in the field and preparation of the relevant human resources.


Additionally, it is important to solve the issues regarding the property, where the EPC Contract takes place in public sector (for both state and municipal level), as dividing the support mechanisms always becomes an issue, especially in cases when in the same space different public or public and private entities are located, as well as when the owner of the building is different contracting entity under the public procurement rules or private entity and their views on the energy efficiency are different from other public procurement contracting authorities or state.


In general, the reduction of energy costs in public sector in Europe has shown that it causes reduction in financing, which in turn does not motivate the contracting authorities to be positive regarding the EPC project implementation. Bearing in mind the specific administrative rules that are applicable in the specific country, some contracting authorities have right to keep the benefit which is achieved via the costs savings; however, other authorities do not have that right. Contracting authorities have right to solve this problem by pre-project negotiation phase, however the relevant changes in the procurement procedures are still relevant to take into account the specifics of signing this type of contracts. Additionally, on both state and municipal level, a decision will have to be made, whether the saved money shall stay to the contracting authority during the whole term of the contract.


For example in Czech Republic, hospitals usually can keep the saved costs (which is attributable to high autonomy and capacity to independently develop projects), while educational buildings (schools) do not have access to those savings which is distributed in municipal budget. Combination is also acceptable when owner and budget curator split the costs and savings associated with the project.


For the abovementioned reasons, in order for Georgia to fulfill his international obligations with respects to energy efficiency – via signing EPC Contracts and their integration in state procurement, it is necessary to:


  • Simplify EPC implementation procedure in state procurement process, introduction of adequate, relevant system based on the transparency of public procurement which covers alongside with procedural aspects the relevant project registration, monitoring and effectiveness evaluation.
  • Elimination of encouragement problem, in order to implement EPC projects in public sector. This will allow public sectors to keep the assigned budget after the costs are cut and finance the EPC projects by the costs saved by the EPC projects themselves.


Article was developed under the EFIX project (Energy financing mix in order to activate private sector finance for increased investments in sustainable energy project) which was funded by European Union’s Horizon 2020 research and innovation programme in 2018.


See the article.


For more  information about the project pleas see  the project website