Webinar on Eurostat Guidance Note on EPC

In a webinar organized by EESI 2020 together with Fedarene in November 2015, European EPC experts discussed with Eurostat the implications of the guidance note on EPC.

A guidance note on EPC published by Eurostat poses major challenges for the further development of the European EPC markets. The document, which is being seen critically by many energy efficiency suppliers and clients, could pose a serious barrier for EPC in the public sector.

In August 2015, Eurostat published the guidance note “The Impact of Energy Performance Contracts on Government Accounts”. The document defines as to whom the gross fixed capital formation (meaning the investments in energy saving technologies) have to be attributed to: the public building owner (EPC client) or the ESCO (EPC supplier).

In a nutshell, Eurostat comes to the conclusion that all capital expenditure (“capex”) within EPCs should be treated, by default, as government expenditure. The only exception would be if a project fulfils the criteria of a public private partnership (PPP), which can be classified off-government balance sheets. However, EPC projects hardly ever fulfil the PPP criterion that the project has to “cover a capital expenditure in the already existing assets […] equal at least 50 % of the asset’s value”, so this does not help EPC.

So what are the consequences of Eurostat’s note? Basically, it puts an end to the possibility, that EPC projects can be implemented off-balance. But what does off-balance mean and why is it important?

If the contracting rates that an EPC client pays to the ESCO during an EPC contract are classified as operating costs (also: “opex” for operational expenditures), these expenses do not appear on the client’s balance sheet. The rates would be paid from similar budget positions as the costs for energy. This makes sense, as the costs and benefits of the project are then being balanced in the same area of the budget.

Eurostat now defines the contracting rates per se as capital costs. The investments will necessarily appear in the client’s balance sheet. Although the ESCO usually pre-finances the investments in EPC, Eurostat prescribes that it must count onto the public client’s investment budget, possibly increasing his debt level. Public debt levels, however, are limited through the Maastricht Treaty of 1992, and many local authorities will have great difficulties of getting permission from supervisory bodies to engage in EPC if it is interpreted as public debt.

As a consequence most local authorities will have much higher administrative burdens to engage in EPC, as the projects will have to be approved by the supervisory bodies. And highly indebted communities might not get permissions for EPC anymore at all. In spite of the fact that the projects will result in net savings for the client, thus contributing to budget relief. Not to mention the positive effects on energy efficiency and climate policies and targets, which can be harvested on top of the financial savings.

In a webinar organized by EESI 2020 together with Fedarene in November 2015, European EPC experts discussed with the responsible Eurostat representative the implications of the guidance note. While the discussions may have contributed to an improved mutual understanding, Eurostat could not offer any exceptions to help EPC in public buildings.

Meanwhile, EPC suppliers and facilitators from all over Europe are voicing concerns that the Eurostat note will have severe negative effects on the market development. The European associations EU.BAC and EFIEES and the Transparense project initiated a survey among market stakeholders to lobby for a correction of the guidance note. The European Commission is to be requested to look into this issue again, so that the ambitious European energy efficiency targets are not thwarted by European accounting rules which aim to limit public debt but in fact block energy efficiency investments which could deliver not only energy and CO2 savings but also financial relief for public building owners involved.

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