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Jyukankyo Research Institute

Promoting Performance Contracts in Japan – Cases Review –. Jyukankyo Research Institute. Hidetoshi Nakagami President,Jyukankyo Research Institute Inc. October 31,2001. Table of the Contents. 1. Introduction 2. ESCO business climate in Japan

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Jyukankyo Research Institute

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  1. Promoting Performance Contracts in Japan – Cases Review – Jyukankyo Research Institute Hidetoshi Nakagami President,Jyukankyo Research Institute Inc. October 31,2001

  2. Table of the Contents 1. Introduction 2. ESCO business climate in Japan 3. Implementation of ESCO projects at municipalities 4. ESCO project at Osaka Prefecture ---The first full-fledged ESCO case at municipality in Japan--- 5. Conclusion

  3. Table of the Contents 1. Introduction 2. ESCO business climate in Japan 3. Implementation of ESCO projects at municipalities 4. ESCO project at Osaka Prefecture ---The first full-fledged ESCO case at municipality in Japan--- 5. Conclusion

  4. The Latest Energy Policy for the Long-term Energy Demand in Japan (1) Prospect of the Final Energy Demand and CO2 Emissions (May, 2001) (2) Breakdown of GHGs Reduction Target at COP3 (3) GDP Elasticity of the Final Energy Demand (4) The Government Proposed Measures for2010Energy-Saving Target (July, 2001)

  5. (1) Prospect of the Final Energy Demand and CO2 Emissions (May, 2001) Target level

  6. (2) Breakdown of GHGs Reduction Target at COP3

  7. Final Energy Demand annual growth ratio (%) GDP annual growth ratio (%) Elasticity 73/80 -0.04 3.5 -0.01 80/90 2.0 4.1 0.50 90/99 1.6 1.1 1.40 99/10 0.15 2.0 0.08 99/10 0.00 2.0 0.00 (3) GDP Elasticity of the Final Energy Demand

  8. Management of Traffic System (TDM , ITS) Inter-Sector 1% 17% Strengthen of Standard for Factory 36% Transport Sector Industrial Sector Technology Development of Electric Vehicle 10% 30% 57Million kl 36% Promotion of Clean-Energy Automobile 3% Commercial and Residential Sector 33% 8% Strengthen of Standard for Appliances 10% 15% Top-Runner Approach Strengthen of Standard for Housing (4) The Government Proposed Measures for2010Energy-Saving Target (July, 2001)

  9. The steep increase in energy consumption will be expected in the Commercial sector. Promotion of an Building Energy Management System (BEMS) with IT technology Preparing circumstances to promote ESCO projects Strengthening expansion of the regulatory action for Office buildings. ESCO guarantees energy savings at fixed rate Prospect for the ESCO as One of the Energy Conservation Measures (at Office Buildings) BEMS Measures for office building ESCO Regulatory action Energy Cost Savings by every conservation Customer Customer Profits Customer Guarantee Savings ESCO Service ESCO charge Energy cost Energy cost

  10. Table of the Contents 1. Introduction 2. ESCO business climate in Japan 3. Implementation of ESCO projects at municipalities 4. ESCO project at Osaka Prefecture ---The first full-fledged ESCO case at municipality in Japan--- 5. Conclusion

  11. Situation of Entry into the ESCO Business (Member Companies of JAESCO)

  12. Recognition of the ESCO Business (among medium-size Factories)

  13. Development of the ESCO Performance and its Outlook (Member Companies of Jaesco)

  14. Table of the Contents 1. Introduction 2. ESCO business climate in Japan 3. Implementation of ESCO projects at municipalities 4. ESCO project at Osaka Prefecture ---The first full-fledged ESCO case at municipality in Japan--- 5. Conclusion

  15. Recognition of the ESCO Business among Municipalities (March, 2001) Source: Survey by Ministry of Public Management, Home Affairs, Posts and Telecommunications

  16. Recognition of the ESCO Business among Municipalities (1999-2000) Source: Survey by Ministry of Public Management, Home Affairs, Posts and Telecommunications

  17. Prospect of ESCO implementation at Municipalities Source: Survey by Ministry of Public Management, Home Affairs, Posts and Telecommunications

  18. Table of the Contents 1. Introduction 2. ESCO business climate in Japan 3. Implementation of ESCO projects at municipalities 4. ESCO project at Osaka Prefecture ---The first full-fledged ESCO case at municipality in Japan--- 5. Conclusion

  19. Location of Osaka Prefecture Osaka Prefecture JAPAN

  20. Structure for Implementation of the ESCO Project Osaka Prefecture Research Consignment Public Building Division Jyukankyo Research Institute Consulting (co-work with Osaka Public Building Division) Adjustment among related divisions - Energy Audit - Settlement of the legal barriers - Setting the policy line for the ESCO project - Making the Request for Proposals - Setting the timeline for the RFPs - Establishment of the evaluation standards - Making general outline of the ESCO contract - Supporting other variety of municipal work Section Originating Request Medical Center Division

  21. Objects of the Energy Audits (1) Hospital A: Osaka Medical Center and Research Institute for Maternal and Child Health Total Floor Space：６７，９３０㎡ (2) Hospital B: Osaka Prefectural Rehabilitation Center Total Floor Space：１４，６２７㎡ (3) Market A: Osaka Prefectural Central Wholesale Market Total Floor Space ：　４５，１１２㎡

  22. Results of the Energy Audits

  23. Settlement of the Legal Barriers Problems to be Solved: (1) Characterization of the ESCO Project (2) Approval of Long-term Debt Contract (3) Interpretation of Installment Plan and Hidden Bond Issues (4) Permission to Use Administrative Property (5) Locus of Operational Management Responsibility (6) Method to Select the ESCO

  24. (1) Characterization of the ESCO Project at Osaka Prefecture Result of the Consideration: ESCO project is - Comprehensive tailor-make contract, - Particular contract model. It is interpreted as a procurement of Specific Services on behalf of Energy Saving Services.

  25. Result of the Consideration: ESCO projects: - Long-term contract (10-15 years). - During the term of contract, the municipal entity needs to pay for the ESCO services every year. Under Article 214 of the Local Authority Law, local municipal entity needs Approval of Long-term Debt Contract at Local Assembly. (2) Approval of Long-term Debt Contract for the ESCO Project

  26. Result of the Consideration: Under Municipal guidance on application of debt: Municipal entities should pay for its procurement within a purchased year from the prepared budget. Inappropriate extension of the payment term could be illegal and called “hidden bond.” However, there are certain types of goods and services that could be procured. (3) -1 Interpretation of Installment Plan and Hidden Bond Issues

  27. (3) -2 Interpretation of Installment Plan and Hidden Bond Issues Result of the Consideration: Under the present circumstances: - Only limited amount of debt to be issued each year. - Hard to utilize the debt for such ESCO projects. - However, Osaka prefecture successfully interpreted ESCO project as a procurement of ESCO services, which will be provided under a comprehensive tailor-make contract, including design & construction and guarantee for energy savings

  28. (4) -1 Permission to Use Administrative Property Result of the Consideration: Shared Savings Contract scheme: - During the contract term, all ESCO equipment is owned by the ESCO - This means that private company’s property is placed in the municipal site. - Needs for The ESCO to apply for permission to use administrative property and pay the use fee for it. - Possibility of reduction or exemption for the fee, though, it needs to be given more consideration.

  29. (4) -2 Permission to Use Administrative Property (continued from previous page) Reference of the Consideration: * Article 238-4 of the Local Autonomy Law: management and disposition of the administrative property * Article 225 of the Local Autonomy Law: Use fees * Municipal Ordinances on behalf of reduction and exemption of the fees for the use of administrative property * Municipal Regulations on behalf of the standards for the reduction and exemption of the fees for the use of administrative property * Legislation Supporting PFI (PFI=private finance initiative)

  30. Result of the Consideration: ESCO Service : Operation and maintenance of the facility, Municipality : - Employees are responsible for management of the buildings. - Municipalities are unlikely to let private companies be completely responsible for the public facilities. Municipality : The existing equipment ESCO : The newly installed ESCO equipment. (5) Locus of Operational Management Responsibility

  31. (6) -1 Method to Select the ESCO Two Options: The cost and the energy saving effect depends on each ESCO’s proposals and low-budget proposal would not necessarily bring the best benefit for the municipal entity. Applying general competitive bidding for the ESCOs is inappropriate. Among other ways of supplier selection, two types could be considered to apply for the ESCO projects at municipalities; (1) competitive bidding system with comprehensive evaluation, and (2) proposal method and negotiated contract.

  32. Option A: Competitive Bidding System with Comprehensive Evaluation The enforcement order under Local Autonomy Law (*1) allows competitive bidding system with comprehensive evaluation. However, this selection method is only applied within the limits of the estimated price for contract, and the municipal entity needs to specify the detail of the project beforehand at certain degree. This method is inappropriate to have ESCO proposals with ingenuity and uniqueness. (*1: Article 167-10-2) (6) -2 Method to Select the ESCO (continued from the previous page)

  33. Option B: Proposal Method and Negotiated Contract This system is to invite public participation for the ESCO proposals without any prior specification of the detail by the municipal entity. Among the participation, the municipal entity may enter into a private contract with the best ESCO based on the objective evaluation applied to the submitted design proposals. Compared with other supplier selection methods, this one could be the most appropriate ordering system, which enable procurement of flexible and effective ESCO proposal. Problem with this method. (TO (6)-4) (6) -3 Method to Select the ESCO (continued from the previous page)

  34. (6) -4 Method to Select the ESCO (continued from the previous page) Problem withProposal Method and Negotiated Contract: Even though the Proposal Method and Negotiated Contract seems appropriate, there remains an issue with giving a reason of the private contract. Local Autonomy Law and Accounts Law limit to exclusive cases to be able to apply this method. Such exclusive cases are;(1) competition is not effective according to the nature and the aim of the contract, (2) there is an urgent needs for the procurement, (3) there is no participants, (4) winning bidder doesn’t enter into the contract, etc….

  35. (6) -5 Method to Select the ESCO (continued from the previous page) Result of the Consideration: Osaka Prefecture adopted Proposal Method and Negotiated Contract with a careful consideration, giving a reason of the procurement of ESCO services, which require special skills and track down the supplier, according to the Exceptional Government Ordinance(*1) . (*1: Article 10-1-1)

  36. Policy Line of the ESCO Project at Osaka Prefecture

  37. Timeline from RFPs to Conclusion of the Contract

  38. Evaluation of the ESCO Proposals (the Real One)

  39. Evaluation Items for ESCO Proposals • - Past Performance on Other ESCO Projects • - Greater Annual Profit for the Municipality during the Contract • Term • - Greater Total Profit for 15 Years • - More than 10% of Energy Saving Rate for Total • - Greater Effect on CO2 Reduction and Environmental • Improvement • - Greater Amount of the Guaranteed Energy Savings • - Financial Credibility and Ability to Access Long-term • Financing • - Shorter Contract Term

  40. Payment Condition

  41. Table of the Contents 1. Introduction 2. ESCO business climate in Japan 3. Implementation of ESCO projects at municipalities 4. ESCO project at Osaka Prefecture ---The first full-fledged ESCO case at municipality in Japan--- 5. Conclusion

  42. Operational Issues Adjustment among the interests of the various related departments and agencies within the municipal entity Increase in overall project cost due to procedure for permission to use administrative property and the use fee No consideration for consigning operation and maintenance of the existing equipment to the ESCO No authorization for operation manual for the existing equipment provided by the ESCO Lack of incentives for the ESCO to achieve more Energy Savings due to absence of the Bonus clause Preferential treatment for the local companies

  43. Task for the Future To encourage further implementation of ESCO projects at Municipal entities, such problems below need to be solved: Further study for the procedure based on the Legislation Supporting PFI Problem solving of the needs for identifying quotation of the project cost in advance Reduction or Exemption measures for the fee to use administrative property Simplification of the process of RFPs

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