Jyukankyo Research Institute

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

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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

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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 for 2010
  Energy-Saving Target (July, 2001)

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(1) Prospect of the Final Energy Demand and CO2
Emissions (May, 2001)
Target level
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(2) Breakdown of GHGs Reduction Target at COP3
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(3) GDP Elasticity of the Final Energy Demand
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(4) The Government Proposed Measures for 2010
Energy-Saving Target (July, 2001)
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Prospect for the ESCO as One of the Energy
Conservation Measures (at Office Buildings)
BEMS

• 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.

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
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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

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Situation of Entry into the ESCO Business (Member
Companies of JAESCO)
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Recognition of the ESCO Business (among
medium-size Factories)
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Development of the ESCO Performance and its
Outlook (Member Companies of Jaesco)
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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

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Recognition of the ESCO Business among
Municipalities (March, 2001)
Source Survey by Ministry of Public Management,
Home Affairs, Posts and Telecommunications
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Recognition of the ESCO Business among
Municipalities (1999-2000)
Source Survey by Ministry of Public Management,
Home Affairs, Posts and Telecommunications
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Prospect of ESCO implementation at Municipalities
Source Survey by Ministry of Public Management,
Home Affairs, Posts and Telecommunications
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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

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Location of Osaka Prefecture
Osaka Prefecture
JAPAN
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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
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Objects of the Energy Audits

• (1) Hospital A
• Osaka Medical Center and Research Institute for
  Maternal and Child Health
• Total Floor Space67,930?
• (2) Hospital B
• Osaka Prefectural Rehabilitation Center
• Total Floor Space14,627?
• (3) Market A
• Osaka Prefectural Central Wholesale Market
• Total Floor Space 45,112?

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Results of the Energy Audits
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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

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(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.

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(2) Approval of Long-term Debt Contract for the
ESCO Project

• 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.

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(3) -1 Interpretation of Installment Plan and
Hidden Bond Issues

• 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.

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(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

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(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 companys 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.

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(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 (PFIprivate
  finance initiative)

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(5) Locus of Operational Management Responsibility

• 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.

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(6) -1 Method to Select the ESCO

• Two Options
• The cost and the energy saving effect depends on
  each ESCOs 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.

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(6) -2 Method to Select the ESCO (continued from
the previous page)

• 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)

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(6) -3 Method to Select the ESCO (continued from
the previous page)

• 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)

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(6) -4 Method to Select the ESCO (continued from
the previous page)

• Problem with Proposal 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 doesnt enter
  into the contract, etc.

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(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)

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Policy Line of the ESCO Project at Osaka
Prefecture
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Timeline from RFPs to Conclusion of the Contract
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Evaluation of the ESCO Proposals (the Real One)
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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
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Payment Condition
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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

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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

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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