Energy Purchase Agreements: Useful if a School is now Worried About Cashflow

The RHI subsidy, combined with a net reduction in operating costs from the installed low-carbon heat technology, will usually achieve a significant net saving for schools on oil and just about achieve break-even for schools on gas. The main advantage will be that the converted buildings will have a much-reduced carbon footprint: it is the generation of heat using fossil fuels that is the main source of carbon and other greenhouse gas emissions on a school estate.

Schools wanting to get conversions done but now unable to find the capital may want to consider the energy purchase route. Energy purchase agreements are often referred to as heat or power purchase agreements, depending on the technology to be installed; or ESCOs, which stands for Energy Services Company (the ESCO is the company that is providing the energy as a service).

The concept of an energy purchase agreement is that a 3rd-party pays for and owns the installation and then sells the energy generated – whether it be heat or power – back to the school at a price which is low enough to be attractive to the school but high enough to cover the provider’s own costs and also generate a return on investment for the provider.

The advantages are that it negates the need for the school to find any capital or take any loan repayment risk; and the agreement is usually structured to offer a degree of immediate savings in operating costs for the school. The quid pro quo is that the school commits to purchasing a level of energy annually which is similar to that currently used, over a 20 or 25-year period.

The disadvantage is that over the 20 or 25-year term the school will not save as much money as it would through self-financing or via a bank loan. Contractually this is also a more difficult financing methodology to set up and manage successfully and careful consideration needs to be given to exactly what buildings are in scope for the agreement and what tasks and services it covers. Nonetheless this route does at least enable a school to achieve a sustainability target when it might not otherwise be feasible, which has become a more common situation thanks to Covid-19. It also offers a lifeline to schools that currently use oil for heating that are unable to finance a low-carbon heat conversion project before the forthcoming RHI entry deadline.

EPAs usually offer a buy-out option during the term of the agreement, or at its end, such that the school can take over ownership. Heat purchase agreements invariably rely on the inclusion of the RHI, without which they are unlikely to prove cost-effective for either party.