An investigation into the key factors that determine the lifespan of energy cost-saving contracts

Abstract

South Africa has one of the most energy-intensive economies in the world and with the extravagant increase in electrical energy costs of the last 20 years, the South African economy has found itself in a situation where the stringent increase in electrical costs, combined with other profit inhibiting factors such as recessions and pandemics, are leaving companies with dwindling profit margins. This combined with the ever-increasing pressure to decarbonise has left companies with little choice but to reduce their energy consumption, and more importantly, reduce energy costs. The problem that these companies face is mainly that they do not possess the expertise to employ energy-cost reducing measures, and secondly, they do not possess the capital means to purchase more energy-efficient equipment. This has given rise to several different contract models whereby external (third party) companies use their capital, expertise and labour to execute energy cost-saving projects at clients' sites and are then renumerated based on the energy cost-savings achieved. Various types of contract models are used, but the mechanism is more or less the same - an external company (the ESCo) uses its capital to find, develop and implement energy cost-saving projects and initiatives at a client`s site and is remunerated based on (verified) energy cost-savings achieved. These contracts are collectively referred to, in this study, as energy cost-saving contracts. Since South Africa has such an electrical energy-hungry industry and because electrical costs have inflated by such a big margin in the last two decades, hundreds of these ESCo types of companies have emerged, creating a highly populated and competitive energy cost-saving industry. As such, companies operating in this industry are finding it harder each day to build their clientele and therefore, the need to retain existing clients has grown to become an intricate part of survival for these ESCo companies. This study investigates: - The key factors that determine the lifespan of an energy cost-saving contract; - investigates the factors that clients of these contracts take into consideration when measuring the success of the said contract;

- evaluates the contract (as a whole) and most importantly; - the factors the clients of these contracts take into consideration when decisions are made relating to the renewal of these types of contracts. This study was conducted as a qualitative study, using semi-structured interviews to gather the data. The data was analysed using the Content analysis method and the results are displayed graphically as well as in table format. The findings of this study were that contractual performance was the first and foremost considered factor when the success of these type of contracts are measured, followed by the actual value (value due to the energy cost-savings, as well as additional value brought about by other aspects, such as non-energy benefits). The study also found that the decision whether or not to renew a contract was not just made by participating role-players on the client`s side, but also it is often made by non-participating stakeholders, such as Financial managers and procurement managers. When this decision is made, the key factors taken into consideration are historical contractual performance and possible future benefits that the contract can bring. The study makes recommendations based on the finding and concludes with the results as follows: For an ESCo to have the best possible chance of achieving contract renewal, it needs to build a relationship with its client, a relationship that is founded in trust, so that the client will be comfortable with the related by the ESCo. The ESCo needs to endeavour to align the client`s perceived value of the contract, with the actual value thereof, this includes monetising non-energy (and non-contracted) benefits that the contract has brought. Additionally, the ESCo have to explain to the client (participating- as well as non-participating stakeholders), the possible future benefits that the contract can produce. The ESCo needs to ensure that these are explained comprehensively and clearly to the stakeholders on the client side, and make sure that this is well and truly understood by both participating stakeholders, as well as non-participating stakeholders.