Combined Heat and Power Focus

DECC's Free resource supporting the development of CHP

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Energy Services Contract Projects

There are several issues to consider when moving forward with an energy services contract. These include: 

  • Initial tender preparation

  • Initial selection of tenderers

  • Initial proposals

  • Project development with selected contractor

  • Full tender submissions

  • Full tender and contract evaluation

  • Negotiation of energy services contract

Initial tender preparation

The preparation of an ESCO tender focuses on producing a performance-related specification rather than a detailed technical one, and on inviting tenderers to submit an offer relating to a contract for supplies of energy. Since the proposed CHP plant is likely to remain the property of the contractor, the tender needs to concentrate on specifying:

The contractual issues of importance.

The physical and operational connections between the site and the contractor.

The tender documents will need to contain as much information on the site and its requirements as possible, without setting limits and constraints that will make the project appear unattractive to potential contractors.

In parallel with the tender preparation, it is important for a company to prepare a summary of the objectives it is seeking to fulfil by selecting the ESCO contract option. This should state the importance of each objective and its priority to ensure that subsequent stages in the tender procedure are performed correctly.

Initial selection of tenderers

Responding to an invitation to tender involves potential contractors in significant amounts of time and effort: it involves site visits, initial plant design work and a contractual proposal. It is, therefore, common for the company to hold an initial meeting with each tenderer to establish/confirm a level of mutual trust and understanding. In some cases, this may be extended to a form of qualification procedure that requires the potential tenderer to give some basic information and commitments when responding to a tender. This initial screening by the company is important to ensure a reasonable level of compatibility with the contractual requirements of the tenderer. It should enable the company to draw up a realistic shortlist of tenderers.

Drawing up a shortlist is based on the potential tenderer’s contract experience to date and on information that may be provided by other companies and sites. The selected contractor will become intimately involved with the site and its activities, so the company must be comfortable with and confident of working closely with that contractor, both initially and in the longer term. The company should also examine each potential tenderer’s business policies and company background, as these may well have an influence on its selection decision.

Initial proposals

If the company requests a full and comprehensive ESCO tender response, there is a possibility that the on-going workload and cost – for either party – can escalate to levels that are difficult to manage. Experiences of this nature have resulted, in some cases, in the adoption of a simplified tender procedure: this is often preferred by potential ESCO tenderers to limit their time and cost exposure at this stage.

With a simplified tender procedure, the company focuses on the selection of a contractor that can meet the specified requirements in principle, without finalising all the contract details. At this stage, the tender specification should focus on the levels of service to be provided, and on defining the criteria that will be used to judge the responses. This approach provides indicative levels of service and cost, and confirms the contractor’s ability to meet the levels of service that have been specified. The abbreviated tender and budget proposal can be used as the basis for selecting a contractor with whom the CHP project can now be developed.


Project development with selected contractor

An agreement is drawn up between the company and the selected contractor, enabling them to work together to develop the CHP project on an ESCO basis. This agreement defines the obligations of each party, based on the tender and its response, and often involves a commitment by the company to work exclusively with its selected contractor. There is sometimes a sharing of the development costs, with some financial penalties paid by either party if it chooses to withdraw from the agreement. Such an agreement will often require an appropriate level of transparency in the development process and costings, to enable mutual trust and confidence to be built up.

In parallel with this procedure, a second contractor may be nominated as an alternative with whom project development can continue if the agreement with the first choice contractor proves to be unsuccessful.

Full tender submissions

The alternative to a development agreement with a selected tenderer is to follow up receipt and evaluation of the initial tender responses with a fuller, revised specification to selected tenderers, inviting them to submit a full tender response. The number of tenderers invited to make a full tender response should be kept to a minimum. It should involve only tenderers whose previous responses have established an appropriate level of trust and generated confidence in their abilities.

Even a full tender submission of this type is unlikely to contain a detailed contract that is ready for acceptance. Contract details at this stage will usually be limited to indicative contents such as terms of agreement, charges and variation schedules, and performance guarantees.

Full tender and contract eveluation

This step may be reached either by working with a single selected contractor, or by receipt of full tender submissions. Tender evaluation needs to concentrate on certain key issues:

  • Annual energy and operating cost savings.
  • Effect on company finances.
  • Guarantees on security of supply.
  • Basis for charges and variations.
  • Acceptability of contract terms.
  • Options on and effects of early contract termination.
  • Sanctions and penalties applicable to either party for non-performance.
  • Flexibility for changes to contract or CHP plant.

The company also needs to compare the contents of tenders with the objectives that were originally set.

Negotiation of energy services contract

Whether the full tender process has involved one or more tenderers, the final stage is the negotiation and agreement of a comprehensive contract covering every aspect of the full energy supply service. Typical issues that need to be defined in the contract include:

  • Performance guarantees and obligations of each party.
  • Levels of supply and charges, metering systems, and fuel and energy records.
  • Compliance with statutory requirements on a wide range of issues.
  • Insurance and liabilities.
  • Provisions for ownership of plant on termination or expiry of contract.
  • Confidentiality and exchange of information.

These negotiations can often be prolonged and detailed, but they are the key to concluding the mutually beneficial contract on which the success of the CHP plant depends.


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