Shared Savings vs. Guaranteed Savings: Understanding EPC Models

Reading Time: 12 minutes
Key Takeaway: Choosing the right EPC model—Shared Savings or Guaranteed Savings—impacts your project’s risk, cost, and energy efficiency outcomes. Understanding the difference helps you make confident, informed decisions.

---

Summary Box

Shared Savings vs. Guaranteed Savings: Understanding EPC Models

• Shared Savings: Energy savings are split between the facility owner and the ESCO.

• Guaranteed Savings: ESCO guarantees specific savings; the owner pays only if savings are achieved.

• Each model has unique benefits and risks.

• Choice depends on your risk tolerance, budget flexibility, and operational priorities.

• Proper understanding ensures optimal financial and operational outcomes.

---

Introduction (PAS Framework – ~120 words)

Energy Performance Contracting (EPC) promises cost savings and improved energy efficiency for businesses and public facilities, but not all EPC projects are created equal. One of the biggest questions facility managers face is whether to choose a Shared Savings or Guaranteed Savings model. The problem is, choosing the wrong model can lead to unexpected costs, disputes, or lower-than-expected savings.

This is why Shared Savings vs. Guaranteed Savings: Understanding EPC Models is essential reading. By understanding the differences, benefits, and risks of each approach, you can select the model that aligns with your financial goals and risk tolerance. This guide breaks it down in simple, actionable terms so you can make confident decisions for your EPC project.

---

Shared Savings vs. Guaranteed Savings: Understanding EPC Models

(Eighth-grade reading level | 2,400 words)

Energy Performance Contracting (EPC) is widely used in Malaysia to improve energy efficiency while reducing operational costs. EPC projects are typically structured around two main financial models: Shared Savings and Guaranteed Savings. Choosing the right model can directly affect project outcomes, financial risk, and long-term performance.

Below, we’ll break down Shared Savings vs. Guaranteed Savings: Understanding EPC Models in a simple, practical way, covering benefits, risks, implementation, and real-world examples.

---

1. What is a Shared Savings EPC Model?

A Shared Savings model is one where the Energy Service Company (ESCO) and the facility owner split the energy savings.

How it works:

• ESCO invests in the project upfront.

• Energy savings generated from upgraded equipment are shared between the ESCO and the facility owner.

• Duration of the agreement defines how long the savings are split.

Advantages:

• No upfront cost for the facility owner.

• ESCO is incentivized to maximize energy savings.

• Flexibility in payment and investment.

Risks:

• Savings split may reduce immediate financial benefits for the facility owner.

• Requires precise monitoring and verification to ensure fair sharing.

Shared Savings is ideal for organizations with limited capital but willing to share part of the savings to get upgrades.

---

2. What is a Guaranteed Savings EPC Model?

A Guaranteed Savings model guarantees a specific level of energy savings by the ESCO.

How it works:

• ESCO designs, implements, and operates the project.

• Savings are guaranteed in the contract.

• If the guaranteed savings are not met, the ESCO pays the difference.

Advantages:

• Predictable energy cost reduction.

• Reduces financial risk for the facility owner.

• Provides peace of mind; the owner only pays if savings occur.

Risks:

• ESCO may be more conservative in estimating savings, which could limit investment in deeper efficiency improvements.

• Upfront costs may be slightly higher due to guaranteed savings premium.

Guaranteed Savings is ideal for organizations with strict budgets and low risk tolerance.

---

3. Key Differences Between Shared and Guaranteed Savings

Feature	Shared Savings	Guaranteed Savings
Risk to Owner	Medium	Low
Upfront Cost	Low/None	Medium
Payment Model	Split savings	Paid from guaranteed savings
ESCO Incentive	High (maximize savings)	Medium (conservative estimates)
Predictability	Variable	High
Best For	Organizations with limited capital	Organizations with low risk tolerance

---

4. How to Decide Which EPC Model Fits Your Facility

Consider the following factors:

• Risk tolerance: How much risk can your organization accept?

• Capital availability: Do you have upfront funds or prefer no initial investment?

• Operational complexity: How critical is predictable performance?

• Project scale: Larger projects may benefit more from Shared Savings, smaller or high-stakes projects from Guaranteed Savings.

• Long-term financial goals: Are you aiming for maximum savings, or consistent and predictable cost reduction?

---

5. Role of an ITA in Choosing the Right Model

An Independent Technical Advisor (ITA) can help you select the right EPC model.

How an ITA adds value:

• Assesses your facility’s energy profile.

• Reviews contractor proposals for accuracy.

• Evaluates projected savings for both Shared and Guaranteed models.

• Advises on risk management and contract terms.

• Ensures energy savings are verifiable and realistic.

Using an ITA ensures the chosen model aligns with your financial and operational priorities.

---

6. Implementation Steps for EPC Projects

Step 1: Energy Audit

• Identify energy-saving opportunities.

• Collect baseline energy consumption data.

Step 2: Proposal and Model Selection

• ESCO presents Shared and Guaranteed Savings options.

• ITA reviews feasibility and risk.

Step 3: Contract Signing

• Define payment structure, duration, and savings calculation method.

• Include verification and performance clauses.

Step 4: Installation and Commissioning

• Upgrade equipment (lighting, HVAC, pumps, controls).

• Test and verify system performance.

Step 5: Monitoring and Verification

• Continuous measurement of energy savings.

• Ensure payments and sharing are accurate.

---

7. Financial Implications of Each Model

Shared Savings:

• Immediate savings may be smaller due to split.

• ESCO incentivized to maximize performance.

• Potential for larger total savings over time.

Guaranteed Savings:

• Predictable monthly/annual cost reduction.

• ESCO carries risk if savings are not achieved.

• Less upside potential but lower risk.

---

8. Real-Life Examples

Example 1: Shared Savings

• Hospital upgrades HVAC system.

• Energy bill drops by RM 300,000/year.

• Savings split: 60% facility owner, 40% ESCO.

• Facility benefits from upgrades without upfront capital.

Example 2: Guaranteed Savings

• Government building installs LED and BMS systems.

• Guaranteed savings: RM 150,000/year.

• ESCO compensates if savings are below RM 150,000.

• Budget predictable; low financial risk.

---

9. Common Misconceptions

• “Shared Savings means we lose money.”
  No—owners still save, just share part of the benefit.

• “Guaranteed Savings are too expensive.”
  They may have slightly higher cost but lower risk and predictable ROI.

• “EPC is complicated.”
  With an ITA and proper contract, EPC is straightforward and low-risk.

---

10. Tips for Maximizing EPC Benefits

• Use an Independent Technical Advisor to validate savings.

• Clearly define baseline energy consumption.

• Monitor project progress regularly.

• Negotiate transparent contract terms.

• Evaluate both models against long-term strategic goals.

---

11. Conclusion & Call to Action

Understanding Shared Savings vs. Guaranteed Savings: Understanding EPC Models is critical for making informed decisions about your energy efficiency investments. Choosing the right EPC model balances risk, savings, and operational priorities. With proper planning, monitoring, and ITA guidance, your EPC project can deliver predictable, measurable, and meaningful energy savings.

WhatsApp or call 013-300 6284 today to discuss which EPC model is right for your facility and start your journey toward cost-effective, risk-managed energy efficiency.