The transition to low-cost, highly efficient clean energy technology is being accelerated by an accompanying revolution in innovative business models to deploy that technology. As with other similar industry shifts, the fundamental drivers are sound economics combined with the right business model.
You’ve no doubt heard of Software as a Service (SaaS) and its advantages over on-premise software when it comes to investing in energy management. In this guest post by Angela Ferrante of SparkFund, we’ll learn about a lucrative new business model called Lumens as a Service.
The Trillion Dollar Energy Savings Opportunity
Lumens as a Service (LaaS), the subject of a May 2017 report from RMI, holds an enormous opportunity. According to one study, potential building energy efficiency savings could exceed $1 trillion over a decade.
The opportunity is particularly compelling for lighting, as it represents about 10% of commercial electricity consumption, as reported by the U.S. Energy Information Administration in 2016.
Reinventing the Purchasing Paradigm
Innovative business models have boosted rooftop solar for individual homeowners, which remained a low-growth market so long as a system needed to be purchased by the homeowner. It wasn’t until companies like SolarCity made it possible for a family to install a rooftop system without purchasing it, instead paying only for the power it produced each month, that millions of homes sprouted solar panels. In this way, ownership of the asset (the PV system) was separated from the service it provides (renewable power). As a result, the market boomed.
Though most households already own cars, something similar happened with Mobility-as-a-Service providers like Uber and Lyft. The millions of customers who pay for such services are entirely separated and protected from the capital expenditures and maintenance costs of owning a car, paying only for the service a vehicle provides.
In the commercial and industrial world, the “as-a-service” model is already a familiar one for office equipment; it is how almost all copy machines are brought to market. Customers typically contract with a company like Xerox for copying-as-a-service—detailing the volume of prints and copies they need per month and leaving the capital cost, troubleshooting, and maintenance of the machines themselves to the supplier.
Economics Alone Are Not Enough—The Right Business Model Is Needed
Yet even though the as-a-service business model is ubiquitous in commercial buildings in the form of copy machines, and has unlocked big economic and carbon-saving opportunities in the solar power and personal mobility sectors, it has not reached critical mass for building energy efficiency. In fact, the building energy-efficiency market continues to operate with legacy business models, despite its vast economic potential and the opportunity to scale benefits across a portfolio of properties.
A 2012 report by the Rockefeller Foundation and the Deutsche Bank Group found that $279 billion of investment in building energy-efficiency retrofits could yield more than $1 trillion of energy savings over 10 years, not to mention an enormous reduction in carbon emissions. But despite that eye-popping potential return, actual investment has been meagre. So far, the building performance industry has yet to fully appreciate the benefits of an as-a-service model—even though current technology makes it possible to economically improve building performance, enhance net operating income, and make building assets more valuable. LaaS looks set to change that.
Innovative Companies Deliver Lumens as a Service
Retrofitting a building with low-cost, high-quality energy-efficient LED lighting offers terrific value but is stymied by market constraints. An upfront investment in the high six figures is needed to retrofit a large commercial building with LED lighting. Such a capital cost is added to the balance sheet and competes with other priorities. And managing the installation and maintenance of the LEDs and their controls is an added burden.
Treat an LED-lighting retrofit like a copy machine, however, and those constraints disappear. A service provider can implement the lighting, controls, and retrofitting with no up-front cost and deliver a specified, measured lighting service, assuming the capital costs and other burdens while sharing energy savings with the customer. The lighting—measured in lumens—is thus provided as a service.
However, even this simple customer/service-provider model is not frictionless, and more is needed to break open the market. As with anything new, a change in business mindset is required to fully appreciate and move forward with this new approach. Contracts are complicated. Financiers must navigate rigorous and costly accounting reviews. And success stories exist but have not yet been widely reported.
That’s where companies like SparkFund come in. Such companies act as a facilitator, making it possible for customers and service providers that would not otherwise undertake a LaaS project to do so in a smooth and seamless way. Financing is a large part of what SparkFund does—bringing the cost in the first year of a typical project down to a fraction of traditional capital investment. The company also helps service providers navigate the complexity of a LaaS contract, as well as set up the appropriate measurement, documentation, and billing procedures to monetise the energy savings.
Just as solar installers are not interested in managing or negotiating rooftop-solar power purchase agreements (PPAs), not every lighting-retrofit service provider is capable of managing LaaS agreements. But in the same way that companies like SolarCity made PPAs ubiquitous, so will innovative firms like SparkFund make LaaS more common. Even better: because so much commercial real estate is held in large portfolios, it is reasonable to believe that LaaS may soon be used as a procurement strategy for owners, in addition to being a means to buy a single lighting-retrofit project.
From Theory to Practice: What Is the Market Potential?
In one use case, the real estate investment trust (REIT) of a banking company is relying on LaaS to meet publicly stated energy-reduction goals. It has ready access to capital, but did not want to divert its own cash resources to energy projects—nor consider efficiency projects versus other core investment decisions. It needed a program that enabled portfolio-wide implementation of efficient technologies on a rolling basis, with minimal cash outlay. With LaaS, the REIT is working with experts who deploy smaller projects incrementally, which together add up to a major benefit: meeting energy reduction goals.
LaaS is well on its way to unlocking a large part of the $1 trillion energy-savings potential of building efficiency retrofits, but it is just the tip of the iceberg for business model innovation in the building energy sector. Real estate owners and tenants operate in a tough market and the mere availability of economical clean energy technology is not enough to ensure widespread implementation. Because buildings consume 42% of primary energy in the U.S., according to U.S. Energy Information Administration data, the financial stakes are high—and the climate stakes are even higher. New business models like LaaS are crucial to reducing carbon emissions quickly enough to prevent catastrophic climate change. Continued innovation and market leadership will help service providers capture this burgeoning market, and yield better buildings for owners, occupants, and the environment.
This guest post was originally published at the RMI Outlet. It has been republished here with kind permission from the author. Some minor changes have been made to reflect DEXMA style considerations.