Energy as a Service: Your Businesses Complete Handbook

Energy as a Service: Your Businesses Complete Handbook

Energy as a Service (EaaS) offers a cutting-edge pay-for-performance approach, allowing businesses to leverage on-site energy efficiency and renewable energy systems without upfront costs or ownership responsibilities. A specialised EaaS provider handles the entire process, from initial project financing and deployment to ongoing operations and maintenance. This third party assumes all performance risks and project oversight.

Does an EaaS model align with your organisation’s energy strategy and goals? Read on to explore if this innovative solution could benefit your business’s evolving energy needs.

What is Energy as a Service (EaaS)?

Energy-as-a-Service (EaaS) is a model where customers pay a recurring fee for energy services instead of making an upfront investment. Under EaaS, a service company owns the electrical devices and manages energy usage to deliver the desired service to the customer.

Over the past few decades, service-based business models have grown popular across various traditional industries, from video streaming to clothing rental services. These models typically involve a subscription where the customer can benefit from a product without purchasing it outright or directly handling its usage. For producers, service models can provide steady revenue streams, while customers benefit from increased value and accessibility through financing options.

In the electricity sector, Energy as a Service offerings allow customers to access energy services like lighting through a recurring payment rather than direct electricity bills or costly equipment upgrades. Like service models in other industries, EaaS can make advanced energy technologies more accessible to consumers. It can benefit service providers, electrical grids, and society by enabling better energy solutions.

Benefits of Energy as a Service Model

The EaaS Energy as a Service model can provide valuable benefits to commercial, hospital, and higher education customers. This section outlines some potential advantages, though more data and experience are needed to identify the best market segments and use cases.

1. Upfront Cost Savings

Many commercial clients are hesitant to divert capital away from core business needs to fund building retrofits. EaaS can be an attractive option for organizations pursuing energy efficiency without tapping their own finances upfront.

Under EaaS, the service provider secures third-party financing to cover all project costs, allowing the customer to avoid any upfront expenses or internal capital outlays. Their funds remain available for other priorities.

2. Off-Balance-Sheet Treatment

EaaS offerings are typically structured as off-balance-sheet financing solutions. Service payments allow businesses to treat energy efficiency projects as an operating expense akin to a utility bill rather than a capital expense for equipment they must purchase, own, maintain, and depreciate.

Since the provider owns the energy equipment, it is not debt on the customer’s balance sheet, improving their bottom line. They can secure the needed energy services with reduced uncertainty, as the provider assumes performance risk to achieve projected savings.

3. Greater Operational Savings and Efficiency

Savings from energy efficiency projects are calculated and guaranteed using agreed-upon methods to measure and verify performance. The EaaS model’s pay-for-performance approach drives providers to continuously optimize operations. This leads to lower energy, water, and maintenance costs that generate positive cash flow for customers.

Ongoing maintenance and performance tracking help technologies operate at peak efficiency for sustained savings over time. It also encourages the adoption of innovative solutions customers may otherwise avoid due to perceived risks.

EaaS allows deep, comprehensive energy retrofits that would be difficult to afford upfront, such as upgrades to heating/cooling systems, energy management controls, and on-site renewable power. While expensive initially, these measures maximize long-term energy savings and improve indoor environmental quality.

3. Greater Operational Savings and Efficiency

4. Portfolio-Wide Retrofits Made Easier

This model benefits owners of multiple buildings as providers can bundle retrofit opportunities across sites into one contract. The provider can implement the same upgrades, such as LED lighting, across many buildings, saving time and resources.

For example, a provider upgraded over 600 BT sites across 31 regions with LED lighting and controls, resulting in nearly £16 million in annual energy savings. The EaaS structure also offers flexibility to incorporate new efficiency measures over time, typically at the same contract rate, thereby enhancing total savings across the customer’s portfolio.

5. Reduced Operational Risks

For many organisations, energy management isn’t a core competency. Staff often struggle with selecting technologies, navigating incentives, and implementing retrofits. Energy as a Service vendors provide access to experts who can design project scopes and install, maintain, and verify the performance of efficiency upgrades.

Customers face lower risks of paying for underperforming equipment because vendors contractually guarantee energy savings at a known cost. Long-term agreements allow locking in lower, fixed energy prices over the contract if the provider achieves promised savings.

6. Enabling Distributed Energy Adoption

In recent years, there’s been a shift toward distributed energy resources (DERs) located near customers to enhance grid reliability, reduce costs, and meet customer interest in renewables. DERs can generate power onsite or reduce demand through energy efficiency.

EaaS can drive the adoption of various DERs—efficiency, demand response, renewables, and energy storage, that require high upfront costs and expertise beyond a customer’s core business. Building owners who adopt efficiency and renewables can reduce the carbon footprint of their portfolio.

Types of EaaS Business Models

Research has identified four main categories of Energy as a Service models, each with specific characteristics and common offerings in the market.

Types of EaaS Business Models

Turnkey Energy-as-a-Service model

These models are the most widely recognised as “energy-as-a-service.” Primarily targeting commercial and industrial (C&I) customers, turnkey EaaS providers finance, install, and manage energy assets like efficiency upgrades, on-site generation, and demand response for an ongoing fee with no upfront costs for the customer.

These offerings evolved from energy performance savings contracts offered by energy service companies (ESCOs), which guaranteed a level of energy cost savings. Turnkey EaaS expands this model to also include distributed energy resources.

Outcome-as-a-Service model

These models provide a specific energy outcome, like lighting or heating as a service, rather than energy itself. For a recurring fee and no upfront costs, providers install or upgrade energy-efficient equipment and then guarantee delivery of those services (e.g. lighting hours, heat).

Similar models exist for EV charging-as-a-service and mobility-as-a-service, offering a guaranteed amount of vehicle charging or use.

Energy management model

These services optimise a customer’s energy usage through demand response, home/building energy management systems, and controls for distributed energy resources like solar, batteries, and major appliances.

Some services generate revenue by enabling customers to participate in demand response programs or share savings from reduced energy bills. For EVs, this includes vehicle-to-grid solutions that leverage managed charging for grid services.

Innovative commercial model

These commercial models help reduce upfront costs for customer-sited energy assets like rooftop solar, batteries or EVs. Options include leasing, subscriptions that provide access to virtual/aggregated assets through solutions like virtual power plants.

EaaS vs EPSC: What’s the Differences?

Numerous public and private organisations are utilising energy services contracts to facilitate energy efficiency retrofits for their buildings. Two popular Energy as a Service examples are Energy Savings Performance Contracts (ESPCs) and Efficiency-as-a-Service (EaaS). Although both service models enable large-scale implementation of energy efficiency upgrades, they have distinct key differences.

EaaS vs EPSC: What’s the Differences?
EaaSEPSC
How does it work?With EaaS, the building owner contracts with a service provider to directly purchase energy savings. They agree upfront on what will be upgraded (e.g. lighting). The provider designs the optimal upgrade solution, funds 100% of the project cost, and installs the new equipment they own. The customer then makes payments to the provider based on the measured and verified energy savings, often at a fixed rate per unit of energy saved. At the end of the contract, the customer can choose to buy the equipment, extend the contract, or return the equipment. Energy services agreements are a common EaaS structure.In an ESPC, an energy service company (ESCO) installs new equipment based on an agreed scope of work. The ESCO guarantees that the project will achieve a certain level of energy savings, called a “performance guarantee.” The customer can pay the upfront installation costs themselves or through financing. The customer owns the equipment during the contract. If the measured savings fall below the guaranteed level, the ESCO pays the customer for the underperformance.
Project scopeEaaS can also handle large multi-site, multi-measure projects, but can be applied to smaller, single-building projects as well.ESPCs are well-suited for large projects across multiple buildings or campuses that can include various efficiency upgrades under one contract.
OwnershipThe service provider purchases and owns the installed equipment, so there is no new asset on the building owner’s balance sheet. Payments are treated like an operating expense.The building owner owns the new equipment, which appears as an asset on their balance sheet if financed.
Measuring SavingsEaaS efficiency upgrades also rely heavily on M&V, as service providers typically bill customers for energy savings based on the results of annual M&V reports quantifying actual realized savings. However, some streamlined EaaS offerings may forgo active M&V in favor of using predetermined “deemed savings” values.The M&V protocol is critically tied to the performance guarantee – it contractually defines when the guarantee comes into effect based on measured savings shortfalls. The level and frequency of M&V activities can significantly impact the transaction costs of structuring an ESPC.
Payment Structure and GuaranteeEaaS operates as a true pay-for-performance model where customers directly purchase and pay for measured and verified energy savings as they are realized. EaaS agreements commonly define these service payments using a fixed rate such as dollars per kilowatt-hour saved, similar to power purchase agreement pricing for renewable energy.The customer makes recurring payments to the energy service company (ESCO) to compensate for contracted services like M&V, maintenance, repairs, etc. If the project’s realized savings fall below the contractual performance guarantee level, the ESCO is obligated to pay the customer to make up for that savings shortfall.
Adoption and StandardizationEnergy as a Service has seen growing traction and adoption in recent years, particularly within the private commercial building sector.ESPCs have a much longer track record and a higher degree of standardization, including specific government guidance and resources such as the Federal Energy Management Program (FEMP)’s process for soliciting ESPC bids for federal contracts.
Accounting ImplicationsUsually treated as an off-balance sheet. The owner expenses 100% of the service payments to the provider.Typically recorded on the building owner’s balance sheet. The owner can expense equipment depreciation and any financing costs.
Contract ComplexityMedium-high complexity. Contracts can be simpler and faster to negotiate than ESPCs, though more involved than standard financing. Typical project timelines are under 9 months.High complexity. Extensive negotiation is often required to tailor the performance guarantee and define measurement & verification protocols. Project timelines can exceed 1 year.
Project Size and Contract LengthVersatile for both large (>£800.000) and smaller (£20.000+) projects. Contract terms range from 5-20 years.Typically used for larger projects over £800,000 with contract terms of 10-20 years.
Common SectorsMost are adopted in commercial buildings, higher education, and healthcare. Increasing MUSH market penetration.Most common in municipal, university, school, and hospital (MUSH) markets but growing in commercial.
StandardizationLess standardisation with a wider variety of offerings and service providers.Highly standardised with a longstanding history and federal procurement guidelines.

Type of Services Offer by Energy Service Providers

Energy Service providers offer a range of advisory, implementation, and management services to help customers optimise their energy usage and costs:

Type of Services Offer by Energy Service Providers

Energy Advisory

ESPs are evolving into trusted energy advisers that can formulate customised strategies based on a customer’s energy needs. They leverage data analytics tools, load profiles, electricity forecasts, benchmarking, and advanced modeling to identify opportunities for consumption optimisation. Energy advisory service extends to providing guidance on energy procurement, renewables, efficiency, and emerging technologies.

Energy Asset Installation

ESPs provide turnkey services for deploying on-site energy assets like renewable generation, battery storage, microgrids, smart meters, and high-efficiency equipment. This includes end-to-end engineering, procurement, and construction (EPC). Established ESPs can also facilitate access to project financing for customers through their lending partnerships. Asset installations enable customer savings through self-generation, peak shaving, and energy efficiency.

Energy Management

ESPs offer ongoing energy management as a service solutions through monitoring, control, and optimization of energy loads without burdening the customer. Smart home/building offerings provide integrated monitoring, automated control, and consumption optimization, focusing on occupant comfort. Customers can select preferred electricity supply sources (e.g. renewables), control loads based on real-time pricing signals, and participate in utility programs.

Subscription-based models

Fixed monthly fees with the ESP, assuming price/ volume risk. Profits come from reducing the customer’s total energy costs below the contracted price through audits and efficiency upgrades.

Performance-based contracts

Variable revenues linked to achieved savings, typically through energy savings performance contracts (ESPCs). Savings are shared per a defined split (shared savings), or the customer receives guaranteed savings (guaranteed savings). ESPCs provide a financing vehicle to fund upgrades from projected savings.

Light Up Energy is a leading energy consultancy offering advisory, implementation, and ongoing management solutions to optimise energy costs and usage. The expert team leverages advanced analytics to benchmark customer usage against live pricing data from over 20 energy suppliers. This enables Light Up Energy to formulate customised strategies that combine the most competitive energy procurement with the deployment of on-site assets like renewables, storage, and efficiency upgrades.

Light Up Energy’s Solution for Energy as a Service

Light Up Energy’s Solution for Energy as a Service

In today’s energy market, with dozens of suppliers, choosing the right business energy provider can be daunting. Suppliers cater to different sectors, business sizes, and customer profiles. Understanding which suppliers are the best fit based on your specific needs is crucial for securing optimal pricing.

Our expert energy consultants will guide you through the procurement process, securing competitive supply contracts, handling supplier transitions, resolving billing issues, managing changes of tenancy and metering problems. We’ll proactively anticipate your contract renewals to renegotiate terms and leverage market conditions for the best renewal rates.

When it comes to energy contract management, Light Up Energy’s account management and client support come at no additional charge, providing value-added services. We’ll review your past utility bills to identify any discrepancies like overcharges, incorrect tariffs applied, or Climate Change Levy (CCL) overpayments due.

We’ll coordinate smart meter installations to automate your meter reading process and eliminate estimated bills. We can also assist with manual readings before your supply contract begins.

In Conclusion,

The Energy as a Service business model offers businesses a compelling solution to meet their energy needs efficiently, sustainably, and cost-effectively. By partnering with an EaaS provider, companies can reduce their carbon footprint, optimize energy consumption, and focus on their core operations without worrying about the complexities of energy management.

However, every business has unique energy requirements and operational constraints. To explore how EaaS can be tailored to your specific needs, we encourage you to contact the team of energy experts at Light Up Energy. Take the first step towards a more sustainable and efficient energy future!

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Light Up Energy
Light Up Energy, founded by hospitality experts with 20+ years of experience, helps businesses save money via innovative energy management strategies.

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