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The Possible Future of Energy-As-A-Service?

image credit: https://www.safie.hq.af.mil/Portals/Installationenergydeliverychain
Kristin Hogan's picture
Office Manager/HR Administrator SolMicroGrid

  • Member since 2022
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  • May 31, 2022
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One often hears the term “Energy-as-a-Service” in the electric industry. That sounds simple enough. Various companies provide as-a-service offerings for improved lighting and other efficient energy technologies. The model is not new, and variants. In fact, some variants in use today have been around for over a half-century. The original concept is well over a century old. So, with energy as-a-service, what do you get? What does that term actually mean, and what might it mean in the future?

“As-a-service” models have been around for a long time. Perhaps one of the best known is the airline industry’s “Power by the Hour” approach developed by Rolls Royce in 1962. Under that original model, which is still in existence today, Rolls Royce offered a guaranteed number of aircraft engine operating hours for the Viper engine on its business jet.

 Enjoying power by the hour

No alt text provided for this image

https://www.ssplprints.com/image/95896/hawker-siddeley-hs-125-executive-jet-1965  

How is the term used for electric customers?

That approach eventually found its way to the electricity space, where energy services companies (ESCOs) in the late 1980s and early 1990s began offering “energy performance contracting.” Under those arrangements, ESCOs assumed responsibility for upfront investment-grade energy audits, project engineering, financing, and installation of various efficient end-use technologies - such as lighting, motion sensors, and variable speed motor drives. ESCOs also included guarantees that resulting savings would cover any debt service related to the projects. 

An offshoot of that approach resulted in the “lighting-as-a-service” model now provided by many lighting equipment manufacturers and suppliers. Here, the customer pays an ongoing subscription for an efficient lighting upgrade - including installation, maintenance, and replacement – avoiding what might have otherwise been a steep upfront capital expenditure. The savings from the resulting efficiencies are generally sufficient to pay for a good portion or even all of the subscription fees. These programs are becoming quite popular, with a market estimated to be in excess of $6 billion over the coming five years

However, one could argue that the phrase as employed today is somewhat misleading and not truly energy-as-a-service. More appropriately, these are capital-as-a-service financing models, with a focus today on financing energy-consuming devices. 

Outcome as-a-service

The future of as a service in the electricity space may involve something quite different, but something many customers in the U.S. would probably be happy to pay for (at the right price): a guaranteed outcome at a fixed price. This type of product would combine the input fuels (the cost of electricity service, say) with the end-user devices, so that one would literally pay for what one truly wants: the specified outcomes, such as lighting, heating, and motor power. As a Harvard Business School professor once said, “People don’t want a quarter-inch drill. They want a quarter-inch hole.” 

I just want to pay for the hole

No alt text provided for this image

https://www.homedepot.com/c/ab/types-of-drill-bits/ 

The concept already exists in a partial form, with some vendors guaranteeing the output of their products, whether availability of compressors or train uptime, but in this country, it has as yet not included the costs of the energy inputs. 

There’s no real reason, that it couldn’t, though. In fact, this idea is not new and originated in France over a century ago with the concept of “chauffage” (literally the French word for heat). With chauffage, vendors financed and installed furnaces while also ensuring a steady supply of coal to those furnaces during the lifetime of the contract. They sold neither the furnace nor the coal but rather billed for the heat. 

The fully integrated chauffage approach has seen a more recent incarnation in Europe. Some ESCOs there assume the overall responsibility for a contractually designated set of services, such as lighting and heating. In countries where competitive power markets and retail suppliers exist, the ESCOs also assume the responsibility and risks associated with electricity supply. Since the ESCOs own the risk of supplying electricity, and contracts are as long as 20-30 years, they are incentivized to provide these services as efficiently as possible. 

Is chauffage coming to our shores someday soon?

If brought to the U.S., such an approach could be both elegant and economically efficient. There are a number of potential benefits, including: 

1)    Equipment purchasing is time-consuming and involves research and trade-offs between capital and operating costs. Many businesses have fixed annual budgets and purchase energy-consuming products with first cost in mind, rather than the entire life-cycle considerations. A third-party solutions provider would view that differently and buy more efficient equipment if incentivized to do so, especially under longer-term contracts where investments in efficient technologies have more time to pay off.

2)    Utility tariffs are complex and often nearly impossible to decipher. Sophisticated management of electricity costs often involves complex strategies, such as reducing monthly demand charges (utility charges based on the highest consumption during a 15-minutes or hourly period during the monthly billing cycle) or more effectively operating within time-of-use based tariffs (where electricity prices in the evening can be more than twice those earlier in the day). Business managers often have difficulty addressing these complexities. They have other jobs to do, and they don’t have time to master the arcane nuances of utility rates. By contrast, a solutions provider offering an outcome-based approach would have an incentive to address these nuances and select the right equipment to optimize financial performance.

3)    The challenge gets even harder when businesses operate in competitive retail power markets, where they have to buy their electricity supply from a third party. Here, managers must both deal with paying the utility delivery services and navigate the most volatile commodity markets in the world (where kilowatt-hour prices from one hour to the next can easily double, and potentially increase over 10-fold from one day to the next. This is a challenge for even the most seasoned facility energy manager, but where there is risk and volatility, there is also an enormous opportunity for those with the skills and incentive to do so, such as energy services companies. 

The United States Air Force has recently issued Requests for Information for a fully-integrated comprehensive chauffage type of approach, and one Air Force base in Massachusetts is advancing the concept. Today, while nobody yet offers such a solution in the U.S., we are now seeing the necessary elements in the marketplace that may eventually lead to that result. We now have more efficient end-use technologies, coupled with cost-effective batteries that help customers better manage when and how they draw power from the grid. We have also recently seen the development of self-learning software that can oversee the entire customer energy ecosystem and optimize economic outcomes. 

Thus, it may not be long before enterprising companies offer to take the entire hassle off your hands. For a price… 

Action items:  

1.     Evaluate the potential to lower your costs by investing in efficient end-use technologies

2.     If such opportunities exist, you may want to investigate whether an as-a-service approach to finance specific technologies, such as lighting, works for you 

Efficiently yours,   

Matt Ward and Joyce Bone – Founders, SolMicroGrid 

Kristin Hogan's picture
Thank Kristin for the Post!
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