The following is a contributed article by Brett Feldman, a research director at Navigant Research.
Corporate commercial and industrial (C&I) energy and sustainability managers are looking for cost-effective, customized and comprehensive energy solutions. These solutions must guarantee energy savings and transfer project execution risk without CAPEX to meet sustainability and operational efficiency needs.
Meanwhile, energy suppliers and vendors are introducing a number of broader options to meet new-customer energy management needs. These options are turnkey, portfoliowide and sector-specific technical solutions with transaction financing instruments and innovative business models. These new solutions transcend the historical single-site, fee-for-service energy efficiency project approach.
The confluence of new-customer needs and vendor offerings makes up the broader set of portfoliowide, financed energy efficiency and distributed energy resource (DER) solutions. These solutions characterize a new energy as a service (EaaS) solutions framework. Navigant Research defines EaaS as follows:
The management of a customer’s energy portfolio by applying new technology solutions, financing and business model innovation to avoid customer CAPEX while reducing energy use, spend and risk.
Energy portfolios often include program management, energy supply, energy use, load management and asset management. EaaS solutions frameworks serve and balance these needs while keeping risk in check.
Financing options emerge in a fluid and connected market
The C&I EaaS market is evolving as a flexible, connected solution offering. It is characterized by competition between dedicated EaaS vendors with financing options and a separate ecosystem of fee-for-service energy management vendors.
For example, a C&I energy user may opt to have a third-party EaaS solutions provider design and install energy efficiency upgrades as a CAPEX. However, the same energy user could deploy intelligent building analytics and controls under the as-a-service contract to improve payback and monitor savings progress in a more cost-effective manner.
Vendors that go to market with a well-defined set of EaaS solutions still compete with fee-for-service energy efficiency and DER solutions deployed by CAPEX, which do not require a long-term financed EaaS agreement. Financing options are emerging across EaaS solutions offerings to provide the options that C&I energy users increasingly seek.
Many C&I customers are looking for clean, efficient, flexible and low cost energy solutions that enable them to meet sustainability goals and reduce operating costs. To meet these needs, C&I customers are moving to distributed and renewable energy resources.
Customers are interested in controlling energy usage and are under pressure to manage energy spend fluctuations and guarantee the reduction of total energy use with minimal CAPEX (i.e., financing flexibility).
These same customers are also looking for straightforward ways to meet climate and energy reduction targets through renewable procurement and energy efficiency. To further reduce operating costs, these customers are participating in demand management programs (when accessible).
The emergence of these new, beyond energy efficiency EaaS offerings can help provide a comprehensive, outsourced approach to the range of climate and energy initiatives, which are scalable and can address needs for simplified solutions.
C&I customers have reason for caution
However, many C&I customers are cautious and resistant to change.
These customers struggle to commit to innovative financed solutions to meet energy savings and sustainability goals. Many C&I customers are hesitant to sign long-term financing agreements, even with a savings guarantee.
At the same time, even shorter-term financing, like an energy service agreement or an equipment subscription, leave customers struggling to decide whether to finance a project or spend capital. This is especially true if the simple payback range is three-four years.
Most customers have complex organizational structures involved in energy, sustainability and facilities. Aligning with the client to make decisions is a challenge. However, it can be overcome by educating knowledgeable customers on how new EaaS financing instruments work. This is the key to improving customer adoption.
C&I customers that move past standalone projects toward a portfolio approach to energy need a partner that can address project feasibility, development, design, engineering, technology integration, permitting and financing. These factors must be addressed across energy efficiency and new DER solutions for multiple properties and regions. In response to these needs, the larger market EaaS players are starting to bring broader technical expertise under a single offering.
C&I energy users, DER financiers and DER solutions providers face significant challenges in the deployment of new integrated customer energy management solutions. These challenges can be framed as a customer paradox.
Turnkey and sector-specific vendors are the solution
To overcome these challenges, C&I energy users will increasingly seek turnkey, balance sheet-backed vendors.
Ideal, but rare, vendors can guarantee energy and cost savings through innovative EaaS financing offerings. This need shifts the EaaS solutions deployment challenge away from CAPEX and toward service contracts categorized as OPEX, which is more favorable from the accounting point of view.
This move will address C&I customers’ needs, transferring risk to vendors that are equipped to address the new energy management option under EaaS solutions models.
A full set of EaaS solutions with financing options will increasingly be required to address the portfolio needs of C&I customers, with energy storage, smart building analytics and controls as key enabling technologies. The rise of these new financing instruments is the base for the delivery of new EaaS vendor business models.
These new financing options and business models have emerged to better meet C&I energy customer needs for portfoliowide EaaS solution delivery, CAPEX spend avoidance and risk transfer.