Utilities see opportunity in Energy as a Service offerings
Innovative ways to finance energy efficiency could help smooth the way for new rate structures and cleaner energy
Craig Clydesdale describes the company he founded, OOM Energy, as a "private utility" that can take customers off the traditional grid while providing cleaner, more reliable and cheaper energy.
"We become the utility," Clydesdale told Utility Dive.
Companies increasingly want to pay a fixed subscription fee for a range of products, from efficiency upgrades to their entire energy package. "Private utility" models have emerged due to the growing power sector trend of Energy as a Service (EaaS).
"Subscriptions really hit on psychology, and what customers want in their pricing," Lon Huber, Navigant's energy director, told Utility Dive. "They don't want too many choices and they dislike the taxi-meter effect."
"We've been installing generation across North America for years, but a few years ago it became clear that clients wanted nothing to do with owning the generation."
Founder, OOM Energy
Clydesdale's OOM — short for Order of Magnitude — provides onsite power generation to clients for a fixed monthly fee. Under a long-term Energy Services Agreement, the Canadian company allows customers, typically in the industrial sector, to essentially design their own resource mix while also being assured there will be no disruptions.
The company's generation solution is "completely plug and play," said Clydesdale, typically using natural gas and battery storage. But pretty much any configuration can be put in place, he said, including renewables or a continued tie to the traditional grid.
The business model is built around two concepts: simplicity for the customer and reliability of power.
"We've been installing generation across North America for years, but a few years ago it became clear that clients wanted nothing to do with owning the generation," said Clydesdale. And while the company often is able to provide customers with about a 20% discount to what they had been paying, he said "economics are not typically the driver. Power quality is the biggest deciding factor."
EaaS is a "small but rapidly growing segment," said Huber, that has the potential to help create cleaner and more efficient electric grids. But the idea is fundamentally economic, rather than altruistic.
"The model is brought about by changes in accounting rules and how you treat operating leases," Huber said.
'Is the juice worth the squeeze?'
New Financial Accounting Standards Board rules require operating leases to be recorded on balance sheets by offering energy as a service. However, using a subscription model, companies can avoid sinking large amounts of capital into new equipment or taking on new debt.
While OOM offers to entirely replace a company's electric utility, it is more common in the EaaS space to see targeted offerings, such as building retrofits, lighting installations and HVAC replacements. The high up-front costs of efficiency projects can make upgrades prohibitive for many companies, creating an opportunity for service offerings.
Sparkfund is one such company, providing efficiency solutions as a subscription service. The company describes its mission as "transforming how businesses implement energy technology," and Chief Marketing Officer Angela Ferrante says it helps businesses answer a simple question.
"Is the juice worth the squeeze? Is it worth it for me to adopt changes as a building owner? Subscriptions get at and overcome this issue," Ferrante told Utility Dive.
"In the world of commercially-owned buildings, no one has stopped and said, 'How can we make this a simple journey for the customer. It's a lot of effort to dive in and, technology by technology, building by building, adopt new things."
Chief Marketing Officer, Sparkfund
SparkFund was founded five years ago and has helped a wide range of customers, including hotels, schools and financial firms, to make efficiency improvements. In part, demand for its services is being driven by the rapid advancements in efficiency that have been made in the last decade.
"Over the last 10 years, everyone has acknowledged there's an energy efficiency gap," said Ferrante. Newer building construction is significantly better than older stock, and new businesses are taking advantage of the latest and most efficient equipment.
Sparkfund aims to make closing that efficiency gap a more manageable and affordable process for businesses who aren't principally focused on energy use.
"[Customers] have so many competing options for their capital, efficiency is not compelling enough, generally."
President and CFO, Empower Equity
"In the world of commercially-owned buildings, no one has stopped and said, 'How can we make this a simple journey for the customer,'" said Ferrante. "It's a lot of effort to dive in and, technology by technology, building by building, adopt new things."
Empower Equity takes a similar approach to funding energy efficiency upgrades, offering subscriptions that companies need for financial and energy reasons.
"We see ourselves as a service provider for energy efficiency," Empower President and CFO Derek LaClair told Utility Dive. "The closest [comparison] we see out there in the market is a waste management services contract. You don't pay up front for your dumpster."
The new accounting rules covering operating leases go fully into effect this year, and are the driving force behind Empower, which focuses on smaller projects, roughly from $30,000 to $2 million. That tends to be a problematic area, said LaClair: too big for a small business to take on, but perhaps too small for an energy services company to take them as a client.
That can make efficiency projects a tough sell for many companies, which has traditionally resulted in low adoption of new technologies.
"[Customers] have so many competing options for their capital, efficiency is not compelling enough, generally," said LaClair. "It's fixing something that's not broken, for 10% to 20% savings. ... The actual savings are nominal."
This is where new financing methods have created opportunity for both service companies and utilities.
Utilities see opportunity in service offerings
SparkFund is backed in part by Energy Impact Partners, a venture capital firm supported by more than a dozen major utilities, including Southern Co., National Grid, Xcel Energy, Ameren, Alliant Energy, TransCanada and TEPCO.
EIP Vice President of Innovation and Commercialization Evan Pittman told Utility Dive that utilities want a piece of the as-a-service business model, and don't necessarily see third-party providers as a threat. Sparkfund, for instance, last year partnered with Shell to provide commercial building services like lighting, retail power and electric vehicle charging.
"Utilities want to be in a position where they can, in an ideal world, generate some revenue and earnings off of delivering those products," Pittman said. They also want to be the trusted energy advisor for companies, he said, which "still has tremendous value" even if utilities are not the ones selling the service.
EIP surveys its utility coalition annually to divine their top priorities, and last year the list included renewables, storage, customer engagement technologies and advanced analytics. Along with those, said Pittman, is a growing focus on electrification — from households, to public electric vehicle charging, to industrial electrification.
"Our utilities are pretty much universally interested in finding solutions C&I customers want," said Pittman. "There is still a lot of low-hanging efficiency fruit and increasing opportunities in the [distributed energy resource] space."
According to Navigant's Huber, the small business segment is the "hardest nut to crack" when it comes to deploying efficiency projects. "In general, they don't have established credit-worthiness, they are usually renting their commercial space, they're really busy and not energy sophisticated," he said.
"How do you still get advanced price signals out there, but in a way the customer base can respond to? Having a sophisticated third party or utility do it for them."
Energy director, Navigant
EaaS may help ease grid transformation
In that respect, the new wave of innovative financing and EaaS offerings has the potential to accelerate grid evolution. And for utilities struggling with developing new rate structures, it may actually ease the transition.
"We need to send more and more sophisticated price signals to customers. That's been the overriding theme of rate design for the past decade or two," said Huber. On the other hand, "a large amount of customers just want simplicity and some certainty in their pricing."
With a sophisticated third party providing services in between the utility and customer, more granular and nuanced rate design can be rolled out faster.
"They both in a way lead to the same place," said Huber. "I would argue the energy as a service model leads to that end point faster because most customers aren't sophisticated enough to handle the rate signals to align pricing to their system."
Many industrial consumers can optimize their operations to energy price signals, but a large share cannot, said Huber. "How do you still get advanced price signals out there, but in a way the customer base can respond to? Having a sophisticated third party or utility do it for them."
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