The as-a-service model, in which capital-intensive costs are spread out over the useful life of the product or offering, has become commonplace.
The best example is software-as-a-service (SaaS), now the preeminent way to acquire and use personal and enterprise software. This model replaced the more capital-intensive approach of businesses buying their own computing infrastructure, purchasing and updating these servers with new versions of their applications, and spending significant amounts of money to do so.
Within energy and building technology, the use of SaaS applications is not new. For example, co-working providers offer workplace-as-a-service, which replaces a long-term lease, plus a lot of other costs (such as utilities, furniture and facility management) with a flat monthly fee based on simple metrics like the total number of desks or people.
Another offering, data-as-a-service, provides a stream of data for a flat “per point” or “per feed” price. This simplifies the complexity that goes into collecting these data streams, which may include deploying sensors and other hardware.
This model also has been offered within building energy management. Energy waste, and the elimination of it, is a significant business opportunity, though the high upfront costs to improve building performance have always created friction in the market.
Energy management software, offered as an as-a-service solution, was one of first approaches to deliver energy efficiency. While software dashboards and reporting products are fairly ubiquitous, an open question is whether some energy waste is being left on the table. This is due to poor user adoption of these products, in addition to difficulty turning data analytics and insights into cost savings.
Next up: EEaaS
These questions have opened the door to energy efficiency as a service (EEaaS), which is an emerging model to deliver energy savings without upfront capital. While it has been around as a concept for nearly 10 years, it’s gained momentum since 2017 due to new market entrants.
The model sees a third-party financing the equipment used to retrofit a building, while the owner uses the ongoing energy savings to pay this back. Unlike a software subscription, actual energy savings are delivered to the building owners.
The offering is attracting attention from large incumbents across various parts of the energy and building management value chain. For example, CBRE has invested in Redaptive, which started with a focus on LED lighting retrofits, but is steadily expanding to other energy upgrades. Carbon Lighthouse, which has raised money from Johnson Controls, is another leading EEaaS provider.
There are a number of other growing firms that have similar solutions, though the details of the offerings are often adjusted to the specific building or organization type that is targeted. For example, Sparkfund works with technology and solutions vendors, helping them fund their own deployments without upfront capital from customers.
Parity offers an as-a-service approach to energy savings, but for multifamily buildings. Cenergistic offers a “behavior-based” approach that embeds energy managers into public school districts to drive reductions. Metrus has succeeded in working with utilities, helping their customers fund various building and energy upgrades.
These firms tend to be smaller startups with fast growth. But more mature firms offer EEaaS as one of many financing and deployment options. These firms have been the targets of acquisitions, which is unsurprising given the general state of M&A in the industry.
For example, Veolia bought Enovity in 2017, which can provide upgrades with a guaranteed energy and maintenance contract. Centrica purchased SmartWatt, which also can deploy energy retrofits and/or lighting without upfront capital, earlier this year.
These vendors do not provide homogenous offerings. Their differences can be summarized across three considerations:
- Range of energy measures: While most firms aspire to provide a broad range of energy conservation measures, some focus on a specific type, which can include LED retrofits or HVAC upgrades.
- Significance of the as-a-service model: Some firms only offer an as-a-service approach, while others will offer this financing model as one of a few options.
- Financial terms: Shared savings is a model in which the energy cost reduction is split between the client and vendor. But in some cases, beyond a prearranged service fee, the energy cost savings flows to the building owner.
The differences noted above likely will become less defined, especially as these firms seek growth by moving into adjacent markets. And moving forward there will require more innovation around financing models, which may be tailored to specific building types, specific types of equipment, or more focused on data-driven operational enhancements (without equipment upgrades).
While these firms have gained market share, they still serve a small portion of the 5.6 million commercial buildings in the U.S. Many local and regional building service contractors are the first in line to perform various upgrades and maintenance projects.
One opportunity may be to help these small firms finance upgrades on an as-a-service basis, with a technology platform to assist with ongoing operations. Without such support, offering energy efficiency services may be difficult. But given the opportunity and their established channel to market, such a growth trajectory does make sense.
Energy efficiency as a service fills a need in the market. It also provides a win-win that will drive more vendors to consider the offering and encourage more building owners to invest in energy cost reductions.
That said, there are still some questions of scalability: How fast can these EEaaS firms grow? Most leading vendors have served hundreds of buildings, while even smaller energy management software players work with thousands of buildings.
And while many commercial buildings are open to third-party operation of their core building systems, some are not. For example, data centers, grocery stores and even refrigerated warehouses view HVAC and refrigeration systems as mission-critical.
Whatever the true total addressable market size of EEaaS turns out to be, the model is here to stay.
Joseph Aamidor provides product and market strategy guidance to building owners/operators, building management firms, technology providers, investors and early-stage innovators. Previously, he served as director of product at Lucid Design Group and was a product manager at Johnson Controls.