Efficiency-As-A-Service

• Wants to pursue retrofits across your portfolio without spending your own capital

• Prefers off-balance sheet treatment for the delivery of efficiency services

• Wants a pay-for-performance solution where a third party takes on performance risk and provides project management and maintenance

• Is looking for a financing mechanism with a contract term ranging from 5 to 15 years, with periodic buy-out options

• Wants a new way to procure energy efficient technologies across your portfolio without the hassle of ownership

To compare efficiency-as-a-service to other financing options that might be a good fit, answer a few questions about your organization.

This section begins by describing a typical energy services agreement (ESA) because it is the most common efficiency-as-a-service structure. Then the two “Alternative Approach” sections will discuss different structures in comparison with the ESA. Note that efficiency-as-a-service space is rapidly evolving, so many different arrangements are in use, and more are in development.

Under an ESA, the provider enters into the ESA directly with the customer for a contracted period (typically 5-15 years). Before equipment is installed, the ESA provider performs a baseline of the customer’s energy consumption and calculates an upfront estimation of savings. The ESA provider then pays and manages a contractor to install the high-efficiency equipment and help maintain the equipment through the contract period. Once project installation is complete, a measurement and verification (M&V) analysis is performed to determine actual savings compared to baseline energy use. 

The customer then enjoys lower utility bills throughout the contract term. The customer pays the ESA provider a charge per unit of energy saved that is set below its baseline utility price, resulting in immediate reduced operating expenses. The ESA payment can be structured either as a percentage of the customer’s utility rate or as a fixed dollar amount per kilowatt-hour saved. The ESA provider retains ownership of the equipment for the duration of the ESA term and pays for maintenance to ensure reliability and performance. New efficiency measures can be added during the duration of the contract. At the end of the contract, the customer can elect to purchase the equipment at fair market value, extend the contract, or (less commonly) return the equipment.

An ESA can be thought of as an energy efficiency version of the Power Purchase Agreement (PPA), a structure commonly used to finance renewable energy systems. Under an ESA, the customer doesn’t bear the project performance risk since it only pays for savings actually achieved. Instead, the ESA provider bears this risk and gets paid less if the project savings are lower than expected. However, ESAs vary significantly in terms of contract structure, method used for measuring realized savings, and how the customer and provider split performance risk and upside. Some ESA providers are exploring the possibility of combining ESAs with on-bill repayment.

Typically, ESA projects are funded through a combination of equity from the ESA provider and outside debt from a lender. The ESA provider typically forms a special purpose entity (SPE) that owns all project equipment and is repaid by customer payments under the ESA.

Some providers are offering alternative efficiency-as-a-service models that differ from the ESA and MESA. One example is “lumens-as-a-service,” in which a customer specifies its desired lighting output (which can be framed in terms of footcandles or lumens of light supplied, or other metrics) and the provider delivers a contracted lighting service to achieve those outcomes. Another example is a “subscription agreement,” in which customer payments are based on the function or output of the installed energy equipment rather than measured savings, resulting in a simpler contract. Other models such as “electric vehicle charging stations as-a-service” are also being explored. The “as-a-service” concept can potentially be applied to a wide range of technologies using a variety of structures, and the space continues to rapidly evolve.

Efficiency-as-a-service is a relatively new but proven structure that has been used to implement multi-million dollar retrofit projects in Fortune 500 companies and major facilities across the U.S. It is most common in the commercial & industrial and MUSH (municipalities, universities, schools, and hospitals) sectors, but it can work for any sector. Efficiency-as-a-service is a flexible financing mechanism that can incorporate a wide range of efficiency measures, including water. Efficiency-as-a-service is often described as part of a broader transition to energy-as-a-service, in which third-parties provide technical, financing, and/or procurement solutions for energy technologies in exchange for a service fee, rather than having the customer purchase the systems outright.

Efficiency-as-a-service is gaining popularity because it overcomes market barriers that other mechanisms do not, and it limits customer performance risk while still providing an avenue for short-term energy and cost savings. With the upcoming Financial Accounting Standards Board changes to lease accounting that will bring operating leases onto the balance sheet, efficiency-as-a-service will likely be one of the few remaining efficiency financing options to be consistently considered off-balance sheet. Efficiency-as-a-service represents part of a larger shift across the industry away from customer equipment ownership and toward an “as a service” model, where the customer does not own the efficiency equipment but instead pays for energy savings or output like a service.

The efficiency-as-a-service market is thought to be growing quickly, but no thorough and up-to-date analysis of current market size has been conducted. Navigant has estimated global revenues from the lighting-as-a-service alone could become $2.6 billion by 2026. A 2012 analysis by Deutsche Bank Climate Change Advisors and the Rockefeller Foundation estimated that more than 100 ESA projects had been completed, with a pipeline for potential ESA projects of approximately $500 million across all firms. These numbers have likely grown substantially since then. Within the Better Buildings program, the Financial Allies completed over $450 million in efficiency-as-a-service projects from 2012 to 2019. Financing small and medium size projects has proven challenging due to high transaction costs, but through aggregation and streamlined business models, efficiency-as-a-service has the potential to help unlock this market which many traditional energy performance contract (EPC) models are unable to address.