Sasha Wedekind, a research analyst of building efficiency and decarbonisation at Guidehouse Insights, explores some of the key trends within the global energy-as-a-service market.
Commercial, institutional, and industrial customers increasingly look to outsource energy management functions due to the growing complexity of available energy technologies. Resilience, sustainability, and decarbonisation mandates also encourage outsourcing.
Meanwhile, these customers have limited ability to spend CAPEX on non-core operations, are hesitant to engage in long-term contracts, expect quick ROI, and have cost of capital concerns. Vendors are responding to these needs by developing turnkey energy-as-a-service (EaaS) solutions that extend beyond energy efficiency and offer unique financing to meet client needs.
EaaS is a term that has circulated energy markets for a long time; it is surrounded by a lot of hype and stakeholder interest. For many years, the model was successfully pursued by only a few vendors. Now a wider group of market players is implementing EaaS projects. While the EaaS financing market is still nascent, it is positioned for rapid growth across global markets.
OPEX-based financing emerges as a key feature of EaaS
Definitions of EaaS have been in flux for the past few years, with multiple interpretations of this business model prevalent between different market players. Different vendors have placed emphasis on different features as the core of an EaaS agreement, including:
- Embedded guarantees
- Comprehensive nature of the energy solution
- Flexibility and scalability of the contract
- Energy savings
As a result of this variance in emphasis, contradictions have characterised the market in terms of what is considered essential in an EaaS contract and what is considered ancillary, as well as how this project delivery mechanism is distinguished from others (such as performance contracting).
Adding to the confusion, many new terms to describe EaaS or its variations have flooded the market, including efficiency-as-a-service, decarbonization-as-a-service, sustainability as a-service, and more. These different
characterisations remain the reality of any emerging market.
However, there are signs of agreement on a common set of defining principles that describe EaaS. The financing element, which focuses on OPEX-based payments rather than the use of CAPEX or debt, increasingly is recognised as the central distinguishing feature of agreements. It is emerging as a critical value proposition in a time of financial uncertainty and reluctance to spend CAPEX or take on debt for non-core elements of business.
Guidehouse Insights defines EaaS as a business model innovation that allows vendors to deliver technologies that historically have been paid for via CAPEX or debt under a service contract, with the following two characteristics in place:
- The client ceases control of the energy assets covered by the contract and outsources operation of the assets (heating, cooling, lighting, resiliency, or other outputs) to the EaaS provider.
- OPEX-based fee payments are used rather than CAPEX or debt, resulting in potential off-balance sheet treatment.
EaaS appeals to customers across all segments
Energy-as-a-service is an appealing proposition for customers across large, medium, and small businesses. Across all customer segments, an EaaS deal enables customers to transfer risk, simplify operations, and focus on their core business while meeting their efficiency, sustainability, or resilience goals.
Through EaaS, customers can also redirect CAPEX resources to critical areas of operation and realise potential immediate cash flow and off-balance-sheet treatment of the transaction.
The customer must give up ownership and control of energy assets to receive these benefits. However, as the complexity of new energy technologies and systems grows, customers increasingly look for third-party providers to manage these systems and in return guarantee outputs for energy provided, efficiency, or greenhouse gas (GHG) emission reductions.
Core pillars of the EaaS value proposition
Sustainability regulations and corporate social responsibility targets are particularly strong drivers of growth among large corporate and institutional clients, such as higher education. Carbon neutrality and
other GHG targets require companies to use a wide variety of strategies and technologies to reduce emissions across operations and energy supply.
Comprehensive EaaS agreements can help clients navigate this complex technology landscape by determining sustainability strategy and outsourcing operations and management or required technologies to a third party, all while preserving CAPEX for key business functions.
Sustainability is less of a driver among smaller customer segments where energy savings and efficiency primarily drive growth.
Smaller customers in retail, hospitality, office and other segments historically have not been offered appealing energy efficiency financing options due to their expectations for quick ROI and shorter-term contracts.
EaaS is unlocking this market to efficiency solutions by allowing clients to forego CAPEX, generating immediate cash flow, and offering shorter-term contracts that can be quickly signed and executed.
Pandemic boosts EaaS growth
COVID-19-related impacts have led to holds on projects. However, customer interest in this model is growing. EaaS is well-positioned to support cash-strapped customers by generating savings and avoiding CAPEX.
Customers are re-evaluating how CAPEX is spent, creating opportunity for OPEX financing. EaaS also enables customers to realise immediate savings and often provides short closing times on simpler contracts for mechanical systems. As a result, EaaS can create cash flow for customers.
Guidehouse Insights estimates the global as a service financing market to be $1.6 billion in 2020, growing at a compound annual growth rate of 36.8% between 2020 and 2029. The 2029 market size is projected to reach $27.2 billion. North America is expected to be the largest market for as-a-service financing for energy solutions in 2020, representing 42% of the total market value.
Most of the market revenue is associated with lighting and mechanical systems. However, Guidehouse Insights expects that to change as distributed energy resources (DER) increasingly become financed through EaaS agreements. Current EaaS contracts for DER are limited to individual case studies scattered around the world. However, demand for sustainability and resilience, bundled with the value proposition of EaaS, is expected to drive this segment of the market to scale rapidly over the next 10 years.
As-a-service financing revenue by region, world markets: 2020-2029
Capturing market opportunity requires consistent strategy
The EaaS market is anticipated to grow rapidly. There are multiple paths to earning market share, including through partnerships, organic growth, and mergers and acquisitions.
Regardless of path to market, Guidehouse Insights recommends that vendors do the following to capture this market opportunity:
Define EaaS relative to other services and financing options: Vendors should focus on defining and articulating what differentiates EaaS from other project delivery mechanisms, contracts, and services. Marketing and business development should be streamlined to communicate value and differentiation.
Determine target market segments and market to their needs accordingly: EaaS offers many benefits and can be structured to achieve a wide variety of objectives. Expectations and needs vary depending on customer segment and vendors are expected to target their messaging and communications specifically to the needs of different businesses and institutions.
Develop a wide range of capabilities: EaaS solutions providers need to assemble a wide variety of expertise to successfully go to market across a wide range of customer segments. Required capabilities include mechanical systems, DER, microgrids, analytics, the Internet of Things, and software. In addition, vendors are expected to have expertise in sustainability, risk management, operations and maintenance, and administrative functions.
For more information on EaaS latest market trends and detailed market size and forecast segmentation, see Guidehouse Insights’ report, Market Data: As a Service Financing for Energy Solutions.
About the author
Sasha Wedekind is a research analyst contributing to Guidehouse Insights’ Building Efficiency and Decarbonization solution. Wedekind specialises in global market analysis and market forecasts for the construction, retrofit, and ongoing operation of more energy-efficient buildings, as well as new business models for energy solutions. Her areas of focus include building decarbonisation, energy efficiency, electrification, emerging EaaS business models and associated financing mechanisms, goto market strategies, and competitive landscape.