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Efficiency as a Service Business Model Helps Overcome Customer Payback Challenge

Jul 05, 2018

In a blog last year on my Energy as a Service framework, I highlighted how corporate commercial and industrial (C&I) energy and sustainability managers are choosing to deploy distributed energy resources (DER) using new, project-based financing to meet their sustainability energy management needs. But new, project-based DER financing instruments are not a panacea. Many corporate C&I energy and sustainability managers face what I call the customer payback challenge, as illustrated in the graphic below.

Customer Payback Challenge

(Source: Guidehouse Insights)

The customer payback challenge can be summarized as follows:

  • C&I customers are hesitant to deploy capital for non-core operations like energy management.
  • C&I customers that do deploy capital for non-core operations like energy management are hesitant to approve projects unless the ROI is less than 1-2 years.
  • C&I customers are much more likely to pursue financing if the overall monthly costs are lower than their monthly utility bills.
  • C&I customers are hesitant to sign long-term agreement for financing instruments or service procurement agreements.
  • C&I customers often express concerns that the cost of capital for energy-related financings is higher than their own internal cost of capital—even if they overcome the barriers listed above.
  • This paradox results in significant project deployment inertia.

ESA and the Payback Challenge

One solution offering that is helping to overcome the customer payback challenge is the Efficiency as a Service Agreement (ESA) offered by Metrus Energy. Metrus Energy’s ESA is analogous to a solar PV power purchase agreement, in the sense that sources of private capital are used within a project finance instrument. However, in an ESA, service payments by the C&I energy user are based on actual avoided kilowatt-hours of electricity or therms of natural gas. The ESA also allows for the C&I energy user to transfer the risk of project design, execution, and performance monitoring to Metrus and its network of project deployment support partners.

A recent project announcement by Metrus Energy highlights how its ESA can overcome many of the customer payback challenges. In this project, Metrus Energy is executing a $5 million ESA transaction over a 4-year term with a Fortune 100 technology customer as part of a rollout of LED lighting and building management systems upgrades at multiple sites in two separate states. Metrus has now financed more than $41 million under this customer’s ESA program, resulting in over 1 billion kWh of energy savings.

C&I energy users are looking for Efficiency as a Service offerings that avoid capital outlay from the C&I customer, allow for the transfer of project execution risk, and are performed under a short-term agreement as part of an ongoing, repeat series of projects across a user’s portfolio. Guidehouse Insights will be keeping a close eye on further deployments like these within my Energy as a Service research coverage.