• Building Energy Management
  • Energy as a Service
  • Energy Service Companies

Energy Service Companies Face Increasing Pressure from Energy as a Service

Sasha Wedekind
Jan 22, 2020

Smart Buildings

In December 2019, the University of Iowa announced a 50-year agreement with ENGIE and Meridiam to operate its utility system and help the university reach its decarbonization goals. The agreement comes on the heels of a similar 2017 contract between Ohio State, ENGIE, and Axium Infrastructure. While contracts of this scale are still rare, energy as a service (EaaS) agreements are becoming common in the energy services market.

For energy service company (ESCO) businesses, the rise of EaaS solutions poses both a strategic challenge and a potential opportunity to accelerate revenue and grow customer bases. ESCO performance contracting (ESPC) models are one of the first examples of EaaS offerings, and help clients avoid CAPEX while reducing energy use, spend, and risk. However, EaaS business model innovation provides more flexible and comprehensive options to clients, slowly eroding the role of ESPC in some segments of the market, such as education.

What Is Driving Demand for EaaS?

The innovative aspects of the EaaS business model lie in the broadening of the scope of energy services and associated financing to meet client needs. Solutions are no longer focused on just energy efficiency or energy supply. Instead they often aim to achieve decarbonization targets and replace aging infrastructure. Energy management is being outsourced, with clients no longer owning the equipment and associated maintenance responsibility. Financing is often based around fee-for-service, leases, and other mechanisms bundled together to offer a customized solution.

This expansion in scope associated with EaaS is primarily driven by the proliferation and growing affordability of a variety of technologies changing the energy management landscape. Solar and storage, intelligent building systems, and demand response software allow customers to achieve performance outcomes beyond energy efficiency. They include decarbonization, resilience, and building independence. Commercial and municipal, university, school, and hospital (MUSH) clients are more sophisticated in their expectations. They look for cost-effective, customized, and comprehensive energy solutions to meet evolving energy needs.

How Are ESCOs Adapting?

To meet these new customer demands, ESCO delivery and go-to-market strategies are evolving to drive down project costs, meet energy savings demands, and provide additional services. ESCOs are adopting the ESPC process to include equipment and services while still ensuring profitability. This new approach blends energy efficiency upgrades with onsite supply distributed energy resources (DER) and infrastructure upgrades to deliver resilience and infrastructure improvements to the customer.

Multiple ESCOs are going beyond broadening the scope of ESPC contracts and are seeing success with EaaS models. Schneider Electric is one example. In partnership with The Carlyle Group, Schneider Electric formed AlphaStruxture to deliver comprehensive energy management and infrastructure upgrade projects using the EaaS business model. The JFK Airport Terminal One Redevelopment is one such project. It is based on a state-of-the-art microgrid and aims to “To reduce energy use by as much as 30% and contribute to a goal of reaching 100% renewable energy usage within the next decade.”

ESCOs that do not adapt to new customer expectations and a changing market will face competition both from EaaS market players and from ESCOs adapting to the new landscape. Growing technology-agnostic and DER skillsets, managing risk, offering financing options outside of ESPC structures, and developing sales channels outside of MUSH customers will be key to ESCO success in the EaaS market.

For more information, look for the upcoming ESCO and Energy Efficiency as a Service for Commercial Buildings report from Guidehouse Research, a Guidehouse company.