Insight on "Energy as a Service"

The need to reduce energy consumption is as critical today as it has ever been. Decarbonization and the need to reduce greenhouse gas (GHG) emissions are national priorities. Inflation puts a heavy toll on energy budgets, and worse, the energy burden affects businesses of all types, including multi-family rentals.

How Does it Work? … Now is a good time for landlords, commercial building owners, and property managers to consider an Energy as a Service (EaaS) contract to manage costs. It is a business model that allows a building owner or manager to forego the upfront expense of purchasing energy-utilizing equipment, and instead, pay for the equipment in monthly installments.

This model works well where a building owner wants to renovate a building and replace energy-utilizing equipment with a more efficient alternative. It may be air conditioning, lighting, water heating, refrigeration, etc. It can also include parts of the building structure, that although they do not use energy themselves, they affect the energy consumption of the building. Examples are windows and insulation. The purchase and installation of the equipment can be expensive, and on that basis alone, seeking financing makes sense. However, what makes EaaS more attractive is the opportunity becomes “investable”; the owner knows that the reduction in energy use and on-going maintenance yields an operational cost reduction and thus will lead to a project payback.

The model also offers tremendous convenience for the owner. He or she may not have a staff with expertise in selecting appropriate replacement equipment, performing any needed design or building modeling, and managing the project.

So where does one turn to get started? The owner will enlist the services of an energy project developer to undertake the complete task. They will perform a thorough energy assessment of the building and its equipment, provide the engineering and planning for replacement, install the new equipment, and manage the project start to finish.

How is the project funded and paid for? … The developer will pay for the project upfront. In most cases the developer will obtain the needed funding (loan) from a third-party lender. It will also be the developer who will be paying back the loan. In return the building owner will enter into a contract, the EaaS contract, with the energy project developer and the owner will pay the developer a monthly fee to cover all costs and profit. A contract term of 10 to 15 years is typical.

The financing portion of the contract can be significant. The project is normally subject to underwriting where the design, cost, and expected savings may reviewed and need to be validated before the funding is approved. The ultimate success of the project, however, depends on the owner fulfilling their payment obligations and may be required to show creditworthiness as a requirement.

How often do these opportunities arise? … The author has been working in the energy efficiency field for over 30 years. One lesson learned is “there is always low hanging fruit on the tree.” Energy end-use equipment has undergone considerable efficiency improvement over the many years. One example is solid state lighting, commonly referred to as LED lighting. It offers exceptional energy efficiency over traditional fluorescent lighting, has long life, and costs have dropped, making most lighting upgrades very economical. Air conditioning and heating systems continue to be improved with better efficiency. The electric heat pump (a device that works like an air conditioner, but heats rather than cools), once only applicable to southern states that do not have severe winters are now designed for use in northern climates. In many areas they are “go to” alternatives over gas heating. Other measures like energy saving windows, solar reflective (cool) roofs, and efficient water heaters all offer energy saving and environmental benefits. These technologies are appropriate for inclusion in an EaaS contract.

Where’s the Benefit? … First and foremost, the building owner avoids the upfront cost for the project. More so, the energy and operational cost reduction of the project may exceed the monthly owner contract cost, leaving the customer a positive cash flow and come out ahead from the very beginning. Equipment maintenance is normally included in the contract, further reducing the owners ongoing operational costs.

EaaS contracts are not limited to energy saving measures. They can also include equipment that contributes to the buildings energy resilience and improve its environmental benefit. Measures may include a solar array, stand-by generators, electric vehicles (EVs) and chargers, electric alternatives to fossil fueled equipment, and other energy resources in the contract.

An important component of pursuing an EaaS contract is for the owner to select an energy project developer capable of doing the job. A worthy developer should have qualified people to perform the energy assessment and specify sound upgrades, ones that will generate adequate savings but also fulfill their purpose and meet the needs of the building and its occupants. They should also be able to discuss in detail what energy measures are being proposed, how they work, and a thorough explanation of its economics.

It behooves any prospective project owner to be objective as they consider an EaaS contract. It is easy to be down on the idea because of its complexity or because of the number of other parties involved (financers, contractors, building assessors, the developer, etc.), whose costs and profits will be rolled into the contract. Any conscientious owner will ask themselves if there is a cheaper or easier way, and it may lead to doubt. The best approach is for the owners to compare the projected benefits of the project with their financial, energy, environmental, and other goals and be sure attributes of the project meet established targets and use that information to decide which way to go.

Also remember the project may be eligible for federal, state, or local incentives. These may be in the form of a rebate, tax credit, tax deduction, etc. The EaaS contract, by itself, should not disqualify an owner from the benefit. The incentives should be able to be transferred to the developer through the contract, and if rolled into the economics of the project, the overall return on investment should even be better for the owner.

So if you are considering ways to reduce costs, decarbonize, reduce energy burden, add emergency back-up power, replace gas and oil-fired equipment with electric, and want to avoid the large up-front investment, plus meet your energy and decarbonization goals, an EaaS contract may be the right solution!

Author: Robert Phillips of Energy Insights 07/18/2023