Chief financial officers of non-energy intensive companies don’t always find support to commit capital toward long-term energy efficiency improvements for operations. Understandably, corporate budgets must be put to use on projects and opportunities that deliver top-line growth, so bottom-line efficiency improvements are dwarfed by competing internal investment opportunities.
Change Is Coming for Efficiency Improvements
Energy efficiency as a service (EEaaS) is growing exponentially in North America. Navigant, a Guidehouse company, estimates annual market value will reach $278 billion by 2028, with individual projects approaching $100 million in size for some of the largest Fortune 500 corporations. The growth in demand is attributed to EEaaS’ wide appeal in many branches of modern corporations:
- Operations managers look for innovative ways to upgrade facilities
- C-suite executives face increasing pressure from institutional investors to deliver on a low carbon future and protect the business in a fast-changing environment
- Chief sustainability officers seek no or low cost ways of meeting public commitments to reduce carbon emissions
Demand for EEaaS Grows as Decision Makers’ Objectives Align
EEaaS programs are offered by specialist third-party providers that finance project development and construction and own the assets in the long-term. Corporate clients face no upfront CAPEX obligations since the whole program sits on the EEaaS provider’s balance sheet. When upgrades are finished, clients make service payments under a long-term contract. Payments are typically based on actual energy savings, which means a chief financial officer is only liable for real savings created by an immediate reduction in OPEX. Metrus Energy, Inc. first pioneered the EEaaS offering 10 years ago.
The greatest challenge many of our customers face is getting access to capital to pay for efficiency upgrades and then finding the right balance between funding meaningful projects (that often have long paybacks) and maintaining operational flexibility within their real estate portfolio. We’ve had a lot of success in helping customers navigate these issues and are excited to see EEaaS take hold as the market matures. - Bob Hinkle, President and CEO of Metrus Energy
Corporations are attracted to this solution for more than just the ability to move facility improvements off balance sheet. Some of the benefits are described below:
- Zero Cost: EEaaS providers typically absorb all development and implementation costs.
- Day One Savings: Companies can see cost reductions from the moment the project is delivered, rather than over the usual payback period.
- Program Delivery: Projects are delivered by expert companies that manage the assets for the lifespan of the project.
- Fast Solution Delivery: Programs are typically delivered faster than if the program was managed internally.
- Performance Improvements: Facilities have state-of-the-art technology installed, which improves output delivery (at a lower cost per unit).
- Long-Tail Implementation: Funding can be allocated to solutions that have medium-term payback periods, which otherwise wouldn’t make the cut.
- Reduced Carbon Emissions: Direct and indirect emissions reduction means corporate sustainability targets are closer to completion without sacrificing budget.
As noted by Ric Braam, Chief Financial Officer of Bristol Hospital and Health Care Group, Inc., “Being able to pay for critical new equipment and facility upgrades from energy and water savings makes good financial sense and keeps us focused on providing outstanding patient care.” As the sector continues to experience rapid growth, venture funds have entered the market, accelerating sector growth. Energy Impact Partners LLC and CBRE Group, Inc. have recently invested in EEaaS platforms Sparkfund and Redaptive, Inc., respectively.
As EEaaS solutions become more visible in 2020, Navigant anticipates larger deals will be announced and more capital providers will enter the market. This will likely result in a reduction in the overall cost of capital—which will only make the offering more attractive to corporations seeking to meet strategic objectives.
This post was originally on the Navigant Research website.