Efficiency-as-a-service is a pay-for-performance, off-balance sheet financing solution that allows customers to implement energy and water efficiency projects with no upfront capital expenditure. The provider pays for project development, construction, and maintenance costs. Once a project is operational, the customer makes service payments that are based on actual energy savings or other equipment performance metrics, resulting in immediate reduced operating expenses. The energy services agreement (ESA) is the most common type of arrangement, but other models such as lumens-as-a-service and energy subscription agreements are also in use.
Efficiency-As-A-Service may be a good fit if your organization.To compare efficiency-as-a-service to other financing options that might be a good fit, answer a few questions about your organization.
This section begins by describing a typical energy services agreement (ESA) because it is the most common efficiency-as-a-service structure. Then the two “Alternative Approach” sections will discuss different structures in comparison with the ESA. Note that efficiency-as-a-service space is rapidly evolving, so many different arrangements are in use, and more are in development.
Under an ESA, the provider enters into the ESA directly with the customer for a contracted period (typically 5-15 years). Before equipment is installed, the ESA provider performs a baseline of the customer’s energy consumption and calculates an upfront estimation of savings. The ESA provider then pays and manages a contractor to install the high-efficiency equipment and help maintain the equipment through the contract period. Once project installation is complete, a measurement and verification (M&V) analysis is performed to determine actual savings compared to baseline energy use.
The customer then enjoys lower utility bills throughout the contract term. The customer pays the ESA provider a charge per unit of energy saved that is set below its baseline utility price, resulting in immediate reduced operating expenses. The ESA payment can be structured either as a percentage of the customer’s utility rate or as a fixed dollar amount per kilowatt-hour saved. The ESA provider retains ownership of the equipment for the duration of the ESA term and pays for maintenance to ensure reliability and performance. New efficiency measures can be added during the duration of the contract. At the end of the contract, the customer can elect to purchase the equipment at fair market value, extend the contract, or (less commonly) return the equipment.
An ESA can be thought of as an energy efficiency version of the Power Purchase Agreement (PPA), a structure commonly used to finance renewable energy systems. Under an ESA, the customer doesn’t bear the project performance risk since it only pays for savings actually achieved. Instead, the ESA provider bears this risk and gets paid less if the project savings are lower than expected. However, ESAs vary significantly in terms of contract structure, method used for measuring realized savings, and how the customer and provider split performance risk and upside. Some ESA providers are exploring the possibility of combining ESAs with on-bill repayment.
Typically, ESA projects are funded through a combination of equity from the ESA provider and outside debt from a lender. The ESA provider typically forms a special purpose entity (SPE) that owns all project equipment and is repaid by customer payments under the ESA.
An Alternative Approach: The Managed Energy Services AgreementThe Managed Energy Services Agreement (MESA) is a variation on the ESA with a few important distinctions. In a MESA structure, the provider assumes the broader energy management of a customer’s facility, including the responsibility for utility bills. The MESA provider essentially acts as an intermediary between the customer and the utility. The MESA provider will charge the customer an agreed-upon fixed rate based on historical energy consumption, thus protecting the customer from utility rate changes. MESAs are especially of interest in sectors where a “split incentive” between landlord and tenant is an issue, as the structure of the agreement allows MESA charges to be passed through to tenants.
Some providers are offering alternative efficiency-as-a-service models that differ from the ESA and MESA. One example is “lumens-as-a-service,” in which a customer specifies its desired lighting output (which can be framed in terms of footcandles or lumens of light supplied, or other metrics) and the provider delivers a contracted lighting service to achieve those outcomes. Another example is a “subscription agreement,” in which customer payments are based on the function or output of the installed energy equipment rather than measured savings, resulting in a simpler contract. Other models such as “electric vehicle charging stations as-a-service” are also being explored. The “as-a-service” concept can potentially be applied to a wide range of technologies using a variety of structures, and the space continues to rapidly evolve.
