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The heightened focus on the need to mitigate climate change and accelerate the energy transition has encouraged government entities, corporations and other major consumers of energy to look to efficiency as a way to decarbonize their operations and their buildings. Globally speaking, improvements in energy efficiency could represent more than 40% of the emissions reductions needed to put the world on the path to net zero by 2050, an effort that will require comprehensive energy abatement measures to reduce demand without slowing growth.
Governments have a critical role to play by introducing policies that both incentivize and regulate energy efficiency, but it is up to industries and individual companies to make it happen. While not always recognized as such, reducing energy consumption through efficiency is the most cost-effective way for organizations to decarbonize. It enables them to reduce their emissions and pursue sustainability goals while reducing their operating costs.
It sounds simple enough – reduce energy demand and reap the benefits in the form of improved profitability and enhanced competitiveness. Yet if it were that straightforward, all organizations would be energy efficient, industries would have a much smaller carbon footprint and the world would be further along the path to Net Zero. Clearly, it is not so easy.
Successful carbon reduction poses a challenge, particularly for companies with multiple sites, not because they lack the ambition, but because they lack the capacity and often the governance to drive the necessary changes. Most do not have the in-house resources to design an actionable program and carry it out efficiently on their own. Some do not fully appreciate that energy efficiency is not a one-off exercise, but rather a continuous process requiring company-wide buy-in and efficiency champions that will monitor performance continually.
Another impediment is that corporations always have CAPEX arbitrage between their core business and energy transition initiatives, the latter typically having CAPEX limitations and a longer return on investment (ROI) period. Corporate leaders, who have financial targets to meet, often assume a priori that fundamentally transforming a company’s energy demand is simply too complex, and too expensive, to meet standard corporate investment criteria. This assumption can be proven false by assessing which sustainable solutions can be leveraged to generate cost savings and business value.
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One such solution is Energy Savings as a Service (ESaaS), which is designed to enable companies to painlessly overcome the technical, financial and behavioral barriers to energy consumption reduction. ESaaS offers a business model that improves energy efficiency, reduces one’s carbon footprint and saves money on energy costs, all without upfront capital expenditure or hiring new staff. It’s like having one’s cake and eating it too. In what follows we explore how it works.
Decarbonizing a multi-site business can be a complicated affair. ESaaS simplifies it by outsourcing to an experienced sustainable service provider the energy conservation measures (ECMs) that will contribute to a company’s energy savings. The service provider not only collaborates with on-site efficiency teams to identify opportunities for energy reduction, but also finances and implements the identified solutions, and follows that up with maintenance and energy management and a commitment to achieve the agreed energy savings target.
In return, the service provider is paid via a periodic (e.g., quarterly) service fee, based on the energy savings achieved, for the duration of the contract (typically 10 years). It is up to the provider to make accurate calculations of the expected savings to ensure they recover the funds invested in the various ECMs. And the savings can be substantial once an ESaaS program is rolled out over several or even dozens of sites. One might be tempted to ask, “What’s the catch?”
When energy demand reduction is approached as a partnership, there is no catch. The innovative ESaaS business model relies on a long-term partnership between a contracting client and a service provider that delivers economic and sustainability advantages, providing the same level of energy service but at a lower cost and with greater efficiency.
An ESaaS contract is structured in a way to enable a client to benefit from asset-based energy efficiency measures without having to disburse any CAPEX. Repayment for the upgraded assets is effectively subsidized (totally or partially) by the savings generated from the energy performance of the ECMs installed at their facilities. In fact, the list of ECMs on a site may be selected to provide immediate positive cash flow in the form of net energy bill savings.
In other words, projects may be considered eligible for investment within an ESaaS program as long as the expected performance-based service fee remains lower than the expected energy bill savings generated by the ECMs. This way, an ESaaS program enables a company to shift from traditional CAPEX investment criteria (e.g., payback period shorter than 2 – 3 years) to the deployment of all projects, provided energy expenses remain cash flow positive, thereby expanding the pool of viable projects.
What is more, this means that projects with a shorter payback period are cross-subsidizing projects with a longer payback period that would not have been deployed under a traditional investment approach. By putting the right program governance in place, this principle can be extended not only across projects on the same site but across several sites to make sure as much energy potential as possible is harnessed.
In addition to not requiring upfront CAPEX from the client for investing in ECMs, an ESaaS program can further help companies solve the internal competition for CAPEX between core business and sustainability initiatives. Indeed, depending on the accounting standard followed by the client, the details in specific contractual clauses, and subject to auditors' approval, ESaaS contracts can be off-balance sheet for the client. This way, a company’s solvency ratios can be maintained and indebtment capacity can be preserved for strategic projects.
An experienced provider of energy efficiency or other sustainability programs is familiar with the criteria for, and internal corporate debates about the operational priorities, investments and energy procurement needed to be successful. A truly impactful sustainability partner is not only able to analyze an organization’s energy efficiency issues and help align its stakeholders regarding the need to act, but is also able to design, finance, build and monitor the solutions.
ESaaS is an integrated solution providing energy efficiency upgrades to an organization with a potentially expansive portfolio of sites. Left to one’s own devices, achieving the necessary synergy between those sites can be a frustrating endeavor for any organization, as they are designed to optimize productivity and performance, with sustainability measures typically being supplementary to the core purpose.
Yet, while many companies may not be equipped with the internal resources to, for instance, reduce energy consumption across their entire portfolio, most have sustainability teams working to improve the efficiency of their sites and have staff on the ground with deep knowledge of their assets. An efficient ESaaS service provider should leverage the ECMs already initiated and tap into site teams’ local expertise to design and engineer solutions, manage tenders, and evaluate eventual suppliers of the necessary assets, effectively co-constructing a global efficiency program. Once the roadmap is agreed upon, for implementation it can be handed off to the service provider to conduct project management during the contracting, installation, and commissioning phases.
Shifting the financing and operational responsibilities to a service provider reduces the risks and pitfalls associated with undertaking an energy efficiency program. A capable provider of an ESaaS program has the specialized digital means to conduct sophisticated data analysis to identify the optimal energy-saving measures, the internal resources to standardize and streamline the ECMs transversally across a portfolio, and the experience to conduct holistic implementation in collaboration with the teams at diverse sites across multiple geographies.
Implementing a global program also requires access to a large pool of global and local suppliers of ECMs and utility equipment to enable effective procurement outcomes. Having these capabilities and capacity enables a provider to deliver the benefits of economies of scale, such as the cost-effective implementation of energy reduction solutions at a faster pace and larger scale than if approached with a siloed, site-by-site methodology.
To deliver ESaaS programs, ENGIE Impact has developed a five-step methodology covering solutions development, project management and implementation to be applied at a small group of sites in a pilot phase and then rolled out to an increasing number of sites across geographies.
1. Data Collection
Sound business decisions require accurate data insights, and energy consumption is no exception. To successfully drive energy efficiency, the first step is to collect data through a key data checklist and introduction workshop. This requires collaboration between the service provider and the site team to gather relevant energy consumption and production data. If a company has insufficient data, proprietary digital solutions may be used to facilitate data gathering
2. Identification of ECMs
Based on data analysis, on-site audits, technical discussions, and co-construction workshops with site teams to build on their prior internal assessments and deployment of ECMs, additional key ECMs are identified. This comprises engaging with local stakeholders to draw up an ECM report that includes site consumption validation (as a yearly baseline), confirmation of the technical and financial feasibility of the projects and estimating the energy savings. At the pilot level, identifying ECMs that foster transversality among sites is a key consideration
3. Contractualization
The goal here is to lay out the innovative contractual and financing framework of ESaaS, leveraging available subsidies and potentially using an off-balance sheet model if it is desired by the client and is feasible. Investment in the ECMs is funded by the ESaaS service provider. Reimbursement of CAPEX invested and OPEX for maintenance is covered through a periodic service fee based on energy performance realized. Energy Performance Measurement and Verification (M&V) protocols are detailed in the contracts.
4. Implementation
This involves designing, financing and installing the identified physical measures – replacing the lighting with LED, replacing pumps, fans or motors, installing variable speed drives, compressed air optimization, heat recovery, chiller optimization, etc. – and then maintaining those ECMs over the lifetime of the contract. The key here is leveraging the local presence and ecosystem of a service provider with deep understanding of the local context and a commitment to follow the strictest health and safety standards jointly with the site teams
5. Maintenance and Energy Management
Energy efficiency is not a one-off exercise but is realized through continuous improvement. Accordingly, implementing energy efficiency measures does not stop with the installation of the ECMs. Reducing final energy demand is addressed not only through technical solutions but also requires employee awareness to drive behavioral change. Properly conceived, ESaaS also involves relationship building. Of course, having granular monitoring tools — referred to as energy management and information systems (EMIS) — that track energy usage and ensure the technical upgrades are operating at maximum efficiency is a critical backstop to have. Digital tools are used to continuously monitor production efficiency to guarantee long-term value and to track and report performance for the duration of the contract.
The client is a major player in the automotive technology industry, with 266 industrial sites in 35 countries and some 114,000 employees. The company committed to reaching carbon neutrality on Scopes 1 and 2 by 2025, achieving 50% reduction of Scope 3 emissions by 2030 and CO2 full neutrality on all scopes by 2050, a massive undertaking.
The company partnered with ENGIE Impact to develop a global program in less than two years that can deliver the energy solutions they need. In addition to the tight timeline, they needed an innovative financial mechanism that could help them navigate the tight margins in their sector and stay off-balance sheet.
To meet these two imperative constraints, the automotive supplier needed to change the usual ways of contracting energy projects and develop a strong partnership with an energy and sustainability transformation champion. The ESaaS contract that was arranged to accomplish this is a 10-year partnership between the client and ENGIE Impact that will significantly contribute to their energy efficiency objectives. The ESaaS program roadmap addresses more than 110 plants in 13 countries, rolled out in five successive geographical batches covering Europe, China, Latin America, and the U.S. It will enable the company to confidently target about 15% energy savings while reducing their energy-related OPEX.
The program illustrates a streamlined, end-to-end approach, from energy savings identification, calculations, and verifications to implementation and maintenance while integrating the financing of the assets. The innovative financing scheme enables the project to be funded with the best conditions for light assets while avoiding balance sheet impact for the client. A single team is coordinating the program across geographies and suppliers.
The key ingredient to the success of this approach is close collaboration between the ESaaS service provider and the client. Continual stakeholder engagement and governance alignment is part and parcel of a successful implementation partnership. The intent behind this methodology is to empower our partner’s team to accelerate their energy efficiency program and create ownership while limiting the resource requirement on the client side.
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