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The events of 2022 have highlighted the fragility of the energy transition and the importance of ensuring reliable access to affordable energy. This lesson is particularly crucial for companies having industrial sites with significant energy demands. By taking greater ownership of their utilities and transitioning the assets that generate them from fossil fuels to renewable energy, these companies not only reduce exposure to market fluctuations but also create a viable path for decarbonization.
Replacing fossil fuel-fired on-site assets with green alternatives or installing new assets as part of a comprehensive carbon reduction strategy, however, can be complex and require a significant capital outlay. Industrial sites can have diverse utility needs – including power, steam, hot water, cooling, chilled water, hydrogen, nitrogen or compressed air – that require different assets to produce them. There is no one-size-fits-all decarbonization template for every site, and even the most knowledgeable of site procurement teams may have difficulty finding the right mix, especially considering possible medium- to long-term technology and market evolutions.
The complexity and expense of installing sustainable on-site assets to generate one’s utilities is motivating more and more organizations to outsource their energy assets to expert energy service providers that take an end-to-end approach, called (on-site) Utility as a Service (UaaS). This is a financing and implementation scheme designed to simplify the decarbonization of utilities at complex industrial sites, removing technical and financial barriers and enabling the transition to green energy.
Take the challenge of industrial thermal energy, for instance. Thermal energy for industrial processes accounts for 25% of global energy consumption. Only 10% of that energy is currently generated by green sources, making it the ‘next frontier’ of decarbonization. Even though there are barriers to using renewable energy for high-temperature heat applications, renewable solutions are available for most heating and cooling needs, but they require capital expenditure (CAPEX) mobilization and a combination of technologies to meet various needs.
Managing the funding, design, installation and operation of such a system is not the core business of most companies. Financing an end-to-end sustainability project on their own would require a company to introduce a fundamental shift in the corporate investment mentality. Rather than focusing on quick returns on investments (ROI) from core business assets, such as production lines and new products, they would need to approve major investments in green energy assets which deliver long-term benefits but don’t necessarily impress shareholders concerned with the next quarterly report. The pressure to deliver short-term financial returns often tips the balance in favor of the most expedient solution.
The UaaS model helps companies clear these major hurdles. Co-creating an implementation program with an energy expert that assumes ownership of the energy assets can lead to full decarbonization of the site while lowering total costs to the operational minimum.
In recent years, the preponderance of decarbonization efforts have focused on electricity, with significant advances in energy efficiency and the adoption of renewables like solar and wind. While these solutions are crucial initial steps toward decarbonization, they are not sufficient to meet the complete needs, including heating and cooling requirements, of industrial sites with ambitious carbon goals. These facilities require a broader range of options, such as combined heat and power (CHP) driven by renewable fuels, trigeneration, biomass boilers, anaerobic digestion, heat pumps, electric boilers, heat recovery systems, efficient chillers, and air-compressors, among others.
To optimize the reduction of Scope 1 and 2 emissions at industrial facilities and achieve a clean energy system, a holistic approach is necessary for on-site utilities. On-site utilities involve generating renewable power on-site to meet a company’s energy needs while greening its operations. The financing, ownership, construction, operation, and maintenance of these assets can be done separately, with a company finding a source of capital and managing the various contracts over the lifetime of its energy assets, rather than outsourcing those solutions to an expert energy partner.
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However, it is advisable for companies seeking the benefits of on-site utilities to engage a service provider to co-design and engineer complete utility solutions for a particular site in collaboration with its corporate leaders and site staff. This provider can support implementation of the decarbonization plan by playing a project management and engineering, procurement, and construction (EPC) advisory role, but it doesn't necessarily fund and operate the selected solutions.
UaaS, on the other hand, is a business model in which the energy service provider undertakes the entire project lifecycle, from design to maintenance, to deliver mature as well as innovative integrated utility solutions. This entails a company transferring ownership and responsibility for energy-producing assets to an energy partner that supplies the required utilities within agreed cost and quality parameters. It is an all-inclusive package in which the service provider assesses, along with the contracting company’s local resources, the energy needs of the site, designs a tailor-made solution, draws up a roadmap, and then builds, operates and maintains the system.
The key piece to the UaaS puzzle is that the provider managing the utilities also provides the finance, arranging CAPEX to either purchase and retrofit existing assets from the client or purchase new assets. The client only pays a price for the renewable energy delivered by those assets, a purely operational cost. The upfront investment is the responsibility of the provider.
This benefits the client by significantly lowering the bar to acquiring asset upgrades that will provide long-term decarbonization benefits. It is also beneficial from an accounting and investor point of view. Since it does not require upfront CAPEX from the client, depending on the accounting standard followed by the client, the details in specific contractual clauses, and subject to auditors' approval, UaaS contracts can be off-balance sheets. This way, a company’s solvency ratios can be maintained and indebtment capacity can be preserved for strategic projects.
Typical of ‘as-a-service’ models, UaaS is an outcome-based model with a contract structured to reduce the total cost of ownership below that of business as usual. The first step is ensuring that energy efficiency is optimized before selecting the most cost-effective mix of low-carbon solutions to meet the site’s utility needs. Client payments are based on service usage over the contract's duration, typically 10 to 20 years, eliminating the need for the client to invest CAPEX or take on debt. The remuneration model involves fixed and variable fees and, since it is value- or outcome-based, depends on the supplier successfully meeting contractual KPIs such as quality of supply, reliability, alignment with the decarbonization trajectory, and other performance measures.
The variable fees cover variable OPEX and fuel costs proportional to the quantity of utility-supplied, while the fixed fee covers CAPEX (design, procurement, financing and construction), lifecycle maintenance and operation and light maintenance. Because the service provider assumes the investment costs, is responsible for meeting performance commitments, and absorbs most of the risks, it is to their advantage to design a highly efficient, customized solution by closely assessing the client’s energy needs and the economic potential of the project. Avoiding the risk of cost overruns, delays and performance failure requires optimal asset planning, sizing, and operation, resulting in smaller, cheaper, and highly efficient systems.
The UaaS model works best when approached as a partnership. An experienced service provider collaborates with the client's teams, leveraging their local expertise and existing assets. This collaboration involves co-designing and engineering solutions, managing tenders, and evaluating suppliers for successful implementation. Experience with on-site utilities and sustainability programs helps smooth internal corporate debates about the operational priorities, investments and energy procurement needed to be successful in one’s decarbonization efforts.
Shifting financing and operational responsibilities to a service provider reduces risks associated with on-site utilities. The provider’s all-in package removes operational and financial risks for the client. This comprehensive approach addresses four thematic areas:
Utility decarbonization involves designing complex interactions between different utility streams, implying a shift toward holistic and integrated solutions. Many industrials evaluate technologies in silos, while key synergies between them can help accelerate Net Zero goals. An approach suited to the task involves baseline assessment, ambition setting and stakeholder engagement, identification of emissions-reduction levers, scenario modelling to compare technologies and costs, financing and contracting and then defining an actionable roadmap to facilitate implementation. ENGIE Impact calls this global approach ‘Net Zero Factory’.
Utility transformation requires significant capital investment, which can be challenging for companies focused on core activities. The longer payback period and lower economic returns of green projects may deter investment committees. Nonetheless, these types of investments still need to happen, making ‘as-a-service’ options an attractive alternative.
Large projects require approval at different levels of the company, necessitating organizational mobilization and the push for replicability across multiple sites. The focus is on maintaining consistent approaches, principles, processes, and governance across sites for easier implementation.
Achieving Net Zero requires a long-term view and commitment. Initial improvements in energy efficiency and solar energy are not sufficient. Exploring and combining all utility options effectively is crucial to reach Net Zero.
The case study below illustrates how close collaboration between a service provider and an industrial client can set up a UaaS pilot to serve as fertile ground for a potentially expansive decarbonization effort.
The client is a major player in the consumer goods and food and beverage sectors, with 200+ factories in 60+ countries and 100,000+ employees, demonstrating the huge scale of the decarbonization task ahead. The company has set very ambitious sustainability goals, including reducing Scope 1 and 2 emissions by 100% by 2030 against a 2015 baseline, with an interim goal to reduce them by 70% by 2025.
ENGIE Impact utilized its Net Zero Factory approach to assess a first cluster of production sites and develop pilot decarbonization plans. The goal was to create a decarbonization roadmap and engineering studies, followed by the construction, ownership and operation of new, decarbonized energy assets. ENGIE Impact, leveraging its association with the ENGIE Group, designed a comprehensive Utility as a Service program for the sites.
At the first site, the validated solution integrated a combination of technologies including a biomass (wood chip) boiler, a multi-fluid boiler, an electric boiler, a heat exchanger (thermal oil to steam), waste heat recovery, an absorption chiller and heat storage. This composite solution is designed to enable full decarbonization well before 2030 and provide energy cost savings with the lowest Total Cost of Ownership. At the second site, a biomethane boiler in combination with a heat pump and solar PV solution was determined to be the most favorable mix, enabling full decarbonization well before 2030 with the highest energy consumption savings, highest energy cost savings, lowest CAPEX impact, and lowest service fee.
Collaborating closely with the client, ENGIE Impact and the client's teams co-constructed a decarbonization roadmap for approximately 20 sites worldwide. This roadmap included a Preliminary Decarbonization Assessment, site assessment, energy efficiency audit, joint alignment on emission reduction solutions, and a preliminary decarbonization plan.
The roadmap was followed by a “Getting ready for implementation” study, which included an investment-grade decarbonization roadmap, alignment on options and adoption of best solutions to achieve emission targets through long-term techno-economic optimization. This included the definition, prioritization and characterization of all projects required to implement the pathway.
The key success factors in this case study include starting small, building trust, and engaging with all stakeholders for better buy-in and commitment. The end-to-end UaaS model, where the service provider finances the solutions and shares ownership of the project's vision and success, provides a future-proof and cost-effective roadmap for plant decarbonization.
Overall, the case study demonstrates the benefits of a partnership between a service provider and an industrial client to implement a UaaS program, enabling decarbonization, reducing emissions, and achieving sustainability goals. An expert energy service provider that seamlessly integrates assessment, advisory, financing, project management as well as implementation roles, and can leverage its ties to a global energy company, is a great advantage for an industrial site looking to implement a sustainable utility upgrade. UaaS shows that while solving the utilities puzzle can be challenging, it doesn’t have to be burdensome.
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