Energy and alternative sources are hot topics of conversation nationally, and there’s no shortage of related opinion, research and trends across a range of industries. However, I’ve seen a consistent and increasing shift toward energy strategies that transfer significant operational risk to the developer, maximize tax benefits, monetize assets and preserve or enhance balance sheet and credit-rating metrics.
To a large extent, the national solar industry has been a trendsetter in this movement, with no-cost delivery methods like the power-purchase agreement or solar-services agreement. What we’re seeing now is the application of these same concepts, with a few key enhancements, to thermal energy assets, waste-to-energy concepts and other related areas.
The real innovation for me hinges on Energy-as-a-Service (EaaS) solutions. To begin to understand their value, I think you have to start by distinguishing yesterday’s “product economy” from today’s “subscription economy.” In the product economy, consumers would drive to retail locations (think Tower Records) and make a one-time, upfront payment in exchange for ownership of a static product. After the transaction, the consumer owned the product outright and incurred the burdens of ownership: control of the product, an obligation to maintain the product, risk of loss through damage and risk of loss/depreciation through functional obsolescence.
Subscription-economy flagships like Netflix and Spotify gambled that consumers would much prefer to shed the burdens of ownership and keep the benefits (i.e., the value from the product itself) under a monthly subscription model. To say they were right is an understatement. The number of subscriptions in the United States has increased exponentially in the past 20 years, while companies like Tower Records have long since gone bankrupt.
The revolution we’re seeing in today’s energy industry borrows from these very same root concepts. The product economy delivery methods require the building owner to borrow a significant amount of money to fund energy-efficiency improvements to a facility. The building owner then receives a static product with a how-to manual, a 12-month warranty and an obligation to operate, maintain, renew and replace the assets over its life cycle. Because most building owners recognize that plant maintenance is a non-core function, it’s not hard to imagine why so many see their energy cost savings erode under this model.
EaaS brings to the energy sector what Netflix brought to home entertainment. With an EaaS solution, the building owner sheds the burdens of acquiring, renewing, operating and owning the asset to the counterparty and pays a monthly subscription fee in exchange for 24/7/365 availability and service. No big upfront payments, no debt on the balance sheet and no operational headaches.
Health care and higher education have seen the benefits of this model. And even local institutions like the University of Arkansas for Medical Sciences (UAMS) in Little Rock have capitalized on these agreements, including its recent energy-savings performance contract with my team at Bernhard. Once completed, UAMS’ energy-efficiency ranking will be in the top 1 percent of all academic medical centers in the United States, in addition to annual savings estimated at $4.8 million. This is a very involved project that incorporates power generation, airside and waterside mechanical improvements, controls upgrades, lighting improvements and other services designed to generate measurable and verifiable savings on an annual basis.
Beyond UAMS, I’ve been engaged in approximately $500 million in EaaS arrangements for health care and higher education clients in just the past year. These transactions are spread across four different U.S. states and include many hallmark EaaS benefits, such as asset monetization, risk transfer, energy optimization, infrastructure renewal and credit-rating uplift.
While new to many nationally, EaaS has been a commitment from Bernhard for some time. With more than $700 million in closed EaaS transactions under our belt, we are a confident market leader. I still see misconceptions that are hangovers from the old delivery methods. EaaS has put an end to the “it-takes-money-to-save-money” philosophy that many building owners still (unfortunately) subscribe to.
Under the EaaS framework, improvements are typically funded by the developer, relieving the building owner from straining cash reserves or debt capacity. No doubt that many hangovers remain, but I’m motivated by valuable innovations like EaaS and the subscription economy. It’s that simple: It just works.
Rob Guthrie is the executive vice president for Bernhard’s Development Division, where he is responsible for leading the Bernhard team in the successful development of turnkey Energy-as-a-Service projects for clients in health care, higher education and commercial sectors. Learn more at Bernhard.com.