Lighting in the future will be delivered as a service rather than a capital cost, according to a new report from the Rocky Mountain Institute, creating incentives for smarter and more efficient installations.
RMI is pushing to grow a lucrative Lumens as a Service (LaaS) model for lighting in the US, which independent research by Navigant estimates could boom from a $35.2 million market in 2016 to $1.6 billion by 2025 – 45 times the current size.
“However, the potential market is likely significantly larger than forecasted if service providers make LaaS their go-to-market strategy,” the Lumens as a Service report says.
“New business models, such as Lumens as a Service, can both accelerate adoption of LED lighting and expand the overall market opportunity.”
The idea is that instead of building owners installing their own lighting systems, an agreement is struck with a service provider that specifies a desired performance level for the overall lighting system – “namely, illumination level, obligations to repair or replace underperforming and broken systems during the agreement term, and performance standards for system availability during occupancy and non-occupancy hours – rather than specific components or technologies to be used by the system”.
Service providers would be incentivised to make the system as efficient as possible because their profit would be based upon savings made on energy bills.
RMI says the move to lighting as a service could overcome the capacity and capital constraints currently limiting the ability of building owners to assess appropriate lighting options and get them installed.
These barriers have led to a “massive underinvestment” in advanced lighting technologies that could cut costs, improve productivity, slash emissions and attract tenants, the report says.
“Given the significant constraints on building owners’ balance sheets, internal competition for capital is intense. Even some of the highest-return projects are not being considered by owners due to the impact on their balance sheets.”
- Similar pressures on capital expenditure drove Ecosave to come up with a leasing model for energy for building owners, where the service provider owns the equipment installed onsite and charges a variable fee for energy, depending on energy savings. See A financial solution to power energy efficiency
Under RMI’s proposed model, building owners would receive immediate net operating income through service provider rental payments that would give providers the right to deploy LaaS in the building, enabled by expected future energy savings.
Tenants could have some of the rent payment passed on, and there would also be “non-energy” benefits in the form of improved employee productivity and health and “an enhanced ability to attain energy and sustainability goals and credentials”.
RMI sees it working as follows:
- Service providers will most likely choose a highly efficient system design – consisting of LEDs with smart controls – because the service agreement puts them in a position to capture most or all of the value of any lighting-related energy savings, depending on the contract structure.
- Service providers can choose to make rental payments to commercial building customers based on a pre-retrofit assessment in order to have the right – but not the obligation – to deploy LaaS in customers’ spaces and capture this value. Depending on contractual arrangements, these payments can also be shared with or passed on to tenants.
- The customer receives indirect benefits and maximises asset value, given the potential rental income stream and implementation of high-quality lighting systems.
- The risk of owning and maintaining lighting shifts from customers to service providers, who specialise in evaluating energy savings and can optimise lighting performance to maximise savings.
While third-party financing has the potential to overcome capital and capacity constraints, there are still a number of barriers, including uncertainty around areas like the accounting treatment of loans, energy service agreements and operating leases.
“Commercial building customers may hesitate to use LaaS if they are not offered reasonable and well-defined contractual terms, such as clear termination rights and solutions that bring appropriate benefit to the contracting parties, overcoming the often referenced challenge of split incentives,” the report says.
Tips for service providers include:
- Ensure the LaaS service agreement specifies certain contractual terms, such as defining contractual roles and responsibilities, establishing payment and incentive capture, establishing termination rights, and specifying other terms appropriate to ensuring service agreement characterisation.
- Set a product specification strategy to meet customer requirements. RMI research indicates that LED retrofit kits paired with lighting sensors and controls are a top package for service providers to consider in commercial office retrofits.
- Target key trigger points in building life cycles, such as building purchases and investments, tenant fit-outs, and new lease structuring.
- Distinguish between customer and tenant lease types only as helpful to balance ambitions to scale LaaS offerings with the needs of different customer segments and with the terms of different tenant leases.
RMI says that over time other building energy technologies could become “as a service” technologies “that can finally decouple energy investments in buildings from buildings owners’ capital constraints”.
“The energy revolution has been fuelled by business model innovations that provide services to end users, rather than selling them capital,” it says.
“For solar photovoltaics, the innovation was the power purchase agreement. For mobility, it’s been a shift from personal car ownership to mobility services provided by the likes of Uber and Lyft. To date, buildings have largely been left behind. With LaaS, RMI has set out to change that.”