What is Energy as a Service and how does it work? The energy production sector is one of the most affected by the digital transformation. Electricity is what connects us today and will make us travel tomorrow. In the fight against climate change, it is therefore important to ensure that the steady increase in electricity consumption is matched by a greater share of production from renewable sources.
However, compared to fossil fuels, renewable energy sources still have high installation and maintenance costs and lower reliability: the focus of governments and markets is therefore on finding solutions that can integrate and make energy production, distribution and storage systems more efficient.
The European Union wants to achieve climate neutrality, an ambitious goal that foresees a profound transition of the European economy towards digital and green. The process is long, gradual and companies cannot wait until 2050 to start implementing changes in the way they consume energy.
Technological development and the increased focus on sustainability are driving new business models that optimise consumption. Energy as a Service (SaaS) is what the International Renewable Energy Agency (Irena) has defined as the most innovative, with benefits for all segments (commercial, industrial and consumer).
In this JOurnal article we look at what Energy as a Service is and how it works, who the main players in this business model are and what the benefits of digital transformation are for the energy sector.
ENERGY AS A SERVICE DEFINITION
The constant change in the energy world is leading to the emergence of new models capable of increasing the value of energy supplies through the integration of different production systems with a view to sustainability.
Energy as a Service is an innovative business model in which the company not only provides electricity, but also related services: from consultancy to system installation, from monitoring software to consumption control software.
As the transition to a CO2-free system is driving companies, organisations, public administrations and consumers to look for new ways to use and manage their electricity consumption, an energy service provider monetises the value created by the digitisation of the energy sector.
The European Commission calls these companies ESCo (energy service companies). These can be broadly of two types.
On the one hand, there are the traditional energy producers who want to remain competitive in the dynamic market conditions and therefore gather new skills either organically or through partnerships with third parties such as information technology (IT) companies.
On the other hand, EaaS is a business model that involves the entry of new players such as IT companies, software houses, aggregators and consultants in digital transformation and energy rationalisation.
Three main factors are contributing to the development of EaaS: technological advances in electricity generation; improved energy storage capacity; the spread of smart devices and smart cities development.
Research into renewables is lowering the cost of installing climate-neutral systems. Photovoltaic, wind and marine energy sources are becoming reliable sources and their share of energy is gaining in importance. The combination of large batteries allows energy to be stored during periods of lower demand and released during peak demand.
The internet of things and cloud computing are some of the innovations that make it possible to integrate renewable and traditional energy, collect and measure large amounts of data and automate complicated supply processes.
In addition to technological development and the increased focus on sustainability in the fight against climate change, the development of EaaS is also driven by the pandemic, which has dramatically increased the cost of energy production.
Generally, ESCo’s services to their clients are of three types: consulting, installation, and energy management solutions. The installation of the systems may include forms of financing.
Electricity suppliers are evolving into trusted energy advisors who help customers formulate strategies tailored to their energy needs. Trusted energy advisors forecast prices, analyse consumption histories and current systems to identify opportunities for optimisation.
ESCos can provide on-site or off-site installation of renewable energy production or energy storage systems. Projects include microgrids, smart meters, efficient machinery and appliances, and anything else that can help save and even generate revenue through self-generation of electricity. As part of the installation, ESCos may give access to funding for project implementation.
ESCos are able to provide energy management solutions in three aspects: monitoring, remote control, and load optimisation. Smart home solutions make it possible to manage consumption at any time and apply changes in relation to price variations. Other services may include, for example, the ability to choose which energy source to draw from, whether renewable or conventional.
HOW EAAS COMPANIES EARN
How are margins generated by ESCos? For energy advice there is no direct revenue model, while the other two types of services do have it. For energy assets the margins are on technology installation or financing.
Energy management, on the other hand, is divided into two main types of contract:
Subscriptions are fixed monthly tariffs where the company assumes price and quantity risks. The ESCo makes a profit when the value of the quantity of energy consumed by the customer is lower than the price paid. Preliminary analysis is done to see how much electricity can be saved by installing more efficient devices or using consumption monitoring software. End users can receive rewards based on their actions to save energy.
Performance contracts vary depending on the amount of energy delivered. The client and the ESCo share the cost savings based on two models:
In the first model the costs are shared between the two parties according to a fixed percentage. In the second, the customer is always guaranteed a percentage of savings. The company therefore has a direct interest in operating in a way that maximises energy savings. The form of the performance-based contract also works as financing. The owner of a factory, for example, can renovate its facilities today with the savings accumulated tomorrow.
THE ADVANTAGES OF EAAS
Energy as a Service is a new paradigm moving towards a decentralised, digitised and electrified energy system. Smart technologies make it possible to integrate different sources of supply and to modify consumption autonomously in real time. The needs of the consumer, industrial and commercial segments are changing. The ways in which energy is supplied are changing with the integration and automation of systems. In short, the digital transformation of the energy sector is a particularly complex process, but one with undoubted advantages in terms of both cost reduction and environmental sustainability.
One of the most interesting new features of Energy as a Service is the arrival in the energy sector (which has historically posed high barriers to entry) of new players able to provide a wide range of innovative services.
The energy aggregator, for example, is a new type of supplier that regulates the consumption of electricity by a group of consumers or sells on their behalf the excess of electricity produced. Telcom companies provide home and business monitoring services. On the basis of more in-depth data analysis, software houses develop software for increasingly efficient energy use.
With the integration of incremental shares of renewable sources into the overall energy system and the smoother distribution of resources, the EaaS paradigm allows more flexibility in the relationship between energy demand and availability.
The integrated approach of the EaaS model can provide greater support to customers who want to install renewable energy or storage systems. For example, a number of solutions are emerging for those who do not want to install technologies in their homes (such as renting photovoltaic panels) that allow customers to keep their contracts even when they move to a new address.
Energy as a Service opportunities therefore encourage renters to activate solutions that reduce costs through more efficient consumption. These models enhance energy generation through renewable sources without significant investment by end consumers.
In the future, consumers and businesses will not just pay their bills for heating and lighting their homes and facilities.
The role of electricity and its suppliers will change dramatically in the coming period, with new companies entering the market to provide new types of services. It is therefore inescapable that digital transformation, such as the one applied in the energy sector by IPPO Engineering, will become more and more prominent in energy management.
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