What type of business model would suit you best?
The objective of this section of the Renovation Hub is to present the variety of Business Models that already exist to finance energy renovation, guide you in this large collection to find those that are the most adapted to your needs, provide recommendations for replication, and illustrate the application of most promising ones through Business Cases.
Today’s measured rate of refurbishment is much lower than what should be observed to remain in line with Europe 2050 ambitions. There is a need to accelerate the market uptake and large-scale implementation of energy efficient refurbishment solutions to bring the renovation level to 3% per year until 2030. The poor market acceptance of innovative and adaptable refurbishment solutions is in most cases due to the fact that these solutions are not associated to an adequate business model. Innovating on the technological side is not enough: there is also a need to innovate on the business side. Innovative business models have already been demonstrated and validated, but their replication is very slow: how can this replication be supported?
The following business models will be presented:
Business models based on One Stop Shop (OSS) concept
- OSS based on Step-by-Step approach [Example: Enerphit]
- OSS provided as a complementary business (e.g. by utilities) [Example:Dong-CleanTech concept]
- OSS provided by Private-Public-Partnership [Example: Remourban]
- OSS provided by multi-disciplinary team cooperation [Example: Energiesprong]
- OSS provided by joint venture of retailers with industry and contractors [Example K-Rauta and Rautia]
- OSS provided by contractors’ cluster cooperation [Example: ENRENOV]
- OSS supported by digital tools [Example: BetterHome ]
Business models based on Product Service Systems (PSS) – Energy Service Companies (ESCO)
- Energy Supply Contracting (ESC)
- Energy Performance Contracting (EPC) [Example: EPC+]
- Integrated Energy Contracting (IEC)
Business models based on new and innovative revenue models
- Feed-in remuneration scheme
- Developing properties certified with a green building label
- Building owner profiting from rent increases after the implementation of energy efficiency measures
Business models based on new financing schemes
- Property Assessed Clean Energy (PACE) financing [Example: EuroPACE]
- On-bill financing
- Leasing of renewable energy equipment
- Energy savings obligations
Each Business Model presentation is structured in four blocks: What? Who How? Why?
Financing through rent increase
Building owners who do not occupy a building themselves or housing corporations can profit from additional revenue opportunities after undertaking investments for energy efficient measures if they are allowed to charge higher rent from their tenants after the renovation. The higher rent takes the tenant’s energy savings into account. This helps overcome the barrier of split incentives, i.e. the lack of incentives to realize building improvements when owner and occupant are different parties.
This business model is based on a regulation that allows such rent increases and is being introduced in a number of countries. Such regulation is possible in situations where a legislation on maximum rents and/or maximum allowable rent increases exists. This is usually the case in the social housing sector, but it may also exist in the wider residential rental sector where buildings are owned by private persons or property companies.
As this business model is based on a change in legislation regulating the rental sector, its attractiveness for the building owner directly depends on the details of the legislation, e.g. how much of the energy savings or of his up-front investment a building owner is allowed to recover. It is unlikely that being able to charge higher rents to tenants will be the sole driver for a property owner’s decision to undertake renovation measures. However, the higher rents may still play a significant role in the decision. It is expected that in its current form the business model is mostly applied for the implementation of energy efficiency measures which are usually more cost-effective than renewable energy technologies. But theoretically the business model may also be applied for the implementation of renewable energy technologies (RET), e.g. for the installation of a heat pump which reduces energy costs for the tenant. There are only few new business models and innovative policy instruments which specifically address the barrier of split incentives. This implies that this business model, potentially supported by additional incentives, may play an important role in catalyzing energy improvements of the existing building stock in the large rental sector.
The application of the business model is limited to countries or regions that have a regulated rental sector. In this sector, mostly large property owners are active, such as social housing corporations which frequently have the long time horizon, access to capital and technical expertise required to plan and undertake renovation measures.
RentalCal is an international research project funded by the European Union under the H2020 framework. The project aims at developing a methodology for the profitability assessment of energy efficient refurbishment investments in the rental housing sector. The second objective of RentalCal aims at providing comparable and transparent information on the profitability of energy efficiency investments that can be used both for the assessment of investment decisions, and for the comparative analysis of existing barriers in the private rental housing stock of participating countries. RentalCal specifically aims to prepare the ground for investment in the existing rental housing stock, all across EU.
One-Stop-Shop provided by contractors’ cluster cooperation
In today’s construction industry a movement from conventional competition and contract models towards new partnership and collaborative business models can be observed. These partnership business models comprise management and manufacturing methods and correspond more to real businesses in the construction industry. This progress of the market within the construction sector leads to a usage of new business models also in order to overcome traditional price-driven competition towards a more collaborative working environment and a value-driven competition. Moreover, each large building retrofitting project needs slightly different business models according to building ownership, building typology, scope of the retrofitting, requirements, barriers such as available financing, actors engaged, guarantees, referenced projects, etc. The actors in the retrofitting project life cycle should be able to choose the optimal business model, and should be able to realise it (organisation, contracts, resources, knowledge, and technical competences). Solid and well-defined methodology and digital tools are needed for the project based on development and implementation of these novel business models. An individual SME is limited in many ways to reach these goals. The only solution is a collaborative, cluster or networked based approach.
In this context, it may happen that the service provider of the One-Stop-Shop business model is a team of contractors that may all be SMEs or with a major contractor and its affiliated partners. Small-medium sized construction companies may thus enter into partnerships with other actors such as suppliers of key components/material and architect/engineering company if these capabilities do not exist in house.
In case of SME cluster collaboration, generally, the SMEs scope, competences and resources are limited for developing large construction investments, for example large real-estate retrofitting projects. Mainly in the public sector, where the competition is based on the “lowest price” criterion, the SMEs have many difficulties to win the projects. An important opportunity is the adaptability and flexibility of SMEs to different contractual arrangements. This can be implemented only by a group of companies covering all required competences, in well-organised collaborative approach. The operation and maintenance organisation and end-users should be directly involved. These actors have key impact on high performing buildings (retrofitted buildings) and with that also on the overall outcome (economic, environmental, social) of the retrofitting project.
In this framework, SMEs operating in the construction field and in the same region may look for a holistic coverage of the construction industry market, applying business models which can be profitable by fulfilling a wide spectrum of clients’ requirements. Clusters of regionally active construction SMEs have an increasingly need to be organised into networks or strategic alliances. This will answer to the business opportunities, which require individual resources such as specific expertise, workforce or equipment. For widening the range of competences some of them enter even wider association such as e.g. German Facility Management Association (GEFMA).
Nevertheless it has to be underlined that when the client is from the public sector, it is necessary to define the leader of the SME cluster to be possible to contract projects. Definition of the leading SME partner can be a problem. Legal issues have to be cared about (contract forms, assurances in the case of SME bankruptcy, responsibilities and guarantees for longer time).
PACE: Property Assessed Clean Energy
The Property Assessed Clean Energy (PACE) concept has been widely piloted in the US. Under this scheme, local governments issue bonds for renovation projects. The building owner repays the loan through an additional special “assessment” payment on its property tax bill for a specified term (Assessments are comparable to loans as the property owner pays off its debt in installments over a period of various years. But legally, PACE assessments are not considered to be loans). When the property changes ownership, the remaining debt is transferred with the property to the new owner. In other words, PACE financing is a mechanism set up by a municipal government by which property owners finance energy efficiency and renewable energy measures via an additional tax on their property. The property owners repay the “assessment” over a period of 15 to 20 years through an increase in their property tax bills (in the US, property tax payments are made annually or in arrears. Payment modalities may be different in other countries). When the property changes ownership, the remaining debt is transferred with the property to the new owner.
This Business Model is now being adapted to Europe: EuroPACE adopts best practices from the US PACE market and intends to further enhance its reach, scope, and overall impact well beyond the American experience. This Horizon2020 EU funded project started in March 2018 and will develop, pilot and standardise the PACE financing scheme for residential energy efficiency retrofits in European cities.
One-Stop-Shop supported by digital tools
In this business model the key player is supported by digital tools supporting home-owners as well as designers in the initial planning of the renovation work. The tool usually act as a guide to optimize the application of the overall retrofitting process by for example collecting all the information related to the initial state of the building to be renovated and the preferences, the needs and desiderata of the building owner. The ICT tool processes the information gathered and suggests an optimised approach to the renovation project. The main advantage is the possibility to effectively manage the whole process in a comprehensive way. The possible disadvantages of the model are the resources needed to produce all process descriptions and checklists needed. It may also be difficult to make sure that all adopt the new working models. The commitment of the whole organisation is needed.
As the idea is very much based on creation and availability process descriptions, checklists and tools, the maintenance and keeping the material up-to-date has to be carefully checked. Thus it is highly important to be able to create reliable initial information about the building and rely on the initial model. In order to make reliable assessment about the saving potentials in terms of energy and costs, the actors involved must be able to use appropriate tools for energy performance assessment, and be able to make justified conclusions about the savings. Here the quality of the initial information is highly important. In addition, a solid understanding of the users’ behaviour and willingness to commit to energy savings is essential.
One-Stop-Shop provided by Public-Private-Partnership
The Public Private Partnerships (PPP) is a well-accepted delivery model in the construction sector, involving a contract between a public sector authority, the public building owner, and a private contractor in charge of the management and the development of the building renovation project.
The private party provides the service to the public authority, assuming substantial financial, technical and operational risks in the renovation project.
In this collaborative model, private and public partners collaborate coordinating their skills and knowledge for long term contracts (usually 20-30 years). The selected contractor involves designers, maintenance services providers and other subcontractors needed stipulating specific contracts with each of them, during the whole project duration, being the only contact point for the public building owner.
PPP models are mostly used in very complex projects that require high level of integration. Since PPP delivery method is widely used around the world, many types of financing contracts may be used under this scheme: usually, for instance, the PPP contractor finances the initial investment and the client pays a constant fee for using the property during the contract. In some cases, a private sector consortium may create a special company called a “special purpose vehicle” (SPV) to develop, build, maintain and operate the asset for the contracted period.
PPP model are usually implemented in the case of multidisciplinary projects where team members have to strongly collaborate. Because of the mix of responsibilities and finance schemes, PPP delivery models provide opportunities for both public and private sector. However, PPP are complicated delivery models in the construction sector that require strong involvement of the different stakeholders, therefore PPP delivery method may cause an increase in time and cost of projects delivery and increase potential risks associated to the different steps of development.
Energy Performance Contracting (EPC)
The EPC model is based on delivering energy savings compared to a predefined baseline. In the Energy Performance Contracting (EPC) model, an Energy Service Company (ESCO) enters into arrangements with property-owners to improve energy efficiency of their property by implementing various measures. Thus, the application span of Energy Performance Contracting involves the entire building as one incorporated energy-consuming unit. In other words, under an Energy Performance-Contracting (EPC) business model, an Energy Service Company guarantees energy cost savings (also labelled as ‘Negawatt-hours’) in comparison to a historical (or calculated) energy cost baseline. For its services and the savings guarantee, the ESCO receives performance-based remuneration in relation to the savings it achieves. Generally, savings achieved can only be measured indirectly as difference between consumption before and after implementation of the EE and RE measures (relative measurement: savings = baseline – ex post-consumption).
The standard scope of services encompasses the entire building. RET may play a role but with most EPC projects the focus is on the implementation of energy conservation measures. EPC models run under long-term contracts of typically ten years, depending on the payback time of the energy savings measures and the specification of the building owner.
ESCOs can also finance or arrange financing for the operation, and their remuneration is directly linked to demonstrated performance regarding the level of energy savings or energy service.
In conclusion, more than a funding model, an EPC is a programme of practical engineered energy efficiency measures that are implemented in buildings to deliver real energy savings such as HVAC, lighting, controls and building fabric improvements. In addition, to ensure the building is used in the most efficient way, building occupants receive training on energy efficiency practices.
Indeed, when measuring savings through a comparison between a baseline and post-retrofit energy costs, two major difficulties may occur:
- The baseline itself may be difficult to determine with enough accuracy due to a lack of availability of historic data (e.g. from bills or meters).
- The determined energy cost baseline is not a constant but subject to changes in climate conditions (e.g. ambient temperatures, solar radiation etc.) and in energy prices. Besides, utilization of the building may change. These changes need to be taken into account when calculating energy cost savings. Especially the changes in utilization may cause considerable difficulties for the ESCO and the facility owner in adjusting the baseline.
The intention is to keep the total energy consumption to a minimum – by way of demand side energy efficiency methods. To ensure promised energy savings have been achieved over the contract duration, a procedure termed “measurement and verification” is used. Adhering to an internationally recognized protocol such as the International Performance Measurement and Verification Protocol (IPMVP), customers can be assured that guaranteed savings have actually been delivered despite changes to the climate, the building and its use over time. The procedure is subject to the EPC contract, regulating the partnership between the ESCO and the customer. The contract regulates general issues such as property rights, usage of the systems and partnership duration. Furthermore, it stipulates the amount and structure of the investment, its implementation, how it is controlled as well as the maintenance of the energy saving measures which have been taken. It particularly determines the extent and distribution of the annual savings.
The EPC light business model aims at achieving energy savings mainly through optimization and organizational measures with low or no investments in technical equipment. The ESCO acts as an external energy manager taking over the responsibility to operate and optimize the energy related installations (heat boilers, building automation, lighting control). Usually the contract duration is short (2-3 years), since pay-back of high investments on hardware is not necessary. In this model the energy savings are still guaranteed by the ESCO. This model is very interesting for customers with little capacity or few resources for sustainable energy management. The first EPC light pilot project was developed in in Pankow district, in Berlin, Germany, during the guarantEE project.
The EPC plus business model extends the service of the ESCO to comprehensive structural measures on the building shell like insulation or window replacement. These services are usually not part of the classical EPC because of excessively long pay-back periods. The contractual arrangement contains special regulation on financing. Usually the customer has to pay a share of the investment through a grant or by combination of EPC with subsidy programs. EPC plus is very suitable in buildings with high need for renovation. The combination of both structural renovation (EE) and energetic optimization (RET) leads to high energy savings up to 50%. The ESCO can involve a cluster of SMEs, responsible of jointly supplying EE measures and RET services.
One-stop-shop provided by multi-disciplinary team cooperation
Multidisciplinary team cooperation is a novel model of business where the project is carried out by a multi-disciplinary team in a cooperative manner. The multi-disciplinary team consists of partners with complementary competences, such as achitects and designers, constructors, energy-efficiency experts, market and financial experts, technology suppliers, strategy and operations planners. Starting from the initial design phase, the team works together, in strict collaboration with the building owner, in order to select the most feasible intervention technologies and renovation measures to adopt, planning the whole renovation project according to customers’ needs and desiderata, considering also the costs related to planned works.
The cross-fertilisation of gathering different actors together in an early phase of the renovation project permits to define a holistic approach to the renovation intervention. In this way sustainable and energy–efficient retrofitting solutions and innovative solutions for the life time of the facility can be achieved, with an optimal control over the total costs of the renovation project and guaranteed efficiency performances.
The main idea in this business model is that the same team of consultants representing different design disciplines or expert areas will carry on with the project and produce the holistic design service for the building retrofitting.
The team should be able to give a deeper value promise based on their value proposal in the initial competition stage. Value proposal cover the overall offerings each organisations of the team could produce. Value promise is a part of offerings and tailored for the facility question and it is answering to the targets of the client. Value promise should be in core of the contract with the client and the team. Table below provides the St. Gallen approach for this BM.
One-Stop-Shop / Step-by-Step approach
The Step-by-Step renovation model is a widely diffused model of building refurbishment that consists in the repairs or replacement of different building components, such as the windows, plasterwork, roof covering, boiler etc. according to their life duration. One of the benefits of such an approach is that it gets the most out of each building component so that the initial investment is taken advantage of to its fullest.
The need of repairs or replacement of various components arises at different points in time. Inevitably, in the case of a complete retrofit building components that are still intact are renewed unnecessarily before time. In the step-by-step approach this can be avoided.
When applying a step-by-step approach, at least a rough overall plan should be made for all measures including those which lie in the distant future, before starting the work. In this way it can be ensured that an optimal end result is achieved in terms of cost-effectiveness, energy efficiency and quality.
The building owner, being it a private or public owner, in collaboration with the designer (planner) defines a planning for the renovation measures to be carried out and a timeline of implementation. The different contractors are involved by the owner in the renovation project in successive phases, according to the initial plan. The design risk is shared between the owner and the designer, while different contractors assume the construction risks associated to their tasks.
The following points should be included in such forward-looking overall planning:
- Chronological order of the measures: besides the expected time-point for the renewal of the individual components this also depends on the functional context. For instance, for window replacement with airtight windows, the installation of a mechanical ventilation system will also be necessary at the same time. Similarly, a heat pump with low temperature heating can only be installed if the heating load has already been largely reduced by means of insulation measures.
- Energy-relevant quality of individual building components: if the future quality of thermal protection of all building components is determined in advance, then the energy standard of the building that is achievable in the future can be ascertained by means of an energy balancing software program. The future energy costs and savings can also be determined with this. The transparent final goal provides motivation for implementing the necessary building component quality at each step.
- Building envelope – position of the airtight layer and insulation layer: if the approximate location of the airtight layer and insulation layer in the building component structure is specified, then it will be possible to find out whether the two layers can be continued without any gaps at the component connections as far as possible – even in the case of adjacent components which are not being modernised at the same time. This is the only way to achieve a building that is airtight and thermal bridge minimised as a whole.
- For subsequent measures, clarify in advance the points that must be given attention now: a good standard of thermal protection can only be achieved easily and cost-effectively if the interrelationships between measures that are not being implemented at the same time are kept in mind in advance. A typical example is that of a new balcony which is already joined to the (as yet) uninsulated wall of the house with a thermal separation. What at first does not seem to make sense in terms of construction prevents a massive thermal bridge at a later point in time when the wall insulation is carried out, and therefore makes it possible to realise the full potential for saving energy.
- Economic efficiency analysis (optional): if the energy savings achievable over the useful life of the measure are compared with the investment costs which are necessary for improving efficiency going beyond the level for maintenance alone, then it will be easy to recognise whether a measure is successful in economic terms as well. As a rule, this may support the building owner‘s decision to implement ambitious efficiency measures. In addition, the building owner can already plan for the necessary investment funds in the long term.
- The step-by-step renovation model was deeply studied and standardised within the EU project EnerPHit that developed the EnerPhit Standard based on the Passive House methodolgy and concept.
In conclusion, step-by-step modernization permits to building owners with limited financial resources to spread the investment costs for modernisation measures over a longer period of time. Moreover, the model permits to avoid unnecessary renewal or repair of components that are still good in terms of appearance and function. The extra costs for improving the level of thermal protection will often be moderate if energy saving measures are carried out at the same time as repair work that is necessary in any case. This speaks in favour of energy-related modernisation of each building component only when it needs to be repaired anyway.