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:Energieheld Switzerland]
- 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)
- Enhanced Energy Performance Contracting
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
- Crowdfunding model
Each Business Model presentation is structured in four blocks: What? Who? How? Why?
Enhanced Energy Performance Contracting
The Enhanced Energy Performance Contracting (EPC) model, proposed by NOVICE project, consists to generate revenues from Energy Savings, as in the classic EPC model, but also to generate revenues from Demand Response Services.
Demand response is a way of shifting or reducing electricity usage during peak periods. Indeed, when electricity demand exceeds supply on the grid, clients’ electrical asset consumption can be adjusted by using aggregator technology. Thanks to this shift, power returns to the grid and the supply and demand balance is restored in a cost effective and green way. Also, the clients earn revenues simply for participating and being available.
In the Enhanced EPC model, the ESCOs remain the single point of contact for all measures but uses the services of a demand response aggregator to provide services to the grid. A Memorandum of Understanding (MoU) governs the relationship between ESCO and Aggregator.
Market readiness for Enhanced EPC is varying across European countries. Some of them, like France or UK, have well developed or growing ESCO markets and several open DR markets with regulation that encourages aggregators to participate. Other countries (Belgium, Germany, Finland…) have either an advanced ESCO or an open DR market but strict regulations that limit the ability of aggregators to participate. Finally, some EU countries like Italy or Spain have immature ESCO and closed DR markets (or do not legally allow aggregation).
Crowdfunding approach is an alternative method, completely different to the common typical business process, used to raise capital through small collective efforts (amounts of money) of a large number of people, friends, family members, customers and individual investors, and finance a project. In particular, it allows to know about a business even before it is launched, and is based on a network of people. Large investments have to be planned using multimedia information systems (text, audio, images, video, animations, …) that should persuade investors (no banks or other institutions involved) without providing guarantees of the business plan.
Nowadays, the crowdfunding for real estate sector is only applied to the U.S. market. In Europe, crowdfunding for real estate projects is not allowed yet, but there are various platforms that are already using the concept in different ways (e.g. banks are involved in this business and the amount of the investment is limited). Italy is an example of this approach, and even if it has been the first country to introduce a legal framework regarding equity crowdfunding, the market is still waiting for some changes in order to be as efficient as in the US.
The Crowdfunding scheme until now has been used to finance a wide range of projects in different fields, such as art, scientific research, medical, travel, social, civic projects, and only recently has been applied to renovation and the energy efficiency sector.
Crowdfunding can be classified into four different models, according to the revenue model as explained in the following figure:
- Donation Based Crowdfunding
- Rewards Crowdfunding
- Equity Crowdfunding
- Lending-based crowdfunding
Properties certified with green building label
Green building certification systems assess a building’s performance based on environmental and wider sustainability criteria and provide the evidence that building procures a certain sustainability standard. Green certification can stimulate investments in renewable technologies, even when they are not cost-effective. However, it is generally efficient in niche markets because such certification is on a voluntary based.
In this business model a property developer or architect designs and builds buildings certified according to a voluntary green certification scheme, expecting to realize a sales/rent price premium compared to conventional buildings. This is frequently the case in the North American and some Asian markets.
This premium should compensate for the additional costs related to the green features of the building, and for the costs of the certification.
Drivers for an increasing demand for certified buildings include:
- Corporate Social Responsibility (CSR): green buildings are part of their green image;
- Reducing operating costs of green buildings
- Enhancing levels of comfort for building users, which in commercial buildings may lead to higher productivity and less sick leave;
- Regulation which mandates green certification, for example for public buildings, and turns voluntary schemes into mandatory ones.
Most green building certification systems cover a range of environmental and broader sustainability criteria related to energy and water uses, indoor environment and materials used. Some systems also include criteria on functionality and comfort, economic questions and innovation. Normally, a building must fulfil most of the criteria set by the certification systems.
There are a variety of voluntary certification systems globally. The most widely used are the U.S. Green Building Council’s LEED standards and the UK based ‘Building Research Establishment Environmental Assessment’ (BREEAM). There are also schemes which focus exclusively on energy related criteria, e.g. the U.S. and Canadian Energy Star label for buildings, the German ‘Passive house’ standard, the French ‘Haute Qualité Environnementale’ (HQE) stardard and the Swiss ‘Minergie’ standard.
In addition to certification systems, there are also building rating systems, which do not issue a formal certificate. These rating systems support project developers by setting clear standards on what constitutes a green building. As rating a building is cheaper than undergoing a formal certification process, rating systems are frequently used for residential buildings.
Energy Savings Obligations
Energy Saving Obligations are a policy tool obliging energy companies to implement and realise energy savings at the level of end users. It stimulates business models with financial incentives offered by energy suppliers to building owners, renters or energy service companies.
Innovative financing options can also emerge under energy saving obligations for utilities. The utility (potentially via an Energy service company or ESCO) proposes incentives for energy efficiency investments, financed through higher energy prices. These incentives offer opportunities for building owners. Despite first intention oriented to energy savings and energy efficiency, energy saving obligations could also be an important driver for renewable energy technology in the built environment.
Energy Saving Obligations stimulate energy companies to develop new energy efficiency services for final customers (often in partnership with electricians and installers), or they outsource the obligation and delegate it to the ESCO. Generally, in this business model, energy companies transfer the costs of the energy efficiency measures (and potentially renewables) to final consumers, through higher energy prices.
Energy companies, or ESCO partners, need to create financial incentives for consumers to voluntarily implement energy savings in buildings. For instance, in Italy, France or UK, subsidies for saving measures are the most common financial incentive. In order to be able to finance the incentives offered, energy companies are generally allowed to charge higher energy prices to all customers. In many cases, financial incentives for energy consumers are combined with information to encourage energy efficiency measures.
Feed-in remuneration scheme
A feed-in remuneration is a support scheme allowing the producer of renewable energy to receive a direct payment per unit of energy produced. This feed-in remuneration can be a tariff, like a preferential price covering the full generation costs, or a premium, which provides a ‘bonus’ for the producer to cover the financial gap between the generation costs of using renewable energy versus using conventional (fossil) energy.
Feed-in schemes are very efficient to increase the deployment of RET, as they cover the higher cost of RET by compensating the owner with a higher price for the renewable generation. A feed-in remuneration scheme creates opportunities for business cases as it can cover the financial gap between RET and conventional technologies. Feed-in tariffs or feed-in premiums for electricity from renewable sources are the most common, but also exist for renewable heat.
Through a feed-in remuneration scheme the producer of renewable energy receives a direct payment per unit of energy produced. A feed-in scheme guarantees access to a predictable and long-term revenue stream, which can serve as a stable basis for a business model.
In addition to the tariff scheme, in which the producer gets a fixed price for the supply of energy, and the premium scheme, in which the producer gets a premium in addition to income from selling the energy on the market, hybrid forms are also possible. In these, the premium complements the income from the market, to jointly cover the generation costs. Producer gets a fixed amount, but from two different sources. This hybrid form is similar to a feed-in tariff for the investors, but it has different consequences for government expenses. A feed-in scheme typically publishes rates per energy unit for eligible production (e.g. in €/GJ or €/kWh). If a producer is eligible, a contract (or agreement) can be obtained from the government that allows the producer to claim the specific tariff (or premium) for every unit produced. This agreement fixes the conditions and levels of the tariff, typically 8-20 years depending on the technology. So once an agreement is entered, this is virtually risk free. Some feed-in schemes only cover energy that is delivered to the grid, whereas other schemes also cover auto-production (using generated energy for own purposes).
Feed-in schemes do not look at specific projects and real costs, but instead use cost estimates per category. As a result, within a category some initiatives may be economically viable whereas others are not. To build a viable business model based on a feed-in scheme, the investor has to undertake a careful assessment of the project economics taking into consideration e.g. climate conditions for solar PV or heat pumps, technology costs, and fuel prices, e.g. prices of biomass for a biomass boiler.
In the case of building refurbishment, feed-in schemes can be used by households and small/medium enterprises who want to generate their own energy using renewable sources (e.g. solar-PV or biomass heating). Such business models by households or SMEs can be focused on production for own use, or for the sale of energy to the grid. Feed-in schemes typically differentiate in categories by size of the installation, technology and fuel used. The level of remuneration is based on the category specific generation costs (usually estimated through the size of the installation, for instance installed capacity in kWp for PV), but the actual payment is based on production (e.g. kWh of electricity).
Leasing of Renewable Energy equipment
Leasing enables a building owner to use a renewable energy installation without having to buy it. The installation is owned or invested in by another party, usually a financial institution such as a bank. The building owner pays a periodic lease payment to that party.
This business model consisting in leasing Renewable Energy Technologies (RET) offers new opportunity for building owners to use RET without having to make an upfront investment. It is applicable to large scale equipment in commercial buildings and in some cases to small-scale devices for private home owners, for instance RET such as photovoltaics. The opportunity to lease equipment may be part of an energy services package offered by an Energy Service Company (ESCO), but may also be offered on its own, especially in the case of individual residential customers. In addition to RET, leasing may be available for energy equipment and installations like condensing boilers, small and micro-CHP systems.
Generally, the actor who offers the lease (i.e. the lessor) remains owner of the asset during the lease period. However, several types of leasing are possible, which differ in ownership and other economic, legal and fiscal conditions. There are two main types of leases: operational lease (or operating lease, usually treating as renting) and financial lease (or capital lease, usually treated as a loan. In that case, there is a an ownership transfer option at the end of the lease period).
Leasing can be a central component of the business model of an ESCO having limited own capital (and therefore limited access to debt), which in this case may lease equipment from a financial institution. The ESCO then installs the equipment at the premises of its customers as part of the services that it offers. However, building owners may also finance RET via leasing without the involvement of an ESCO.
Leasing can also be a central component of the business model of a company that introduces a specific new technology to the market. Company providing the technology can offer it to property owners via a leasing arrangement, including a service and maintenance package.
In brief, the different scenarios can be illustrated as follow:
- A bank acts as the lessor of RE equipment. The building owner leases – for instance – a solar water heater directly from a bank, which owns the equipment. In exchange the building owner pays a periodic lease rate during the contract period which includes a lease instalment and interest share:
- An ESCO undertakes the negotiations with the financial institution, provides additional services to the building owner and acts as the tenant of the equipment, which is still owned by the financial institution. The advantage of the involvement of an ESCO is that the ESCO can act as a facilitator:
- A provider of a specific technology, such as a micro-CHP system, leases the system to private or commercial customers. This approach is mostly used by companies who want to bring a new technology into the market, and must compete against established technologies, traditional institutional areas of influence and potentially long supply chains to individual customers. The technology provider usually also provides operation and maintenance services for the equipment:
Leasing is however not frequently used for RET (and even less for EE solutions). One reason for this is that not all RET can be leased. Generally, any equipment totally integrated in a building has to be owned by the building owner. If installed technologies become part of the building, an operational lease is impossible because for this type of lease the ownership has to remain with the lessor. Another reason is that regulation usually requires that after the leasing period, an asset can be reused in reasonable state at a different time and place. This criteria is referred to as ‘fungibility’. RET systems such as soil or water-based heat pumps do not meet this criteria as the complete system cannot be removed without substantial damage. Similarly building insulation, which is often a very suitable energy efficiency measure, cannot be removed after the end of the lease term.
One-Stop-Shop provided by joint venture of retailers with industry and contractors
Creating a joint venture of retailers with industrials (materials and product manufacturers / suppliers) and contractors is a solution to set up a one-stop-shop model to refurbish existing buildings. Consortium of industrials with complementary products provides a full-service package.
On-bill financing programmes are another model to cross the barrier of high up-front costs and access to capital. A utility provides capital to a home-owner for the installation of Renewable Energy Technologies (RET) or Energy Efficiency (EE) measures, and refund is made through the home-owner energy bill, i.e. building owners (or building users) repay the loans through an extra on their utility bills. Preferably, the overall utility bill should still be lowered thanks to the associated energy cost savings. Also, if the house is sold, it is possible to structure the programme in a way that the loan stays associated with the utility meter and can be transferred to the new owner.
Two types of programmes exist for the on-bill financing business model:
- With an on-bill loan programme, a personal loan is issued to the building owner, repaid as a specific item on the utility bill (repayment periods are often set at around 5 years). However, it is legally not linked to the property or the utility meter;
- In on-bill tariff programme, the building owner also repays the loan via the utility bill (repayment periods are often set at around 10 years), but in this case it is considered as an ‘essential service’ and own part of tariff. The obligation for payments stays with the property and is transferred to the next owner in the case of sale of the property.
Generally, the target for the investments in RE and EE measures is to generate positive cash flows for the property owner, so repayment periods vary depending on the expected energy savings and the useful life of the installed measures.
In the on-bill financing business model, the utility does not only administer the programme and collect payments via electricity bills, but it also finances the investments from its own capital.
Integrated Energy Contracting (IEC)
The Integrated Energy Contracting (IEC) business model is a hybrid of Energy Supply Contracting (ESC) and Energy Performance Contracting (EPC) which combines two objectives:
- Reduction of energy demand through the implementation of energy efficiency measures in the areas of building technology (HVAC, lighting), building envelope and user behaviour;
- Efficient supply of the remaining useful energy demand, preferably from renewable energy sources.
It is methodologically based on the ESC model and is supplemented by a “deemed energy savings” approach regarding energy efficiency measures. Compared to standard ESC model, IEC model extends the range of services to the energy and emission savings potential for the whole building, with support of Quality Assurance Instruments (QAIs).
Deemed savings are a specific approach to estimate energy and demand savings, used with programs targeting simple efficiency measures with well–known and consistent performance characteristics. Basically, this method involves multiplying the number of installed measures by an estimated (or deemed) savings per measure, which is derived from historical evaluations. This approach replace the potentially complex and costly measurement of energy savings undertaken in the EPC business model. Therefore, IEC reduces transaction costs, especially for small projects.
As compared to standard ESC, the range of services in IEC model is extended to the overall building or commercial enterprise, so the offer is not limited to heat supply. Instead, the model is intended to be used for all energy carriers such as heat and electricity, but also other consumption media such as water or compressed air.
As with ESC and EPC, the IEC business model offers the building owner the choice to outsource technical and economic risks, associated with the implementation of Renewable Energy Technologies (RET) and energy efficiency measures, to a professional third party and buy services instead of individual components. IEC may be particularly suitable to combine supply from renewable sources with energy conservation measures, and thus accelerate RET adoption.
Basically, the IEC business model benefits from the ESC with similar price components, and it is supplemented with a flat rate price for the energy efficiency measures. Individual QAIs for the installed energy efficiency measures secure the functionality and performance of the measures, but not their exact quantitative outcome over the entire project cycle compared to EPC tools. The objective is to simplify the business model and to reduce (transaction) cost by balancing measurement and verification cost and accuracy. Appropriate QAI’s need to be defined for each energy efficiency measure, e.g. a one-time performance measurement for a new street lighting or a one-time thermographic analysis for verifying the quality of a refurbished building envelope. These QAIs replace the annual measurement and verification of the EPC savings guarantee.
Energy Supply Contracting (ESC)
The Energy Supply Contracting (ESC) business model is a proven model to implement efficient supply (from fossil and/or renewable sources) in new and existing buildings of the public, industrial, commercial and large residential sectors. The goal is to bring a reduction of final energy demand, although efficiency gains are usually limited to the energy supply system.
Indeed, under an ESC model, an Energy Service Company (ESCO) is only remunerated for the useful energy output, i.e. it supplies useful energy, such as electricity, heat, or steam under a long-term contract to a building owner or building user. It is therefore in the interest of the ESCO to reduce the final energy demand. The output is measured and verified in Megawatt hours delivered. ESC models run under long-term contracts of typically ten to fifteen years, depending on the technical lifetime of the equipment deployed.
Extended project terms or building cost allowances allow to include measures with longer payback times, like facades with integrated PV modules or entire building envelopes. The building owner has the opportunity to outsource technical and economic risks related to energy supply activities (including planning, installation, operation, maintenance and financing of equipment for heating, cooling or electricity generation) to a professional party and to buy services instead of individual components. ESC often includes supply of final energy through the ESCO.
As the ESCO’s remuneration is performance based and depends on the useful energy output delivered, the ESC model provides an incentive to increase the efficiency of the energy conversion and to reduce primary energy demand. Contract covers the outcome and all costs of the services, as well as the commercial, technical and operational risks of the project. ESC may accelerate the uptake of Renewable Energy Technologies (RET) if they are cost competitive over the lifecycle of the project because ESCOs have an inherent interest to reduce life-cycle costs.
One-Stop-Shop provided as a complementary business (by e.g. utilities)
The One-Stop-Shop concept means that a single service provider is responsible for holistic renovation of the building as per the wishes of the building owners, including implementation of energy efficiency measures, or building internal renovation. Thus, the one-stop-shop model foresees that a single actor offers full-service holistic renovation packages including consulting, independent energy audit, renovation work, follow-up (independent quality control and commissioning) and financing.
Key actors that could develop a One-Stop-Shop Model for the renovation of existing buildings are real estate agencies, insurance companies and utilities. These key actors take advantage of their existing market position, to sell a complete package which they compose by using subcontractors to gather the right skills. The advantages and opportunities offered by the development of such a complete service package are:
- To enter a growing market (energy efficient renovation)
- To open new businesses thanks to the development of new partnerships with other companies
- To offer a clear and complete value proposition (and quotation) that fulfils the needs of the owner.
The first step to develop a new and innovative One-Stop-Shop business model is to understand the customers’ real needs. Regarding renovation, the building owner might not know precisely his own needs, as he may have limited knowledge about what can be done to the building in order to make it more energy efficient. The decision-making process is therefore a “learning process”. To guide him through this, credibility and trustworthiness is a prerequisite. As a consequence, the challenge is to create consortiums with a mixture of credibility, an existing market position, capacity and capability to supply a complete package of good quality. In the case of stakeholders that decided to expand their business into renovation as a complementary business, they shall involve directly the different trades (e.g. installers to change the heating system, carpenter to install windows, construction company to improve insulation and/or install windows, energy auditor to evaluate energy efficiency potential, and if relevant window/door supplier, insulation supplier, painters, heating system suppliers).
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.