Commercial real estate owner/operators are familiar with the upfront costs of energy installation and ongoing operational maintenance. These include (but aren’t limited to) grid connection fees, service line installations and regulations. New buildings might require wiring and panels, while amp upgrades on older facilities present their own challenges. At the same time, energy efficiency measures to help counteract climate change can also strain budgets.
This is where an Energy-as-a-Service (EaaS) model could come into play. This method can reduce capital outlay and maintenance costs while boosting operations and efficiencies.
“This approach helps clients upgrade and maintain assets without upfront capital, paying only as savings are achieved, or through a subscription model for the installation,” said Jon Lemmond, Technical Program Management Practice Lead, Energy Advisory Services, at JLL.
According to Michael Durham, EaaS also goes beyond being just an energy deal. “It is an infrastructure monetization transaction that uses energy assets as the vehicle,” said Durham, Optimum Energy’s Vice President, Structured Finance, Development and Opportunities.
The Not-So-New Concept
Lemmond, Durham, and other experts told Connect CRE that EaaS involves a third-party provider that installs, operates, finances, and maintains a building’s energy assets while delivering power to the customer. The building’s owner/operator pays the provider for guaranteed services.
Durham explained that a basic EaaS arrangement involves the following:
- Third-party capital funds for upfront infrastructure modernization
- The provider designs, installs, operates and maintains the systems for the contract term, while taking on performance risk and lifecycle replacements.
- The client pays a monthly service fee that is designated as an operating expense, rather than a capital obligation.
According to Greenberg Traurig Real Estate Shareholder Paul M. Williams, the EaaS legal arrangements are typically implemented through combinations of power purchase agreements, energy service agreements or concession-style operating contracts.
Additionally, “agreements also include a defined pathway to lower-carbon energy supply over time, if that is an objective for the owner or a local compliance requirement,” said Rob Thornton, president and CEO at the International District Energy Association.
While the EaaS nomenclature is fairly new, the concept reaches back several decades. Said Williams: “Energy service companies and power purchase agreements, especially in the public sector, have been around for decades.”
The commercial real estate sector began eyeing EaaS beginning in the 2000s. “The same reasons why commercial real estate started moving into EaaS are the same reasons that it’s beneficial today,” commented Andrew Thurmond, Counsel in Troutman Pepper Locke’s Capital Projects and Infrastructure practice. “These include volatile energy prices, corporate ESG goals, net zero commitments and local building performance standards.”
Additionally, “as pressure increases from corporate boards to increasingly drive down energy costs and consumption while decreasing carbon footprints, these offers became increasingly attractive to clients across industries,” Lemmond noted.
Understanding the Upsides
One main benefit of EaaS arrangements is the elimination of upfront capital. The provider pays for and finances the equipment, network, and other physical assets. Another advantage has been the transfer of risk. If something breaks down, the provider steps in and fixes it (or pays to have it fixed. Lemmond noted the convenience of structured energy management assets, while Durham indicated that such arrangements can help balance sheet bottom lines.
Then there is the ability to upgrade as energy technology improves, again without upfront costs. EaaS can also be used as a differentiation strategy.
“Owners can market ‘green,’ ‘all-in energy’ or predictable operating cost offerings to tenants,” Thurmond said. “Tenants and buyers often respond favorably to more comfort, better reliability and credible sustainability performance,” Thornton commented.
In short, “A properly structured EaaS agreement represents a rare fusion of financial accretion, liquidity creation, risk mitigation, and operational resilience, all delivered within a single contractual structure,” Durham said. “Few strategies offer this combination of bottom-line efficiency and balance-sheet protection.”
Knowing the Downsides
This doesn’t mean that an EaaS model is the perfect solution for energy delivery. “Those looking into this approach must understand the term length, pricing structure and escalation mechanisms, service-level commitments and buyout or transfer provisions,” Thornton said.
And those term lengths last for a long time, sometimes up to 30 years. “This means future owners and lenders might inherit the contract,” Williams explained. Many of those future owners might not want to pursue Energy-as-a-Service for their own needs, which might restrict buyer pools.
Furthermore, the EaaS model is only as good as its provider. Said Durham: “An operator with a thin balance sheet, limited deployment history, or no performance record on comparable assets is a meaningful risk in a long-duration infrastructure contract.”
Speaking of this, an EaaS agreement locks a building owner or operator into an ironclad contract that limits their choice of providers. Lemmond said that owner/operators won’t be able to switch to less-expensive providers, nor will they have access to newer technologies.
Also, though owner/operators are paying for convenience, staff and skill augmentation and the offloading of administrative and technical management, “there can be a higher overall total cost of ownership for the asset over the length of the contract, despite the lack of capital outlays at the outset,” Lemmond added.
The Path Ahead
The experts predict that commercial real estate owners and operators will broaden their use of EaaS. Right now, only a small provider group knows “structure, finance, deliver and operate complex, long-duration EaaS agreements at scale,” Durham observed. This won’t be the case forever. “As the model gains institutional acceptance, more capital and more operators will enter,” Durham said.
Thurmond agreed, indicating that EaaS usage will continue to expand and become more standardized. “We would expect an emphasis on EV charging and mobility,” he added.
In addition to cost and convenience, external factors could also spur greater usage of the model among property owners and operators. “This would be driven by building performance requirements, local energy and water use guidance, electrification, resilience needs, and tenant expectations,” Thornton commented.
Additionally, there could be greater integration of EaaS with energy storage and backup technologies. “This would include leveraging Storage-as-a-Service through battery deployment for demand response management, broader utility relationship management and monetizing distributed generation assets,” Lemmond said.
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