The Emergence of OPEX-Based Financing as a Critical Component of EaaS

While the market for EaaS finance is still in its infancy, it is well-positioned for significant expansion across worldwide markets.

FREMONT, CA: Due to the rising complexity of modern energy technology, commercial, institutional, and industrial customers are increasingly looking to outsource energy management services. Outsourcing is also encouraged by mandates for resilience, sustainability, and decarbonization.

Meanwhile, many customers have limited CAPEX available for non-core operations, are hesitant to enter into long-term contracts, want rapid ROI, and are concerned about the cost of capital. Vendors respond to these needs by providing turnkey energy-as-a-service (EaaS) solutions that go beyond energy saving and provide clients with customized financing options.

EaaS is a word that has been bandied around in the energy sector for an extended period; it is surrounded by a great deal of hype and stakeholder interest. For long years, only a few vendors successfully followed the approach. Now, a broader range of market participants is undertaking EaaS projects. While the industry for EaaS finance is still in its infancy, it is poised for tremendous expansion across worldwide markets.

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OPEX-based financing appears as a critical characteristic of EaaS:

For the last few years, definitions of EaaS have been in flux, with diverse interpretations of this business model widespread among different market players. Other suppliers have placed a premium on various aspects as the foundation of an EaaS deal, including—integrated assurances, the energy solution's comprehensive nature, the contract's adaptability and scalability, and savings on energy.

As a result of this disparity in emphasis, the market has been characterized by discrepancies over what constitutes an essential component of an EaaS contract and what constitutes an accessory component, and how this project delivery mechanism is distinguished from others (such as performance contracting). To add to the complexity, a slew of new terminology for EaaS and its variants have entered the market, including efficiency-as-a-service, decarbonization-as-a-service, and sustainability-as-a-service. These distinctions characterizations continue to be a fact of life in any rising economy.

There is, however, evidence of consensus on a single set of defining concepts for EaaS. The financing element, which emphasizes operational expenditures rather than capital expenditures or debt, is increasingly recognized as the primary distinguishing feature of agreements. It is establishing itself as a significant value offer in an era of financial instability and reluctance to pay CAPEX or incur debt for non-core company operations.

According to Guidehouse Insights, EaaS is a business model breakthrough that enables suppliers to supply technologies that were previously paid for through CAPEX or debt through a service contract with the following two characteristics:

● The client relinquishes control of the energy assets covered by the contract and contracts with the EaaS provider to operate the assets (heating, cooling, lighting, resiliency, or other outputs).

● Fees are paid using OPEX rather than CAPEX or debt, which may result in off-balance-sheet treatment.