A combination of rapidly advancing technology and a change in U.S. accounting standards is encouraging a new business model for financing lighting and other energy-system upgrades. It’s not often that electrical contractors pay much attention to accounting practices beyond their own tax reporting. However, in this case, taking a little time to get up to speed on commercial lease accounting could open the door to lucrative business opportunities in today’s evolving lighting and controls markets.
The new approach to lighting ownership, called “lighting (or lumens) as a service” (LaaS), is coming to the fore thanks to three unique trends. The first is the rapid deployment of new LED lighting equipment, driven by falling prices and performance that meets or exceeds legacy fluorescent and HID systems while using significantly less energy. Second, there is a parallel interest in increasingly affordable sensors and controls, both to meet stringent new energy codes and make use of the broad range of data-collection capabilities sensors provide. The third is a move to change how businesses account for equipment leases in their balance sheets, which is making service agreements more attractive than leases when it comes to financing new equipment purchases.
Though the LaaS model is a new concept and not yet broadly deployed, its proponents suggest the concept would be familiar to any commercial office manager familiar with financing photocopier operations. In most cases, companies don’t buy photocopying equipment. Rather, they make a monthly payment for an established number of photocopies over a period of time. The manufacturer or distributor retains ownership of the equipment, along with responsibility for the machinery’s maintenance.
“You pay for function. You pay for output,” said Tanner Smith, director of national accounts and strategic partnerships for Sparkfund, a Washington, D.C.-based startup specializing in the financing of LaaS agreements.
From energy expense to income stream
The Rocky Mountain Institute (RMI) outlined one approach to the LaaS model in a May 2017 report, “Lumens As A Service.” The RMI envisions LaaS suppliers “renting” the ceiling space (and, perhaps, wall space) from commercial building owners, with the right to install lighting and related controls in that space. The suppliers then sell the output of that equipment—illumination—back to the owner for a monthly fee. A portion of the related energy savings is rebated to the owner as a monthly rent payment, which creates a new revenue stream on the owner’s balance sheet. This can be advantageous, especially for the real estate investment trusts that market commercial-building portfolios to investors.
Iain Campbell, managing director of the RMI’s building practice and one of the report’s co-authors, said the rental idea addresses several pain points for commercial building owners and managers seeking to improve their facilities’ efficiency.
Campbell listed several reasons that efficiency measures in buildings don’t get done, including a lack of capital, an insufficient return on investment and uncertainty over the return such efforts might generate.
“What we’re trying to do in a service agreement is sell an output, not an input, and in the lighting world, that’s lumens,” he said. “It’s basically a pay-as-you-go arrangement.”
While schools, universities and government agencies have long turned to energy service companies (ESCOs) for such off-the-books financing, Campbell said that private enterprise doesn’t have access to similar funding. State-level legislation enables public-sector organizations to take on loans or other debt for energy-efficiency improvements, where future, energy-cost savings are guaranteed without having to show that debt on their balance sheets. Corporations and other private-sector organizations, however, must make such long-term obligations clear in their financial reports. Service-agreement payments simply show up as a monthly line-item expense.
New cloud-based control capability often is a part of LaaS upgrades and help prove the argument that related payments are going toward a service agreement, rather than a lease for capital equipment. While the building owner has access to lighting controls, the software behind those controls—along with data collected from related sensors—is hosted on servers owned by the lighting supplier or another service provider.
“There’s a control test, as to who controls the asset,” Campbell said. “It’s who has overall control, and supervisory, digital control passes that test.”
In addition to the detailed financial discussion, the RMI report has recommendations on the most effective upgrade solutions in commercial projects. A combination of improved performance and lower installation costs led the researchers to LED retrofit kits, as opposed to either simple LED replacement lamps or full-on fixture replacements.
“If you’re doing a refurbishment of the entire space, I’d say, go ahead and do the full lighting system,” Campbell said. “But if you’re only looking to do a lighting retrofit, that middle option has a lower cost and is less disruptive.”
The companies now participating in the LaaS market aren’t necessarily following RMI’s rental model. One of the current leaders, Enlighted, Sunnyvale, Calif., helps line up financing for customers’ lighting upgrades, but its primary service offering is based on the data it gathers from its proprietary sensor systems.
“We are essentially an IoT [internet of things] platform for the commercial building market,” said Sanjiv Kaul, the company’s executive vice president for marketing.
Enlighted uses the ubiquity of lighting, along with its available power, to support broad networks of its sensors, and provides a suite of apps that enable its customers to ensure lighting levels are optimized and better understand how their current space is being used.
Working with lighting-fixture manufacturers, Enlighted has developed troffer-style retrofit kits that are designed to minimize installation time. With labor being the biggest expense in a retrofit operation, these fixtures can be installed into existing troffer framing in five to seven minutes, Kaul said. The improved efficiency of the LED fixtures, with operation optimized by the company’s controls, creates immediate savings.
“Typically, when you do an LED upgrade, along with our control sensor, the savings are 75 to 80 percent,” he said.
The ideal Enlighted client is a large corporation with multiple buildings in its property portfolio. A financial analysis of current lighting costs (plus heating and air conditioning costs—the company also has a mechanical system control platform) shows where possible savings could be found.
“Typically, making the economics work depends on what the cost of energy is and what the rebates are,” Kaul said.
Enlighted is bullish on the possibility that the growing emphasis on energy efficiency will prove profitable for its own bottom line. Companies such as this are only beginning to recognize the value sensor-generated data could bring to consumer operations.
“We think it’s a huge market, the market for IoT platforms in buildings,” Kaul said. “It’s just like when the iPhone first came out—there were very few apps. We see this becoming a very big business over time.”
Enlighted is engaging with ECs to help that business grow, as well. The company has developed a suite of classes to explain IoT concepts and related installation requirements.
“We give them training to make them feel comfortable and confident that they can handle it,” Kaul said.
Lighting as a subscription
Closer to the RMI model is the LaaS approach championed by Sparkfund, which provides customers with upfront financing for LED lighting and control upgrades that are paid back under what the company calls a “subscription” model. This approach meets the definition of a service agreement as described in RMI’s report.
“[The goal is to] radically change the procurement market,” Sparkfund’s Smith said. “It’s analogous to the way we’re accessing things in our personal and professional lives, whether that’s Netflix or the copy machine. We want to put equipment in peoples’ spaces in a way that doesn’t affect their balance sheets.”
In discussing the company’s marketing approach, Smith emphasizes the gap Sparkfund sees between the energy-saving capabilities of today’s lighting and controls systems and the ability of commercial customers to access those savings due to a lack of appropriate financing options.
“We typically characterize technology as a ‘what,’ and there are a lot of great ‘whats’ in the market,” he said. “But the list of ‘how’ is really short, and our organization has become really enamored of becoming a ‘how.’”
Like Enlighted, Sparkfund also includes mechanical equipment and control upgrades in its service offerings, though lighting is generally the first option customers consider, Smith said, because the resulting savings are so immediate. Subscriptions are priced over a five- to seven-year range and offer a path to eventual ownership of the installed systems, while still providing savings over previous related energy costs.
The company sees value in customers viewing the subscriptions as an ongoing relationship that enables regular access to new technologies as they evolve, with no upfront capital costs. The monthly payment takes care of the technology, itself, along with the costs of installation, operation and maintenance.
“Really, what we’re talking about is outsourced equipment—we are taking on the risk of ownership,” Smith said. “This is really a method to take advantage of that continuing curve of improvement. People want a mechanism to implement smarter technologies and to continue to add on as the technologies become more scalable.”
Though the concept is still new, Smith said that interest in Sparkfund’s subscription approach is growing among potential customers, as well as manufacturers and distributors looking to provide options for owners and their contractors.
“Every day that goes by, it gets a little easier,” he said. “The need to own has been replaced with the desire to access value.”