Energy-as-a-Service (EaaS) is a private business model that enables consumers to subscribe to an energy service (such as lighting), rather than purchasing the equipment necessary to provide that service (such as light fixtures). In our issue brief from December, we explored how EaaS models have been used in the past to facilitate the deployment of low-carbon technologies. Some of the EaaS models we explored in that issue brief include models for energy-efficient equipment and for solar energy, which have expanded access to these clean technologies by removing up-front costs for consumers. In our latest working paper, we build on our previous work and explore how EaaS models can be applied to other energy services to expand electrification and decarbonize the economy.
Electrification refers to replacing energy end-use equipment that runs on fossil fuels with equipment that runs on electricity. As described in a recent RFF explainer, electrification is considered to be pivotal for reducing carbon emissions from the transportation and building sectors, which, as of 2018, accounted for 47 percent of all carbon emissions in the United States.
However, expanding the deployment of electric energy equipment, such as electric vehicles (EVs) and grid-connected water heaters, presents challenges. Barriers such as high up-front equipment costs, consumer uncertainty about these technologies, and a lack of publicly available EV charging infrastructure complicate these efforts. Our paper explores how energy service subscription models for electric vehicles or water heaters can be used to overcome some of these barriers and expand access to these cleaner electric devices. In the paper, we discuss possible business models for both energy management and use of electric vehicles and water heaters, as shown in Table 1.
Our paper explores how these hypothetical EaaS business models described in the table above could both encourage electrification and avoid some of its potential adverse consequences, such as increases in peak load.
We explore two basic models: a subscription for energy management, which involves optimizing energy usage in order to minimize costs, and a subscription for energy services, which enables consumers to use an energy service such as hot water without purchasing the necessary devices. Both forms of subscription involve a regular payment for the associated service.
These service company business models are possible under two frameworks: a demand-response variant and a time-varying pricing variant. In the demand-response variant, service companies aggregate a portfolio of electric vehicles or grid-connected water heaters to bid into wholesale electricity markets as demand-response resources. In the time-varying pricing variant, service companies shift energy consumption for vehicle charging (or heating the water tank) from high-price periods to low-price periods, thus lowering energy costs and enabling the companies to earn a profit from arbitrage while billing consumers a flat rate for their services.
Society benefits from these models in several ways. For one, these electric end-use technologies can provide grid services, which individual consumers have no incentive to provide under a private ownership model, and which service companies can profit from. These grid services include charging or heating during periods of high renewable generation, reducing or halting use during peak demand periods, and providing other ancillary grid services, such as frequency control.
Second, energy management by a third party can reduce the impacts to the grid that result from electrifying a significant portion of the vehicle fleet or water heaters. As described in our Common Resources blog post, unmanaged charging of vehicles in particular can substantially increase peak load and require significant infrastructure upgrades (e.g., higher generating capacity to meet peak load, local distribution grid upgrades). Energy management by EaaS providers can help avoid some of these grid impacts and added costs for energy infrastructure, by aligning the incentives of charging and heating with the operational constraints of the grid at large.
Lastly, the service business models under which the service company retains ownership and recoups costs in the form of monthly subscription fees have even greater societal benefits because they expand access to technologies that customers may not otherwise be able to afford.
The second part of our paper focuses on the challenges and barriers that stand in the way of these business models becoming widely used, along with the regulatory and policy changes that could overcome these barriers. These changes include introducing real-time pricing tariffs for vehicle charging or water heating, allowing distributed energy resources to participate in wholesale energy markets, and introducing more ancillary service products (such as ramping) that reward these electric technologies for their grid services. We conclude with questions for future study, including an exploration of the role for utilities with respect to these models and further research needed to overcome limitations of the EaaS model in this application.