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How Innovative Business Models Can Boost The Energy Efficient Buildings Market

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Construction is the single biggest industry in the developed world, at around 13% of Gross Domestic Product, with the greatest environmental impact. There are approximately 190 million buildings in Europe and most of them were built before energy efficiency was a common issue in construction. Accelerating the market uptake of Energy Efficient Buildings (EEB) projects is crucial and that is where innovative business models can play a major role. They can support the needed change by reorganising firms’ internal structure and offers, overcoming certain barriers to EEB uptake and aligning with the new business opportunities brought by the need for sustainable and energy efficient buildings. In the frame of the UMBRELLA project, a Europe-wide stakeholders’ engagement was undertaken to analyse their understanding of the business model concept and their motivation for energy efficiency, and to determine how to overcome the building value chain fragmentation. This paper relies on concepts of sustainable and energy efficient transition pathways to address how innovative business models can boost the energy efficient market. It highlights how the co-evolution of business models with both the wider energy system and the natural environment is responsible for the need of both innovative and sustainable business models, which are necessary for ensuring a long-lasting change in the energy efficient building market. The innovative and sustainable characteristics of four business models are presented, according to criteria of functional and product-service system thinking. The analysis of these elements will allow for further replication and adaptation of these promising models.
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Eva Boo, Eve Dallamaggiore, Niall Dunphy, John Morrissey
1
HOW INNOVATIVE BUSINESS MODELS CAN BOOST THE
ENERGY EFFICIENT BUILDINGS MARKET
Eva Boo*1, Eve Dallamaggiore1, Niall Dunphy2, John Morrissey3
1: LGI Consulting,
13 rue de Marivaux, F-75002, Paris, France
*first author e-mail: eva.boo@lgi-consulting.com; +33 1 8416 3077
{eve.dallamaggiore}@lgi-consulting.com web: www.lgi-consulting.com
2: Cleaner Production Promotion Unit,
G.02A Civil and Environmental Engineering, School of Engineering,
University College Cork, Ireland
{n.dunphy}@ucc.ie web: www.ucc.ie
3: School of Natural Sciences & Psychology
Liverpool John Moores University
Byrom Street, Liverpool, L3 3AF United Kingdom
{j.e.morrissey}@ljmu.ac.uk web: www.ljmu.ac.uk
Keywords: Innovative business models, value creation, energy efficient buildings, market
uptake
Abstract
Construction is the single biggest industry in the developed world, at around 13% of
Gross Domestic Product, with the greatest environmental impact. There are
approximately 190 million buildings in Europe and most of them were built before energy
efficiency was a common issue in construction. Accelerating the market uptake of Energy
Efficient Building (EEB) projects is crucial and that is where innovative business models
(IBM) can play a major role. IBM can support the needed change by reorganising firms’
internal structure and offers, overcoming certain barriers to EEB uptake and aligning
with the new business opportunities brought by the need for sustainable and energy
efficient buildings. In the frame of the UMBRELLA project, a Europe-wide stakeholders’
engagement was undertaken to analyse their understanding of the business model concept
and their motivation for energy efficiency, and to determine how to overcome the issue of
building value chain fragmentation. This paper relies on concepts of sustainable and
energy efficient transition pathways to address how innovative business models can boost
the energy efficient market. It highlights how the co-evolution of business models with
both the wider energy system and the natural environment is responsible for the need of
both innovative and sustainable business models, which are necessary for ensuring long-
lasting change in the energy efficient building market. The innovative and sustainable
characteristics of four business models are presented, according to criteria of functional
and product-service systems thinking. The analysis of these elements will allow for further
replication and adaptation of these promising models.
Eva Boo, Eve Dallamaggiore, Niall Dunphy, John Morrissey
2
1. BARRIERS TO THE ENERGY EFFICIENT BUILDING MARKET REVEAL
BUILDING SOCIO-TECHNICAL SYSTEM LOCK-IN
The energy efficient building market is faced with a plethora of barriers to widespread uptake;
however a lack of appropriate technologies does not constitute one of these. Energy efficient
building technologies already exist and although their initial cost can be higher than their less
efficient counterparts, most of these technologies make economic sense when analysed on a
life-cycle cost basis. Despite this proven cost-effective opportunity to reduce energy
consumption, a large portion of the potential for energy efficiency in the existing residential
building sector remains untapped [1]. The most common identified barriers are [1-2]:
- Market barriers and failures: low priority of energy issues for consumers and firms;
information failure of available solutions; split incentives; price distortion due to non-
internalisation of negative externalities; fragmentation in the building supply chain.
- Information failures: overall lack of awareness; lack of skills and knowledge.
- Financial barriers: difficulty with access to capital due to high up-front investment; high
transaction costs; low paybacks; uncertainties; risks; information failure of financiers;
competing purchase decisions.
- Institutional, administrative and structural barriers: cumbersome regulation & planning;
complex multi-stakeholders issues.
This paper first explains why these barriers exist and then presents how innovative business
models represent an adapted solution.
Buildings meet so many human needs that they represent critical interfaces with many
societal functions and related technical processes, from energy delivery to energy generation,
from protection against natural hazards to the need of living space, social cohesion, etc. This
means that they are most likely to be concerned by change and adaptation. Today the building
industry is facing multiple environmental sustainability related challenges, which go beyond
the simple need for energy efficiency. On the one hand severe economic, social and
environmental issues have fostered the implementation of sustainable development and
the need for a low-carbon economy. On the other, geopolitical conflicts, such as the 1973
oil crisis, have forced energy-dependent countries to rethink their energy policy for
increased security and independence.
Accounting for 40% of the EU’s total primary energy consumption and for about 36% of
Member States’ greenhouse gases emissions [2], buildings are at the heart of the EU
energy policy and have a key role in limiting any further damage to the environment
through the release of greenhouse gases and other pollutants.
Having acknowledged that the need for energy efficient buildings is a consequence of the
need for enhanced sustainability across the economy as a whole, and in particular with
regard to energy policy, the authors advocate that an appropriate framework for explaining
the reasons for these barriers is the multi-level perspective on sustainable transition [3]
augmented by co-evolutionary economic thinking.
In this framework, buildings and the building industry are seen as elements of a socio-
technical system, which is defined as ‘a seamless web of interlocking artefacts,
Eva Boo, Eve Dallamaggiore, Niall Dunphy, John Morrissey
3
institutions, organisations, natural resources, knowledge, etc. that combine to fulfil
particular societal functions via production, distribution and consumption processes’ [4].
These socio-technical systems are embedded in socio-technical regimes, i.e. ‘the locus of
established practices and associated rules (engineering beliefs, routines, heuristics, social
expectations and visions) that stabilize existing systems’ [4]. Socio-technical regimes form a
deep structure that shapes the activities of the actors that reproduce the various aspects of a
socio-technical system [3-4].
It is this structure that encourages path dependent, incremental innovations, as opposed to
disruptive radical innovations, thus lending stability to socio-technical systems and supporting
the emergence of prevailing means by which particular societal functions are realized [4]. A
transition from one socio-technical regime to another usually comes from external
pressures offering windows of opportunities for mature innovations to challenge the
existing routines. In short, socio-technical regimes, generally, only shift from one
paradigm to another when there is alignment of mature innovations with external
pressures.
Within the building industry, needs for energy efficiency can be considered as an external
pressure and expression of the wider societal sustainable and energy transition underway.
The barriers to the uptake of energy efficient buildings can be viewed in this context, as a
manifestation of current locked-in regime and the need to find sufficiently mature
innovations to persistently challenge the existing paradigm.
2. INNOVATIVE BUSINESS MODELS FOR BOOSTING THE ENERGY
EFFICIENT BUILDING MARKET
The relatively low uptake of energy efficient buildings solutions to date reveals the need of
innovative solutions to unlock the market. However, as energy efficient technologies already
exist, innovation must come from something else. Steward [5] explains that in order to
successfully deliver sustainability transitions, we should focus on the development and
implementation of ‘system innovations’ and that an important aspect of these system
innovations will be the design and implementation of novel business models [5]. While a
business model can be seen as a systemic method for generating revenues and profits by
creating value and delivering a set of value propositions (i.e. a set of products or services [6])
business model innovation relates to the development of a novel activity for the creation and
capture of value [6].
The reason why innovative business models can lead to increased penetration of energy
efficiency measures in the built environment [1] is due to their performative role. Doganova
& Eyquem-Renault [7] explain that business models represent active constructs or market
devices that are capable of shaping the environment in which they are operating by playing a
performative role that frames the way businesses and markets behave, develop and grow.
Innovative business models have therefore been identified as a means by which new markets
can potentially be created [8] or by which existing ones are reshaped [9]. This explains why
innovative business models can boost the energy efficient buildings market: by reorganising
firms’ internal structure and offers, organisations will overcome certain barriers to EEB
Eva Boo, Eve Dallamaggiore, Niall Dunphy, John Morrissey
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uptake and align with the new business opportunities brought about by the need for
sustainable and energy efficient buildings.
3. FROM A BOOST TO A LONG-LASTING CHANGE: INSIGHTS FROM THE
FUNCTIONAL ECONOMY
The authors argue however that innovation itself is not sufficient due to the very nature of
business models. In addition to their capacity to change the market, BMs co-evolve with the
context in which they are practiced [11]. This essentially means that the lock-in of the current
non-energy efficient building market has (at least partially) been created by the incumbent
business models. Innovation should not only be novel in comparison to what currently exists,
but it should also solve the problems created by incumbent socio-technical building and
energy regimes. This means that innovation in business models should be innovation that
brings sustainability.
One of the most promising solutions to achieve sustainability is the optimisation of products
life-cycle to minimise their environmental impacts. The idea behind functional thinking and
the consequent functional economy concept is that to reduce material throughput and
decoupling of economic growth from environmental impacts, products should not be sold to
consumers, but rather the functions they deliver [12]. Producers must become function
providers [13] and integrate in their business measures of performance for the function they
provide. Since producers are concerned by the function they have to perform, they can retain
the ownership of their performing materials and focus on increasing their efficiency.
Therefore leasing, sharing and other functional arrangements between the provider and the
owner may take place. They can also make available to their customers not only products, but
also accompanying services, such as training, operation, maintenance, recycling, financing,
development, and disposal [13].
The concept of product-service systems (PSS) may be seen as a means for achieving the
functional economy [14-15]. Mont [16] defines a PSS as ‘a system of products, services,
networks of actors and supporting infrastructure that continuously strives to be competitive,
satisfy customer needs and have a lower environmental impact than traditional business
models’. Since the starting point of business development with the PSS concept is the final
functionality or satisfaction of the consumers’ desires, [14] firms become more responsible
for fulfilling customers’ needs, and therefore they undertake various processes to increase
their efficiency, minimise their overheads and maximise their profit margin [14].
Development of such PSS requires that firms develop a ‘greenfield’ mind-set (i.e. ignoring
existing structures, routines, etc.) and engage in a concerted effort with other firms and
society; and lastly that customers become partners in the common task of functional delivery
[13].
In order to provide long-lasting change the authors advocate that business model innovation
should embrace principles of functional thinking and product-service systems. The following
section shows examples of the most promising innovative and sustainable business models
studied in the UMBRELLA project.
Eva Boo, Eve Dallamaggiore, Niall Dunphy, John Morrissey
5
4. INNOVATIVE AND SUSTAINABLE BUSINESS MODELS EXAMPLES
The EEB market is very complex due to the large number of stakeholders engaged in a wide
range of activities at all stages of the building value chain. While the different players and
their actions are interlocked around the lifecycle of a project, the building value chain is very
fragmented; for any given project, many configurations of actors are possible. In the
UMBRELLA project, a Europe-wide stakeholder engagement process, comprising a series of
face-to-face interviews with stakeholders all along the construction supply chain, generated
rich data on EEB value chains, with a particular focus on business model aspects. These data
were analysed to develop the insights presented in this paper, suggesting innovative business
models configurations and highlighting potential solutions to the challenge of building value
chain fragmentation.
The interests, motivations and market expectations collected through the interviews coupled
with the functional and product-service system thinking were considered as the criteria to
select the most promising business models. Four business models are presented in this paper
as a part of the business model analysis carried out in UMBRELLA.
4.1. One-stop-shop business model
Value proposition: To offer a unique contact point for all the services involving an energy
efficient project, from planning, execution and follow up. One-stop-shop organisations
provide a holistic approach, simplifying the planning process and advising on the most
adapted financing schemes and technical solutions.
Revenue model: One-stop-shop organisations, including ESCOs, engineering firms or general
contractors, carry out their services and they receive a pre-agreed price depending on the
scope of the contract.
Customers and market segment: Homeowners who have the capacity to open or increase their
mortgage loan. This business model has been widely replicated in the last years to support
owners in their decision making process.
Figure 1: One-stop-shop business model
Eva Boo, Eve Dallamaggiore, Niall Dunphy, John Morrissey
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Risks: No performance or financing risk is borne by the organisation; these are assumed by
the owner.
4.2. Metered energy efficiency transaction structure (MEETS) Business Model
Energy Service Companies (ESCOs) have focused their work on projects with short to
medium payback times. However, deep retrofitting, where the substantive investments and
measures are made, is often put aside. This model was born in the USA to answer the owners
lack of motivation and to ensure the utility that the model will not have adverse effects on its
financial position. It represents a win-win situation for the owner, the utility and the ESCO.
Value proposition: The concept is built upon a trialogue between the ESCO, the utility and the
owner. An ESCO partners with a utility to provide incentives -a rent- to the owner to
undertake deep energy retrofitting projects. It could be considered as a power purchase
agreement between the owner and utility by leasing the property’s energy efficiency to the
ESCO.
Revenue model: The ESCO "rents" the building for installation of energy efficient equipment
and compensates the owner with a monthly payment (motivating the owner). The utility
charges the owner upon the baseline energy data (20-year power purchase agreement) and
pays a premium to the ESCO for each kWh of metered energy (remuneration of the ESCO).
The utility can sell the real metered energy savings to the energy markets (motivating the
utility).
Customers and market segment: It is a very recent model born in the USA. It can be applied
to housing, offices and public buildings. It is attractive to owners as they receive a rent for a
more efficient building.
Risks: The performance and financing risks are borne by the ESCO; the utility assumes the
non-payment risk from the owner and the owner borne the energy price risk.
Figure 2: MEETs business model
Eva Boo, Eve Dallamaggiore, Niall Dunphy, John Morrissey
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4.3. Energy Supply Contract Business Model
Value proposition: ESCOs provide an “off-balance-sheet” arrangement for the client to
supply energy and are paid with an agreed fixed fee based on the real kWh generated.
Revenue model: The ESCO designs, provides financing based on its own balance sheet,
purchases the equipment, installs and executes the operation and maintenance (O&M) of the
equipment. Costs of all equipment upgrade renewals and repairs are borne to the ESCO. The
ESCO’s remuneration is performance-based and depends on the useful energy output
delivered
Customers and market segment: This type of BM is suitable for clients with a relatively
constant heat load and willing to outsource the energy supply management and the technical
and economic risks related to the supply. Potentially suitable buildings include public
buildings, offices, or housing.
Risks: The ESCO assumes all responsibility for the design, financing, installation, operation
and maintenance (including fuel delivery). The performance risk is transferred from the
customer to the ESCO. The credit risk is also absorbed by the ESCO, as it assumes the
financing of the project. The customer engages to buy energy for long-term contracts, 10-15
years, so the fuel fluctuations are retained by the customer.
4.4. INTEGRATED ENERGY CONTRACTING (IEC)
IEC provides an integrated approach between energy conservation and energy supply.
Value proposition: The ESCO reduces the energy demand through energy conservation
measures plus ensures an efficient supply, preferably from renewable energy sources.
Revenue model: Remuneration of the ESCO comes from the useful energy delivered,
depending on the actual consumption, as well as flat rate service remuneration for O&M,
including quality assurance.
Customers and market segment: It is built on the widely spread ESC energy contract, but
includes the demand side measures. It has only been implemented in few projects for now.
Figure 3: ESC business model
Eva Boo, Eve Dallamaggiore, Niall Dunphy, John Morrissey
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Risks: The performance risk is transfer to the ESCO. The credit risk depends on the financing
of the model.
5. CONCLUSIONS
By using the multi-level perspective theory on sustainable transition with a co-evolutionary
point of view between business models and their wider environment, it appears that business
models have the capacity to overcome the current lock-in of the building socio-technical
system from which a number of recognised barriers arise. In order to turn this potential of
BMs into a long-lasting and sustainable change, innovation should take into account the
characteristics advocated by the functional economy and the product-service system literature.
Four business models, which offer the required characteristics for boosting and changing the
energy efficient building market in a sustainable way, are presented. Table 1 below
summarises the essential characteristics of these business models.
Business model
ESC
IEC
One-stop-
shop
MEETS
Innovation to overcome barriers
Support in the decision making process
(subsidies, other) (addresses information failure)
~ ~
Remove up-front investment barrier
(addresses financial barrier)
Receive strong incentives to undertake project
(addresses financial barrier)
Having a unique contact point with integrated
approach (addresses information failure)
Reduce uncertainties of low payback
(addresses financial barrier)
Sustainable function-based/PSS characteristics
Provide a function rather than a service (addresses
environmental degradation)
~
Figure 4: IEC business model
Eva Boo, Eve Dallamaggiore, Niall Dunphy, John Morrissey
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Table 1: Functions provided by each stakeholder (“~” means that it is partially done or sometimes included in
the business model)
Highlighting the features that make up innovative and sustainable business models should
allow for a better understanding of business models and the characteristics they should have
to unlock markets. In the medium term, this can serve to launch adaptation and replication
measures of these models. The functional and product-service system thinking allows for
many win-win situations emerging from new and innovative opportunities that could not have
been harvested before due to the lock-in effects of the existing building socio-technical
regime. This sustainablethinking also provides ways for reorganising the building value
chain, which emerged as a very crucial issue in the UMBRELLA project.
REFERENCES
[1] L. Würtenberger, J.W.Bleyl, M.Menkveld, P.Vethman, X.van Tilburg (2012), “Business
models for renewable energy in the built environment”, IEA-RETD, in Energy Research
Centre of the Netherlands.
[2] Economidou, M. (2011) ‘Europe’s buildings under the microscope A country-by-
country review of the energy performance of buildings’, BPIE
[3] F.W Geels (2011). The multi-level perspective on sustainability transitions: Responses
to seven criticisms. Environmental Innovation and Societal Transitions, 1, 24-40.
[4] F.W Geels (2004). From sectoral systems of innovation to socio-technical systems -
insights about dynamics and change from sociology and institutional theory. research
policy, 33, 897-920.
[5] F. Steward (2008). Breaking the boundaries: transformative innovation for the global
good. London: Nesta.
[6] C. Zott, R. Amit (2010). Business Model Design: An Activity System Perspective.
Long Range Planning, 43, 216-226.
[7] L. Doganova; M. Eyquem-Renault (2009). What do business models do? Innovation
devices in technology entrepreneurship. Research Policy, 38, 1559-1570.
[8] D.J. Teece (2010). Business Models, Business Strategy and Innovation. Long Range
Planning, 43, 172-194.
Ownership arrangement (increase efficiency)
~
~
Performance risk is borne by the contractor
(addresses financial barrier and uncertainty)
Offer associated/integrated services (addresses
information failure, maximise efficiency)
Based upon cooperation with other firms (addresses
building chain fragmentation)
Engage with customers (maximise function
provision)
Eva Boo, Eve Dallamaggiore, Niall Dunphy, John Morrissey
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[9] M. Johnson (2010). Seizing the White Space: Business Model Innovation for Growth
and Renewal, Boston, Harvard Business Press.
[10] M. Johnson, C. Christensen, H. Kagermann (2008). Reinventing Your Business Model.
Harvard Business Review, 86, 12.
[11] M. J. Hannon, T.J. Foxon, W. F .Gale (2012), The co-evolutionary relationship between
Energy Service Companies and the UK energy system: implications for a low-carbon
transition.
[12] R.W. Stahel (1994). The Utilisation-Focused Service Economy: Resource Efficiency and
Product-Life Extension. The Greening of Industrial Ecosystems. B. R. Allenby.Washington,
DC: National Academy of Engineering, National Academy Press: 178-190.
[13] O. Mont (2002), Functional thinking-The role of functional sales and product service
systems for a function-based society. The International Institute for Industrial Environmental
Economics, Lund University, Sweden.
[14] A. Tukker, U. Tischner (2006). Product-services as a research field: past, present and
future. Reflections from a decade of research. Journal of Cleaner Production, 14, 1552-1556.
[15] R. Roy (2000). Sustainable product-service systems. Futures, 32, 289-299.
[16] O. Mont (2004). Product-service systems: Panacea or myth? PhD, Lund University.
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In the last decade ‘sectoral systems of innovation’ have emerged as a new approach in innovation studies. This article makes four contributions to the approach by addressing some open issues. The first contribution is to explicitly incorporate the user side in the analysis. Hence, the unit of analysis is widened from sectoral systems of innovation to socio-technical systems. The second contribution is to suggest an analytical distinction between systems, actors involved in them, and the institutions which guide actor’s perceptions and activities. Thirdly, the article opens up the black box of institutions, making them an integral part of the analysis. Institutions should not just be used to explain inertia and stability. They can also be used to conceptualise the dynamic interplay between actors and structures. The fourth contribution is to address issues of change from one system to another. The article provides a coherent conceptual multi-level perspective, using insights from sociology, institutional theory and innovation studies. The perspective is particularly useful to analyse long-term dynamics, shifts from one socio-technical system to another and the co-evolution of technology and society.