In recent years, building owners and property managers have been inundated with information about how they should invest in advanced lighting systems that enable increased control, save on energy costs, and have higher-quality light. Whether used in building retrofits or specified for lighting systems in new high-rise offices, LED lighting offers superior technology and a significant return on investment when compared with other technologies. As a result, the LED market is burgeoning and beginning to generate economies of scale—offering promise that the LED market will ultimately achieve its full potential as an innovative and ubiquitous technology.
However, capacity and capital constraints limit the ability of building owners and property managers to assess different lighting-system options and to pay for upfront investment in new lighting systems. The result is an underinvestment in advanced lighting systems that could otherwise provide commercial building owners and property managers with measurable operating cost savings, as well as help them better meet the demands of tenants seeking high-performance workplaces.
As the world of lighting evolves at a growing pace, barriers to investing in high-performance lighting systems are breaking down and new business models are emerging. The convergence of significant cost reductions and technological advancements for both LEDs and digital lighting controls in recent years is enabling third-party monitoring, control, and ownership of lighting assets. This convergence has set the stage for a new business model: Lumens as a Service (LaaS).
In a new report, RMI shows how industry can leverage a LaaS business model to scale the delivery of cost-optimized advanced LED lighting solutions and capture a share of the multibillion-dollar LaaS market. The report also describes the distinct advantages of LaaS over traditional asset-based business models, and cuts through “as a service” industry jargon by specifying the technical treatment of LaaS from the perspective of service providers and commercial building customers.
LAAS TRANSFORMS THE DELIVERY AND ECONOMICS OF COMMERCIAL LIGHTING
In a traditional asset-based ownership model, a customer purchases an asset (like an advanced lighting system) from a vendor for the customer’s own use. Alternatively, in an “as a service” business model, a customer purchases a service (or subscription) from a service provider who then delivers that service as a fixed price per unit-of-output through assets that the service provider owns, maintains, and improves. In a LaaS business model, a commercial building customer specifies its required lighting outcomes, and a service provider then delivers the contracted lighting service by designing, installing, and maintaining a system designed to meet these outcomes. In addition, a service provider can choose to pay “rent” to the customer to have the right to deploy a lighting system in its space. In exchange, the customer pays 100 percent of the calculated lighting energy cost savings to the service provider, fully aligning the benefits of the upgrade with the roles that each party undertakes.
The LaaS model is transformational because it aligns and incentivizes both service providers and customers to deploy the most energy-efficient lighting systems available. There are several distinct advantages of LaaS over a traditional asset-based model, including:
- Service providers will most likely choose a highly efficient system design—consisting of LEDs with smart controls—because the service agreement puts them in a position to capture most or all of the value of any lighting-related energy savings, depending on contract structure.
- Service providers can choose to make rental payments to commercial building customers based on a preretrofit assessment in order to have the right—but not the obligation—to deploy LaaS in customers’ spaces and capture this value. Depending on contractual arrangements, these payments can also be shared with or passed on to tenants.
- The customer receives indirect benefits and maximizes asset value, given the potential rental income stream and implementation of high-quality lighting systems.
- The risk of owning and maintaining lighting shifts from customers to service providers, who specialize in evaluating energy savings and can optimize lighting performance to maximize savings.
THE ENORMOUS POTENTIAL OF LAAS AS A GO-TO MARKET STRATEGY
LaaS shows great promise for service providers looking to expand revenue streams and for customers wanting an immediate net operating income and cash flow boost. The global LaaS market is expected to grow from $35.2 million in revenues in 2016 to $1.6 billion by 2025. LaaS is currently considered as an alternative, albeit superior, option to loans, capital leases, and operating leases, due to its simpler accounting treatment—suggesting that the potential market is likely to be much larger than forecast if service providers shift to making LaaS their main go-to-market strategy.
Service providers are in a position to drive a profitable paradigm shift in the business model for advanced lighting in commercial buildings, and will likely attract more customers by prioritizing the following considerations for their LaaS offerings:
- Ensure the LaaS service agreement specifies certain contractual terms, such as defining contractual roles and responsibilities, establishing payment and incentive capture, establishing termination rights, and specifying other terms appropriate to ensuring service agreement characterization.
- Set a product specification strategy to meet customer requirements. RMI research indicates that LED retrofit kits paired with lighting sensors and controls are a top package for service providers to consider in commercial office retrofits. The system came out ahead of others based on a combination of first cost, (minimal) installation time, ongoing performance, and straightforward installation that does not fundamentally change core building infrastructure and can easily be switched out.
- Target key trigger points in building life cycles, such as building purchases and investments, tenant fit-outs, and new lease structuring.
- Distinguish between customer and tenant lease types only as helpful to balance ambitions to scale LaaS offerings with the needs of different customer segments and with the terms of different tenant leases.
RMI AS AN INDUSTRY RESOURCE FOR LAAS
Moving forward, service providers and commercial building customers should see RMI and a growing cadre of financing providers as industry resources to help unlock the LaaS market and scale energy performance improvements in commercial buildings.