Ecmweb 13300 Lighting Service Pr
Ecmweb 13300 Lighting Service Pr
Ecmweb 13300 Lighting Service Pr
Ecmweb 13300 Lighting Service Pr
Ecmweb 13300 Lighting Service Pr

Lighting as a Service Showing Promise

April 20, 2017
As lighting grows more capable and complex, a novel approach to lighting upgrades may be attracting more interest.

As lighting technologies advance at near light-speed and luminaire costs fall at a similar pace, the value of prioritizing lighting retrofit and upgrade projects would seem more obvious than ever. Next-generation, feature-rich LED lighting has clearly become cheaper to acquire and install, thanks to growing competition and improving technology. At the same time, lighting’s complexity has grown. Its function and capabilities in the context of emerging interconnected and networked smart-building systems have expanded. Lighting is evolving to become more than just illumination.

(ARC/Architectural Resources Cambridge)

The result: Lighting’s steady price decline may be undercut by a higher “understandability” price tag that erodes the value proposition by complicating access to the array of capabilities, and also challenges, that new lighting brings. That hardening set of realities may be opening the door wider for a novel approach to big lighting improvement projects — one championed as a more direct and cost-effective route to the benefits replacement lighting can deliver. It’s lighting-as-a-service (LaaS), a model that allows lighting upgrades to be funded not with an upfront capital outlay, but instead via a service contract tendered by a lighting services provider. What was a depreciable cost outlay becomes an expensable service fee for the customer.

An evolving idea

A concept that took root along with the emergence of LED lighting as a way to circumvent its initially hefty price tag, LaaS now seems to be evolving on a path that’s parallel to that of LED technology, becoming more nuanced as lighting grows more complex.

But the basic outline remains intact: In addition to furnishing the lighting, an LaaS provider assumes responsibility for maintaining the system over the contract’s term, monitoring its energy usage, and guaranteeing that it’s performing to specifications and bringing the promised savings. The customer funds the lighting improvement at least partially through cost savings immediately realized with more efficient lighting and makes regular payments that reflect the package of services provided and may fluctuate based on energy usage. Unless the contract is extended, the customer can end up taking full ownership of the lighting system at contract expiration.

Accordingly, in a LaaS scenario, not only has capital been preserved or directed to other priorities, but energy savings payback has been accelerated. Plus, responsibility for lighting operation and maintenance has been offloaded to a third party.

What may be changing, though, is the impetus for LaaS arrangements and how their service element is defined and delivered. As prices on LED components come down, the upfront cost of investing in new lighting becomes less burdensome, impacting the calculations made when weighing the options. Yet development of more sophisticated LED lighting systems, packed with sensors and tethered — in some cases wirelessly — to controls, is changing the discussion. It may be less centered on the raw cost of lighting hardware and more about costs incurred by not fully understanding how to extract full value from LED installations.

David Ruttenberg, CEO of Lighting Technology Applications, a New York-based building lighting consultancy, sees the future of new-lighting-deployment discussions revolving more around implementing control technologies. In turn, that could translate to a reevaluation of the assumptions that undergird the LaaS concept and perhaps adjustments to the model itself.

“It used to make sense to lease LED luminaires and structure it as a service, but as we’ve watched bulbs go from $60 to $1.50 apiece in some cases, LaaS doesn’t seem to be as viable a method moving forward,” he says. “What we do see becoming a service, though, is building controls that tie lighting into a network. That may be the future of LaaS, something more encompassing than just the lighting itself.”

Growing ranks

Regardless of how the definition of LaaS might be changing, the broad concept seems to be drawing more attention from would-be players.

The ranks of companies billing themselves as LaaS providers are growing as appreciation for lighting’s multifaceted significance expands. They have expanded to include lighting manufacturers/suppliers, long thought to be destined for the space as the proliferation of extended-life LEDs cuts into the luminaire replacement market.

Providers are being drawn to LaaS because, despite greater understanding of LED lighting and falling prices, end-users still struggle with how to pay for lighting replacement projects that can incorporate scores of far-flung facilities. Those projects compete for a slice of capital expenditure budgets that often prioritize outlays that more directly impact the bottom line through revenue generation rather than cost savings. By offering a funding mechanism that sidesteps a big capital outlay upfront, LaaS arrangements give facility managers advocating for lighting upgrades a way around having to vie for a slice of a highly contested capital budget.

The benefits of an upgraded lighting system include lower energy bills, happier tenants, and a more valuable leasable space (ARC/Architectural Resources Cambridge).

Lighting upgrade projects are still largely conceived and sold as a way to slash energy costs, says Bill Brunette, vice president of sales and marketing for Eco Engineering, a Cincinnati-based turnkey lighting upgrade services company whose participation in LaaS projects has been growing. Companies marketing LaaS understand that, he says, and position it as a manageable alternative funding mechanism that can address capital opportunity cost concerns and help facility managers convince wary finance chiefs to approve ambitious lighting replacement projects.

“The biggest competitor in lighting projects are clients wanting to use their money on something else,” he says. “Even though lighting upgrades offer a great payback, it’s not seen as something that’s going to command much attention in a CEO’s annual letter highlighting the year’s important achievements.”

David Dean, president of Tenzing Energy Solutions, the energy services division of Enterprise Solutions, a Nashville, Tenn.-based electrical design and solutions delivery company, sees LaaS steadily gaining its footing as a way to deal with the persistent funding and justification challenges that can dog LED replacement projects. They’re a way to get around not only the upfront-cost barrier, he explains, but also the related delay in seeing the net energy-savings payback from a big one-time investment.

“Energy efficiency projects routinely get pushed out to the following year, and never seem to get done,” says Dean, “so the Laas idea is let’s come in and give you a mechanism to finally get these projects approved by overcoming that whole issue of not having the dollars. The trick is to structure them so they’re accretive to the bottom line from day one in terms of realized energy savings.”

That ability to pull energy savings delivered by high-efficiency LED lighting systems forward is central to the attractiveness of LaaS arrangements. Still, buyers pay a premium to the provider for leasing the LED equipment and the host of system maintenance and oversight services provided. At the end of the day, those financing costs are a consideration and have to be weighed against the cost of either financing by another route or even buying it outright. Here again, more manageable LED prices can impact that calculation.

“If a CFO were to get into the bowels of some of these agreements, they might find the cost of financing it is higher than what they’d pay to go out and get their own financing,” Brunette says. “Cost of money is an issue, and it’s possible a big Fortune 500 company could find a better deal.”

Buying peace of mind

But how to pay for a comprehensive lighting project is far from the only consideration. Purchasers also have to factor in the reality that modern lighting systems are complex. They must be properly installed, maintained, and managed to deliver the promised savings and performance. For many, the prospect of going it alone — buying a lighting system, installing it properly, and handing management over to facility or operations personnel that may lack the requisite knowledge — could put a substantial investment at risk.

That’s an obvious selling point for LaaS providers, the savviest of whom understand lighting system controls and can not only integrate that part of the puzzle into project design, but also oversee installation and manage the system afterward. Both services address a primary concern of clients of San Francisco-based Redaptive, Inc., a five-year-old company that’s been moving into the LaaS space: that incompetence could squander a costly investment, a very real danger technology upgrades can pose.

“The issue is project execution and performance risk, the chance of a project going sideways on them or the technology not performing,” says co-CEO, John Rhow. “Trying to get executives to sign off on a large project that can run into seven or eight figures is difficult, even more so if they see the potential that the thing won’t end up working.”

LaaS arrangements help facility managers avoid large capital outlays when pursuing an upgrade to their lighting system (ARC/Architectural Resources Cambridge).

And for clients, Rhow says, “Consequently, Redaptive performs measurement and verification on lighting systems to track energy usage and demonstrate to the customer that the lighting upgrade is as efficient as promised.”

“A lack of clear understanding of the savings attributable to an upgrade is part of the risk scenario for the customers,” he says. “There’s a need for us to deliver transparency about the system’s true performance.”

In evaluating LaaS as a way to continue lighting upgrades at facilities operated by building materials supplier Saint Gobain North America, the firm’s sustainability and energy manager finds system oversight an appealing feature. Ryan Spies has been leading the charge to tap the capital budget to replace lighting at company facilities. However, he often has to contend with queries about their real contribution to cost savings. He points to metering as a solution, but since it can be difficult to secure funding for that, on top of lighting, a no-cash-outlay LaaS approach that incorporates metering offers a workaround.

“Ultimately, it’s hard to prove to your accounting department that you saved money through a lighting upgrade and not through some other process,” he says. “But it can be hard to justify the additional cost of metering, even though everyone knows the value of getting that data. If it comes rolled into an LaaS package, that might be better.”

Controls at the core

That ability to use the LaaS framework to more easily structure lighting projects could become even more valuable as controls in lighting systems take center stage. With more talk of lighting systems becoming possible data communications backbones in smart buildings and the developing Internet of Things (IoT), and priority being placed on managing how lighting is delivered and utilized in facilities, control capabilities could take center stage.

“There’s a lot of talk about a new lighting communications standard, and the prospect that instead of Wi-Fi we’ll use Li-Fi to transfer signals,” says Ruttenberg, the lighting consultant. “We could have security, communications, data, and building energy-efficiency controls all managed via lighting.”

Utilities that provide electrical service to buildings are closely watching the evolution of lighting and other types of controls in buildings, and that could provide another boost for LaaS. Controls for building electrical loads will be central to demand-response programs that utilities are interested in rolling out to cut peak energy demand. Thus, the need for controls capable of communicating with service providers is beginning to draw utilities into the LaaS discussion.

Edward Bartholomew, commercial lighting program manager with National Grid, a utility serving parts of the Northeast, says the company is now exploring a pilot subsidy program that may have LaaS-style features. It would help fund, through rebates, lighting upgrades that incorporate not only better lighting, but also controls that can optimize it for reduced energy usage, improve its spectral quality and deployment, and, possibly, optimize lighting systems for overall building efficiency. LaaS, he says, will have to be about more than saving energy, and digital controls can enable the possibilities of “Big Data” for buildings.

“The challenge we need to address is when you go in with an efficient LED lighting system that exceeds code, there’s a need to encourage controls to happen at the same time, because that can’t be addressed later,” he says. “Right-sizing both the lighting and the control system will provide visibility into system performance.”

Such high-level controls, though, can add significantly to the cost of lighting upgrades. And that may further enhance the value of LaaS, especially in organizations that struggle to find a way to pay for lighting improvement projects. But Dean, of Tenzing Energy, says upgraders must increasingly be aware of the possible costs that accompany a failure to ensure that lighting systems are built for an unpredictable future. Dean incorporates active controls from his partners at Columbia, Md.-based Autani to ensure his clients’ can manage and optimize their environments.

“Businesses can struggle with how you get all these things through the funnel, and that’s is why Lighting as a Service tries to solve the capital allocation problem, by moving the cost to an expense item that is less than an expense item (energy costs) that is already existing,” he says.

The financial angle

Looking ahead, one feature of the LaaS model that has buoyed its attractiveness could be in jeopardy, however. Structured as a service contract that can be kept off corporate balance sheets, LaaS agreements could stand to lose some attractiveness if new proposed accounting rules take effect. As the Financial Accounting Standards Board (FASB) moves to strip operating leases of their special treatment, there’s some concern in LaaS provider circles.

“Capital leases show as debt on the balance sheet, but operating leases have been seen as a way to take on debt without having to show it,” says Brunette. “FASB has said that’s a game and that operating leases now have to show up as debt. It’s questionable whether an LaaS is an operating lease or not, but LaaS providers are trying to convince everyone they’re not because payments can vary based on energy usage.”

Accounting treatment, though, may be one of few obstacles facing the LaaS model. With lighting upgrades becoming a more pressing concern for companies with many facilities saddled with outdated and inefficient lighting systems, the LaaS approach could be on track to become a logical, budget-friendly vehicle for securing needed improvements.

Proof that its time is arriving may come in the form of a first-ever research report on the subject by Navigant Research. Issued a year ago, the research firm sees global revenues associated with LaaS growing to $1.6 billion by 2025, from just $35 million in 2016.

Benjamin Freas, principal research analyst with Navigant, says the research reveals an embrace of the idea that as lighting grows too complex to be a one-and-done-and-forget-it purchase, farming out system design, acquisition, installation, and management can expedite the process of securing improved long-term performance and cost savings.

“Lighting as a service is a mechanism to better ensure that you can get some level of acceptable results from an investment, and addresses the question of not whether you should invest but whether you should wait until next year or do it now,” he says. “That’s the challenge in the market.”                                                 

Zind is a freelance writer based in Lees Summit, Mo. He can be reached at [email protected].

SIDEBAR: Utility Incentive Program Lowers Lighting Upgrade Barriers

While it’s ever harder to ignore the myriad benefits of LED lighting upgrades, a stubborn reality is that they’re not always easy to get done. That’s particularly true in the case of building owners and tenants who may want better lighting in their spaces but find themselves stifled by red tape, time pressures, and economic disincentives. The result is that lighting projects may go by the wayside.

There’s no easy way around the obstacles, but two electric utilities serving the Northeast have been trying. For the last two years, National Grid and Eversource Energy have been offering financial incentives and a framework for expediting lighting and control system upgrades in notoriously challenging tenant fit-out projects.

Billed as the Sustainable Office Design (SOD) program, the initiative offsets some of the cost of lighting upgrades, encourages the involvement of visionary lighting designers and fast-tracks approvals. With $1 per-square-foot utility rebates to the customer of record, it mutes the problem of “split incentives” that can prevent both owners and tenants from investing in building space improvements. With multiple barriers removed, the path becomes clearer for tenants or property owners who want to upgrade lighting and reap rewards that can include lower energy bills, improved tenant experience, or enhanced-value leasable space.

“When a tenant or owner wants to design a new space, we want them to remember to include high-efficiency lighting and take this incentive from the utility,” says Marta Schantz, manager at Waypoint Building Group, which is assisting the utilities with the program. “If the pieces are too complex, these projects don’t get done. SOD is designed to make it as simple as possible for lighting projects to be turned around.”

The electric utilities are funding the program because they have a stake in seeing the proliferation of more potentially controllable, energy-efficient lighting. Two years in, SOD appears to be helping change the mindset of building owners, says Edward Bartholomew, commercial lighting program manager with National Grid.

“It’s encouraging that we’ve started to see a change in the way some building management companies are doing lighting,” he says. “They’re building SOD specifications into lighting projects so they can qualify for rebates.”

Lighting designers, too, are benefitting directly from the program. They can claim an electric utility incentive if they’re brought in to help design projects that go beyond strictly prescriptive solutions.

“This has perked up the whole lighting design community,” says Bartholomew. “It’s a way around contractors cutting out higher quality designs to save money.”

Since its launch in spring 2015, the SOD program has funded 13 projects in three states, and a dozen more are in the planning stages, Schantz says.

About the Author

Tom Zind | Freelance Writer

Zind is a freelance writer based in Lee’s Summit, Mo. He can be reached at [email protected].

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