Business Models for cost-effective building renovation at district level combining energy efficiency & renewables

IEA EBC Annex 75 aims to investigate cost-effective strategies for reducing carbon emissions and energy use in city buildings at the district level, combining energy efficiency and renewable energy measures. Nevertheless, identifying the technical solutions is not enough to apply large-scale renovation strategies and achieve the projected building stock decarbonisation. Some of the main barriers to renovation involve the renovation cost and access to finance, as well as complexity, awareness, stakeholders’ management, and fragmentation of the supply chain. In this context, IEA EBC Annex 75 Sub-task D2 worked on promoting cost-effective building renovation at the district level combining energy efficiency and renewable energy systems, by focusing on the business models (BM) that can make the implementation possible. Business models, which describe the rationale of how an organization creates, delivers, and captures value, are relevant to the implementation and acceleration of renovations and provide a tool to overcome barriers such as split incentives and financial complications, which is a priority for policymakers. The main elements addressed are related to the customers and the value that is offered to them, as well as the activities and partnerships that create this value and the revenue.

In developing and implementing business models, stakeholders are essential, as they constitute or influence the above-mentioned business model elements. Renovation is both a highly multi and inter-disciplinary field and it involves a considerable number of stakeholders. A ‘stakeholder’ is any person or entity with an interest or concern in the value proposition. In the building market, we can identify three categories of actors: 1) policy actors, such as municipalities or cities, federal/national government bodies, public agencies or institutes; 2) community or demand actors, such as building owners, housing associations or companies, private housing actors or real estate companies, public or social housing actors, residents or neighbourhood associations; and 3) market actors, such as planning and construction parties, urban planners and architects, suppliers of products or technologies, distribution system operators, energy supply companies, financing intermediaries.

Each category has distinct roles and influences in the development of the built environment, which also vary from district to district and from case to case due to the heterogeneity of possible pre-conditions. As part of the built environment, these actors determine the development and implementation of district renovations. Moreover, interaction is essential to develop the technical solutions and the business models required for the renovation implementation. In that respect, we need information and structure that support the stakeholder dialogue, which is the process that enables communication and interaction between the stakeholders. The motives and means of organising stakeholder dialogue differ in varying contexts. This report elaborates on a rather holistic understanding of stakeholders as actors with potential interests or concerns within the narrow or broader context of a business model for building renovation.

The present report aims to identify the key characteristics of business models important for upscaling business from the building to the district level. Understanding those characteristics and gaining insights about the opportunities the BMs offer for the different stakeholders will support the implementation of the renovation and the stakeholder dialogue. The methods implemented in the study included desk research and quantitative analysis of semi-structured interviews.

Findings

The first part of the analysis concluded with a catalogue of business model archetypes for energy renovation and a catalogue of business models for energy supply. The business model archetypes for building renovation are characterised by 1) the way the renovation is managed, 2) the role of the beneficiary/building owner, 3) the involvement of intermediaries and project managers, and 4) the return of the renovation savings. The present study compiled a catalogue of business models for energy-efficiency renovation by identifying four archetypes that summarize the current approaches. The four archetypes are the following: Atomised, Market intermediation, One-stop-shop, and Energy Service Company (ESCO).

As with any general classification, there are variants in all business models, and the conceptual dividing line from one to another might sometimes be difficult to define. For example, One-Stop-Shops can extend their services from construction to post-construction monitoring if requested, or sub-contract the consultancy phase to a trusted actor. Moreover, the simplification required to define archetypes must be considered. However, the archetypes distinctly highlight the difference in the process organisation and the integration of the solutions and financing.

Concerning energy supply, there is a large variety of business models. Six business model archetypes were identified, which can be split into several types and even sub-types. For the energy supply, three kinds of business model approaches can be defined: demand response (DR) and energy management systems (EMS); electrical and thermal storage (ETS); solar PV businesses (PV). Sub-categories within the three main approaches can be defined as BM archetypes.

Reviewing existing business model archetypes, stakeholders showed that no specific business model combines energy supply and energy-efficient district renovation. Some building renovation projects already apply RES, such as PV panels on the buildings’ roofs. The scale is small and is not always combined as a business model. Even though this fragmentation in the business model hinders the implementation, new players can create business models that offer combined values at the district scale.

In addition, the analysis of success stories further highlighted the elements of the business models that were applied to district renovation. In all the success stories analysed, the main value propositions were the improvement of thermal comfort and the reduction of energy use and environmental impact. Additional value propositions were related to improving the overall living quality and the district's quality. The customer segment was the building owner and the building user, as tenants and energy consumers. In most cases, part of the investment came through public money, either as direct financing or subsidies to homeowners or other frameworks. In large renovation projects, the atomised market model is not common regarding the archetypes. This model could be more applicable in the case of maintenance, with the objective of single measures.

In projects focusing on the connection, modernization and expansion of district heating, the decision-maker was a policy actor, mainly the municipality, in collaboration with the energy supplier that would carry out the intervention. The building owners, such as housing associations, were involved in the connection implementation process. When combined with building renovation, the financing was arranged separately. Thus, the district heating interventions generally are not part of the renovation business model process. Separate entities execute them and do not share a business model. Some building-level measures that comply with the district heating, such as low-temperature radiators, are included in the buildings’ energy efficiency renovation packages. As concluding remarks on the success stories of business models and financing, the role of public bodies can be highlighted, such as regional bodies, municipalities, and their affiliated housing associations, in the decision-making and funding of larger projects.

IEA EBC Annex 75 expert workshops and interviews confirmed that demand actors, such as homeowners and housing associations, had been identified as the business models' main decision-makers and customer 10/142 segments. Additionally, policy actors have a big influence on decision-making, particularly for district-scale implementation, and thus, they need to be addressed by the business models. To combine actors to upscale and combine EE+RES, policy actors have found that structures such as revolving funds, energy cooperatives, and initiatives that can offer a guarantee with public money can support the process to unburden the households of the initial renovation cost. Setting up a network and good practical examples are important for the combined business model development. Subsidies help a lot, but these must not only be available for individual measures (heating conversion) but for the entire process. Financial intermediaries point to a strong direction from national governments to provide the framework for innovative financial structures. Most importantly, funding is needed to support and moderate the process, particularly considering that, at the district level, these are long-term processes.

Even though no specific business models for energy supply are applied to the renovation of districts, some of their characteristics can support the development of business models for district renovation that combine energy efficiency and RES. The analysis of existing business models, success stories and the stakeholders' views on opportunities to upscale energy-efficient renovation to districts has highlighted the following aspects to consider when developing the business models.

• Value proposition: The business model should offer an integral approach beyond the energy efficiency the technical solution achieves. Additional value propositions should be related to improving the overall living quality and the district's quality. Improved thermal comfort and lower energy costs for tenants can be combined with improved appearance and attractiveness of the area, resulting in the increased value of the properties. As the complexity of multiple interventions on the district scale increases, the business model must offer one main point of contact as part of the service, such as in the case of one-stop shops. The service should include technical advice for energy efficiency renovation and integration of RES, coordination of the solution providers and the construction, financial arrangements, such as subsidies and loan applications, and EPCs.
• Partnerships: To upscale renovation to districts and integrate renewable energy, it is clear that both renovation and energy supply actors need to collaborate and offer a combined value proposition. Communication and financial intermediaries also need to be considered because such services can be part of the value proposition. The role of energy network providers is significant. With the integration of RES, districts are becoming energy producers and their place in the energy infrastructure needs to be considered. Policy partners need to be involved in supporting communication and building trust between the beneficiaries and the market actors. Moreover, they need to guarantee a long-term commitment and connect this business model and respective interventions to the larger district development and energy transition plan.
• Financing: With the increasing complexity of the energy supply in building clusters, the partition of Energy Service Companies (ESCOs) of the total market should steadily increase. The streamlined financing could provide multiple benefits, such as improved quality and value and smart project management. The public sector is in a position to balance various local objectives, including cheaper local energy for the public, private and residential customers (contributing to alleviating fuel poverty), local job creation, local wealth retention, low-carbon power generation and local air pollution reduction. By quantifying these objectives through economic modelling, it is possible to create additional value for new financial models.
• Communication: Communication among the stakeholders and particularly the dialogue with the residents to build trust and awareness is key for the upscaling of energy renovations and combination with renewable energy supply. It should underline the common societal goal for decarbonisation and understand the individual district's needs. Ecologic conscience is well developed these days but still cannot be built on as a trigger for high and uncertain investments. The intrinsic motivation from affected actors is usually quite low. A good approach is to address the energy and sustainability benefits in a regular renovation cycle. Transparency and clear communication about costs and benefits is necessary.