Decarbonize low-temperature heating using heat as a service

The growing climate emergency and corporate Net Zero goals demand urgent action from business. Companies have made progress decarbonizing their electricity use, driven by the vastly improving economics of renewable electricity solutions and rising awareness of corporate low-carbon purchasing options.

Heat is the next big challenge on the corporate decarbonization journey, particularly for companies in the light industrial sector, such as the food and beverage industry. Many of these companies require substantial amounts of heat for their manufacturing processes – often in the form of steam – and many have committed to decarbonizing their own asset base by 2030. Industrial process heat represents 28% of global final energy consumption, and often makes up most of a company’s energy use, particularly in industry.

However, companies may struggle to get budget for low-carbon projects because they have competing capital needs, and investments in core business often take priority. In addition, many low-carbon solutions, such as heat pumps and solar thermal, are capital-intensive and often do not meet the minimum rate of return on an investment.

Image: Industrial heat use relative to global final energy consumption and heat production by fuel source, 2018

Source: BNEF & WBCSD (2021). Hot Spots for Renewable Heat: Decarbonizing Low- to Medium-Temperature Industrial Heat Across the G-20.

A heat as a service business model allows companies to engage and pay an energy service company (ESCO) to provide a tailored thermal energy solution. HaaS connects investors looking for long-term, low-risk investment opportunities with companies that need to decarbonize and do so through their operating expenses rather than their capital expenditures.

HaaS is not only attractive from a financial perspective. Technologies providing low-carbon heat are evolving rapidly and thus need specialized expertise to design, operate, and maintain. Working with a third party provides that expertise and can deliver an optimized, reliable service, freeing companies’ resources to focus on their core business. As such, the company outsources the project complexity and risks in exchange for a contractual relationship with only one party – the ESCO.

The services an ESCO renders may vary significantly. Under an energy savings performance contract, the ESCO provides only performance, operation, and maintenance services. In case of a lease, the ESCO owns and finances the asset but leases it to the company which also operates it. Finally, under a full HaaS solution, the ESCO takes responsibility for designing, building, owning, operating, maintaining, and financing the asset. Contractually, the ESCO then guarantees the availability and performance of the asset to the company.

Image: Typical heat as a service project structure

Source: WBCSD (2022). Heat as a service: How to decarbonize commercial and industrial heat use with third-party capital investments.

The heat as a service concept is not new; however, corporate uptake has been limited. To capture the opportunity that HaaS provides, companies require a mindset shift from owning heat generation assets to buying the heat they need from a supplier. Trust in such a long-term arrangement is key. Companies also need to commit to an appropriate development process to ensure the HaaS solution is fully aligned with corporate strategic priorities. This requires the collaboration of many company stakeholders, including the executive office, operations, sustainability, legal, procurement, and finance.

Climate impact

Targeted emissions sources

HaaS enables a company to displace fossil fuels used to run their conventional boilers with low-carbon sources, especially in cases where availability of capital is a challenge. Thus, the company reduces its Scope 1 emissions. Additionally, Scope 2 emissions can be reduced if, in the case of heat pumps, renewable PPAs are signed along with usage of heat pumps that increases the company’s use of electricity.

Decarbonization impact

HaaS accelerates decarbonization by enabling companies to switch to low-carbon heat sources without investing in the technologies themselves. The lifecycle emissions of such sources can be up to 90% lower (i.e., produce 90% less CO2 per kWh generated) depending on which fuel source they replace.

The exact decarbonization impact will also fluctuate depending on the extent to which components are recycled or upcycled following end-of-life.

Business impact

Benefits

HaaS offers a multitude of benefits, which include:

• Reduced CAPEX

The main benefit of HaaS is the reduction of the required CAPEX investment.

• Technology access

Cost-effective decarbonization of a global portfolio will require using various renewable heat technologies, many of which a company may not be well suited to deploy. HaaS solutions allow corporate access to different renewable heat technologies, from biogas to solar thermal.

• Project optimization

Many energy technologies and energy markets are evolving rapidly. An ESCO’s technology and energy market expertise enables optimal operation of the heat solution, maximizing project returns over the lifetime of the contract.

• Financial gains and stability

HaaS can lead to immediate operational cost savings, given that renewable heat solutions often come with reduced operational expenditure (e.g., due to the reduced need for fuel). Additionally, HaaS allows users to lock in energy prices and reduce reliance on often imported natural gas.

• Accounting benefits

HaaS solutions do not necessarily have to appear on the company’s balance sheet – a critical consideration for companies keen on keeping leverage ratios low.

Costs

• Increased OPEX

The ESCO needs to recuperate the capital invested over a long-term period. Therefore, the operational expenditures of the company will be higher than if it bought the asset directly.

Indicative abatement cost

Providing indicative abatement costs is difficult with the economics of HaaS heavily dependent on local market, policy, and climatic environments, but given many HaaS arrangements come with operational cost savings (and no capital cost), abatement costs are often negative.

Impact beyond climate and business

Co-benefits

HaaS can lead to a more efficient use of resources and less delays due to the experience and expertise of ESCOs.

The displacement of fossil fuel heat sources through HaaS can lead to increased employee and community safety and comfort from improved air quality.

Depending on the technology supplied through HaaS, other benefits may emerge. For example, the use of biomass waste (e.g., manure, food waste) can lead to reduced pressure on local landfill use.

Typical business profile

HaaS is most viable in conjunction with technologies such as heat pumps, solar thermal, and geothermal, which are most efficient at lower to medium temperatures (up to 400°C). Therefore, it is most suitable for the light industrial sector, such as the food and beverage industry.

Approach

A tailored contract between the company and the ESCO, as the sole counterparty, underpins HaaS arrangements. It dictates all rights and obligations of the company and the ESCO over its lifetime. A contract of this type must therefore provide options for how the parties can react or make changes when markets, regulatory requirements, or other boundary conditions change.

Image: The heat as a service procurement process

Source: WBCSD (2022). Heat as a service: How to decarbonize commercial and industrial heat use with third-party capital investments.

Stakeholders involved

• Company functions:

Technical: Defines the requirements and chooses the correct technology

Financial: Sets out return on investment thresholds and develops financial models

Legal: Ensures rights and obligations in the contracts are appropriate

Operations: Ensures day-to-day operations are impacted as little as possible and that HaaS is properly integrated into current systems

Procurement: Addresses impact on electricity and other energy supplies

Management: Gives final approval and ensures alignment with strategy and decarbonization goals

• Main providers:

ESCO

Image: Indicative stakeholder mapping

Source: WBCSD (2022). Heat as a service: How to decarbonize commercial and industrial heat use with third-party capital investments.

Key parameters to consider

• Solution maturity

Heat as a service concept is not new, although corporate uptake has been limited.

• Lifetime

Long-term contracts (10-20 years); however, the field is still developing quickly and best practices may change.

• Additional specificities

Heat intensive industries – companies in the light industry.

• Eventual subsidies available

Multiple markets have subsidies in place for the sourcing of low-carbon technology solutions.

• Other

Key considerations to address include demand uncertainty, technical performance, energy and fuel costs, commercial performance, and regulatory changes.

Implementation and operations tips

The benefits of HaaS can be economic, environmental, and operational, but setting it up requires careful planning and an integrated, collaborative approach from both the company and the ESCO. At the outset of the development process, the company must clearly define the project’s objectives, decision criteria, and phases. It also must allocate resources and assign roles. The required mindset shift is to see heat in the same way as electricity: an energy stream that can be bought for a price, albeit under different contractual conditions.