DAREED WP1 D1.6 Review of Business Models & Energy ... Project - WP1 - D1.6.pdf · Decision support...

FP7 – 609082 – Collaborative Project

Decision support Advisor for innovative business models and useR engagement for smart

Energy Efficient Districts

DAREED

Deliverable 1.6: Review of Business Models & Energy

Management Strategies

Authors: Detlef Olschewski, Garyfallos Fragidis.

Reviewers José Pablo Sánchez (Isotrol)

Delivery due date 31.05.2014

Actual submission date 29.05.2014

Status DEFINITIVE

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Organisation: Cleopa GmbH

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1.1 Executive Summary

The business model is a new concept of analysis that emphasizes on explaining how firms “do

business” and how they create and capture value. A business model refers to the “business logic”

that provides answers to the fundamental questions: “what” we do here, “why” we do it and “how”

we do it. Business modelling is a valuable tool for the analysis of business operations, especially

in industries undergoing fundamental changes, such as the energy. The energy sector is

undergoing remarkable transformations under the influence of a variety of factor related largely to

the development of new energy efficient technologies, the impact of ICT on energy grids and the

possibility of small scale energy production from the consumers and other parties. Energy

companies face great pressure today to reassess their business models to accommodate the

changes of the business environment and improve the efficiency and quality of their services. The

task of business modelling provides the baseline for the conception and the development of

innovative business approaches in energy efficiency (i.e. business model innovation).

This deliverable provides an overview of the current business models used for energy efficiency

initiatives at district and urban level and provide an in-depth analysis of their characteristics and

expected outcomes with concern to the total business aspects and the roles of all the

stakeholders involved. The deliverable supports the general purpose of the project, to deliver an

ICT service platform that will enable the development of new services and practices for energy

efficiency and low carbon activities at neighbourhood, city and district levels. In particular, the

deliverable can support the development of new and innovative business models for energy

efficient projects and can contribute in the business exploitation of the results of the project by

energy providers, after the end of the project.

The methodology used moves beyond the conventional financial aspects of a business models to

examine comprehensively the business operations with regard to energy efficiency practices. In

addition, we see the role of other stakeholders with a focus on the role of the consumers and we

describe the key technologies used and the technological trends. As a state of the art analysis,

the deliverable focuses on the existing “knowledge” on energy efficiency business models. For

this, we analyze the business models and business practices applied in previous EU-funded

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research programmes for energy efficiency, especially the ones that focus on district levels. The

deliverable includes also a limited input from the review of the literature, as well as input from

consulting companies and other organisations that analyze the trends and foresee the future of

the energy sector.

The deliverable begins with the anatomy of the typical business models used by energy

companies for the development of efficient energy solutions, such as the Energy Performance

Contracting model and its variations (e.g. shared-savings/ guaranteed EPC), the Energy Supply

Contracting model and its variations (e.g. the Chauffage model), the Integrated Energy

Contracting model and lastly business models for renewable energy solutions (e.g. the Green

Power business model). The role of other stakeholders, such as public bodies and local

authorities, building managers/ owners and urban planners/ designers, in these models and in

general in energy efficiency project is also discussed. Emphasis is put on the new role of the

energy consumer, who is empowered by renewable energy technologies and by ICT technologies

to produce and disseminate energy at a micro scale. This knowledge provides the foundational

layer for the development of new and innovative business models for energy efficiency projects.

The second part of the state of the art analysis refers to the practices and business models that

derive from the implementation of European R&D project that have similar scope and objectives

to the DAREED project. Here we move from the general knowledge provided by the literature to

get in the details of the specific models developed in similar projects and the evaluation of the

experiences gained. The goal here is to analyze the practical implications of the business models,

explore the roles of the critical stakeholders, identify the critical success factors, investigate the

barriers and the anticipated risk factors, review the key technologies used and the technological

trends. This part provides practical insights and implications for the development of new and

innovative business models.

The deliverable ends with an overview of some modern approaches to business models with

regard to value creation and the participation of the customer in the value creation processes that

originate in the area of service management and service science. We present some foundational

concepts of service systems that explain the operation and can support the development of

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innovative service models. We continue with the concept of value co-creation, which incorporates

the customer and other suppliers and stakeholders. Value co-creation and the new role of the

customer in energy efficiency projects is not only related to energy pro-sumption, but affects also

the efforts for customer awareness and engagement in efficient energy practices. In the last part

we present some alternative business models that emphasize on network-based and

collaborative approaches, as well as examples from other service fields, such as the tourism

sector and urban utilities

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Contents

1.1 Executive Summary ............................................................................................................... 3

1.2 Introduction .......................................................................................................................... 9

1.3 Energy Efficiency Business Models ....................................................................................... 12

1.3.1 Introduction to business models and business modeling methodologies ............................................... 17

1.3.2 Business models for energy providers ..................................................................................................... 21

1.3.2.1 Shared-savings EPC .......................................................................................................................... 26

1.3.2.2 Guaranteed savings EPC .................................................................................................................. 27

1.3.2.3 Energy Supply Contract ................................................................................................................... 28

1.3.2.4 Integrated Energy Contracting ........................................................................................................ 30

1.3.2.5 Business models for renewable energies ........................................................................................ 31

1.3.3 The role of public bodies, building managers and district planners in business models ......................... 33

1.3.3.1 The role of public bodies ................................................................................................................. 33

1.3.3.2 The role of building managers ......................................................................................................... 36

1.3.3.3 The role of district urban planners and managers .......................................................................... 38

1.3.4 The role of energy consumers .................................................................................................................. 39

1.3.4.1 The role of consumers in multi-sided energy platforms.................................................................. 40

1.3.4.2 Business models for energy prosumption ....................................................................................... 46

1.4 Analysis of Business Practices .............................................................................................. 49

1.4.1 Related projects reviewed ........................................................................................................................ 49

1.4.2 Business models in related projects ......................................................................................................... 52

1.4.2.1 Method of analysis .......................................................................................................................... 52

1.4.2.2 The market ...................................................................................................................................... 53

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1.4.2.3 Business models .............................................................................................................................. 54

1.4.2.4 New roles of the stakeholders ......................................................................................................... 63

1.4.3 Technologies and technological trends .................................................................................................... 65

1.4.4 Success factors, challenges, barriers and risks ......................................................................................... 70

1.5 New conceptualizations in service models ............................................................................ 75

1.5.1 Foundations of service systems ............................................................................................................... 76

1.5.2 Value co-creation and customer-oriented business models .................................................................... 82

1.5.2.1 The concept of value co-creation .................................................................................................... 83

1.5.2.2 New roles for the customer in value co-creation ............................................................................ 85

1.5.3 Other business models ............................................................................................................................. 87

1.5.3.1 Network-based business models ..................................................................................................... 88

1.5.3.2 Alternative business models from related fields ............................................................................. 89

1.6 Conclusions ......................................................................................................................... 93

1.7 References .......................................................................................................................... 95

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List of figures

Figure 1: The emerging electricity value chain ________________________________________________________ 13

Figure 2: Business opportunities in distributed energy __________________________________________________ 16

Figure 3: The Business Model Canvas (Osterwalder and Pigneur, 2010) ____________________________________ 18

Figure 4: The Shared-Savings EPC Model _____________________________________________________________ 27

Figure 5: The Guaranteed Savings EPC Model _________________________________________________________ 28

Figure 6: The Energy Supply Contract Model __________________________________________________________ 30

Figure 7: Integrated Energy Contracting business model ________________________________________________ 31

Figure 8: Green Power business model ______________________________________________________________ 32

Figure 9: Reciprocal value creation in the energy sector (source: IBM Institute for Business Value) ______________ 41

Figure 10: Multi-sided energy platforms as an energy marketing _________________________________________ 43

Figure 11: Multi-sided energy platforms with an energy aggregator _______________________________________ 44

Figure 12: The business model for the tourism industry (Werthner and Ricci, 2004) ___________________________ 90

List of tables

Table 1: Examples of potential multisided platforms in electricity _________________________________________ 45

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1.2 Introduction

Energy efficiency is at the forefront of energy policies in EU. According to the last Commission's

Energy Efficiency Directive (2012) all the EU countries are required to use energy more efficiently

at all stages of the energy chain, from the transformation of energy and its distribution to its final

consumption, with the goal to cut energy consumption by 20% until 2020. The strategy followed

includes a mix of measures that involve efficiency in energy generation, new obligations for

energy producers and distributors, new initiatives by the government, new roles and more

empowerment to the consumers.

The new policy framework, accompanied by the emergence and the evolution of the energy

efficiency technologies and the change of consumer demands and societal needs shape a new,

complex and demanding business environment in the energy sector. The Energy Efficiency

Directive of 2012 defines ‘energy service’ as the physical benefit, utility or good derived from a

combination of energy with energy-efficient technology or with action, which may include the

operations, maintenance and control necessary to deliver the service, which is delivered on the

basis of a contract and in normal circumstances has proven to result in verifiable and measurable

or estimable energy efficiency improvement or primary energy savings.

The energy companies face great pressure to reassess their business models to accommodate

the changes of the environment and improve the efficiency and quality of their services. Key

drivers for the need for business models are the increasing energy rates, the environmental

concerns, the high cost of infrastructure investment, the development of new energy efficient

technologies, the impact of ICT on energy networks and the possibility of consumers or others to

produce energy, too, at a small scale. The success, hence, in energy efficiency is not only a

matter of policies, measures or technologies, but also of developing and applying the right

business model, that will implement in a proper way these measures and policies, will take

advantage of the new technologies and will develop attractive energy offers.

The business model is a new concept of analysis that emphasizes on explaining how firms “do

business” and how they create and capture value. A business model refers to the “business

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logic”, the “intellectual base” for doing business, which can be described by answering the three

fundamental questions: “what” we do here, “why” we do it and “how” we do it. In other words, the

business model describes the purpose of a company, the way it is organized to achieve the

purpose and the basic operations performed.

Energy efficiency business models and strategies refer mostly to the business practices of the

energy providers and tend cover mainly the financial aspects for the development and

management of energy efficiency projects/ solutions (e.g. investments, funding, energy rates,

etc.). For instance, a typical business model is the Energy Performance Contracting (EPC), in

which the energy provider finances the total investment of a project and is totally responsible for

repaying the loan, while the customer pays the energy provider a percentage (or it can be a fixed

amount) of its achieved savings from the project.

In this deliverable we adopt a more general approach on energy efficiency business modelling.

We define energy efficiency business model as the business logic of how an organization creates,

delivers, and captures value related to energy efficiency. For this, we extend the analytical

framework in two ways: a) we move beyond the financial aspects of a business model and

examine totally the business operations with regard to energy efficiency practices, b) we examine

the role of other stakeholders in the implementation of the business model and their contribution

to its success (or failure), such as urban planners and public spaces managers, building owner or

managers and the citizens. The proposed approach is in alignment with the general perspective

of the DAREED project that emphasizes on energy efficiency initiatives at community level, i.e. at

neighbourhood, city and district levels, with the involvement of all the stakeholders who have an

active role in the decision making about energy efficiency initiatives.

The purpose of this deliverable, hence, is to provide an overview of the current business models

used for energy efficiency initiatives at urban level and provide an in-depth analysis of their

characteristics and expected outcomes with concern to the total business aspects and the roles of

all the stakeholders involved. The deliverable support the general purpose of the project, to

deliver an ICT service platform that will enable the development of new services and practices for

energy efficiency and low carbon activities at neighbourhood, city and district levels. In particular,

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the deliverable can contribute in the business exploitation of the results of the project by energy

providers, after the end of the project.

The concept of the business model is a valuable tool for the analysis of business operations,

especially in industries undergoing fundamental changes, such as the energy. For instance, roles

of energy producers, suppliers, distributors, etc., their operations and their potential need to be re-

defined in an era of self-generation of energy, smart grids and demand-side management. Under

the existing fast moving environment and the dramatic changes in a variety of factors that shape

the energy sector, it is estimated that all kinds of energy companies will need to adapt their

business models to respond to the new business situation.

For the purposes of this deliverable we use Business Model Canvas, a recent methodology

developed by Osterwalder and Pigneur (2010), which has been acquired wide recognition and

acceptance. According to the Business Model Canvas, a business model can best be described

through nine elements (basic building blocks) that show the logic of how a company intends to

create and deliver value and make money: Customer segments, value propositions, customer

relationships, channels, key activities, key resources, key partners, revenue streams and cost

structure. The Business Model Canvas can be considered as a “complete” methodology for the

description of a business model, which extends well beyond the description simply of the

organisational and financial structure of a business operation or the analysis of Strengths,

Weaknesses, Opportunities and Threats (SWOT), which are two conventional ways of analysing

a business model.

As a state of the art analysis, the deliverable focuses on the existing “knowledge” on energy

efficiency business models. For this, the methodology used is based on the analysis of business

practices and business models applied in previous EU-funded research programmes for energy

efficiency, especially the ones that focus on district levels. The deliverable includes also a limited

review of the literature, when it is necessary, and the analysis of reports of consulting companies

or other organisations for the trends and the future of the energy sector.

The deliverable consists of 5 chapters, including the introduction. In chapter 2 we present the

analysis of energy efficiency business models with the use of the methodological framework of

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the Business Model Canvas. In particular, we analyse business models for energy providers and

we pay attention to the role of public bodies, building managers, urban planners and managers

and the role of citizens/ consumers. In chapter 3 we present the practices from relevant EU

funded projects emphasizing topics such as feasibility and efficiency, implied risks, tools and

services employed for knowledge management and decision support, simulation and other

visualization tools, demand management systems and energy bidding services. In chapter 4 we

present some alternative aspects of business models, emphasizing on the role of the customers

and the community and learning from related fields.

1.3 Energy Efficiency Business Models

Business models and business operations are largely shaped by the concept of ‘value chain’. The

value chain consists of a series of activities which are performed in a row and connect the

company's supply side with its demand side. The value chain is based on the premise that value

is created by transforming inputs into products. The aim of the value chain framework is to

maximize value creation while minimizing costs. The product is the medium for transferring value

between the firm and its customers.

Energy provides a typical example of the value chain model - even though it is typically an

operation that belongs to the service sector. The traditional electricity value chain consists of the

generation, transmission, distribution and selling activities from energy providers to the end users.

These operations are used to take place in a serial and uni-directional way, with the electricity

provider playing all the roles and the user being restrained in a passive role related to the

dissemination of the service (only large industrial customers can play a role). Even customer

feedback is passive, derived from the consumption usage.

However, a variety of factors that are beyond the scope of the analysis of this deliverable, has

changed both the operations and the value creation processes in energy. The value chain

acquired more dimensions and has by now become a ‘value grid’. A similar process of increased

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density of means and proliferation of the potential value adding activities applied to the

development of e-business from the previous performed linear business model (Rayport, and

Sviokla, 1995).

The digitalization of electricity networks and the introduction of smart grid technologies added

complexity to the network, moving power and information in multiple directions, introducing new

actors and enabling new business models (Valocchi, Juliano and Schurr, 2010). Business models

are impacted in several important ways by a new information model, a new relationship with the

consumer and the introduction of distributed energy sources. The end users themselves, who

may be capable of providing some combination of demand response, power or energy storage to

the system, become became active players and an integral part of the new value chain. The

‘emerging electricity value chain’ is depicted in figure 1 (Valocchi, Juliano and Schurr, 2010).

Figure 1: The emerging electricity value chain

The factors that already shape and will drive the future developments on the energy (electricity)

value chain are the following (IBM Institute for Business Value/ Valocchi, Juliano and Schurr,

2010):

• The value chain will extend further, grow more complex and involve a wide variety of new participants that traditionally have not been directly involved in the industry.

• The consumer, before now a passive recipient of the value chain product (power), will become an active, empowered value chain participant requiring integration into the network.

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• Both information and power will flow in multiple directions and, as business models emerge to leverage the exponential increase in information flow on the network, tremendous value will be added to the ecosystem.

• Distributed resources (e.g., distributed generation, storage and electric vehicles) will play an increasingly vital role in both operations and value creation and, in the longer term, may ultimately be positioned to radically disrupt the portion of the value chain comprised of the traditional generation- transmission-distribution-retail electricity pathway.

According to a recent research by PriceWaterhouseCoopers (2013) managers expect the existing

power utility business model in their market to transform, even in an unrecognisable way, in the

period between now and 2030. A percentage 94% predicts complete transformation or important

changes to the power utility business model. The same study recognizes a number of ‘potentially

disruptive changes’ that will drive the changes in the business models. Decentralised generation

is already eating into revenues and partly marginalising conventional generation. Ultimately it

could shrink the role of unwary power utility companies to operators of back-up infrastructure. The

growth of distributed generation and its threat to the power utility business model depends on

technological developments and cost. Its rise in Europe has been subsidy-driven. Cost barriers

remain in the way. The future will be also be shaped by a variety of other reasons related to the

energy efficiency, falling solar prices, demand-side management and smart grid technology, as

well as the cost of sources of fossil fuel, etc.

In a similar way, Bain Consulting (Hannes and Abbott, 2013) distinguish the trend for ‘distributed

energy’, i.e. smaller power-generation systems for homes, businesses and communities, as a

response to environmental concerns, rising power prices and regulatory pressures and

incentives. Growth of distributed energy will force change on the traditional energy suppliers’

business models, as some customers will reduce their power consumption from the central grid in

favour of locally produced power. These customers may still depend on the central grid for their

emergency or peak use, so utilities will have to maintain their costly infrastructure and power-

generating capabilities even as revenues from consumption decline. Unlike centralized power

generation, distributed energy relies on smaller networks of power generation, consumed on-site

or distributed locally through a low- or medium-voltage community network. Utilities have three

main business opportunities in the new environment of distributed energy: helping customers

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generate their own energy supply, managing end-user demand for energy and controlling the

distribution and consumption of energy within the network (see fig. 2.2).

• Opportunities in demand management. They refer to working with customers (mostly industrial and commercial ones) to reduce their power consumption (overall and peak) and related expenses through more efficient heating and cooling systems, better building insulation and smarter electric drives in automated equipment. Demand managers can also help customers smooth energy consumption curves by shifting demand into off-peak times with lower prices

• Controlling a distributed energy network. Utilities manage a distributed energy network in real time, via a control center that monitors generation capacity from various sources and distributes it according to demand. Analysis of data over time allows the controller to predict usage and balance loads in order to reduce overall investment in power generation.

• Distributed energy supply. Typical power sources for these energy systems include: solar photovoltaic installations, small combined heat and power plants (CHPP) for households and small and midsize businesses or larger CHPPs for commercial and industrial environments, larger PV installations, onshore wind parks that industrial and commercial organizations rely on to generate their own electricity or feed it into the grid. The opportunities in this part of the value chain include planning, building, installing and operating the physical assets, as well as the commercial opportunities in financing and managing risk. Utilities can exploit contractor models in which they buy, install and maintain equipment, leasing the supply of electricity to customers.

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Figure 2: Business opportunities in distributed energy

In the previous figure we can distinguish three different categories of energy services and the

corresponding business models:

• The commercial/ industrial segment includes energy services for commercial and industrial customers, that are based mostly on facilities management or performance contract models; this category is the most well-developed and mature currently.

• The community segment includes services, such as heating, are offered to a group of customers in the same location (e.g. neighbourhood, community residential buildings, social housing, etc.). This segment is facing great growth currently and it is at the epicentre of research and commercial efforts.

• The household segment includes energy suppliers, contractors or equipment suppliers that target residential customers. This is the least developed segment, however it has great potential, because of the huge number of households, as well as new technologies for distributed energy production at micro-level.

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1.3.1 Introduction to business models and business modeling methodologies

A business model describes the “business logic” of a firm (Osterwalder, Pigneur and Tucci, 2005),

i.e. the intellectual base for doing business, which can be described by answering the three

fundamental questions: “what” we do here, “why” we do it and “how” we do it. In other words, the

business model describes the purpose of a company, the way it is organized to achieve the

purpose and the basic operations performed. Zott, Amit and Massa (2010) suggest that there is a

widespread acknowledgement that the business model is a new unit of analysis that emphasizes

on a system-level, holistic approach to explaining how firms “do business” and how they create

and capture value. Every business operation has a business model, which can be sometimes

conceived and described explicitly, or exist and refer to the business logic implicitly (i.e. the

company operates in a specific way, without understanding the implications) (Magretta, 2002).

The business model, hence, helps to capture, visualize, understand, communicate and share the

business logic. In addition, business models can function as blueprints for business operations

and for the comparison of companies or markets in a structured way, providing the basis for the

identification of critical success factors.

There is variety of business model methodologies (e.g. Afuah and Tucci, 2001; Chesbrough and

Rosenbloom, 2002), the analysis or even the presentation of which is beyond the scope of this

deliverable. To create a common base for discussion and the conditions for mutual

understanding, we present briefly the Business Model Canvas, a recent methodology developed

by Osterwalder and Pigneur (2010), which has been acquired wide recognition and acceptance

as a comprehensive and state-of –the-art approach to business modelling. The Business Model

Canvas is depicted in figure 3.

According to the Business Model Canvas, a business model can best be described through nine

elements (basic building blocks) that show the logic of how a company intends to create and

deliver value and make money:

• Customer segments

• Value propositions

• Customer relationships

• Channels

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• Key activities

• Key resources

• Key partners

• Revenue streams

• Cost structure

Figure 3: The Business Model Canvas (Osterwalder and Pigneur, 2010)

The nine blocks cover the four main areas of a business:

• Customers (Customer segments, Customer relationships, Channels)

• Offer (Value propositions)

• Infrastructure (Key activities, Key resources, Key partners)

• Financial viability (Revenue streams, Cost structure).

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Customer segments: It defines the different groups of people or organizations an enterprise aims

to reach and serve. Customers comprise the heart of any business model, as without (profitable)

customers, no company can survive for long. In order to better satisfy customers, a company may

group them into distinct segments with common needs, common behaviors, or other attributes. A

business must make a conscious decision about which segments to serve and which segments to

ignore. Some examples of different types of customer segments are: mass market, niche market,

segmented market.

Value propositions: It is the business offer (i.e. distinct mix of elements) that creates value for the

customer, by resolving problems and satisfying needs. The Value Proposition is the reason why

customers buy and choose to one company over another. The Value Proposition is an

aggregation of benefits that a company offers and are considered important by the customer and

it resolves a customer problem or satisfies a customer need. Some Value Propositions may be

innovative and represent a new or disruptive offer. Others may be similar to existing market

offers, but with added features and attributes. The elements of value creation can be based on

attributes of the product/ service such as the following: newness, performance, customization,

design, usability, status (brand), price, cost reduction, risk reduction, accessibility.

Customer relationships: They are established and maintained with each Customer Segment.

Relationships can range from personal to automated. They influence the overall customer

experience. Some types of Customer Relationship are the following: personal assistance, self-

service, automated services, communities, etc.

Channels: They are connecting the company with the Customer Segment in order to deliver the

Value Proposition. Channels are customer touch points and provide an interface for interaction

with the customers. Channels serve several functions, including: communication (raising

awareness among customers about a company’s products and services, helping customers

evaluate a company’s Value Proposition, providing post-purchase customer support, etc.),

distribution (delivering a Value Proposition to customers) and sales (enabling customers to

purchase specific products and services).

Key activities: They refer to the most important things a company must do to make its business

model work. Every business model requires some key activities to create and offer a Value

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Proposition, maintain Channels to reach markets, maintain Customer Relationships with

Customer Segments and have Revenues. Key Activities can be related to production, problem

solving, management, platform/network, communication, etc.

Key resources: The assets and capabilities required to make a business model work. Key

resources enable a business enterprise to create and offer a Value Proposition, maintain

Channels to reach markets, maintain Customer Relationships with Customer Segments and have

Revenues. Different Key Resources are needed depending on the type of business model, such

as physical, financial, intellectual (brands, proprietary knowledge, patents and copyrights,

partnerships, customer databases) or human.

Key partners: They are the network of suppliers and partners that make the business model work.

Key Partnerships are all the relationships, except for with the Customers. Companies create

partnerships to optimize their business models, reduce risk, or acquire resources. Motivations for

creating partnerships include: optimization and economy of scale, reduction of risk and

uncertainty, acquisition of particular resources and activities, etc. We can distinguish between

four different types of partnerships: strategic alliances (between non-competitors), co-opetition

(strategic partnerships between competitors), joint ventures to develop new businesses, and

buyer-supplier relationships to assure reliable supplies.

Revenue streams: They are the arteries of the business model. Revenue Streams result from

Value Propositions successfully offered/ delivered to Customers, according to the pricing

decisions. A company may have one or more different Revenue Stream from each Customer

Segment. Revenue Streams can take place with some pof the following ways: sale, usage fee,

subscription fee, renting, leasing, brokerage fees, advertising, etc.

Cost structure: The cost resulting from the execution of the business model elements: Creating

Value, Delivering Value, maintaining Customer Relationships and Partnerships, and generating

Revenue, all incur costs. Such costs can stem from Key Resources, Key Activities, and Key

Partnerships. Cost Structures can have some of the following characteristics: fixed costs, variable

costs, economies of scale, economies of scope, etc.

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1.3.2 Business models for energy providers

In this study we use the term energy providers to include the utilities and the Energy Service

Providers/ Companies (ESCOs). Notice that in the energy grid era the roles sometimes tend to be

mixed and a single company can play different roles in the market. Utilities are seen as

“institutional” players that deliver energy and care for energy efficiency. Utilities can act as

aggregators of consumer demand and create positive system benefits through energy efficiency

programs. According to the EU Energy Services Directive1 (2006) an ESCO is a natural or legal

person that delivers energy services and/or other energy efficiency improvement measures in a

user’s facility or premises, and accepts some degree of financial risk in so doing.

As it is implied in the Energy Services Directive, an ESCO is a business model in itself, perhaps

the typical one in the context of energy efficiency initiatives. The heart of the business model is

the concept of the energy performance-based contracting (EPC). An EPC is a contractual

arrangement between the beneficiary/ customer and the provider (i.e. ESCO) of an energy

efficiency improvement measure or initiative, where investments in that measure or initiative are

paid for in relation to a contractually agreed level of energy efficiency improvement. Hence, the

payment for the services delivered by ESCOs is based (either wholly or in part) on the

achievement of energy efficiency improvements and on the meeting of the other agreed

performance criteria. An EPC allows the beneficiary/ customer to upgrade the energy efficient

equipment, with no need for upfront capital. Services provided by an ESCO include energy audits,

energy management, supply of equipment or energy and energy services (process or space heat,

lighting, etc.).

Accordingly, an ESCO is a company that offers energy services that may include implementing

energy-efficiency projects, as well as and also renewable energy projects. ESCOs achieve

energy savings, usually by providing the same level of energy service at lower cost, and their

remuneration is directly tied to the energy savings achieved. Therefore ESCOs accept some

degree of risk for the achievement of improved energy efficiency in a user’s facility and have their

payment for the services delivered based (either in whole or at least in part) on the achievement

1 Directive 2006/32/EC, Energy End-use Efficiency and Energy Services (Energy Services Directive)

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of those energy efficiency improvements. Quite often the energy-efficiency projects are provided

with the turn-key method and the energy savings are sufficient to repay monthly debt service

costs. ESCOs usually finance or assist in arranging financing for the operation of a new energy-

efficiency project. The fundamental concept of the ESCO business model is that the client does

not have to come up with any upfront capital investment and is only responsible for repaying the

investment made or arranged by the ESCO.

Melland (2010) describes ESCOs as specialists in providing a broad range of comprehensive

energy solutions including designs and implementations of energy savings projects, energy

conservation, energy infrastructure outsourcing, power generation and energy supply, and risk

management. More specifically, an ESCO could be responsible for the following:

• Guarantee a reduction in energy consumption/costs together with a predefined level of comfort/service level

• Delivery of energy, heating and cooling

• Finance (or assist in financing) the project development, installation and operation of facilities

• Steer the operation and efficiency of facilities during the financing period

• Relate profits to achieved savings and service level offered

• Reduce risk through aggregating portfolios of customers

• Provide standardization of contracts, technologies, operation processes and delivery partners.

According to the Institute for Energy and Transport, a typical ESCO project may include the

following elements:

• Site survey and preliminary evaluation.

• Energy audit. Identification of possible energy saving and efficiency improving actions.

• Financial analysis of the project and guarantee of the results.

• Project financing.

• Comprehensive engineering and project design and specifications.

• Procurement and installation of equipment; final design and construction.

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• Project management.

• Facility and equipment operation & maintenance for the contract period.

• Purchase of fuel & electricity (to provide heat, comfort, light, etc.).

• Measurement and verifications of the savings results.

The Institute for Energy and Transport provides a related to ESCOs category of companies are

the Energy Service Provider Companies (ESPCs). They offer energy services to final energy

users, including the supply and installation of energy-efficient equipment, the supply of energy,

and/or building refurbishment, maintenance and operation, facility management for a fixed fee or

as added value to the supply of equipment or energy. Often the full cost of energy services is

recovered in the fee, and the ESPC does not assume any (technical or financial) risk in case of

underperformance. EPSC is paid a fee for their advice or equipment rather than being paid based

on the results of their recommendations. ESPC may have some incentives to reduce

consumption, but these are not as clear as in the ESCO approach. EPSCs may be consultants

specialised in efficiency improvements, equipment manufacturers or utilities. Typical projects

implemented by ESPCs are related to primary energy conversion equipment (boilers, CHPs). In

such projects the ESPC is unlikely to guarantee a reduction in the delivered energy consumption

because it may have no control or ongoing responsibility over the efficiency of secondary

conversion equipment (such as radiators, motors, drives) and over the demand for final energy

services (such as space heating, motive power and light).

According to this, ESCOs differ from ESPCs in that they guarantee savings for their clients, their

profit is linked to the performance of a project, and they often arrange financing. In

general, ESCOs develop, design, and finance energy efficiency projects, install and maintain the

equipment installed, measure, monitor and verify the project’s savings, and assume the risk

involved in the expected amount of savings (Ürge-Vorsatz, 2007). Thus, ESCOs provide

consumers with the energy services they desire, rather than the commodity itself, and incentives

are aligned to provide the greatest level of energy service with the lowest amount of energy

consumption.

The International Finance Corporation (2011) classifies ESCOs into the following four categories

based on their composition and ownership:

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• Independent ESCOs. They are “independent” in the sense that they are not owned by an electric or gas utility, an equipment/controls manufacturer or an energy supply company. Many “independent” ESCOs concentrate on a few geographic markets and/or target specific client market segments.

• Building equipment manufacturers. They are owned by building equipment or controls manufacturers. Many of these ESCOs have an extensive network of branch offices that provides a national (and international) footprint, with sales forces and specialized national staff providing packages of EE, renewables and distributed generation “solutions” to client market segments.

• Utility companies. They are owned by regulated or state-owned electric or gas utilities. Many utility-owned ESCOs currently concentrate on regional markets or focus on the service territories of their parent utilities.

• Other energy/engineering companies. They are owned by international oil/gas companies, nonregulated energy suppliers or large engineering firms.

Boait (2009) recognized three categories of ESCOs: a) business-to-business ESCOs, b) retail

energy suppliers and c) local ESCOs. Business-to-business ESCOs are subsidiaries of large

control companies, oil companies or utilities, that offer comprehensive energy services targeted at

medium and large scale businesses and public sector organisations. Their services are procured

as an aspect of outsourcing of non core activity. Retail energy suppliers include retail gas and

electricity suppliers. They offer services such as maintenance contracts for a fixed fee commit to

rectify all faults in a domestic heating system within a specified time period, and home energy

assessments, etc. Local ESCOs is related to local authority or community initiatives operating in a

district area, often on the basis of some form of public-private partnership. They typically offer at

least some of their customers both electricity and heat that comes from a combined heat and

power plant (CHP).

The market for ESCOs in European Union has been analyzed in a series of three reports

provided by the Joint Research Centre Institute for Energy (the more recent one was developed

by Marino et al. in 2010 and we refer to this one). The report recognized increased complexity in

the analysis of the ESCOs characteristics and business models. ESCO markets in Europe have

been found to be at diverse stages of development. Certain countries (like Germany, Italy and

France) have large number of ESCOs, while in most countries there are only a few ESCOs

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established and often complemented by engineering consultancies and energy efficiency

technology providers offering solutions that can include some typical ESCO services. The report

revealed the following trends:

• Increasing awareness

• Enabling public procurement rules

• Active public support

• Economic downturn

• Diverse market trends across national markets

The same report identified also the following barriers or risks for the development of the service

market provided by ESCOs (Marinova et al., 2010):

• Legislative framework, including public procurement rules

• Low and fluctuating energy prices

• Lack of reliable energy prices

• Lack of reliable energy consumption data

• Financial crises and economic downturn

• Real and perceived high business and technical risks

• Mistrust in ESCO model both from customers and from financing institutions

• Collaboration, commitment and cultural issues

There are two basic types of energy performance contracting (EPC) models for ESCOs

(International Finance Corporation, 2011): shared-savings EPC and guaranteed savings EPC.

Other business model variations include the Energy Supply Contract, the Chauffage model and

the Integrated Energy Contracting (King et al., 2007). Next we provide an overview of each of

them. These variations are related mostly to the range of services delivered under the contracts

and to the question how the required investments are financed.

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1.3.2.1 Shared-savings EPC

In a shared-savings EPC, the ESCO finances the total investment of the project and it is totally

responsible for repaying the loan (if it was incurred). The investment can include a variety of

improvements and replacements, such as the replacement of boilers, insulation, cooling systems,

lighting, renewable energy systems, temperature automation controls, energy data management

software, etc. The projects usually follow the “turn�key” project model and the ESCO undertakes

all phases of the project from the preliminary tasks (e.g. energy audits, design, etc.) to the

development, installation and preparation for the operation. The customer pays the ESCO a

percentage (in practice, in certain agreements it can be a fixed amount) of its achieved savings

from the project, which are set at a level to be able to repay the investment cost of the project,

cover the functional cost and any other cost associated to the project. An important benefit for the

customer is that received the benefits/ energy savings from the beginning of the project.

It is evident that the shared savings model requires very financially strong ESCOs and practically

it is used by the big utility companies or their affiliates, as well as by constructing companies in

energy projects. Since the customer does not participate in financing the project, the model it is

appropriate for markets in which the customers either lack the resources to finance energy

efficient projects or they have limited motivation for this (e.g. they lack awareness for energy

efficiency projects and their benefits). Hence, the shared-savings EPC model is appropriate for

energy efficiency initiatives that target first of all at the citizens, who suffer from both of these

factors. In addition, it can be applied both in industrial projects, especially when SMEs are

involves, as well as in civic projects at district level.

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Figure 4: The Shared-Savings EPC Model

1.3.2.2 Guaranteed savings EPC

In a guaranteed savings EPC, the ESCO guarantees energy cost savings to the customer (i.e.

that the project will bring a certain amount of cost savings). If the agreed/ target cost savings are

not achieved, then the ESCO compensates the customer, that is pays to the customer the

different in money. But contrary to the shared-savings EPC model, the investment cost is incurred

by the customer and the ESCO has no involvement in the investment and bears no financial debt

obligation. Hence, there is a difference in the kind of business risk undertaken by the ESCO: in

shared-savings EPC model it is financial risk, while in the guaranteed savings EPC it is functional/

performance risk. In case that savings are higher than the guaranteed level, the surplus can be

either taken by the ESCO as a bonus for the extra energy savings, or it can be split between the

ESCO and the customer according to a predetermined agreement.

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The guaranteed savings EPC can be applied even by small size and independent ESCOs,

because it does not require large capital assets. The key capabilities of the ESCO must be in the

operational and the management side and related to the exploitation of new technologies. The

model is appropriate for customers that have the financial capability to invest for the project and

want to receive a financial guarantee to being able to pay back the incurred investment cost (e.g.

protect of raise in energy prizes) by stabilizing the related to the energy consumption cash flows.

Figure 5: The Guaranteed Savings EPC Model

1.3.2.3 Energy Supply Contract

Another type of energy business model is based on the Energy Supply Contract (ESC). King et

al. (2007) name this business model “fee-for-service business model” and “premium service

business model”. Here the ESCO or other utility company contracts with a customer for the

delivery of specified energy services, named “useful energy”, such as heating, cooling, water,

lighting, etc. Hence, here the ESCO does not provide energy, but a specific service related to

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energy or even “added value energy service”. The ESCO is responsible for the delivery of the

service and will take care of everything needed to make sure the customer gets the service. The

ESCO manages the cost and risk of delivering the contracted service, and potentially assumes

ownership or direct operation of customer energy infrastructure. In return the ESCO receives a

fee for the service it provides at a pre-determined rate, either at a flat rate for every level of

service received, or escalating according to the service use level.

ESC contracts are generally more orientated towards distributed (local) power supply. If the scale

of the project in large enough, the ESCO will usually install a local “power plant” at customer’s

facilities and will operate and manage it. The ESCO has a constant incentive for optimization the

plant, because the reduction of the energy production cost will mean greater profit margin. As

implied before, the service provider will usually own this plant during the contract period.

The customer in the ESC models is an industry or recently building blocks managers or local

authorities. The key benefit for the customer is the cost efficiency of the solution, the standard

quality of the service and the no need to worry about the instalment and maintenance of the

energy production facilities. This way the customer saves also resources related to investment

and operation/ management of the energy production facilities.

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Figure 6: The Energy Supply Contract Model

1.3.2.4 Integrated Energy Contracting

An ESC is related to another model, named “Chauffage”, or “comfort contracting”. It is a contract

form that is developed in order to provide a “function”. The chauffage model incorporates energy

efficiency measures on both the supply side and the demand side.

A variation of it is the Integrated Energy Contracting (IEC), which is a newly developed

business model that combines elements from both ESC and EPC. The model can be said to

extend the ESC model by including demand side measures. The IEC service model combines

two objectives: reduction of energy demand through the implementation of energy efficiency

measures in the fields of building technology (e.g. HVAC, lighting), and efficient supply of the

remaining useful energy demand, preferably from renewable energy sources (Bleyl-Androschin,

2011). As compared to standard Energy Supply Contracting, the range of services and thus the

saving potential to be utilized is extended to the overall building or enterprise. The scope is

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extended to include heat, electricity, water or compressed air. The results to be achieved by the

energy efficiency service encompass modernization of the installations, lower consumption and

maintenance costs and improvement of the energy indicators (e.g. energy performance certificate

or benchmarking of buildings). In addition, non-energy-benefits such as emission reductions or

increase in comfort and image shall be achieved.

Figure 7: Integrated Energy Contracting business model

1.3.2.5 Business models for renewable energies

King et al. (2007) refer to the “Green Power business model”, which is a specific form of fee for

service that ties more directly to the utility generation mix. In this model, a utility offers green

power to consumers who are willing to pay the full incremental cost of green power or offsets.

This type of offering is designed to offer a value creating product to the green market segments.

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Figure 8: Green Power business model

Richter (2012) suggests also some generic types of business models for renewable energies. The

“utility-side renewable energy business model” refers to typical technologies such as on- and off-

shore wind farms, large scale photovoltaic projects, biomass power plants, and solar thermal

power plants. The value proposition in this business model is bulk generation of electricity that is

fed into the grid. Therefore, the customer interface consists of power purchase agreements on a

business to business level, rather than a relationship to the end-customer. As far as the

infrastructure is concerned, these projects are much more similar to traditional centralized power

plants. They are much closer to the utilities’ core competency of asset management and

operation. Costs arise from construction and operation of the energy project, while revenues

come from the tariffs for electricity or tax- or investment benefits.

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1.3.3 The role of public bodies, building managers and district planners in

business models

In this section we refer to the role of public bodies, building managers and district planners in the

business models for energy providers that were described in the previous section. All these

stakeholders function principally as “customers” in these business models, receiving the services

that are provided by the energy providers. In addition, they act largely on behalf of the energy

users, either they are the building owners, tenants or the local community. However, proprietary

characteristics and small changes in their role may happen.

1.3.3.1 The role of public bodies

Public bodies means in the Commission's Energy Efficiency Directive (2012) ‘contracting

authorities’ on the coordination of procedures for the award of public works contracts, public

supply contracts and public service contracts. A typical case of public bodies are the

local/regional authorities. Public bodies have a key role in stimulating, promoting and supporting

energy efficiency initiatives. In addition, they can participate in energy efficiency projects as

investors, customers or beneficiaries.

With respect to the Business Model Canvas, the role of the public bodies is found on the areas of

Customers and Key Partners.

• As Customers, public bodies get in a contract with an ESCO for the implementation of an energy efficiency project. The beneficiary of the project can be either the public body in itself (e.g. when the project refers to buildings that belong or are operated by the public body) or the community (e.g. when acts as a representative of the community). Their goals relate to reducing the cost of energy or attaining certain environmental standards (e.g. reduction of CO2 emissions).

• The public body can have also the role of the Key partner, when they contribute somehow in the energy efficiency project (e.g. infrastructure or property or anything else).

The role of public bodies is largely related to “community energy” or “district energy” schemes, i.e.

the production of energy at district level with the objective to meet basically the energy needs of

the specific district. Such initiatives have been boosted recently by the opportunities and the

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incentives for renewable energy or the obligation to meet certain environmental standards at

community level.

Bertoldi, Hinnells and Rezessy (2006) describe the “community model” for energy services with

regard to heating services in local communities. Here ESCOs manage the design, building,

financing and operation of “community heating” projects usually, often as a partnership between a

private sector company and a local authority, in which the ESCO undertakes the exclusive

responsibility for the operation, maintenance and possibly energy supply of a local community

area. Local government or social housing schemes can take a lead in the “community model” for

energy services, by contracting out all energy infrastructure on a site or region to an ESCO. The

authors point out that the “community model” for energy services can be applied in a smaller

scale, such as in large new-build housing developments. However, there is relatively little

experience with this kind of model, except in social housing.

The benefits of the “community model” are that the ESCO can design and manage the assets to

achieve best efficiency performance and least life cycle costs. Energy efficiency projects that

scale up at community level can achieve a great impact that outperforms the thresholds set by

guidelines and policies. Finally the ESCO can serve as a facilitator in the delivery of a wider

spectrum of services within a community (e.g. internet), achieving deeper involvement in the

community affairs and improved social responsibility. On the other side, the “community model”

may include certain risks, as there is little evidence that people prefer homes that have lower

environmental impact or low energy cost, or that they prefer communal solutions, rather than

individual ones. In addition, there are some bad experiences and bad reputation with the

community model, in case that they are badly maintained. With regard to the economics of the

community model, quite often the cost of an upfront investment may be recovered with difficulty.

The economics of district energy depend on three main factors (Marinova et al., 2008): the

production cost of the energy, the cost of the energy distribution network, which depends on

network size and energy loads, the customer connection costs. The economic efficiency depends

on also on the prices of competing technologies and the related fuels.

Rezaie and Rosen (2012) describe four categorizations of district energy systems based on the

market served and considering usage density:

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• Densely populated urban areas: In densely populated areas, a district energy system can serve a large number of customers for multiple purposes. Such networks are complicated and require significant financial investments.

• High-density building clusters: High-rise residential buildings, institutional buildings, shopping malls or high density mixed suburban developments are in this category.

• Industrial complexes: Having some similarities to the high-density building clusters, the industrial complex thermal requirements (steam, hot water, both) determines the type of the thermal networks and economics.

• Low-density residential areas: The district energy system for this type of area typically serves an area dominated by single or double residential units.

In the E-HUB project (http://www.e-hub.org) the Public Private Partnerships (PPP) are

proposed also as a kind of business model for energy efficiency projects. The term Public Private

Partnership covers several more specified models which partnerships between the public and

private sector, in which the private sector partners have the responsibility for at least designing,

building, and operating a project-facility. For example, the Design Build Finance Operate (DBFO)

model is a form of PPP in which a public sector client acquires (purchases) an asset-based

service from a private sector service provider. In a DBFO project, the private sector is responsible

for providing a service by means of designing, building, financing and operating the project asset

for the contract period, which can be up to four decades. It is expected that the financial

incentives used by the client and the increased duration and scope of the private sector

involvement will improve the economic efficiency of public procurement. Another example is the

FBOOT (Finance, Build, Own, Operate, Transfer). Here a private operator designs, brings in the

money, builds, owns and operates the energy supply system for a certain number of years,

normally 20 to 25. Investment and operational costs are covered by subscription fees. The private

operator undertakes the production of energy and its transfer to end users, buying deficient

amounts of it from a state-owned company, tuning and servicing the grid and maintaining the

necessary infrastructure. The holder of the network undertakes purchasing excessively produced

electricity, heat and cooling energy and affording the necessary reserve facilities for a certain

period of time. After the expiration of the term, the holder of the grid becomes the owner of the

whole system.

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1.3.3.2 The role of building managers

A building manager is the physical or legal entity that administers the use of energy in a building

or a complex of commercial, public or residential building. Their duties typically include monitoring

the energy use, recommending energy saving opportunities deciding for investments in energy

equipment, identifying and reporting problems, reporting deciding and supervising maintenance

works, communicating with all the building tenants or users for energy related topics, etc. The aim

of energy managers is to reduce energy bills and to reduce energy consumed - without reducing

the benefits for the users. In certain cases the building owner is also the building manager,

however, we focus on building managers because we are interested in their functions and their

role in the energy efficiency business models, rather than on the property rights, that are the key

characteristic of the building owners.

With respect to the Business Model Canvas, the role of the building managers is found on the

areas of Customers and Channels.

• As Customers, building managers collaborate with an ESCO for the implementation and management of an energy efficiency project. Building managers act on behalf of the owners or the tenants of a building. Their goals relate to reducing the consumption and the cost of energy use and improving the management procedures of the energy use (e.g. monitoring, measuring and allocating cost, etc.)

• The building managers can have also the role of a Channel to the energy end users, as they communicate information from the energy provider/ ESCO to the end users or building owners with respect to energy efficiency measures, novelties, investment opportunities, etc.

Buildings are no longer designed individually, but as part of a global energy system, where the

energy behaviour of their interactions with their environment can be predicted and simulated. ICT

provides access to methodologies and tools for the optimised design and management of energy

consumers. Building energy management systems (BEMS) provide enhanced demand-side

management solutions for optimal energy balance and minimised peak power demand at the

neighbourhood level.

Energy use in buildings varies greatly with the type, function and occupancy of the building. Most

of the energy used in residential buildings goes towards conditioning the space (heating, cooling,

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and lighting), which is often more affected by the size of the house than the number of occupants.

Other important factor of energy use is for domestic water heating. According to the project

URBACT2, energy consumption for heat and electricity pose quite different challenges; electricity

for lighting and appliances involves immediate decision-making, while heat energy consumption

patterns are usually based on settings that don’t often change. Electricity is a consumable product

whereas air conditions are perhaps less tangible. As regards the key drivers for investing in

energy efficiency, they are the high energy costs, buildings in need of renovation, improvement in

thermal comfort and environmental and climate protection. On the other hand, the most important

barriers are the need for heating system or building renovations, the lack of financial resources

and the uncertainty about the payback period.

The use of energy in businesses, encompassing offices, retail, lodging, restaurants, etc., is

considerably more heterogeneous than in residential buildings, with each business being unique

in its energy use and the decision makers for energy efficiency projects. Energy is used mostly for

lighting, heating and cooling. Residential buildings are more sensitive to weather than commercial

buildings.

New buildings are expected to develop towards nearly zero energy and even energy positive

performance. Thus, energy efficiency in buildings became more noticeable by the dream for “zero

energy buildings”, i.e. buildings that produce energy as well with the use of reusable resources

and, as a result, the net outcome of energy consumption minus energy production is practically

zero in the long term period. There are three main approaches to energy neutrality in buildings:

reducing energy demand by using equipment that is more energy efficient, producing energy

locally from renewable resources and connecting buildings to intelligent energy grids.

Another trend is for local energy systems or neighbourhood energy management system (NEMS),

which are integrated, multi-energy source systems that can into account all forms of energy

(electricity, heating and cooling energy, gas etc.). The energy system is operated at the

neighbourhood level and there can be many energy producers, energy storage, energy

distribution networks, and end-users of energy. An important target is to improve load balancing

2 http://urbact.eu/en/about-urbact/our-organisation/urbact-projects/

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and the reduction of imbalances (difference between energy production and demand) through ICT

enabled management systems. This requires demand response services and two-way

communication to enable the use of energy flexibility available in both the energy supply and

consumption sides.

1.3.3.3 The role of district urban planners and managers

Urban planners are experts in the design of the use of land and urban infrastructures; urban

managers focus on the management of urban infrastructures. Urban planners and managers

work as technical advisors for public bodies or other organisations, including private property

owners, for the effective use of a community's land and infrastructure. The task of urban

planners and managers can be quite varied and complex, to include also political, economic and

societal aspects for the urban development. However, in this report we are interested only on the

role of urban planners and managers for the implementation of energy efficiency projects at

communal and district level.

Urban development projects aim usually to create a sustainable and energy efficient urban

environment in a residential area defined in terms of a neighbourhood, an urban district or a

whole community/ city. In urban planning energy efficiency is usually a part of a holistic planning

process. The planning process involves meeting the needs of citizens and businesses and the

priorities of public authorities. ICT systems enable robust planning decisions based on optimising

environmental and economic performance.

Urban development projects include social, technical and financial aspects. With respect to the

Business Model Canvas, the role of the urban planners and managers is related to the Customer.

As Customers, urban planners and managers sponsor with the regional authorities the

implementation of an energy efficiency project in collaboration with an energy provider (ESCO).

Urban planners and managers work in close collaboration with the local authorities/ municipality

and the residents.

The German Association for Housing, urban and Spatial Development (2011) discusses the need

for an “integrated urban development concept” that will focus on energy efficiency based on the

principles of sustainability and climate protection. Such an integrated urban development concept

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is interlinked with the territorial planning objectives of the city or region, including energy supply

concepts and the general development strategy. The energy related fields of actions with regard

to urban development includes the rehabilitation of buildings and the modernisation of energy and

technical infrastructure, as well as green space and attractive and healthy public spaces and

environmentally friendly mobility. According to the project URBACT buildings are the largest

energy-consuming sector in the EU, and offer the largest cost-effective opportunity for energy

savings. Cities can mitigate climate change by reducing energy consumption in the construction,

maintenance and refurbishment of buildings.

1.3.4 The role of energy consumers

The energy consumer is the physical entity that uses energy either it is an individual (e.g. citizen)

or a business. The energy consumer is the stakeholder that is affected the most from the recent

trends in energy production and market, usually in a positive way, by being empowered to

monitor, control and manage his consumption. In addition, the energy consumer has much more

opportunities today to receive services in a more efficient and less costly way, to receive a greater

variety of services and also added value services. Lastly the role of the consumer is extended

with the opportunity to produce energy in parallel at micro level, either for self-use or for

commercial purposes also. A Price Waterhouse Coopers survey (PWC, 2013) suggests that

nearly two thirds (65%) of energy providers characterise their customers as ‘passive customers

that take what they are given’, but only 39% expect this to be the case in ten years’ time. Instead,

they foresee a rise of active ‘energy-saving’ and, increasingly, ‘energy generating’ customers.

The consumers can have many kinds of benefits and reasons to participate in any kind of energy

efficiency schemes and contract, such as to save money, to save energy, to protect the

environment, to refurbish old facilities and installations, to improve comfort (in heating/cooling,

ventilation, lighting), etc. In addition, micro-generation might be a new opportunity partly because

of the cost of the asset and the income stream, but also because many technologies reduce peak

demand (i.e. expensive energy). On the other hand, consumers still show little recognition of the

concept of energy services and there is suspicion of energy suppliers and a fear of commitment

(Bertoldi, Hinnells and Rezessy, 2006). For many people energy efficiency is not a priority due to

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low energy prices, transaction costs can be high compared to the savings or the cost savings

diminish as they have to be shared with the ESCO and other stakeholders.

According to the IREEN3 project citizens have the opportunity to influence the planning of energy

efficient neighbourhoods. The involvement of people in the neighbourhood planning process

improves the acceptance of energy efficiency solutions by the community. ICT solutions play a

fundamental role in raising the awareness of the citizens towards good practices in energy

efficiency; for example through information sharing solutions or learning solutions providing

suggestions to the user. These ICT solutions do not overload inhabitants with information but

underline the most important information such as opportunities for cost savings. Efficient decision

support tools will exist to visualise and stimulate the reduction of individual consumption patterns

by highlighting cost savings. The user is motivated towards the adoption of energy efficiency

measures enabled by the ICT solutions due to the gain in comfort and improvement in lifestyle.

Gaming and e-learning can also be used, as well as the diffusion of social networks with the

potential for sharing information on individual energy savings and CO2 footprint introduce a

competitive element that can further motivate towards energy efficient actions.

1.3.4.1 The role of consumers in multi-sided energy platforms

A recent report by the IBM Institute for Business Value (Valocchi, Juliano and Schurr, 2010)

points out that energy customers demands today more than merely reliable energy at reasonable

rates. Consumers ask also for more control over their expenditures and more information about

their energy usage, while at the same time they are more concerned for their environmental

impact and more motivated to take some action for this.

While customers are becoming more demanding from the energy providers, they also have much

more to offer in return and they offer more opportunities for “reciprocal value” (Valocchi, Juliano

and Schurr, 2010). Some of these new elements of reciprocal value are primarily operational in

nature, such as demand response, load profile flexibility, and distributed power and storage that

allow for optimization of system performance and asset utilization. Others, such as information on

3 http://www.ireenproject.eu/

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energy consumption patterns, other consumer demographic and behavioral information, and

access to personal connections/ networks for marketing purposes, are the foundation for new

revenue sources for companies able to effectively leverage the information. The next figure

describes the sources of value for the energy consumer and the opportunities for reciprocal value

created in the relationship between the energy providers and the energy consumers.

Figure 9: Reciprocal value creation in the energy sector (source: IBM Institute for Business Value)

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The flow and volume of information itself, along with new services it enables, are strong

contributors to the creation of new value. At present, there is little financial or operational value to

the data generated by consumers (essentially total usage on a monthly basis) because it is too

limited in scope and frequency of delivery to be of value to parties other than the electric

provider’s own billing and operations departments. However, the quantity, frequency and quality

of data generated by consumers – and its usefulness to energy providers and third parties alike –

are set to grow as smart grid infrastructure is deployed. Devices and software that capture,

analyze and present this information to consumers and energy providers are already beginning to

proliferate, and services that make use of this data are rapidly emerging (PWC, 2013).

Until now the energy sector has not had much reason to create multisided platforms because

product delivery has been a purely physical process; both energy and information flow have been

unidirectional; and the typical end consumer had little desire to communicate with providers other

than for service provision, billing and problem resolution. However, now all of this is changing.

The energy sector moves from single-sided platforms to multiple-sided smart grids, with the

participation of many types of producers, distributors, added value service providers and

consumers, and potentially with different roles and profiles for each of them.

IBM Institute for Business Value (Valocchi, Juliano and Schurr, 2010) provides different forecasts

for the future of energy markets. A certain way for the exchange of value, information and money

is via an energy marketing portal, on which customers can shop for the best deals on power or for

power that meets specific personal requirements (see Figure X). The platform owner creates

value by providing the end user with access to various applications (for energy shopping, energy

management, etc.) in return for passive usage and preference data, which the customer has

approved for use for these purposes. This is delivered back to the platform owner through the

applications for aggregation and presentation for the other side of the platform, the energy

retailer. The retailer has access, through the platform provider, to a suite of applications to gain

access to and evaluate the customer data. This information is valuable to the energy retailers,

and they are willing to pay the platform owner for access to it to build marketing programs for

products and services aimed at likely customers. Informed by the platform owner and the retailer-

side applications, retailers communicate their best offers to the buyers seeking deals or new

programs. Ultimately, the retailer gets return for its “investment” – paying the platform owner for

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access – in the form of increased revenues from consumers who value the programs and

services they offer.

Figure 10: Multi-sided energy platforms as an energy marketing

A slightly more complex example involves an information aggregator (see Figure 10). An

information aggregator builds a relationship with end users by selling them (possibly at a

subsidized price) energy usage display/management devices that are preloaded with useful

applications, all of which are purchased from third-party developers. They thus serve as the link

between device manufacturers and end users and between application developers and end

users. With appropriate permissions from consumers, the platform owner can also collect

information about the end users’ energy usage patterns, build profiles and market those profiles

to energy and non-energy (e.g., appliance) retailers. As with the energy marketing portal, the

retailers are willing to pay for this information because of the benefits they accrue from it. The end

users’ profiles also include information on demand response they are willing to provide; this can

be exchanged with the energy retailers for payment as the need for such response arises. Thus,

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cash can flow in both directions between retailers and end users, with the transactions in both

directions facilitated by the platform owner.

Figure 11: Multi-sided energy platforms with an energy aggregator

Note that in these two examples, the platform owner is a company purely focused on the

operation of the platform and the collection and exchange of data. Except for the end user, any

one of the parties in the ecosystem can also serve as the platform owner – visually, this can be

seen as “collapsing” the value exchange in the diagram for that party into the platform owner role

in the center. For example, a device manufacturer could set up a multisided platform and take on

responsibility as platform owner – including all interactions with application providers, end users

and energy retailers. Software-based platform owners, like information aggregators and energy

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shopping portal operators, will need to master systems architecture and application interface

development and support.

In this new environment there will be many new business opportunities for companies that will

function basically as added value service providers, moving beyond the role of the traditional

energy supply and delivery company. Such services could be related to the creation of complete

solutions, maintenance, knowledge and intellectual property management, research and

development, and contract management. The focus of these new companies will be on human

and intellectual capital management, rather than on the management of physical assets and

processes.

Table 1: Examples of potential multisided platforms in electricity

(Source: IBM Institute for Business Value)

The IBM Institute for Business Value (Valocchi, Juliano and Schurr, 2010) suggests four states

through which the industry will migrate:

• Passive Persistence: Traditional utility market structures still dominate, and consumers either accept or prefer the historical supplier-user relationship.

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• Operations Transformation: Some combination of network and communications technology evolves to enable shared responsibility, but consumers either cannot or elect not to exert much control.

• Constrained Choice: Consumers take decisive steps toward more control but are limited to certain levers (technologies, usage decisions or choices in providers) by regulatory and/or technological constraints.

• Participatory Network: A wide variety of network and communications technologies enables shared responsibilities and benefits.

In multi-sided energy platforms there are opportunities for the development of demand response

systems and programmes, which seek to increase the efficiency of the energy market, by

adjusting the energy consumption (demand) to the fluctuations of the energy production and to

the conditions in the market. Demand response programmes are typically based on the

application of different tariffs according to the time period of energy use or at energy peak

periods. In addition, other demand response programmes give incentives to the consumers to

reduce energy use at certain periods by providing bill credits or payments for pre‑contracted or

measured reductions. Sometimes these programs are followed by penalties on consumers that

fail to respond to their commitments.

1.3.4.2 Business models for energy prosumption

New roles for the energy consumer emerged with the development of distributed energy

generation systems and smart energy grids, that allow the dynamic, effective and “intelligent”

management of information for the production and consumption of energy aiming to improve the

efficiency, reliability and sustainability of the production and distribution of energy. Hence, the

energy consumer becomes a “pro-sumer” and has the opportunity produce energy in parallel,

either for self-use or for commercial purposes. “Prosumption” is a term introduced by Tofler in his

book “The Third Wave” in 1980 to signify the emergence of an era in which the user/ consumer

becomes also provider of the products and services he uses. Prosumption is well manifested

today in energy, with the energy consumer being in parallel the producer of energy from

renewable resources or other materials and disposals (e.g. biofuels). A prosumer in energy is an

economically motivated entity that a) consumes, produces, and stores electricity and energy in

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general, b) optimizes the economic and to some extent the technological, environmental

decisions regarding its energy utilization, c) becomes actively involved in the value creating effort

of energy service (Shandurkova et al., 2012). The role of prosumer in energy includes both the

individual home owner or resident and businesses or other organisations. Shandurkova et al.

(2012) notice that the energy prosumers are active participants in the energy market and they

make the assumption that in the future prosumers will participate more actively in the energy

value chain and will shape in a more drastic way the future trends in the energy market, possibly

by developing a more complete energy production profile.

Energy prosumers will develop closer relationships with an ESP or an ESCO, who will operate

and optimize the energy consumption in a home or a commercial building so as to yield, against a

fee, maximum benefit for the customer. It is also probable that most prosumers in the same

geographical area will be organized by a Virtual Power Plant role (VPP), who will manage this

portfolio. This role may be merged with the ESCO role (Shandurkova et al., 2012).

Shandurkova et al. (2012) describe four business models for prosumed energy services that

focus on the role of alternative producers (rather than homeowners): the “day-ahead”, intraday

and balancing market and the real-time market.

• In a day-ahead market contracts for delivery of power the next day are made between seller and buyer, the price is set and trade is settled. The day-ahead market is driven by the planning the participants need to do: a utility selling power to electricity consumers has to assess the quantity of power needed to meet customers’ demand the coming day, and how much it is willing to pay for this volume, hour by hour; an energy producer has to decide how much he can deliver, and on what price, hour by hour. These strategies of buyers and sellers are reflected through the bids to buy and offers to sell that they enter into the day-ahead market trading system.

• At the intraday market buyers and sellers can trade volumes close to real time to compensate for differences between the trade-settlements at the day-ahead market and the delivery the next day.

• As electricity load fluctuates constantly, any changes in demand for electricity that are not offset by change in load schedule (under- or over-scheduling) will require active trade at the balance market. There, the system operator responsible for keeping the electricity system in balance, can purchase electricity from given generators (in the case of under-scheduling), or compensate them for reducing generation (in the event of “over-

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scheduling”). The system operator determines the amount of energy needed by examining the submitted schedules for delivery and the anticipated demand. Energy purchased in the balancing market (“balancing energy”) covers any shortfalls in demand that schedules cannot meet and allows owners of undedicated generation to sell power into the balancing market.

• In a real time market a higher degree of flexibility will be offered by a large number small-scale units, as there is no restriction on the size of the units (MW), response is dependent on the accumulated price elasticity and the price intervals are of 5 minutes. Real time prices could contribute for a flattened bid curve on the balancing market.

With respect to renewable energies, Richter (2012) suggests two generic business models: a

customer-side renewable energy business model and a utility-side renewable energy business

model. The two generic business models are “ideal types” and represent the two ends of a

spectrum. The customer-side renewable energy business model: In this business model the

renewable energy systems are located on the property of the customer. Possible technologies are

photovoltaic, solar thermal hot water, CHP micro power, geothermal heat pumps, and micro wind

turbines. The size of the systems usually ranges between a few kilowatts and about 1 MW. The

value proposition offered by the utility can range from simple consulting services to a fullservices

package including financing, ownership and operation of the asset. Utility financing and

ownership of customer-side assets intensifies the customer relationship and can provide access

to new customer segments, of customers who otherwise could not afford installation of renewable

energy systems. As far as the utilities’ architecture of value creation is concerned, a management

approach for small scale projects is needed. The revenues for the utility come from return on the

assets and charge for services, while costs arise from administration, installation and operation of

the systems.

Regarding the demand response systems, demand response is no longer bound to consumer

electricity consumption but may comprise consumer electricity production as well.

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1.4 Analysis of Business Practices

In this section we proceed with the analysis of the “business practices” with regard to energy

efficient business models, i.e. the experiences and the practical knowledge from the development

of business models that support the implementation and the commercial exploitation of energy

efficiency projects. We focus on the practices and business models that derive from the

implementation of European R&D project that have similar scope and objectives to the DAREED

project. Our goal here is to review and explore the business models that were developed there,

analyse the roles of the critical stakeholders, identify the critical success factors, investigate the

barriers and the anticipated risk factors, review the key technologies used and overview the

technological trends.

1.4.1 Related projects reviewed

The related to DAREED projects that have been review and analysed come from FP7. We

focused on projects that promote energy efficient solutions with the use of ICT at district level and

they include the development or analysis of business models in their project implementation plan.

The selection of the projects was based on the experience of the project members and it was

supported by the exploration of the Cordis project database.

The projects that have been reviewed and analysed are the following:

• The project UMBRELLA (Business Model Innovation for High Performance Buildings Supported by Whole Life Optimisation) aims to develop a web-based decision support application in recognition of the implementation and motivation of building energy efficiency solutions. The project is centred on the creation of new innovative business models, which will be tailored to various different stakeholders (e.g. owners, occupants, management companies, public authorities etc.), building types, climate and policies.

• The project EEPOS (Energy management and decision support systems for Energy POSitive neighbourhoods) project aims at developing a new system for energy management and automated load control on the neighbourhood level that will achieve the following goals by automated shifting of controllable electrical loads and active end-user involvement in energy management processes: a) matching of local electricity generation and consumption, b) congestion management in local electricity grids, and c) increase of energy efficiency.

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• The project SmartHouse/ SmartGrid takes advantage of the transformation of the electricity sector that enables the efficient generation of decentralized and renewable energy. It is based on a holistic concept for Smart Houses situated within their broader environment. Intelligent networked ICT technology for collaborative technical-commercial aggregations enables Smart Houses to communicate, interact and negotiate with both customers and energy devices in the local energy grid so as to achieve maximum overall energy efficiency as a whole.

• The project Cost-Effective (Resource and Cost-effective integration of renewables in existing high-rise buildings) aims to contribute to the development of a competitive industry in the fields of energy efficient construction processes, products and services. This goal will be supported by the development of new business and cost models which consider the entire life cycle of a building and which incorporate the benefits of reduced operating costs and greenhouse-gas emissions and a decision support tool will help the planners to find the best integrated building concept.

• The project DEHEMS (Digital Environmental Home Energy management System) aims to improve the current monitoring approach to levels of energy being used by households. The project moves beyond monitoring the levels of energy being used to examining also the way in which the energy is used. The system can also provide specific energy efficiency recommendations for the household.

• The project E3SoHo (ICT services for Energy Efficiency in European Social Housing) aims to implement an integrated and replicable ICT-based solution which brings about a significant reduction of 25% of energy consumption in European social housing by providing tenants with feedback on consumption and offering personalised advice for improving their energy efficiency, reducing the energy consumption and increasing the share of RES (Renewable Energy Sources) by informing and supporting the user to decide for the most appropriate behaviour in terms of energy efficiency, cost, comfort and environmental impact, monitoring and transmitting consumption data to Energy Services.

• The project E-Hub (Energy-Hub for residential and commercial districts and transport) develops a system for the capture, conversion, storage, distribution and control of energy, aiming to maximise the use of on-site renewable energy at the district level.

• The project IREEN (The ICT Roadmap for Energy-Efficient Neighbourhoods) examines the ways that ICT for energy efficient and performance can be extended beyond individual homes and buildings to the wider context of neighbourhoods and communities.

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• The S3C project (Smart Consumer, Smart Customer, Smart Citizen) emphasizes on the role of energy end-users in households and small commercial/industrial entities in smart grid projects. The project aims to provide a better understanding of the relationship between the design, implementation and use of particular technology and user interaction schemes and the promotion of ‘smart' energy end-user behaviour.

Note that a series of projects related to DAREED have started recently and they have not

published yet their (preliminary) research results. These projects include the following:

• DOF - District of the Future

• DIMMER - District Information Modeling and Management for Energy Reduction

• OPTIMUS - OPTIMising the energy USe in cities with smart decision support system

• CIVIS - CIVIS

• COSSMIC - Collaborating Smart Solar-powered Micro-grids

• BESOS - Building Energy decision Support systems fOr Smart cities

• IURBAN - Intelligent URBAn eNergy tool

• ORPHEUS - OPtimising Hybrid Energy grids for smart citieS

• E-BALANCE - Balancing energy production and consumption in energy efficient smart neighbourhoods

• INDICATE - Indicator-based Interactive Decision Support and Information Exchange Platform for Smart Cities

• READY4SMARTCITIES - ICT Roadmap and Data Interoperability for Energy Systems in Smart Cities

• URB-Grade: Decision Support Tool for Retrofitting a District, Towards the District as a Service

• AMBASSADOR: Autonomous Management System Developed for Building and District Levels.

In this deliverable we stay with the knowledge derived from the European R&D project. A useful

supplementary input could derive from the business practices of commercial/ industrial

companies, such as ESCOs. Nonetheless, their business models are usually kept secret and are

not available publicly, especially with regard to the critical parts. Hence, the review of the general

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parts of their business models is presented in section 2 of this deliverable, while the compilation

of unstructured and incomplete information or the development of case studies about the

business practices of commercial/ industrial companies is not on a par with the nature of this

specific deliverable.

1.4.2 Business models in related projects

In this section we analyze the business models that were developed in previous European R&D

project in the topic of energy efficiency at district level with the use of ICT. In particular, we review

the methods of analysis they used for their analysis or development of business models, the

market environment in which they developed their business models, the key characteristics, the

success factors, the implications and the results of the business models and, lastly, the roles of

the different stakeholders that participate in these business models. In the next section we will

focus on the technologies used, the technological trends that have been identified, the barriers for

the development of new business models and the critical risk factors.

1.4.2.1 Method of analysis

The project EEPOS used the Business Model Canvas by Osterwalder and Pigneur as the basis of

the modelling method and enhanced it with performance validation methods and criteria as key

considerations for EEPOS and optional partnering and customer co-creation aspects. Their

intention was to use a modelling method which makes it is easy to look at different stakeholders’

involvement in the business model and see by a glance what kind of money flow is expected for

an actor fulfilling the model. The project team claims that with the Business Model Canvas

“companies may discover their role in each kind of business model. By writing this kind of

business model canvas to each partner of the whole delivery chain companies are able to look for

their role and expectations from partners’ point of view. Also each partner in the delivery chain

may assess if they are concentrating on the right issues of the service/product delivery to the

client”.

The project UMBRELLA uses the Value Chain Analysis to diagnose and enhance a company’s

competitive advantage. The project discusses also alternative concepts of value evaluation, such

as value shops, value networks, value constellations and value streams, business ecosystems,

etc. value chain analysis is focused on the construction aspects of the energy projects.

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The business models are analysed from a financial point of view, as well as some organizational

and contractual aspects, that focus on the following:

• access to finance

• cost and ROI

• outline the steps required for implementation

• outline the products and services required for implementation

• outline the contracts required to ensure the uptake of the solution

• outline the contracts required to ensure energy consumption and carbon emission targets are being met

The business models are developed over the lifecycle of the building that includes:

• The design and construction of high performance buildings

• Retrofit solutions for existing buildings to reduce energy consumption and carbon emissions

• Real-time remote monitoring solutions for optimising the operational energy of buildings

• End of life solutions for the disposal, re-use or re-cycling of building components

The methodology of the E-Hub project used five main stakeholder groups: a) private person end

user, b) company end user, c) service provider (energy provider, retailer, transmission operator

etc.), d) land area or real estate developer, and e) public authority or policy maker. The project

analyzed through workshops and interviews carried out in Belgium, Finland, Italy and in the

Netherlands the current business models and services of specific project cases and scenarios

relevant to local energy services (E-HUB).

1.4.2.2 The market

The project UMBRELLA makes an analysis of the energy efficiency building (EEB) market in

Europe. The EEB market is defined as fragmented, with many small and differentiated companies

that follow a variety of ways to approach the owners and offer different solutions. In addition, the

EEB market is very complex due to the large number of stakeholders engaged in the process and

the different interests and different power they have. Market competition and power of the

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different stakeholders depend on the solution implemented, so different business approaches

have to be considered for each case. As a result, each business model of an EEB project is

potentially different.

The project UMBRELLA makes the following remarks for the different stakeholders:

• The legislators -at local, national and European level- can have a big influence in the evolution and expectations of the market.

• The project designers (e.g. engineers, architects and project managers), having global knowledge/ expertise and being capable to connect the different aspects of the projects, have an opportunity to become integrators of the fragmented market in the EEB projects.

• The owners are seen as the central point of the EEB market, as they take the final decision for undertaking an EEB project at their apartment/office/building. They are interested in EEB projects for two reasons: the value of their asset will be increased and the energy savings will reduce the energy bills. If they are not using the building, their interest is limited, as the energy savings won’t be reflected in his cash flow. The constructors are a kind of owners that do not occupy the building, so they aim to increase the value of their assets. The tenant on the other side does not have final decision, neither the power to influence the market, but they are interested in such projects because they will have energy savings.

• The ESCOs are key actors in the EEB market, with great interest for the development of EEB projects.

• Green building certificate organisations also have a great interest in the development of the market, as these projects and building refurbishment works are their major works.

• Utilities and real estate agents get in contact to owners and decision makers, but their interest in the market is not very high as it will barely modify its activity and revenues.

• The product manufacturers (HVAC, construction and electric/digital) have a strong interest in the EEB market.

1.4.2.3 Business models

The project EEPOS suggests “concepts” for business models for “energy positive

neighborhoods”. The business models derive from the 11 scenarios defined in the project and

they are rather idiosyncratic to these scenarios, rather than generic ones. Business models are

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supporting energy trading between: a) buildings within a neighbourhood, b) buildings /

neighbourhoods and grids. The project seeks to combine building construction with maintenance

and energy management services for residential buildings. The business models present

information on money flows and stakeholders actions needed in order to bring the business

models into practice.

The archetype business model is based on the idea of a NEMS (Neighbourhood Energy

Management System) operator with partners who provide control of an energy positive

neighbourhood with users consuming, producing and trading energy. The business models

proposed in the project are the following:

• NEMS operator. The value proposition refers to: a) lower energy costs through high (neighbourhood) level energy use optimisation, bulk energy purchase from market and enabling the selling of self-produced renewable energy, b) more green, sustainable, eco-friendly way of living by optimally utilising existing resources, c) more affordable investment and a comfortable and affordable way (reduced payback time) to start using solar-wind-other renewable energies.

• Energy Prosumer. The value proposition refers to offering a high quality marketplace environment with individual configurable software-agents which represent the needs of the EPROs and the Energy Service Companies are able to deal in real-time as representatives of their “owners”.

• Energy Brokering Tool as a service. The value proposition refers to: a) profit from using the tools, b) green thinking, c) energy savings, d) customers may participate to the definition of the tool, e) innovative tools and processes.

• Energy Brokering Tool as a (self-service) software. The value proposition refers to: a) profit from using the tools, b) green thinking, c) energy savings, d) customers may participate to the definition of the tool, e) innovative tools and processes.

• Software for automatic adjusting of building systems settings. The value proposition refers to automatic adjusting of settings to save energy costs.

• Software for automatic cut of high consumption with user pre-set limits. The value proposition refers to: a) limits to equipment in common areas (not controlled by inhabitants) which incur saving energy, b) saving peak energy costs even when user needs to use energy consuming equipment.

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• End user collaboration tool. The value proposition refers to: a) enabling end-users to compare used energy costs & amount of energy with similar users, b) entertaining games with concrete trophy.

• End user balance card. The value proposition refers to: a) controling energy costs using balance card, b) consuming no purchased energy when using sell-only mode, c) reducing energy costs using buy & sell mode.

• Automatic demand site management, NEMS-developer. The value proposition refers to offering a high quality, open NEMS platform with the possibility to add additional services and interfaces.

• Automated demand side management, NEMS operator. The value proposition refers to: a) co-ordinated energy management and optimisation on the neighbourhood level, b) taking part in energy trading with external parties.

• Power and heat provision to neighbourhood. The value proposition refers to: a) low cost energy through optimisation of RES & conventional sources, b) sustainable life style by reasonable use of RES & conventional sources, c) affordable & feasible way of using new technologies, adapted to particular needs.

Using a similar methodological approach, the project SmartHouse/ SmartGrid proposes 9

business cases and analyses their details and aspects of the related business models. The

description of the business models includes: the description of the following: main idea, actors

and their goals, context and scope, technology infrastructure, sustainability and grid efficiency

effect, value model, cost consideration, integration and communication, success measures.

These 9 business cases refer to the following:

• Aggregation of Houses as Intelligently Networked Collaborations. A commercial aggregator could exercise the task of jointly coordinating the energy use of the smart houses or commercial consumers that have a contract with him. The joint management of a collection of houses and commercial sites can be done in two ways. The aggregator might directly control one or several participating devices (e.g. deep freezers, air conditioning); this would require the end-users to allow direct access to the control of these appliances. Another way is that an aggregator can only provide incentives to the participating devices, so that they will behave in the desired way with a high probability, but not with certainty. The second option leaves the power of control to the end-user, i.e. the owner of the appliances, and might thus be more acceptable, and also easier to implement from a legal perspective.

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• Real-Time Imbalance Reduction of a Retail Portfolio. This business case is rooted in the balancing mechanism as used by TSOs throughout the world. The European variant of this mechanism is part of the ETSO Scheduling System (ESS) and is widely implemented by European TSOs. In this context, an actor that is responsible for a balanced energy volume position is called balance responsible party (BRP).This business case scenario focuses on the balancing actions by a BRP during the settlement period. Traditionally, these real-time balancing actions are performed by traditional power plants within the BRP’s portfolio. The key-idea of this business case is the utilization of real-time flexibility of end-user customers to balance the BRP portfolio. For each control zone, the BRP aggregates all its contracted flexible distributed generation and responsive loads in a virtual power plant (VPP). The BRP uses the VPP for its real-time balancing actions.

• Offering (Secondary) Reserve Capacity to the TSO. This business case is rooted in the ancillary services as initiated by TSOs throughout the world. This business case scenario thus focuses on the participation of parties, having flexible production and consumption, in ancillary markets during the settlement period. Traditionally, these real-time balancing actions are performed by contracted reserve capacity. The key-idea of this business case is the utilization of real-time flexibility of end-users (prosumers) in balancing a control zone. For each control zone, market parties aggregate these flexible distributed generation and responsive loads in a virtual power plant (VPP). The TSO contracts in real-time part of these flexible loads for its real-time balancing actions.

• Distribution System Congestion Management. This business case aims at deferral of grid reinforcements and enhancement of network utilization. The need clearly arises in areas with a large amount of distributed generation near one location or in areas evolving into a so-called all-electric society, e.g. by introducing electric heating (heat pumps) or electric mobility. Non-coordinated control of these new devices may lead to a sharp rise in needed capacity on lines and transformers. By coordination of these devices, they can be allocated timeslots for operation that are spread out over time. Furthermore, coordination can increase the simultaneousness of local supply and demand in case local generation is integrated. Congestion management as a service can be aimed at different beneficiaries. In residential houses, it can be used to get a better match in own production and consumption, thereby decreasing the energy bills (difference between buying and selling prices of electricity and reduction of distribution cost and tax payment). The same holds for large apartment buildings / offices / industrial sites, but there it can also be used to lower the connection capacity cost to the external grid. Distribution System Operators (DSO) may be interested in improvement of the quality of supply in areas with restricted capacity in lines and transformers.

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• Variable Tariff-Based Load and Generation Shifting. The overall load patterns of electricity consumption are quite well predictable. Characteristic peaks occur at some time intervals (e.g. at noon or at 19:00 in mid-European winter days) and other time intervals are characterized by low consumption, especially during night-time. Also, the availability of renewable energy resources can be predicted with certain accuracy, giving an indication of probable situations in the electricity system for the next day.The key idea of the business case is, thus, to provide the customer with a variable price profile on the day before power delivery. This profile, calculated by the retailer, should be fixed once it has been communicated to the customer, so that the latter can rely on it for his further planning of generation and consumption. The price profile can look different for each day, however, to reflect market conditions that also vary from day to day. These variations will likely increase with increasing generation from fluctuating sources like wind and solar energy. The price profiles could be based on the wholesale prices that the retailer faces when procuring the energy amounts he sells to the customer. The exact relation between the spot market prices and the variable tariff profiles sent to the smart customer can be determined flexibly. The possibilities range from a direct adoption of the spot-prices (plus grid costs, taxes etc.) to more complex contractual relations specifying maximum price and average price levels of the customer. At the customer’s premise, an energy management system should receive the price signal and determine the optimal timing for the energy consumption of those appliances that can be shifted in time (e.g. washing machines or dishwashers) or that have a storage characteristic (such as fridges or deep-freezers).It may be part of the business model that the retailer receives feedback from the customers after the publication of the price curve and during the day of delivery on their automatically planned / predicted load and generation profiles. So the retailer can optimize his portfolio by trading on intraday electricity markets.It is also possible, however, to rely solely on a prediction model of customer behavior.The main value driver from the customers’ perspective is to receive a tariff and a technology which reduce their energy bills. The value driver from the retailer’s perspective is the opportunity to attract new customers and reduce his costs when buying from wholesale power markets.

• Energy Usage Monitoring and Optimization Services for End-Consumers. When detailed metering data is collected on a large scale, valuable information can be extracted from the data pool, which can help end-consumers to achieve the desired reduction in energy consumption. For example, through comparing one’s own consumption pattern with average load profiles of comparable households, an end-consumer can become better aware of his energy usage. Or, if the place of energy consumption is made visible in a comprehensible manner, the end-consumer is able to find out how much energy is spent

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by which appliances, and can identify the greatest potential for a reduction of energy consumption. A portal or display that combines information about present and past consumption, comparisons to average consumption patterns, and precise suggestions how to further lower consumption which are tailored personally to the customer is probably the most effective way of realizing the possible increase in households’ energy efficiency. It should therefore be tested within the SmartHouse/SmartGrid project. The business concept of services that comprise average consumption patterns could rely on the principle of reciprocity: those customers who contribute to the data set by allowing metering data to be read by the service provider can also access average data. This concept gives an incentive for the end-users to reveal their data, under the condition that it is not accessible by unauthorized parties. The additional value to the customer provided by the described information services can either be remunerated through additional fees or through enhanced customer loyalty. A combination of both is also conceivable.

• Distribution Grid Cell Islanding in Case of Higher-System Instability. The key idea of this business case is to allow the operation of a grid cell in island mode in case of highersystem instability in a market environment. This business cases considers that the islanding procedure is performed automatically. The scenario has two main steps: the first step takes place before the event that may occur and the second step is the steady islanded operation. During the first step, the system should monitor both the available distributed generation (DG) units and the loads, and should forecast the consumption as well the available power and energy in the next hours. A load shedding schedule should be created based on to the criticality of the consumption loads and on the customers’ willingness to pay for running the appliance during the island mode.Grid cell islanding is of value to the DSO. If instabilities occur in the distribution grid, it is the DSO’s task to restore stability as quickly as possible and with the lowest possible number of affected customers. Through islanding, the DSO can reduce the number of connected customers that are negatively affected by the highersystem instability. Islanding also helps the DSO to quickly restore system stability within his grid area. The service of grid-cell islanding can be provided by a commercial aggregator who installs the necessary control equipment in contracted households and then performs the islanding upon request by the DSO in case of a higher-system instability.

• Black-Start Support from Smart Houses. The key idea of this business case is to support the black-start operation of the main grid. It considers that after a black-out, the local grid is also out of operation and the main goal is to start up quickly in island mode and then to reconnect with the upstream network in order to provide energy to the system. The scenario has four main steps: the first step is before the event that may occur, the second

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step is just after the event, the third step is the steady islanded operation and the final step is the reconnection to the main grid. The first two steps of the black-start support resemble the operation as described for the grid cell islanding case. Black-start support is of value both to the DSO and the consumer. If a black-out occurs in the DSO’s grid area, it is his responsibility to restore system stability as quickly as possible. Flexible demand helps him to perform this task. Black-start support could be provided by a commercial aggregator who installs the necessary control equipment in contracted households and then performs black-start support upon request by the DSO in case of a black-out. This service could be coupled with the grid cell islanding service, and could be provided by the same aggregator. Similarly to the previous business case depends on the market structure and the benefit depends on who is responsible to pay for the possible load shedding and how much the customers are willing to pay for quick power restoration.

• Integration of Forecasting Techniques and Tools for Convenient Participation in a Common Energy Market Platform. The business case ‚Integration of Forecasting Techniques and Tools for Convenient Participation in a Common Energy Market Platform‛ has two main parts. The first part is the data collection which is the most critical part that may lead to a correct forecast. Data collection is part of the business model since data typically is not freely available and sometimes confidential. The second part is the data evaluation and processing, e.g. for extracting a wind power prediction valid for a certain region. The third part is the distribution of results to the different customers that may also be competitors. It can be expected that the more fluctuating generation is to be integrated into grid, the higher the importance of forecasting services will be. Because of vital interest many actors of the energy market even already today use the forecasts of more than one service provider to improve the quality of their own forecasts. This business case provides benefit for both the consumer and the aggregator. The aggregator has the ability to participate accurately in the wholesale market and gain by reducing the uncertainties. The consumer benefits from lower prices. However, this business case requires the participation of the consumers, since an accurate forecast requires online monitoring of the DER and not simply reading from the smart meter.

The project COST-EFFECTIVE developed four business models. The 3 traditional business

models were distinguished through the fact or way of transferring the ownership of technical

appliances. With this approach the following business models types were developed: Product

Based Business Model, Service Based Business Model and Product and Service Based Business

Model. The economic feasibility of 3 traditional business models are presented in a calculation

tool elaborated within the Cost-effective project which will allow a customer to co-design the

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energy- and cost-effective solutions. Additionally, the Innovative Business Model was elaborated

in order to create new business opportunities for energy related innovations in the building

environment.

• The Product Based Business Model. This model follows the traditional way with a transfer of the ownership at purchase. The customer covers all costs. He takes all the risks but also profits from all benefits. The new technology empowers owners with possibility for getting free pure energy on site (energy consumption savings) and gives them impact for façade refurbishing and thus raising market value of the real estate. Energy savings combined with market value increase and raised attractiveness for tenants due to ecological and design aspects are the key points for investing in offered technologies. The strengths of the model are: a) building market value increase, b) ownership of the innovative technology, c) raised attractiveness of the building for tenants. The weaknesses of the model are: a) the high costs of the investment, b) financial risk, c) taking full responsibility for the maintenance of energy efficiency components.

• The Service Based Business Model. In this model no ownership transfer occurs, the value is delivered via access to the energy. The customer benefits from lower energy costs. The risk is taken and the performance guaranteed by the service provider. In this business model type it is possible to transfer the ownership to the customer at the end of the contract. To solve the problem of up-front investment in Cost-Effective offer customers do not pay anything for equipment or maintenance but for electricity through their power purchase agreements. The system performance is guaranteed by the service provider and in case it fails the customer pays nothing. The strengths of the model are: a) lower energy costs, b) no financial or technical risk, c) no up-front costs of the investment. The weaknesses of the model are: a) potential cooperation problems with service provider, b) limited influence on the investment, c) not being able to manage the surplus of energy generated by the technology.

• The Product and Service Based Business Model. It is a mix of 2 business models mentioned before (product based business model and service base business model). The ownership is partly transferred at purchase and part of the value is delivered via access to the energy. Customers participate in the investment cost and the benefits. The strengths of the model are: a) lower responsibility for the investment, b) lower up-front costs of the investment, c) flexibility in contract arrangements. The weaknesses of the model are: a) potential cooperation problems, b) complexity of the terms of the contract arrangements, c) diffusion of responsibility for the investment.

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• The Innovative Business Model. The model establishes long-term relationships and the whole building life cycle and building use operational costs is taken into account. This leads to innovative business models development based e.g. on product after-market services, a new approach for alliances of partners or new value-created services, etc. The strengths of the model are: a) added values created over the lifetime of the investment, b) better possibilities for introduction of innovative energy efficient technologies into the buildings, c) investment costs divided into whole life cycle of the building. The weaknesses of the model are: a) lack of tools allowing for real application of innovative business models, b) limited market demand, c) added values created over the lifetime of the investment.

The E3SoHo project revealed that the main costs of energy efficiency projects at district level are

the cost of the equipment and the cost of installation. As explained below, the other costs, namely

communication and maintenance, can be for now considered to be included in the equipment

cost. On the other hand, the major benefit is certainly related with the energy savings. Other non-

quantifiable benefits include cost control, higher comfort levels and lower CO2 emission for the

environmentally conscious.

According to the results of the E-Hub project:

• Current pricing mechanism is no longer valid, and should be changed. Price incentives are too low at the moment. We should not so much look at different types of energy production only. An overview is needed whereto the end-user requires energy: light, power, heath (high or low-value), mobility, cooling, and comfort. Also information has value.

• A focus on local market could lead to a different focus per region.

• A minimum energy package would be available for everyone with the risk that energy is not available on certain hours. A commercial party could offer you additional energy services against additional fees.

• Often energy itself does not raise interest enough, a service provider has to include also other services as well to the offer.

• There is demand for turnkey solutions and some kind of service integrator. End customers can’t sort out all different technology providers, processes, licenses and subsidies. Thus there should be only one interface or service provider for end customer that deals with all that, and coordinates the processes with subcontractors and partners. Otherwise it is too complicated for the end customers. New service design is needed to get consumers

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involved and willing to pay for new technologies. Facilitators might emerge to help existing businesses with their smart solution transition, by providing information about business opportunities and enhancing collaboration between different industry actors.

The main categories of critical success factors according to the E-Hub project are:

• Favourable investment environment

• Economic viability of the project

• Reliable concessionaire consortium with strong technical strength

• Sound financial package

• Appropriate risk allocation via reliable contractual arrangements

1.4.2.4 New roles of the stakeholders

According to the E-Hub project, the roles and needs of stakeholders in energy service business

are changing:

• There is an emerging tendency among consumers to invest in private energy generation.

• The role of the municipality is changing. It is no longer possible to realize the set of goals on your own as a municipality. The municipality used to formulate environmental goals as a separate policy line. However, people do not want to be patronized by organisations or the government and be dependent, but they want more and often to decide themselves on their surroundings and ways to take an action. People wish to be involved in the decision process already in the early stages. In a town/city, the local lower authorities or housing cooperations could/should get involved. Also activation and integration of community is included. Residents are interested about what is going on in the residential area.

• Parties supporting local initiatives will emerge. Further new players often find a position between the end user and the energy supplier/grid operator, and new businesses are created

• Service designers emphasize that product and service concepts should be simple, usable and appeal to people. Social sharing and visualization usually helps. There are models in which end customers see their consumption compared to a similar household’s average and people can get small rewards if their energy consumption is less than average, for instance.

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The project S3E reviewed various categorization schemes of consumers from the literature. Such

a categorization/ segmentation can support understanding better the motivation of the consumers

for energy efficient solutions, as well as other attributes and behavioural characteristics, and it

can support hence the consumer engagement in smart grid and active demand projects.

The EEPOS project analyzed the role of prosumers who can also generate energy and supply

their extra energy into the grid. At the moment, there are no real markets for prosumers due to

lack of motivation, incentives and information etc. In addition, prosumers have to join forces with

neighbourhood stakeholders to take the advantage of their excess energy. In EEPOS the

elaboration of the new business models are based on user / prosumer information on tariffs and

saving possibilities as well as user/prosumer engagement (co-creation) via the decision making

platform to co-operate with neighbourhood stakeholders. EEPOS will pave the way for offering

value adding services to the customer / prosumer like e.g. Demand Side Management with tariffs

and saving possibilities.

• The benefits for clients/ end-users/ prosumers are the possibility to participate in the Smart Grid and Energy market via a broker, leading to a stronger position and savings on energy costs by selling excess energy and automatically monitored peek cost cut off.

• The benefits for building owners are the possibility to utilize new services available via using neighbourhood energy management as well as increase value of buildings by providing less energy consumption.

The work in the EEPOS project until now does not include expected revenue of profit information

which shall be included at the end of EEPOS project, when field tests and EEPOS concept is

more mature to produce information on expected costs and turn over. EEPOS project is also

targeted to special groups such as SMEs and other smaller actors.

The E3SoHo project analyzed the role of the condominium manager, which is supposed to be

played by an ESCO. The condominium manager will be able to promote services to the utility.

With the use of energy management systems in each apartment of the condominium it will be

possible to store the monitored data of energy consumption of each flat. It this way, the manager

of the condominium can sell this data acquired locally to the utility in real time. In this way, the

utility will better predict the consumption of the condominium, to better perform the electric grid

power system action, regarding to the production to meet the demand.

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Regarding the role of the consumer, the project suggests the concept of reciprocity: the

customers who contribute to the data set, by allowing metering data to be read by the service

provider. This concept gives an incentive for the end-users to reveal their data, under the

condition that it is not accessible by unauthorized parties. The additional value to the customer

provided by the described information services can either be remunerated through additional fees

or through enhanced customer loyalty. The proposed rationale is that either the energy feedback

has a value in itself for the customer (this valuation could also be exploited through higher

average tariffs or through advertisement), or other measures, for example through subsidies or

tax relief, have to compensate for the losses in sales volumes to make this a viable business

case.

The project S3E analysed the role of aggregators in multi-sided platforms. Aggregators enable

small loads to participate in the market which would not be accessible for them otherwise. They

typically take an intermediary role between end-users and other market players on a multi-sided

platform. They commercialize the aggregated flexibility from the end-users to the other market

players. This aggregated flexibility can provide a number of services to the different market

players, like offering reserve capacity (for TSOs), distribution system congestion management (for

DSOs), portfolio management (for BRPs and retailers), and energy usage monitoring and

optimization (for end-users). According to the findings of the project, such innovative business

models currently remain largely untested, partly due to uncertainties under the current regulatory

framework, however in the future they will most probably become increasingly important.

1.4.3 Technologies and technological trends

The project IREEN, as a strategic project for the future of ICT for energy efficiency at building and

territorial levels, makes a very comprehensive analysis on the technologies used and the

technological trends. The project recognizes 4 basic technological areas for project related to

energy efficiency neighbourhoods.

A) Design, planning and realization:

• Design: activities focused on the development of computer-aided solutions to support the design of integrated systems.

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• Modelling: the generation and management of digital representations of physical and functional characteristics of a neighbourhood. Information models become shared resources supporting decision-making from the earliest conceptual stages, through design and construction, operational life and eventual demolition.

• Performance estimation: is focused on the development of energy simulation packages to support the design phase in energy performance estimation.

• Construction and maintenance management: includes the development of tools to improve the efficiency of production, planning, procurement, logistics, site management etc.

B) Decision support:

• Performance management: is focused on the modeling of user preferences through AI. One example could be the assessment of energy saving obtained by controlling the heat energy use in a neighbourhood by exploiting meteorological data collected in real time.

• Visualization of energy use and production: focuses on the development of simple, easy understandable and comparable mechanisms for the visualization of energy performance data.

• Behavioral change: is related to the development of understandable and comparable mechanisms for the visualization of energy performance data.

C) Energy management:

• Intelligent monitoring and control: is related to the development and implementation of meshed, self-adaptable and easy to install sensor networks (i.e. hardware and software, operating systems and protocols), development of automation and control technologies, improved diagnostics, performance data analysis, smart metering and actuation, intelligent and predictive control systems etc.

• Energy brokering systems: is a system for exchanging information allowing utilities to exchange hourly quotations of prices at which each is willing to buy and sell electric energy. Utility systems must have bilateral agreements and transmission arrangements between all potential parties to allow exchanges to take place.

• Energy hub: is related to ICT solutions for the function and optimization of the energy hubs. The energy hub concept models energy flows of different energy carriers on the macroscopic level. A hub therefore is defined as a local concentrated set of energy

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converters and/or storages and its dimension can range from a single household up to an entire city or area model.

• Smart grids: is related to ICT solutions for the transmission grid at the neighbourhood, gathering and acting on information. For example automated reaction to improve the efficiency, reliability, economics, and sustainability of the production and distribution based on information about the behaviour of suppliers and consumers

• EE Services: business concepts and financing: is focused on innovative ways to exploit ICT solutions for energy efficiency by business models and financial tools.

D) Integration technologies are ways to integrate the ICT systems at a neighbourhood level.

• Process integration: can be defined as a holistic approach to process design and optimization, exploiting the interactions between different units in order to employ resources effectively and minimize costs. This technology area is focused on research activities to overcome limitations of process integration by exploiting ICT solutions capabilities.

• System integration and open data: open data corresponds to the idea that certain data should be freely available to everyone to use and republish as they wish, without restrictions from copyright, patents or other mechanisms of control. Intelligent control within a neighbourhood involves a wide variety of different technologies from different vendors and companies coexisting. Information exchanged through these technologies is heterogeneous. This technology area is focused on ICT (for example middleware, connections, gateways) to integrate information to allow the whole system to work properly. The availability of open data should facilitate this process.

• Interoperability and standards: many ICT tools are used in the life cycle of neighbourhood infrastructures and components, e.g. buildings - design and simulation tools, management tools, control and monitoring systems, energy trading systems). This research area focuses on increasing the interoperability among the current ICT tools, and how in the future they are applied along the life cycle of neighbourhood components.

• Knowledge sharing: is focused on mechanisms for the capture, structuring, and propagation of knowledge related to energy efficient neighbourhoods across organisations and within organisations themselves.

• Virtualisation of the built environment: is focused on the virtual mapping and representation of the built environment of the neighbourhood (for example augmented reality)

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• Communication: is related all ICTs focused on facilitating and optimizing the communication process among different stakeholders.

The project notices that the most addressed technological area is “Energy management”,

followed by “Integration Technologies” and “Decision Support”; the less addressed area is

“Design, Planning and Realisation”. Within “Energy Management” the most covered subarea is

“Intelligent Monitoring and Controlling”, followed by “Smart Grids”. Within “Integration

technologies” the two largest subareas are “Communication” and “System Integration and Open

Data”. Within “Decision Support”, the most addressed sub-areas are “Visualization of Energy Use

and Production” and “Behavioural Change”. Within the “Design Planning and Realisation”, the

“Design” subarea dominates.

With regard to the major technological trends, the project points out the following:

• Integration technologies will enable a cross-organizational, cross-domain and holistic approach for decision-making and interaction of stakeholders engaged on energy efficiency at the neighbourhood level. It will also promote new, common, inter-linked and wider access to reliable and affordable data related to energy efficient neighbourhoods (EE/N), including the consideration of privacy and security and the development of new business models. Integrated systems will facilitate the connection of the differing needs of building information model (BIM). A Knowledge sharing platform for EE at neighbourhood scale will enable access to intelligent digital catalogues and exchange of information between stakeholders while protecting the intellectual property rights of knowledge providers. It will also facilitate access to an increasing variety of e-services (e.g. e-learning and e-commerce) while decreasing the carbon footprint inherent to the mobility activities that used to be required to implement and/or enjoy these activities.

• Internet of Things (IoT) and Cloud Computing will be also integrated as they become more reliable and universal. Cloud computing technologies and Big Data methodologies will manage and enable the storage of huge amounts of energy related data provided by various interconnected nodes of IoT. In this context virtualisation of services will be a must. IoT and ubiquitous computing developments will provide access to a huge amount of energy-related data from each district´s infrastructure and enable the development of self-learning systems based on historical data and integrated with near to real-time data. These systems will make available dynamic information about behavioural patterns, supporting better management of energy efficiency at the neighbourhood scale.

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• Semantic data integration, protocols and standards for communication between neighbourhood’s components, and full interoperability between applications and systems, data bases and devices used by different EE/N stakeholders will be the foundations of this paradigm. A Neighbourhood Energy Management System (NEMs) will be implemented. Energy monitoring and control will be simple and universal. Building Management Systems (BEMs) will become part of the NEMs, together with multiple simulation, control and management tools (e.g. traffic, road networks, urban plans, energy production potential maps, energy distribution network and emissions).

• Privacy and security of energy related data will be a fact, enabling access to consolidated data for energy efficiency actions at the neighbourhood scale in a secure way by deploying computational intelligence and other security technologies for risks management and prevention associated to the management (store, share, exchange, etc.) of personal/aggregated or sensitive energy consumption data.

According to the EEPOS project, the (NEMS) operator needs an IT-based decision making

system. A company (or its partners) aiming for business growth on energy markets controlled by

ICT systems must have comprehensive knowledge on information flows within a neighbourhood

grid (IT, electricity, heat etc.). Such challenges will lead to a desire for bidirectional information on

demand and availability. Currently few neighborhoods buying, producing and selling energy exist,

but with increasing number of zero or positive energy buildings, the number of such regions will

increase and there for business opportunities are awaiting for companies eager to respond to the

challenge.

The E3SoHo project identifies as the main technological areas the following: a) optimised energy

management – integrating control of the lighting system, of the HVAC system, etc.; b) real-time

consumption information of one-family-apartments; c) connection through the Internet for remote

control, monitoring, assessment based on collected data, etc. Specifically the in-house energy

management systems have the following capabilities: a) near real-time monitoring and

visualization of electricity demand, b) possibility to monitor both locally (dashboard), c) possibility

to visualize the historical data.

As an example of the technical solutions deployed, we refer to the pilots of the E3SoHo project

that include the following main components:

Pilot A: • Smart meters and sensors for measurement of a) Energy consumptions

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(electricity, cold water, DHW and heating) of the dwellings as well as the global gas consumption of the building. b) comfort parameters c) behavioural parameters within the dwellings (open/close window sensors), d) DHW production by solar thermal panels.

• Data aggregators from several sources

• Communications network.

• Data processing engine.

• User interfaces.

Pilot B:

• Control cabinet

• Weather station

• Reed switches for windows

• Energy meters

• Hot water and heat meters

• Temperature and PIR sensors

• PLC controller and PC server.

• User interface (additionally, tablet for user interface)

1.4.4 Success factors, challenges, barriers and risks

The project S3C provides a set of key success factors for end-user engagement:

Activation

phase

• Provide added value

• Understand end-users

• Educate end-users

• Create commitment & appeal

Continuation

phase

• Effective feed-back, pricing & communication

• Variety of intervention methods

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• Ease of use

• Social comparison

• Reflection & learning

The S3C project identifies 9 key challenges for end-user engagement:

• Understanding the target group(s): Which instruments or approaches contribute to achieving better understanding of the enablers and barriers of target groups and the type of end-user interaction scheme best suited to them?

• Products & services: How can innovative products and services provide clear added value to end-users, while contributing to fostering smart energy behaviour?

• Incentives & pricing schemes: Which incentives and pricing schemes contribute to fostering smart energy behaviour?

• End-user feedback: What feedback information and which feedback channels contribute to fostering smart energy behaviour?

• Project communication: Which communication channels, information and marketing techniques contribute to recruitment and engagement of end-users in smart energy projects?

• Cooperation between stakeholders: Does involvement of non-energy stakeholders contribute to end-user engagement and smart energy behaviour?

• Bottom-up support: Which instruments or approaches contribute to facilitating end-user empowerment?

• New market structures: Which features of the interaction between end-users and energy market structures contribute to end user engagement and smart energy behaviour?

• Scalability / replicability: Which issues hamper and/or facilitate up scaling or replication of smart energy projects?

Consumer engagement can be achieved according to the S3C project basically with dynamic

pricing schemes and meaningful feedback. As far as it concerns dynamic pricing schemes,

various tariff structures may be offered for which different levels of peak clipping and reduction of

the energy bill have been reported. Key attributes for the success of dynamic pricing schemes are

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the rationale of the scheme, the number of time blocks used, the price update frequency, duration

of peak periods, rates and rebates offered, the price spread, the price components that are made

dynamic, and whether automated or manual control is applied. Regarding feedback, various

options can be used, such as in-home displays, websites, ambient displays, informative billing,

and smartphone apps. As a general finding, mixed feedback channels are considered best suited

to address a heterogeneous end-user population. Concerning feedback content, different types of

information can be delivered to the end-user, including current and expected usage rates, bill

predictions, historical comparison, differentiation by appliance, unusual usage alerts, social

feedback (comparison with others) etc. Direct feedback (e.g. real-time and historic usage) tends

to be somewhat more effective than indirect feedback (e.g. processed via billing), and also social

feedback appears relatively effective. End-user interest and involvement is assumed to be

increased by training, innovative customer service and support (e.g. using social media),

appropriate communication channels, face-to-face interaction and continuous information.

In the EEPOS project the barriers for energy management implementation on distribution grids

are related to the following:

• Immature technology

• Poor policy support

• Lack of research & development activities

• Lack of research in active end-user involvement

• Lack of standards

• Lack of open standards

• High implementation costs

• Low economic benefits

• Security and privacy of data

• Lack of skilled workers

• Poor compatibility between existing protocols, systems and standards (open and proprietary)

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The E-Hub project analysed the administrative, legal and technical barriers for renewable energy

production:

Administrative and

legal barriers

• Inefficient administrative procedures (high number of authorities involved, lack of coordination among authorities, lack of transparent procedures, long lead times, high costs for applicants etc.)

• Renewable energy not or insufficiently considered in spatial planning

• No or insufficient standards and codes for RES equipment (specifications not well defined, not

• Expressed in EU/international standards, etc.)

• Tenancy law and ownership law impede the development of building-integrated renewable energy technologies

Infrastructural

barriers

• Grid access is difficult to obtain (transmission system operators/ distribution network operators not open to renewable energy, lack of transparent procedures, long approval times, unfavourable cost allocation leading to high grid connection costs)

• Lack of available grid capacity (weak grid environment, lack of interconnection capacity, no or slow grid reinforcement and/or extension, grid congestion leading to curtailment)

Financial/ economic/

market barriers

• Renewable energy not cost-competitive under current market conditions (high capital costs, unfavourable market pricing rules, subsidies for competing fuels, long reinvestment cycles of building-integrated technologies etc.)

• Limited access to finance/high cost of capital due to high perceived risk

• Favourable power purchase agreements are difficult to obtain

• Power markets are not prepared for renewable energy (lack of access to the power markets, exercise of market power by

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large players, design not favourable for supply-driven RES, etc.)

• Lack of skilled labour (e.g. for planning and installation), problems with the guarantee/ warranty/ maintenance regime

• Restricted access to technologies (only a few technology providers, lack of production capacity, lack of R&D capacity), bottlenecks regarding feedstock supply (e.g. steel, silicon, etc.)

Information and

acceptance barriers

• Lack of knowledge (about benefits of renewable energy, about available support measures, etc.)

• Lack of acceptance (NIMBY opposition to renewable energy plants and power lines, public concerns about sustainability of biofuels etc.)

Barriers against the development of active demand and smart metering solutions are the

following:

• the acceptance of active demand by different power market participants,

• regulatory framework issues,

• existing contractual arrangements,

• conflicting interests of different power market participants,

• appropriate pricing models,

• monitoring of service provision,

• information management and,

• a number of risks that may worry potential users or suppliers of active demand systems.

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1.5 New conceptualizations in service models

The energy sector is undergoing remarkable transformations under the influence of a variety of

factor related largely to the development of new energy efficient technologies, the impact of ICT

on energy grids and the possibility of small scale energy production from the consumers and

other parties. The volatile business environment provides opportunities for business model

innovation that will harness the undergoing changes and will provide more value-added and

energy efficient solutions.

This section provides an overview of some modern approaches to business models with regard to

value creation and the participation of the customer in the value creation processes that originate

in the area of service management and service science. The description is only indicative and

aims to reveal some trends in service models that could provide insights for business model

innovation in energy. Such an attempt could be based on the assumption that energy is also a

service sector (insights for business model innovation may come frequently from unrelated fills as

well).

In the first section we focus on some foundational concepts of service systems that explain the

operation and can support the development of innovative service models. The concept of the

service system here does not coincide with an information system but refer basically to service

business models – which can be supported in their operation by information systems. Next we

present the concept of value co-creation, which has been `developed as the most fundamental

concept in the literature of service management and service science. Value co-creation moves

beyond the production process and emphasizes on the value creation process, which includes

the customer/ consumer/ user and other actors as well. Value co-creation and the new role of the

customer in energy efficiency projects is not only related to energy pro-sumption, but affects also

the efforts for customer awareness and engagement in efficient energy practices. In the last part

we present some alternative business models that emphasize on network-based and

collaborative approaches, as well as examples from other service fields, such as the tourism

sector and urban utilities.

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1.5.1 Foundations of service systems

Ferrario and Guarino (2009) provide a general ontological foundation for the notion of service

systems that regards services as complex systems of commitments and activities with

spatiotemporal characteristics that are related to the actual circumstances of people and

organizations. The proposed service ontology is informal in nature. They provide the following

definition of the core notion of service: “A service is present at a time t and location l iff, at time t,

an agent is explicitly committed to guarantee the execution of some type of action at location l, on

the occurrence of a certain triggering event, in the interest of another agent and upon prior

agreement, in a certain way”. Accordingly, any service is a commitment situation in which

someone (the service trustee) guarantees the execution of some kind of action(s) (by means of a

service producer, which may coincide with the trustee or be delegated by him) in the interest of

somebody who agrees (the service customer), at a certain cost and in a certain way. The

commitment act can be seen as a speech act that most of the times is codified in a document

(e.g. a contract, a SLA or an unofficial object). They make the distinction among the notions of

service commitment, service content, service availability, service process and service delivery. An

analysis of the key concepts of the ontology follows.

• Service Commitment. The key characteristic of service is the commitment. It is a temporal entity (or static event) resulting from an agent’s (trustee’s) promise to perform certain actions in the interest of potential beneficiaries in correspondence of certain triggering events. The commitment explains the “rules of the game”: what types of action compose the service, what types of agents are entitled to execute those actions, what types of agents may qualify as recipients, what types of events can become triggering situations.

• Service content. It concerns the kind of action(s) executed in a certain way to which the trustee commits. It characterizes a service in a prescriptive way by refering to “what” needs to be done for the benefit of the customer.

• Service roles. There exist three service roles. The ‘service trustee’ is the entity that commits to perform certain actions that provide service in the interest of potential beneficiaries in correspondence of certain triggering events. The ‘service producer’ performs these actions that are related with the delivery of the sevice; he may coincide with the service trustee or be a different entity, delegated by the service trustee. The ‘service customer’ is the beneficiary of the service process and agrees with the service trustee the terms of the service delivery.

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• Service process. It is a set of business processes that implement the service commitment. It characterizes the service in a descriptive way by analyzing “how” the process needs to be executed to bring benefit to the customer. The service process includes customized service production, delivery planning and coordination and service context monitoring.

• Service availability. It involves a service process running at a certain time and location. A service may be concretely available even if it is not actually performed and delivered.

• Service delivery. A service has to be distinguished from its actual delivery to a particular customer. Service production and availability can be different from service delivery. Typically the same service guarantees multiple deliveries, because it is not the service that is delivered, but its content.

• Service acquisition. It refers to the activities of the customer in order to receive the service content. Service acquisition typically negotiates a service offer resulting from service bundling and presentation activities on the producer’s side. Service acquisition includes service discovery, which is the event where the service trustee (or producer) and the service customer first meet together; service negotiation, which involves an agreement between the two parties, and service invocation, which refers to the event where the customer agrees to the service (not necessarily implying immediate production).

• Triggering event. It allows justifying the passage from service availability to service invocation. It may refer to a simple request made directly by the customer (in this case the service invocation coincides with the triggering event) or to the occurrence of a particular event that triggers the action (in this case a service may be available at a certain time even if none of its foreseen actions do actually occur).

• Service value exchange. It is an event that refers to the transfers of value as a result of a service production. It is based on the concept of reciprocity of value. Service value exchange is decomposed in Producer’s cost, Customer’s cost, Producer’s revenue and Customer’s revenue. While in the case of the producer, most of the times both for cost and for revenue the value has to be intended in terms of money, in the customer’s case things are more complicated. Even though there’s always an ultimate recipient of a service, we could also have indirect recipients of a service.

Based on this service ontology, Ferrario and Guarino (2009)propose a basic ontological layered

structure of services. A service is conceived as a complex event, with five main proper parts:

service commitment, service presentation, service acquisition, service process and service value

exchange. All the blocks are events characterized, roughly, by their temporal location and by their

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participants. Specifying a service amounts to constraining these events by imposing suitable

restrictions on their temporal locations and participants (“thematic relations”). The ordering

relationship of the service structure is not so much a temporal precedence (indeed most of these

events are temporally overlapping), but rather an (existential) ontological dependence

relationship: in order for an event at a certain layer to occur, some event at the higher level has to

occur. Ultimately, all the events belonging to the service process presuppose some acquisition

event, which in turn presupposes the service commitment.

Poels (2010) provides a conceptual model of service systems for the study of interactions in

service exchanges. Service is considered as a process, not as a resource having intrinsic value.

Service exchanges do not transfer services, but they are constituted of economically reciprocal

services. Furthermore, service systems are not viewed as value producers or consumers, but as

value co-creators playing roles of resource provider and integrator.

A service system is an aggregate of resources that are controlled by the system (as

configurations of resources). At least one operant resource must act in a service and at least one

resource must be acted upon, meaning that service implies the application of competences which

must be integrated with other resources to create value. The service systems involved in a

service are explicitly identified via value co-creation roles. A resource provider co-creates value

with another service system (i.e. a resource integrator) for the benefit of that other system by

providing/applying resources. A resource integrator co-creates value with another service system

(i.e. a resource provider) for its own benefit by integrating the resources provided/applied by the

other system.

Poels provides also some additional model views on the core model. They are the Service

System Composition View referring to the composition of the service system from other service

systems, the Accountability View referring to the constitution of the service system of service

agents, and the Service Process View referring to the constitution of service of service

interactions.

• This Service Exchange View shows that each service needs a reciprocal service. This means that when a service system provides resources for a service that benefits another service system, then this other service system must provide resources for a requiting service that benefits the first service system.

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• The Service System Composition View shows how service systems are composed of other service systems. The Service System Composition View can be used to keep track of the resources that at any given moment are comprised by a service system.

• The Accountability View shows that service systems can delegate their resource providing and integrating responsibilities to agents that can subsequently be held accountable for the service. Two accountability roles can be distinguished. A resource providing agent acts on behalf of the service system that is the resource provider in the service. A resource integrating agent acts on behalf of the service system that is the resource integrator in the service. An agent that acts on behalf of a service system is an operant resource controlled by the system.

• The Service Process view can be integrated with the Basic Service Exchange Model for identifying the state of a service in terms of the service interactions that have taken place or that are currently going on. Accordingly, a service can be seen as being composed of service interactions between the resource providing and integrating service systems.

Weigand et al. (2009) propose a Unified Service Ontology in which business services and

software services (e.g web services) are conceptually unified. On the basis of the unified service

ontology, the authors propose a Unified Service Model that can be used for value-based service

modeling and design; the design method that starts from a value model and helps to identify

services and transform them into web services. The Unified Service Ontology identify five salient

characteristics of services that apply both to business services and software services:

• A service is an economic resource (i.e. it is an object that is considered valuable by actors and that can be transferred from one actor to another).

• A service is always provided by one actor for the benefit of another actor.

• A service is existence dependent on the processes in which it is produced and consumed. In other words, a service is consumed and produced simultaneously.

• A service encapsulates a set of resources owned by the provider. More precisely, when an actor uses a service in a process, she actually uses the resources encapsulated by the service. When an actor acquires a service in an exchange process, the customer does not get ownership rights on the encapsulated resources, but only use rights.

• A service is always governed by a policy. This means that when a service is used, the resources encapsulated have to be used in compliance with a number of rules formulated in a policy.

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Weigand et al. (2009) propose also a classification of services (with core, complementary

enhancing, support and coordination services as major subtypes of services) and a Service Layer

Architecture that includes three layers (informational, utility and business) and can support the

integration of business and software services. The Service Layer Architecture aims to integrate

business services and software services. They distinguish three equivalent levels:

• The business level refers to economic services provided by an economic actor to fulfill a customer need.

• The informational level refers to software services that have the goal to produce information or enhance communication.

• The infrastructure level refers to software services that support other informational service, such as by storing, processing or transferring data.

Weigand et al. (2009) propose that their method, namely the Unified Service Ontology, together

with Classification Service Model and the Service Layer Architecture, can support identifying or

designing services in the business domain and import the results in the information system

domain for the design of Web services. For this, they outline briefly a service design method

consisting of three steps, that can bridge the business and software level:

• Step 1: Value model creation or adaptation. Here business activities are modeled from the business perspective with the use of e3-value (even though they admit that it has problems with large enough models).

• Step 2: Business Service Identification. Here management and coordination services are identified and business rules and policies governing the services are defined.

• Step 3: Software Service Identification. The goal of this step is to identify services at the informational level and infrastructure level

Wild, Clarkson and McFarlane (2009) provide the Activity Based Framework for Services (ABFS).

The concepts of the framework are drawn from activity modelling approaches found in IT-related

fields (such as task analysis, domain modelling, process modelling and the soft systems

methodology) that include a variety of issues related to business process modeling, human-

computer interaction, process engineering and design, etc., and tend to emphasize the internal

structure of business operations. The concepts are organised in three levels:

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• The Service Environment provides the general, external context for the operation of a service system; it has social, cultural, political and physical dimensions.

• The Service System is the core part of the framework. It is organised around the concept of the Service Activity; in other words, service activities are assumed to be carried out within a service system. The service system includes the concepts of Objects that are organized in a Service Domain, Goals and Values of the various Actants; service activities are carried out by Actants (people) and/ or Artefacts with have Structures and Behaviours that may affect the Objects in the Service Domain.

• The Effectiveness Measures of the Service System. There may be a variety of effectiveness measures, depending on the value (i.e., benefit) sought.

The service science approach is based on ten foundational concepts (Spohrer and Maglio, 2008).

• Resources: “everything that has a name and is useful”.

• Entities: complex and dynamic value co-creation configurations of resources that can initiate actions; all entities are resources, but not all resources are service systems entities.

• Access rights.

• Value co-creation interactions: the promises and contracts that entities agree to, because they believe following through will realize value co-creation for both entities.

• Governance Interactions: a type of value-proposition between an authority service system entity and a population of governed service system entities.

• Outcomes: the results of service system interaction.

• Stakeholders: customers, providers, authorities and competitors.

• Measures: quality, productivity, compliance, and sustainable innovation.

• Networks: patterns of routine interactions among service systems entities that are shaped over time.

• Service system ecology: the universe of all service system entities and the macro-scale interactions of the populations of different types of service system entities.

Alter (2008) focused on analyzing service systems as work systems. Alter’s approach is based on

the concept of the service system that produces services; service systems are work systems and

they can be understood and analyzed as work systems. In particular, he suggests that any

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purposeful system within a business or governmental entity can be viewed as a service system

because its competences are being applied to produce something valuable for someone else.

The vocabulary of a service system (as a work system) is the following:

• Processes and activities cover a full range of situations that might involve highly structured workflows.

• Participants (not users) refer to humans that participate in the work processes.

• Information includes databases, documents, shared knowledge or even unrecorded discussions and commitments.

• Technologies refer to technological resources used in the work processes.

• Products and Services refer to the physical things or information as potential part of the services provided to the customer.

• Customers include the direct beneficiaries of whatever a work system produces, as well as indirect beneficiaries.

• The environment includes organizational culture and relevant regulations, policies and procedures, competitive issues, organizational history, and technical developments.

• Infrastructure consists of (“human, information, and technical resources that are used by the work system but are shared with other work systems and managed and controlled outside the work system”.

• Strategies refer to the value proposition of the work system for its internal and external customers and its production strategy.

1.5.2 Value co-creation and customer-oriented business models

In this section we provide a brief overview of the concept of value co-creation and the new role of

the customer as contributor in the service value. The new thinking for the role of the customer

elaborates on the concept pro-sumer and enriches it with further opportunities for increased

customer participation. Some new roles for the customer participation in value co-creation

processes are also discussed.

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1.5.2.1 The concept of value co-creation

In the recent years the discussion about the role of the customer and the relationship with the

company has shifted to new directions. The customer today is not considered anymore a passive

actor, whose role is pretty much related to consumption, but an empowered and motivated

individual that participates actively and collaborates with the business company for the

development of products, services and solutions and the co-creation of value. Customer

participation has changed the business mindset and it offers new strategic opportunities. Hence,

emphasis has moved to developing relationships with the customer and co-creating value.

Value co-creation has added new dimensions and has influenced largely the contemporary

research, becoming a major research topic, especially in the field of service marketing and

management, with several outstanding research efforts being based on it and sponsoring it. One

can distinguish here the development of the Service Dominant (SD) logic (Vargo and Lusch,

2004; 2008) and Service Science. SD logic is based on the concepts of ‘service’ as a process of

using ones competences and resources for the benefit of another party and ‘value co-creation’ as

a process of collaborative value creation between the customer and other economic and social

actors; value is determined as ‘value-in-use’ and ‘value-in-context’. Service science was proposed

with the purpose to understand the nature of service system entities (how they access and

configure resources), their interactions and the possible outcomes of those interactions (Spohrer

et al., 2008) with the utmost goal to create a research basis for boosting service innovation.

Several other research efforts have been exposed and positioned with respect to SD logic.

Gronroos (2011) goes one step further to suggest that the customer is, in fact, the creator of

value, while the providers may potentially participate in the value creating processes of the

customer in certain circumstances, either by facilitating the customer, when they provide the

resources the customer uses for the creation of value, or by co-creating value with the customer,

when they interact and collaborate directly. Specifically, the value creation process takes place in

three spheres (Gronroos and Voima, 2013):

a) The provider’s sphere, where the firm creates value by producing process resources

and processes for customers to use and, hence, facilitates customers’ value creation.

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b) The customer sphere, where the customer creates value as ‘value-in-use’ (during use),

independently of the provider, by integrating resources and adding self-resources. Here

the customer is the value creator, while the provider is a producer of the resources the

customer integrates in his process of value creation and may participate in the process

either as value facilitator or as value co-creator. When acting as a value facilitator, the

supplier cannot create value for customers and it is indirectly involved in the customers’

value creation by providing inputs (resources) into customers’ self-service value-

generating processes.

c) The co-creation sphere, where the customer interacts directly with the provider for the

co-creation of value. Here the provider moves beyond providing inputs and directly

interacts and engages in the value generation process of the customer. The customer on

the other hand only in direct interactions between the user and the firm can the user get

the opportunity to participate in the firm’s production processes and be a co-creator.

A similar approach of the provider as value facilitator is adopted by Heinonen et al. (2010), who

suggest instead of focusing on how customers can be engaged in co-creating with the firm,

service providers should rather focus on becoming involved in the customers’ lives.

Next to the direct or indirect contribution to the execution of the business processes for the co-

creation of value, the customer has a wider impact on the value creation, which is related to his

role as determiner or evaluator of value (Vargo and Lusch, 2008). The customer is the not only

the subject in the usage or consumption process, with his identity, perceptions and intentions, but

also provides the context (Vargo and Lusch, 2008) and, hence, the meaning to the consumption.

Lusch, Vargo, and Tanniru (2010) propose the concept of Service Life Cycle Management

(SLCM), which is based on product life cycle management and adapted to the S-D logic. The

phases of the SLCM refer to service conception, delivery, continuing dialog among the service

provider and recipient and perhaps the service community, on-going service evaluation and co-

creation of revised service offerings. Next they propose a model of “learning to serve in a value

network” that explicates how organizations are able to serve by learning and adapting constantly

their offer to create competitive value propositions. In brief, an organization enhances its chances

of serving by ‘liquefying’ (i.e. separating information from a physical form) information resources

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and re- configuring resources and business processes around form, time, place, and possession

of resources and by improving upon its relieving and enabling processes. This leads to the

organization improving its ability to offer more competitively compelling value propositions. Next

the organization receives feedback indicated by a variety of organizational performance

measures, including cash flow. Hence, the outcome is not necessarily only profits or cash flow,

but feedback or learning. When the results lead to positive cash flow the organization is able to

acquire the resources and service(s) it needs to survive, grow and prosper thereby reinforcing the

positive learning loop.

1.5.2.2 New roles for the customer in value co-creation

In the literature we can find plethora of references to the significance of value co-creation and the

disruptive impact it may evoke on the business practices, as well as in the social life in general.

The emphasis on the customer as a contributor of value provides the foundations for a very

challenging new business ideology that can produce innovative business models and practices.

Value co-creation has emerged as a new concept that rebalances the focus of interest from the

conventional business-oriented approaches (e.g. the unidirectional flow of goods and value from

producers to consumers) to customer-oriented ones (e.g. collaboration with the customer in the

different phases of the product life cycle, emphasis on complete solutions for the customer, etc.).

The concept of value co-creation refers in general to the active participation of the customer in a

variety of activities performed with the support of the service provider, in order to create value

collaboratively. In general, the value co-creation processes can be characterized by a variety of

factors, such as the identity of the customer (e.g. business, individual, groups, etc.), the roles of

the provider and the customer (e.g. initiator, contributor, coordinator, etc.) and the activities the

customer performs (e.g. production, design, refinement, finishing, selection, feedback, etc.), the

kind of value/ benefit created (e.g. economic or social value, experience, self-adaptation, etc.),

the allocation of value between the actors and other stakeholders (e.g. self, another, the provider,

the society), the ways of interaction (e.g. face-to-face, technology-mediated, etc.), the motivation

for participation, etc.

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For many companies the customer is much more than the consumer of their products and

services and the evaluator of their quality. The customer today has a more complex role and may

participate in a variety of situations. Quite often the customer makes a direct contribution to the

products and services consumed in a kind of ‘co-production’ (Vargo and Lusch, 2006), such as in

self-service or do-it-yourself settings, by performing some tasks that should normally be executed

by the provider. Next to the production processes, the customer may participate an contribute

directly or indirectly in a wide spectrum of business activities, including in marketing activities,

such as promotion, selling, branding, etc., in product or service design activities, such as in

customization or the development of new design models, in different phases of new product or

service development processes, such as ideas generation, testing of prototypes, etc., in the

efforts for business process improvement, such as with feedback, etc. In certain cases the

customer may only assist somehow the provider, however in some others cases customer

participation may cover the majority of the tasks or extend to the total execution of the business

processes (e.g. in e-banking, where all the aspects of the service e-banking are performed by the

customer) or cover some of the most critical parts of the value creation process.

The social media have changed the way that companies interact with their customers and

multiplied the impact of the customer feedback (Gallaugher and Ransbotham, 2010; Kaplan and

Haenlein, 2010). The customer can now interact with the company, rate the quality of the services

and provide feedback or recommendations to other in a direct and instant way. New business

models, services and applications emerged that are based on customer feedback, as review and

recommendations from the customers are regarded more independent and trustworthy than when

they come from professionals. The social media and the customer communities can play an

important role in the marketing activities of the companies, such as advertising and promotion.

For instance, Starbucks uses a mix of social media, including their home-bred social platform

‘MyStarbucks Idea’, Facebook, Twitter, Youtube and Foursquarre, for communicating with the

customers, receiving feedback, comments and ideas from the customers and fostering the

communication between the customers for topics related to the company and its services

(Gallaugher and Ransbotham, 2010).

Value co-creation can refer to different domains of activities such as co-production, collaborative

innovation, co-design in the service solution and integration of resources.

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• Co-production is the execution of some tasks by the customer, who substitutes, complements or enhances the service provider in the service production and delivery processes. It usually occurs with the provider offering a platform for collaboration and the customer participating and contributing -either voluntarily or necessarily- in order to achieve personal objectives, support the provider in the execution of his tasks or improve the characteristics of the service. Certain types of co-production is self-service and ‘do it yourself’.

• Collaborative innovation refers to the activities performed for the development of a new service or application, or the improvement or enhancement of existing ones with new features; such activities move beyond the regular/ core product development processes and they may cover all the phases of the product life-cycle, from idea generation, to design, to marketing and after sales services.

• Collaborative design of the service solution refers to making decisions for the features of a service or application in order to bring it closer to the customer’s preferences and needs. The customer sets the (new) requirements of the service or application and the provider adjusts it. Certain types of collaborative design are the customisation of the offering and the personalisation of the solution.

• Integration refers to the aggregation of services and applications, either from the same or from different providers, and their functional integration in a new service composition or a service sequence. Service integration becomes necessary because of the complexity of customer’s needs, that cannot be met frequently by simple, atomic services. A certain kind of integration is the packaging of services, in which the provider proposes comprehensive solutions that include many separate service elements. In certain cases the customer is enabled to create ‘packages’ with his own initiative (e.g. in traveling services).

1.5.3 Other business models

In the last section we describe some examples of alternative business models. We focus on

network-based business models, such as business ecosystems, value networks and value

constellations, and we present some “alternative” business models that demonstrate the

intermediation process in the tourism industry and the value creation mentality for providing

community services in the utility sector.

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1.5.3.1 Network-based business models

It is acknowledged that access to resources is not restricted to one supplier, but it is spread

across an extended network of suppliers and partners, as well as communities of customers/

users. During the 1990s technological developments and new managerial trends (e.g. focus on

core competencies and outsourcing) boosted the growth of networks of business collaboration.

The focus of strategic analysis has moved from the single company to different forms of business

networks. The idea that value co-creation occurs in different kinds of networks, with the

participation of customer, suppliers, communities and other stakeholders has been emerged and

different names have been used for this, such as ‘value networks’, ‘business ecosystems’, ‘value

constellations’, etc.

Normann (2001) suggests that the fundamental structure of a value network can be

conceptualized in terms of the form of resources, the time they are available, the place they are

available, and the possession or use of these resources. Higher value potential (‘density’) can be

achieved by altering the structure of the value network; in fact, value networks are constantly

adapting to improve density. Once the entire value-creation network, including the customer and

communities, is seen as a system of reciprocal value co-creation, all links/ parties in the network

have their own value-creation activities.

The concept of business ecosystems is a recent addition in the literature of business networks

(Moore, 1996; Iansity and Levien, 2004) that steps forward the movement towards symbiotic and

co-evolutionary business networks. A business ecosystem is “an economic community comprised

of a number of interacting organisations and individuals, including suppliers, producers,

competitors, customers and other stakeholders, that produces goods and services of value for the

customers” (Moore, 1996).

The business ecosystems have several specific characteristics. For instance, they concentrate

large populations of different kinds of business entities. They transcend industry and supply chain

boundaries and assemble a variety of organisations that can complement each other and

synergistically produce composite products. Business ecosystems support customer participation.

Interdependence and symbiotic relationships are inherent attributes in business ecosystems; as a

result, the participants counter a mutual fate and co-evolve with each other. But in parallel,

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members compete with each other for the acquirement of re-sources and the attraction of

customers. Co-opetition, the concurrent cooperation and competition of business entities, is

another intrinsic attribute of business ecosystems. Such structures are extremely favourable for

small business entities (SMEs), which can coalesce around, be supported by and co-evolve with

larger and keystone corporations.

Normann and Ramirez (1993) refer to value constellations as the value creating system that

encompasses all the actors that participate in value creation. The focus of strategic analysis is not

the company or even the industry, as it is suggested by the traditional approaches (e.g. value

chain, the five-forces model, swot analysis, etc.), but the value-creating system within which

different economic actors-suppliers, business partners, allies, customers, work together to co-

produce value. A single company rarely provides everything anymore; instead, the most attractive

offerings involve customers and suppliers, allies and business partners, in new combinations.

Successful companies conceive of strategy as systematic social innovation: the continuous

design and redesign of complex business systems The key strategic task is the reconfiguration of

roles and relationships among this constellation of actors in order to mobilize the creation of value

in new forms and by new players.

The underlying strategic goal is to create an ever-improving fit between competencies and

customers and to mobilize customers to create value for themselves. Companies create value

when they make not only their offerings more intelligent but their customers (and suppliers) more

intelligent as well.

1.5.3.2 Alternative business models from related fields

The transformation of the tourism industry and the re-intermediation that takes place there

provides a useful example (Werthner and Ricci, 2004). Tourism products require information

gathering on both the consumer and supply sides. The suppliers market is quite fragmented and

differentiated. Typical suppliers are the hotels, transport companies and restaurants. Hotels and

restaurants are mostly SMEs, while transport companies are mostly big companies. The tourism

industry is dominated by various intermediaries. Tour operators can be seen as product

aggregators, and travel agents act as information brokers, providing the final consumer with the

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relevant information and booking facilities. CRS/GDS (central reservation systems/global

distribution systems), also include products such as packaged holidays, or other means of

transport. National, regional and local destination management organizations are usually public

organisations (or publicly funded) and act on behalf of all suppliers within a destination. The

business model for the tourism industry is presented in figure 12.

Figure 12: The business model for the tourism industry (Werthner and Ricci, 2004)

Some trends in the tourism industry are the following:

• Tourists are addressed by more players, and they play a more active role in specifying their services.

• Travel agents see a diminishing power in the sales channel, prompting them to put more emphasis on consulting and more complex products.

• Internet travel sites are providing new market functionality and technology, focusing on personalized intelligent tools for travelers.

• Destination management organizations are developing cooperation models within destinations; they will occupy a new role as consolidator and aggregator.

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• Based on mass-customization and flexible configurations, tour operators will blur the boundaries between the individual and packaged tour.

• CRS/GDS demonstrate an “Intel inside” marketing strategy by linking to major tourist Web sites to increase transaction volume. They also move into direct sales for the retail segment.

• Suppliers will increasingly form alliances and support electronic direct sales, increasing price competition as well as price differentiation. They will also redefine customer processes such as electronic ticketing or automated check-in.

Normann and Ramirez (1993) refer to the example of two French utilities, Generale des Eaux and

Lyonnaise des Eaux. Their business was at the beginning the provision and management of

water in urban areas. In addition to water, Generale and Lyonnaise and their numerous

subsidiaries provide cities and towns with everything from heating systems, sewers, and utilities

to hazardous waste treatment, municipal construction, nursing homes, golf courses, cable

television, the management of public areas, and even funeral services. The companies have also

become leaders in emerging markets for "green" industrial services, such as waste management.

In fact, all these activities grow organically from a particularly French understanding of the

business that Generale and Lyonnaise are in and of the special skills that they possess. Their

distinctive role can be described as “amenageur des villes”, i.e. their business is not any one

service so much as the production of entire systems of services, and their core competence is not

water or even utilities but rather the financial, social, legal, managerial, and technical engineering

that ensures the smooth operation of public service infrastructures. Their business challenge is to

find new services to offer an existing customer base and so to exploit further their expertise. They

have also emphasized the technological synergies that integration can provide. In Paris, for

example, they use the garbage and trash their street-cleaning subsidiaries collect to fuel

cogeneration plants. Ten percent of Parisians heat their homes with electricity produced by

garbage incineration.

Providing integrated solutions are proving to be a strong competitive advantage. In contrast to

companies that specialize in only one aspect of public-infrastructure provision, Generale and

Lyonnaise can provide cities and towns with an integrated package of offerings. The advantage

for the client is that some activities, for example, cable television or hazardous-waste

management, can take years to become profitable. The city cannot afford to take on the

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development expense itself, and a tender for this kind of infrastructure must take into account

several years of operating losses. They have not merely learned to combine expertise in

construction, engineering, finance, operational management, project management, risk

management, infrastructure development, contractual law, social policy, and much more, they

have made consistent use of the customer logic to leverage this bundle of value-creating

activities.

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1.6 Conclusions

The energy sector is undergoing remarkable transformations under the influence of a variety of

factors related largely to the development of new energy efficient technologies, the impact of ICT

on energy grids and the possibility of small scale energy production from the consumers and

other parties. In these circumstances there are a lot of opportunities for technological and

business innovations. Especially at district or community level, there are new needs and new

prospects for energy efficient solutions. The energy companies have a great chance to reassess

their business models to accommodate the changes of the business environment and to combine

their resources, technologies and capabilities in new ways that will bring business model

innovations.

The purpose of this deliverable was to provide an overview of the business models used for

energy efficiency initiatives at district and urban level and provides an in-depth analysis of their

characteristics and expected outcomes. The deliverable supports the general purpose of the

project, to deliver an ICT service platform that will enable the development of new services and

practices for energy efficiency and low carbon activities at neighbourhood, city and district levels.

In particular, the deliverable can support the development of new and innovative business models

for energy efficient projects and can contribute in the business exploitation of the results of the

project by energy providers, after the end of the project.

The deliverable analysed the typical business models used by energy companies for the

development of efficient energy solutions from an alternative perspective moved that beyond the

conventional financial aspects of a business models to examine comprehensively the business

operations with regard to energy efficiency practices. Emphasis was put on the capabilities and

the role that other stakeholders may have in these business models. The role of other

stakeholders, such as public bodies and local authorities, building managers/ owners and urban

planners/ designers, in these models and in general in energy efficiency project is also discussed.

Emphasis is put on the new role of the energy consumer, who is empowered by renewable

energy technologies and by ICT technologies to produce and disseminate energy at a micro scale

and to adopt smart energy practices in their everyday lives. The analysis of similar European

R&D projects provides useful practical implications of the business models developed there,

Deliverable: D 1.6


94

explores the roles of the critical stakeholders, identifies the critical success factors, investigates

the barriers and the anticipated risk factors and reviews the key technologies used and the

technological trends. The concepts of service systems, network-based and collaborative

approaches, value co-creation and the new role of the customer in energy efficiency projects can

support the development of innovative service models.

The state of the art analysis in energy efficient business models provides the foundational layer

for the development of new and innovative business models for energy efficiency projects. Next

phases in the research is to enrich the existing business models with concepts from value co-

creation, emphasize the role of the consumer, develop new business models for other aspects of

the energy efficiency projects, such as consumer awareness and engagement.

Deliverable: D 1.6


95

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