Phase II of Task 24 takes the theory into practice. Building on the solid theoretical foundations of Phase I, we now look at the:
- Why? and
- So What?
We use a Collective Impact Approach methodology and storytelling as the overarching language and bring together Behaviour Changers from all sectors (industry, government, research, middle actors and the third sector) with the end users whose behaviour they are ultimately trying to change.
This Task will focus on identifying and creating effective business models providing viable DSM value propositions that lead to the growth of the demand market for energy efficiency. In addition, this Task will focus on identifying and supporting the creation of energy ecosystems in which these business models can succeed.
Task 25 – Phase 2 – Business models for a more effective market uptake of DSM energy services for SMEs and communities
Summary of Phase 1 of Task 25
In 2014, the Demand Side Management programme (DSM) run by International Energy Agency (IEA) started this research project on new business models for energy efficiency services (IEA, 2014). This research is part of a growing body of research aimed at understanding what is causing the apparent lack of market uptake of Energy Efficiency. (IEA 2015) new business models for energy services are considered to be a key delivery mechanism for Energy Efficiency and savings. (Boons and Lüdeke – Freund, 2013). A growing understanding is that in many business models underlying Energy Efficiency services, the supplier perspective is dominant. Too little attention is given finding appealing values that go beyond financial savings and profitability, values only appealing to a certain number of people (Hienerth et al., 2011) (Arevalo et al, 2011) (Gentile et al., 2007; Vargo & Lusch, 2008). The premises behind this observation is that the current system (the established system) is technocratic and push oriented and a more user centered approach will be more effective in creating market uptake (Tolkamp et al 2017). This is directly related to the fact that service value is being co-created with the end user. No user means no service. Business models and energy services focusing on the customer perspective and their unique buying reasons for energy efficiency are considered to be the next step in creating a larger market uptake for energy efficiency (Nilsson et al 2012) (Hiernerth et al, 2011). The capability to identify user needs has been found to indeed correlate positively with profit generation and the increase in market share among other indicators, in other sectors (Janssen, 2015).
The key question guiding our work was if indeed these new types of business models and energy services are more effective than the so far rather technocratic and technology push approach type of business models. And if the dynamic capabilities of entrepreneurs and providers of services that facilitate a focus on this customer perspective and tailor their services (Teece, 2011) indeed contribute to a more effective uptake of the product and service. These dynamic capabilities relevant to user centered service development include sensing, conceptualizing, orchestrating, stretching and scaling (Den Hertog et al. 2010). We also investigated if a better alignment of the business model with context was helpful in delivering energy efficiency more effectively because a business model design is strongly influenced by context, e.g. existing legislation and available subsidies, other bottlenecks and constraints, and various players within the current energy production and consumption system. (Bidmon and Knab, 2014; Provance, Donnelly, and Cara Yannis, 2011; Geels and Schot 2010; Huijben and Verbong 2013; Mormann 2014). For a more substantial context analysis for each of the participating countries we refer to the country reports.
The creation of a user centered business model and value proposition, the dynamic capabilities of the entrepreneur/enterprise in navigating the context and user related issues and finally, the context in which the business model and service is deployed were therefore at the core of our empirical analysis.
These findings are based on an analysis of 46 business models in the Netherlands, Sweden, Norway, Austria, Switzerland and South Korea as part of the IEA Demand Side Management Task 25, Together with national experts, we first drew up a longlist of more than 350 Energy Efficiency propositions we could in the participating countries using a quick scan on internet and using the networks of the energy agencies involved. We focused on a mix of retrofitting, lighting, smart solutions and total solution (one-stop-shop) products and services. We explicitly excluded Energy Service Companies (ESCo) and Energy Performance Contracting (EPC) services for non-residential segments because these were already investigated in Task 16 of the IEA DSM. Based on initial information collected in this longlist we made a selection of propositions that would be further analysed to understand their business model, the accompanying entrepreneurial dynamic capabilities and their interaction with context. The selected propositions were chosen to represent variety in success (market share and market uptake) and in alignment or challenging relationship with the broader context (policy, consumer attitudes, regulations), thus representing either a clear fit or stretch relationship with context(Huijben 2015). The selection allowed for comparison of similar smart service, retrofitting, total solution and lighting propositions, operating in different political, institutional, technological, socio-cultural contexts.
We started fleshing out 46 business models using the business model canvas and customer value canvas designed by Osterwalder and Pigneur (2010). During this analysis of the business models, in each of the participating countries we organised a workshop with the entrepreneurs being analysed and other stakeholders from industry, academia and the policy arena to discuss our initial findings. What became quickly apparent is that the canvasses are a snapshot, while the underlying business is a very dynamic and complex entity which operates in a system, which is also very complex, with its own dynamics, something the research field has been researching extensively (Boons, F., & Lüdeke-Freund, F., 2012,),[i]but for the purpose of drawing out basic information about the business model and the value proposition the canvasses by Osterwalder, Pigneur and Clark (2010) were sufficiently adequate. To incorporate the more dynamic view on the business model we investigated the entrepreneur’s journey for each of the 46 propositions as well, which is a description of the business and how it has evolved over time by means of interviews with either the CEO of the companies or the most relevant employee. Also, we identified how the system influenced this development by performing a context analysis by means of literature analysis of relevant material on the context, including grey literature such as websites (i.e, Eurobarometer, Eurostat), and or interviews with key representatives for industry, government, NGO, academia, business and other sectors. In order to collect our data the authors and national experts interviewed all entrepreneurs both on their business, their dynamic capabilities and their perspective on the system they operate in, and we focused on the user centeredness of the business model and the entrepreneur (Tolkamp et al. 2017). As such the data is a mix of self- reported material and material collected on the businesses from for example internet, or provided to us by the entrepreneurs, e.g. on market share and number of clients, turnover etc. [ii]
Key findings Phase 1 and outlook for future research and activities: Phase 2
The findings in Phase 1 of the research of Task 25 are more or less general for many sectors:
- There are some major differences between a business model that is supporting a product compared to the business model that is supporting a service. Those companies that have made the adjustments towards service orientation do report a better uptake and thus are more successful than companies that have a product oriented business model
- In order to conduct a service oriented business (deliver services instead of a product), an entrepreneur needs to have developed at least four capabilities at an acceptable level: sensing user needs, conceptualizing, orchestrating and scaling.
- The context the business model is operating in can be supportive, but also inhibiting the growth and success. Most policies for example are inhibiting service oriented business models and do not focus on the use phase, and essential phase for services.
Four main strategies can be identified with respect to how companies deal with a lack of uptake and context issues.
- The importance of this research is:
- The three levels of business model, entrepreneurial capability and context fit or stretch are strongly interrelated and in order to be successful, the entrepreneur has to improve on all these levels.
- The description of the service ‘version’ of the business model canvas has not been done before, and provides a new tool for business model analysis.
The outcomes of Phase 1 of the Task 25 research for the energy market, is that it provides new knowledge on how stimulation programs should be designed, as well as which initiatives need stimulation. On both national and individual business level there new knowledge was developed on how a business model should be assessed and can be adjusted in order to become more successful in the market. As most entrepreneurs seem to be more or less unaware of their options in this area, a quick tool to scan the business model has been developed (fittoserve).
Our research in Phase 1 was not comprehensive but did allow for the exploration and identification of interesting business models and strategies for energy efficiency focused services and how these could be supported by policy and or other institutional arrangements. We are however just starting to understand what the business models delivering energy efficiency services need to do to be successful, which sectors need what type of models, and what is needed from policy makers or other institutional players in terms of support. In sum, much more research and other activities are needed.
Below we briefly discuss the different topics and activities we feel are in need of more research and then continue with a proposal for a work plan for Phase 2.
Objectives/Subtasks for Phase 2
Subtask 2a: Increasing our comparison, including other sectors and going beyond energy efficiency to also understand sufficiency/circular economy type of business models.
In Phase 1 of Task 25 we focused explicitly on the following type of business models: retrofitting (focused on residential sector and intermediaries delivering retrofitting solutions to residential sector); total solutions, again mostly focused on residential sector and some SMEs; lighting solutions, and smart services such as smart metering, home (energy) management systems. We started with a fifth category (heating), but due to lack of suitable cases in all participating countries we had to abandon this category.
As described above, the contours of matches between one of our four business model strategies and a specific sector are emerging. To increase our understanding and keep up with the emerging trends we propose to include similar business models from other countries in our analysis, for example the UK and other participating countries in the IEA DSM TCP. In addition we propose to focus on an additional number of categories of energy efficiency business models. Part of this expanding of our focus we explicitly propose to start also exploring the business models focused on sufficiency and circular economy and how energy and efficiency are embedded in these and also include combined business models of both Energy Efficiency and Renewables.
The list below is preliminary and it can be changed or increased based on needs of interested partners:
- Broadening the scope to understand how the framework (business model, capabilities, context) applies to other sectors, specifically:
- Demand Response energy service business models
Successful demand response business models are necessary for a good operation of smart grids. At present, most research on these type of business models focuses on identifying the value and business opportunities for the different type of stakeholders. Paradoxically, although by definition demand response services focus on the use phase, a critical element of success, namely incorporating the needs of the actual users or alternatively the providers of flexibility, is largely undervalued and user are often wrongly represented in the design creating important mismatches in use (Breukers et al, 2017) (Sissini et al. 2017). Demand response services focused on both residential sector and larger building types such as hospitals, universities etc. are mostly designed from a technocratic and supply (utility or grid actors) perspective, having technological and system requirements lead instead of user needs. Consequently, demand response services are not often combined with other (e.g. smart) and potentially more valuable services to end-users, e.g. combined with energy efficiency or multiple benefits. An additional challenge is that the owners of the building are sometimes not the actual user of energy and thus the provider of the flexibility. Instead of focusing on the ‘traditional’ technocratic and supply driven type of business models we would explicitly search for alternative models, for example such as Restore; a Belgian company that aggregates multiple loads, a demand aggregator, or Community driven Virtual Power Plants where community needs are leading.
- ICT and (open) data based energy service business models
ICT and open data are considered key drivers for future energy services around for example smart grids and smart buildings, and their transformative role is being investigated by multiple stakeholders, including even the world bank (2012). What lacks investigation however, is again how user centeredness can be incorporated in these type of business models, for example in innovative use of data to for example design neighbourhood energy management systems instead of home energy management systems, or virtual power plants, or in models where ownership of metered data remains with the end-users and the collaborate to aggregate that data and sell it.
- Deepening our understanding about how the four different strategies relate to specific sectors.
- ICT and automation are very different sectors compared to retrofitting or insulation, and different segments such as households, SMEs and commercial buildings might also benefit from different business models and strategies. So far we do see a pattern where retrofitting business models seem to be centered mainly on the second strategy (reframing what you push), whereas the smart service for example, are often a hybrid between the second and the third strategy (pushing something else). and we wish to increase our understanding of such matches.
- Deepening the understanding of the retrofitting sector.
- All countries that participated in Task 25 phase 1 reported a difficult, traditional and fragmented market for retrofitting. The market is dominated by small, very product oriented contractors and installers and as a result, the house owner is ‘lost’ and insulation and retrofitting does not take of (as the unmet potential shows). Despite various stimulation programs, like subsidizing the material. With the knowledge and insights of phase one (specifically: the need to take the use phase in focus, close interaction with the end user) phase 2 can zoom in on this specific sector and design the contours of a new and effective stimulation program.
- Contributing to the development of new service business models for the energy sector.
- One of the key outcomes of phase one is the service oriented version of the business model canvas. The most important differences with the product oriented version are a different focus on the client relation (continuous relation, with the transaction as a starting point), the revenue model and the partner relations. Phase 2 can focus on these new, service business model building blocks and contribute to the knowledge about such service business model:
- Deepening our understanding of different partnering forms in new service business models in the energy sector.
- Many new business models are emerging where users have new roles (other than client), but are also partner and sometimes users are even the main developers of the business model. This occurs for example when dealing with peer-to-peer or when community-to-business type of models where the users become aggregators. These new roles impact the business model profoundly. Not only the partner building block of the business model changes, with new roles, new interactions between provider and user/client, but it also impacts on the revenue model: e.g. business models using new payment schemes such as blockchain such as presented by David Shipworth at the DSM academy. And the resources block of the business models change for example because of the use of (consumer) data as a primary resource and activity in the model. All these changes are profound in the business model innovation field focused on the energy sector and under researched.
- In the business innovation field in general, but in the energy sector in particular there is a dire need for research on cases that explicitly focus on delivering more than just energy efficiency, but that help create systemic change.
- These type of models for example aim to combine energy efficiency, renewables but also aim for sufficiency and or circular economy. In addition this is where multiple or additional benefits find a place in the business model, and multiple value creation is at the heart of the model. These business models are a vastly understudied field in the energy field. It is imperative to understand these models and their implementation. Only a few authors focus on this element. Hiteva and Sovacool (2017) for example discuss how the justice approach can be used to innovate business modelling and also focus on value such as influence on decision-making, participation and fair process. Bocken et al. (2014) discuss new sustainable business models where both stakeholder interests, societal and environmental needs are balanced. The research for this specific topic will lead to a deeper understanding of the underlying mechanisms in this specific type of business model. These include best practices, patterns in other (non-energy) sectors and their applicability to EE services.
Subtask 3a: Deepening our understanding of the issues explaining the inertia of EE uptake
In this subtask we want to explicitly focus on the role of agencies, governments (i.e. context players) in stimulating market uptake of energy services, especially for smaller companies. Few authors are investigating the impact of particular policy instruments on the viability of specific business models (Al-Saleh and Mahroum, 2015) or how public support can help businesses become more service oriented (Plepys et al., 2014). Plepys et al. (2014) conclude that the current market is biased against forward looking business models that do not bring immediate benefits. Secondly, powerful market players oppose these business models because they challenge the competitive advantage of mass production
But much more research is needed, especially in the energy related sciences. Questions such as: what would be effective programs to stimulate demand (insulation and retrofitting), how to solve the hopelessly fragmented market of contractors etc. are in dire need of investigation? This is essential in the success as well as the process of servitisation. In order to tailor such a program to a specific national context, this programme will be co-created with local agencies. Below we explain the above need in more detail.
Service orientation in a business model, and a focus on the use phase to allow energy efficiency to be experienced by a user, for example in terms of the comfort it provides, or control, or ease, are clear drivers for successful uptake of an energy efficiency service. Based on the analysis of the 42 cases in Sweden, the Netherlands, Austria, Switzerland, and Norway we can conclude that those service oriented business models that indeed become big are able to become big thanks to a mother company. This mother company, for example a well-established utility, a university, or holding company, provides them with the following elements: access to a well-established client base and relationship, and therefore also valuable customer data, branding, money, to set up adequate user sensing dynamic capabilities and perhaps most importantly patience and thus time. The services are explicitly not yet commercially viable and therefore need time to experiment, stretch, learn, adapt. It can indeed be witnessed that big players in the energy sector such as General Electric, Schneider Electric, but also many utilities are turning (part) of their business towards this service model approach. GE for example launched Current, a company that blends advanced energy technologies like LED and solar with networked sensors and software to make commercial buildings and industrial facilities more energy efficient and productive is already worth a 1 billion dollar in revenue.[iii] These type of business models and players benefit from taxes but don’t really need targeted policy support.
In most countries that we analysed however, most firms providing energy efficiency services are very small (often under 10 people). These businesses have a very hard time (because of lack of a mother company and thus money and time to experiment and truly sense needs and options) to become really service oriented, and to stretch the context and are not likely to follow the aware market changer or stealth changer strategy. These companies are forced to follow the smart matcher strategy. As mentioned earlier, many of these smaller businesses are very dependent on context elements such as laws, regulations, and they need to develop dynamic capabilities on how to deal with the constantly changing and inherently complex and uncertain framework conditions, and to overcome internal organisation barriers (Smith and Raven, 2012; Chesbrough, 2010; McGrath, 2010). Most SMEs have hardly any capacity and resources to experiment and develop capabilities necessary to move away from a product and technology push approach. What these smaller business need to be able to also move away from the product dominant logic, stretch and challenge the existing system and start becoming more service oriented is room to experiment.
The importance of experimenting is also evidenced by the finding that business models that constantly reinvent themselves in response to changing frameworks are more successful (McGrath, 2010; Mullins and Komisar, 2009; Chesbrough 2010; De Reuver, Bouwman, and Haaker, 2013). This experimentation and or responsiveness is however not facilitated sufficiently by existing framework institutions such as public authorities. Public authorities should nurture energy efficiency entrepreneurs more.
We have not yet performed a comprehensive analysis of which kinds of policy support would best support the four models and strategies, and thus this is the aim of the next phase of this Task 25. In the next paragraph we explore briefly what the different kinds of policy support are that are available and what might be potential valuable support for the four models. In phase 2 we would like to explore these hypotheses.
The traditional ways public authorities can nurture SMEs is through education, information and awareness creation; regulatory and fiscal frameworks[iv]. The push harder/unaware market changer model and strategy’s biggest barrier is their own lack of awareness on where they are positioned on the product-service shift, and these type of businesses’ capability to sense user needs is underdeveloped and they experience a mismatch with what many potential clients need. For this type of entrepreneurs, information and awareness raising campaigns about the paradigm shift, targeting the entrepreneurs would be valuable (Mont & Lindquist, 2003). These entrepreneurs would also benefit from self-assessment information tools. But public authorities can of course also use other policy interventions such as business support schemes that focus on building up the necessary entrepreneurial dynamic capabilities such as sensing user needs, conceptualising and orchestrating. The Energy Agencies involved in this project did indeed organise such workshops with entrepreneurs and these workshops received positive feedback from the entrepreneurs stating that they were now much more aware of the business they are in, and their position on the paradigm shift and what that entails for their business model and necessary dynamic capabilities.
The reframing what you push/smart matcher model and strategy is well able to get to the transaction moment, selling their product and service combination. Their awareness about how to create a longer term relationship with their clients, into the use phase, and thus maximise the potential for energy efficiency and savings is less developed. These type of entrepreneurs need resources to be able to experiment with conceptualising, cocreating with clients to find out what value exists in the use phase. Policy support for this type of entrepreneur can take the form of subsidies for SMEs supporting co-creation or other sensing activities, or grants or subsidies to allow for experimentation with the delivery of multiple value and more collaborative and sustainable type of business models. But support can and should also take the form of training in dynamic capabilities such as conceptualising in incubators or in chamber of commerce type of networks. Public private partnerships such as KiCInnoEnergy have an important role to play here as well, not only delivering business modelling training and support, but with a clear focus on delivering service and value in the use phase.[v]
The third model and strategy aimed at pushing something else and being aware market changers might yet be more supported with other policy instruments. What these type of entrepreneurs face is need for well-developed orchestration skills, and experimental space to learn about user needs. These entrepreneurs could be helped with policy support that opens up customer relations and quantitative and qualitative data on customers that can help businesses identify valuable customer segments. Many public authorities have very relevant open data about labels, infrastructure etc. that SMEs can use to perform a first sensing of user needs, for example finding out which homes might be in dire need of insulation. Policy instruments that might be used to support the development of the orchestration skills these entrepreneurs need are for example collaboration platforms focused on linking businesses with consumer organisations, governmental agencies, NGOs and with other businesses. These can be used to help the smaller businesses find suitable partners to create bundled services which then naturally are able to more easily provide multiple (also non-energy) value. Facilitating partnerships across sectors and including public private partnerships with for example NGOs creating trust by endorsing a type of service (brand independent), certification (when it is standardised and provided by trusted institutions) could potentially also be powerful market changers supporting this third type of businesses. Yet another type of support from public authorities that could potentially be helpful to this third type of businesses is the purchasing power of public authorities. They could be launching customers for SMEs focused on delivering services where energy efficiency is experienced in use. These contracts should then be opened up to serve as demonstration sites for others to learn from and experiment in. Metcalfe and others have stated that in fact, (innovation) policy is about creating conducive context for organizations to engage in experimentation (Metcalfe, 1995; Metcalfe and Miles, 2000). Janssen (2015:120) makes an even stronger statement and states that: “In this respect, one cannot assume this is simply a matter of having the right funding instruments and framework conditions in place; weak innovation capabilities constitute a systemic failure that is detrimental for the processes of novelty creation within markets…. The observation that many firms lack dynamic capabilities and competences to realize new services (Sundbo, 1997), can be regarded as a strong justification for policy intervention.” Authors such as Janssen (2015) and Rubalcaba et al. (2010) therefore argue that policy interventions such as the provision of business services aimed at enhancing these entrepreneurial capabilities of sensing user needs, orchestration, conceptualising, scaling and stretching would therefore we appropriate policy responses.
The fourth model and strategy hardly needs support, except potentially support in creating market pull, for example through more focus on multiple benefits of energy efficiency. The role that public authorities could play in creating more focus on the use phase needs much more research. There are several avenues for research. For example, regulation of feedback on energy consumption, improved and more frequent billing and Energy Performance Contracting for the residential sector. Other interesting foci are the internalising of externalities in the electricity or gas price for example, revisiting the system where the price of electricity decreases with increased use, the sharing economy, regulations with respect to healthy indoor climate, both residential and for buildings in general, regulation about reducing sick leave for companies through better work environments (lighting, heating, acoustics, ventilation).
Subtask 4a: Training, engaging and disseminating
One key experience in Phase 1 of Task 25 is that it is imperative to transfer our knowledge and findings to the relevant actors in different countries and settings. And simply communicating through a webinar or presentation is insufficient. This type of knowledge needs to be experienced and worked with in a real life setting, investigating real business models, real policies and real users.
Therefore we propose to
- set up a strong training system based on subtask 3 toolkit and workshop format; and to do roadshows with participating countries and or other relevant organisations in the countries identified by the participating countries (e.g. business development agencies, advisors) to train policymakers, entrepreneurs and other relevant stakeholders in more service oriented business modelling and the necessary ecosystem changes.
- In addition we aim to organise user centered business modelling interventions in different countries (including the users of the services). Which means we organize interaction between business model/ energy service developers and actual (potential) end-users to experiment with end-user centered business models.
- We also propose to set up a MOOC based on the task, in close cooperation with Leonardo academy/DSM university.
- Of course this activity would also entail a continuation of the more standard disseminating and communicating activities such as conference participating, journal paper writing, newsletter pieces, policy brief and proactively target other technical driven implementing agreements and offer them Task25-tools and cooperation.
The second phase of Task 25 would continually contribute to its earlier set objective of identifying existing a variety of service and use phase oriented business models providing EE and DSM services to SMEs and residential users (individuals and communities), analysing promising effective business models and services for different sectors, identifying and supporting promising national energy ecosystems in which the most promising business models can succeed, providing guidelines to remove barriers and solve problems, and finally working together closely with both national suppliers and clients of business models. The longer term aim of this Task is to contribute to the growth of the supply and demand market for energy efficiency and DSM amongst SMEs and communities in participating countries.
The benefits for the participating countries and for the DSM TCP will encompass: (of course, benefits depend on the definite focus of Phase 2.
- Overview of additional existing business models/ user centered approaches in the different countries;
- Insight in best practice business models based on a comparison of business models in the participating countries;
- Training and exchange of valuable knowledge and learnings between EE business developers, service providers, researchers, policymakers and clients within and between participating countries;
- Access to relevant stakeholders, documents, and state of the art in the research field through participation in a new network of expertise and participation of this network;
- Best practice guidelines for policy makers and institutional stakeholders on how to support the uptake and creation of promising business models for energy services that effectively achieve load reduction at SMEs and residential communities. | actionable and tested programme for agencies as well as other context players to stimulate the uptake of EE services in their country.
- Developed and tested framework for effective business models for demand response/circular/…
- New knowledge on the working mechanisms of the service oriented business model: how to monetise add on-services; how to co-create and co-operate with multiple stakeholders etc.
The principal deliverables for Task 25 Phase 2 will be:
- D7: overview of business model strategies (business model, entrepreneurial capabilities and context stretch or fit actions) for each investigated sector or type of business, including a comparative analysis across countries;
- D8: Overview of the different types of policy and institutional support available to the different types of business models, where relevant country context and sector context sensitive.
- D9: Training road show
- D10: Outreach and dissemination material, including at least 2 academic/journal publications, MOOC, and other outreach material highlighting the Task’s work.
 For South Korea a longlist was not necessary given that South Korea joined later and could make a concrete selection based on lessons learnt from the other countries.
[i] Suggested reading includes Gassmann O. et al. (2016), Saebi et al, (2017), Boons, F., & Lüdeke-Freund, F.(2013).
[ii] For a comprehensive overview of the methodology applied see the Task 25 Annex 1 report on http://www.ieadsm.org/task/task-25-business-models-for-a-more-effective-uptake/.
[iv] Also see the toolkit for policymakers developed by the Ellen MacArthur Foundation (2015)
Contact for more information Dr Ruth Mourik firstname.lastname@example.org