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Servitisation refers to a process of business transformation from selling products to providing services. This involves integrating products and services into an offering for customers, including elements such as operations, maintenance, repair, monitoring, and upgrades, to provide greater value to customers than if they simply purchased goods.
This model removes upfront capital expenditure for customers (transforming CAPEX to OPEX), who enter a contractual agreement with a service provider and pay an agreed fee. For providers, this model generates recurring revenue streams.
Servitisation is recognised as an innovative and disruptive model, and has been implemented successfully across many different sectors and markets. Cooling-as-a-Service has been recognised by Climate Policy Initiative as one of the most promising solutions to tackle climate change. There is a growing trend for service solutions linked to clean and energy efficient technologies, which optimise system performance and energy consumption. Under this model, Service providers retain ownership of equipments and are incentivised to extend and maximise their useful life.
Servitisation is beneficial and effective in many contexts
Customers, technology providers, and financiers have unique needs and goals. The stakeholder journeys outlined below provide insight into the typical steps involved in adopting the servitisation model for clean and energy efficient equipment.
The SET Alliance is here to help you along this transformative ride, and you can find there key tools and documents we developed to make things easier for you.
You can contact us or look for technology providers offering the Services you require (e.g., cooling, heating, lighting) regarding your intentions to acquire a new system or upgrade your existing system. Connect with the best service providers in your region through the SET Alliance.
The service provider will assess your specific needs and systems, and present you with a tailored offer for delivering equipment services and energy efficiency, using the latest technologies.
The contract establishes the key terms of the service, such as the duration, scope of services, and price.
Once the contract is signed, the technology provider will install the efficient equipment. You will have access to and benefit from the usage of the equipment without ownership.
You pay a monthly fee based on the amount of service you use and the provider takes care of the rest. Your ‘pay-as-you-use’ or ‘pay-per-outcome’ fee includes the cost of the system as well as all costs related to operating, maintaining, and the repair of the equipment.
Developing a service offering involves understanding customer needs, adapting internal processes and technology, fostering a customer-centric culture, and redefining pricing and engagement strategies.
Perform a technical and economic evaluation to determine the specifications of the Service. You request a financial assessment of the client and if applicable the issuance of a payment guarantee.
You sign a contract with the client establishing the scope, pricing, and length of contract. Through the installation of energy-efficient equipment, you will minimise operational expenses over the contract period. See an example of a contract.
According to the service contract, you will operate, maintain and repair the equipment. You may also be responsible for electricity &/or water costs depending on the contract agreed. The equipment remains your responsibility. You are incentivised to explore ways to optimise service provision over time.
Your client will likely ‘pay-as-they-use’ or ‘pay-per-outcome’, entailing a monthly fee tied to the outcome or units of consumption. These payments should cover the financing of the efficient system and related services, operating costs, and your margin. The price may also include a premium for a payment guarantee to reduce the risk of default.
At the start of the contract or after a few months of operation, you can explore selling individual or bundles of equipment to a bank (or SPV created for this purpose), leasing them back from the financier. At the end of the leasing contract, ownership returns to you. The service contracts with your customer serve as additional collateral for the investor. Payment guarantees, when available, are endorsed to the buyer of the equipment. Please note that there are several options to finance the equipment.
Approach providers who are seeking recapitalisation to scale up their activities.
Other financing structures can be used such as an SPV mechanism.
As clients, service providers can sell you installed equipment and lease it back through a sale and leaseback agreement. This contract specifies price, duration (for the remaining provider-customer contract), and references any endorsed default-guarantee. The provider-customer contracts serve as additional collateral.
Your client pays a fixed monthly value as established under the sale-leaseback contract to lease back the equipment.
Once the contract has elapsed, ownership of the equipment returns to the service provider.
More efficient equipment often appears to be more expensive; which hinders their market adoption. However analysis of the total life cycle costs for many energy-intensive systems (lighting, heating, cooling, compressed air, storage & mobility) shows that operation and maintenance can account for up to 90% of costs over the life of equipment, far exceeding initial investment. In this case, more efficient equipment means lower operating costs, which can be an attractive proposition for customers. With Servitisation, by removing the need of the upfront CAPEX requirement, customers can take advantage from the benefits of higher efficiency from day 1 of operation.
In addition the model promotes dematerialisation and challenges ‘planned obsolescence’ for such technologies. As services, companies need to make sure their products last as long as possible with the least material input as possible, as it is now their cost factor. For providers,maintaining and optimising efficient equipment and maximising its useful life ensures long-term service contracts with customers.
Energy savings are dependent on existing systems or calculated baselines for different equipment and applications. Typically for Cooling-as-a-Service projects a 20-30% reduction in energy consumption is achieved. Some providers can also offer renewable energy solutions (typically Solar PV). For cooling systems, there is also the possibility of integrating other cost-saving solutions such as waste-heat recovery.
Under a service contract, equipment is not owned by the customer but remains under the ownership or responsibility of the service provider. What is included in the service depends on the specific arrangement between the technology provider and the customer. For example for cooling systems, it can be the full cooling plant up to the air handling units, including piping and other smaller components, or it can be limited for example to the chiller system. The delivery point of the service (i.e. up to which point is the technology provider responsible) must be well-defined in the contract.
Providers may also recapitalise equipment under a sale-leaseback model with a financier. In this case, a financial entity purchases and owns the equipment, leasing it back to the service provider. Providers often include a ‘buyback’ option for customers at market value, which can illustrate that the contract is not an embedded lease.
Both models offer the common benefits for the customer of no up-front investment and optimising systems to maximise efficiency. However, there is a major different in how energy savings are treated. EPC payments are dependent on energy savings. There are two major forms of EPC models: 1) the shared savings model in which the customer does not invest but instead pays a share of the energy cost savings to the project developer; 2) The guaranteed savings model in which the customer takes out a loan and is guaranteed a certain amount of energy savings covering repayment costs.
EPCs, in particular shared savings, can make it hard to create long-term strategic partnerships between Energy Savings Companies (ESCOs) and their customers because periodical negotiation is required to determine payments based on the measurement of savings.
Leasing involves renting an asset for a specific period, with the lessee responsible for maintenance. In contrast, servitisation offers a broader service-oriented model, where a provider not only leases the equipment but also manages its design, implementation, upkeep, optimizing performance, and outcomes. Servitisation emphasises value and outcomes rather than just access to assets.
Servitisation can be more financially appealing than EPC’s or leasing models when there’s a need for long-term, outcome-based solutions. It aligns the provider’s incentives with user success, fosters innovation, and minimises upfront costs. Servitisation emphasises value delivery and performance, making it a compelling choice for industries seeking sustainable, cost-effective partnerships and operational efficiency. As regulation evolves on the use of different technologies (such as energy efficiency, refrigerant use, emission levels) it may make sense to transfer performance risks to expert providers who are best placed to deal with changing standards.
This varies by market and application, for Cooling-as-a-Service we typically see contract lengths of 7-15 years however there are contracts of up to 20 years. Ideally towards the end of the contract, providers and customers should assess and either renew the contract or upgrade the equipment based on the user’s evolving needs and technology advancements with no upfront cost. This ensures continued energy efficiency, cost-effectiveness, and environmental responsibility. Providers often include a buyback option should a customer want to purchase equipment, however this transfers operational and maintenance responsibilities to the customer.
We advocate for the inclusion of electricity in the fixed rate per unit because this means the provider is fully responsible for the costs of operating the system, and the customer is not exposed to the performance risk of the equipment. It is then in the interest of the provider to install equipment with the highest efficiency, as well as offer excellent preventive maintenance to optimise the efficiency of the system and thus reduce the cost of providing the service. A portion of the price per unit of consumption charged to the customer should be indexed to the electricity price, based on a pre-agreed electricity tier. While technology providers are responsible for the performance of the system, they should not bear the risk of increasing electricity prices, nor benefit from decreasing prices.
If consumption levels persistently remain below expectations in a service contract, it can strain the provider’s profitability and service quality. Providers should establish clear terms for such scenarios, allowing contract adjustments or exit options to align with actual usage. It is also possible to agree a minimum usage fee.
Open communication and periodic reviews between both parties are essential to address changing needs and ensure a mutually beneficial partnership.
In order to ensure that the contract is off-balance sheet for the customer under the International IFRS16 accounting regulations, the recipient of the service must be able to characterise the agreement as a service arrangement rather than an embedded lease.
The new IFRS16 has evolved over the years and is more stringent on characterising a contract as a service agreement rather than a lease. The contracts must address country-specific accounting rules and address key aspects such as supervisory control and ownership of the equipment, the net present value of the contract compared to the value of the equipment, and the end of term conditions.
For cooling systems for example, it is important to clearly separate the equipment delivering the cooling service from the building integrated air distribution systems that may already be owned by the building owner, making it difficult to demonstrate control by the service provider. The standardised CaaS contract has been designed to overcome this.
The model is applicable at different scales and the actual minimum ticket size of an investment will depend on investor criteria. Bundling projects may make it possible to cover a number of smaller investments with a single investment vehicle by reaching a larger total investment. The residential sector is a massive market opportunity for service solutions. Serving this market segment requires providers to have the functional capability to provide maintenance and repair to many customers.
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