In Part 2 we concluded that if low carbon and renewable energy (LCRE) projects were to be scaled through aggregation, then the market needs to offer incentives to solution suppliers to reduce the pricing gap.
In this Part 3, we table an idea about the shape of a business model which could help transform this industry.
Here is a definition of a business model: “a system to organise resources profitably”. As economies become increasingly complex and distributed , the idea of being able to organise resources at all, let alone profitably, presents an enormous challenge. Traditional property developments are being challenged because they are required to deliver sustainability targets in the context of LCRE markets which are complex, fragmented and innovative. It is one thing for a developer to let a utilities package for electricity and gas supplies. It is quite another to let a package for Net Zero services which must also offer end users cheaper energy prices.
Here is an idea for an innovative business model. Think Amazon rather than Debenhams. Instead of procuring LCRE solutions through specification and procurement, set up an internal market place within the development contract which delivers a lifetime of sustainable goods and services for each unit as well as the overall development.
How would this work? Firstly, the developer procures a market operator on a term contract (e.g. 10 years). The developer acts as an investor to provide capital funds to set up the infrastructure for this particular project market. Online functions use an existing platform provider. The market is structured as an SPV (perhaps a CIC), has a Board and issues shares. Every supplier to the market has the potential to be awarded shares depending on their performance and the market’s performance.
The developer then gives the SPV a ‘flying leasehold’ over all the properties and site, giving it the right to install, operate and manage a range of LCRE systems. The lease offers security itself so that the operator can raise finance. End users who then buy/lease the properties, will have the right to opt out of the managed assets after a minimum period of say 5 years, but at a premium.
The internal market operator is responsible for delivering the market’s objectives by engaging with a range of suppliers and installing a range of technology systems. This whole process can be undertaken on the basis of collaboration rather than traditional procurement, so that innovation and efficiency is maxed, while adversarial contracting and inefficient practices are relegated to the past.
The creation of internal markets is ideal for addressing aggregated LCRE projects where multiple parties need to be engaged over a period of time but where demand and supply may be at odds and otherwise unable to arrive at an equilibrium point. Internal markets are better able to introduce incentives and operate at a sufficient scale to overcome such issues.
Is the industry ready for this? Companies like PyTerra are certainly moving in this direction, developing the platform on which such internal markets can be based. Three other things are needed.
- There needs to be recognition of this approach from national and local government when promoting best practice and commissioning major LCRE initiatives.
- There is also a need for forward-looking developers, contractors and suppliers to step up and take a more entrepreneurial approach to the delivery of LCRE services.
- Finally, investors need to rapidly recognise that this type of infrastructure project is a good risk and one in which even institutional investors can invest.
Amazon has been phenomenally successful at creating a market infrastructure in which multiple businesses can operate and end users can shop flexibly. Debenhams until the end continued with costly infrastructure which did not support the way that users wanted to shop. Innovative business models which deliver good value, choice and ease-of-use despite complex markets are what is needed in our fickle society.
Do join us in the Low Carbon Collaboration Group on LinkedIn for discussions around this topic (https://www.linkedin.com/groups/12546085/).
© David Arscott July 2021