Published on:Sep 12, 2018By Mark Halper LEDs Magazine, and Business/Energy/Technology Journalist
The LaaS “cash flow” advantage should grow more pronounced versus leasing as new FASB and IFRS rules kick in, MARK HALPER discovers. Further down the road, its face will change to reflect the IoT, data, and human-centric lighting.
Why spend money on lights when you could use it on something more strategic to your business? If you’re a manufacturer, maybe you’d like to build a new factory or develop a new mousetrap. If you’re a retailer, you might see the sense in shelling out for a new megastore or for flashy products that attract customers.
That is exactly what commercial end users are increasingly asking themselves and, in some cases, acting upon.
“Our money is better invested in expanding our range of motorbikes, or on hiring new staff,” said Les Griffin, owner of motorcycle retailer Bikeworld in Dublin, Ireland. Bikeworld recently decided against purchasing new lights even though the dingy 15-year-old fluorescents were in what Griffin mockingly described an “antique” state, which was undermining the benefit of the showroom’s glass façade (Fig. 1).
FIG. 1. Bikeworld’s LaaS deal with UrbanVolt guarantees lux levels, which provides some obvious and not-so-obvious advantages. “Even the colors of the motorbikes are better, which was another bonus we weren’t anticipating,” Bikeworld owner Les Griffin said. The before (top) and after (bottom) shots show the difference. (Photo credit: Signify.)
There was a similar refrain over in Amsterdam, where DIY chain Praxis decided against buying new LED lights for 110 stores that hadn’t had new lighting in 40 years.
“Our main company did not want to invest in such a huge project,” said Henk Schurink, construction and store design manager, referring to parent company Maxeda, which also owns the Brico DIY chains in Belgium.
But never fear. Neither Bikeworld nor Praxis is slogging through daily operations under fading fluorescents. Walk into facilities at either retailer, and you’ll notice bright, new LED lighting. In Bikeworld’s case, 400 LED fittings were supplied by Irish company UrbanVolt. In Praxis’ case, thousands of LED tubes came from Signify, the Dutch lighting giant formerly known as Philips Lighting (Fig. 2).
FIG. 2. When you’re in a store as big as Montana and you’re looking for a part as small as your thumb, it helps if the lighting is good, like at these Praxis stores in Eindhoven (top) and Rotterdam (bottom), which are served — literally — by Signify. (Photo credit: Signify.)
So how did that happen? Have they leased the lights? Financed them through a manufacturer’s loan?
No. Repeat, no. This is important: They did not lease the lights or finance them in a conventional sense.
LAAS IS DIFFERENT FROM LEASING
In a nuanced twist, both Bikeworld and Praxis went for lighting as a service (LaaS) or, as many vendors prefer to call it, light as a service. LaaS is similar to leasing in that it spares the huge upfront capital outlay required to outfit a building with new LED lighting systems, but it goes much further.
In LaaS, the lighting supplier remains responsible for monitoring and maintaining lights, including making any replacements. The supplier guarantees uptime and light levels, often specified in contractual lux levels that are higher than what the user has been accustomed to. And, as LEDs Magazine wrote in our circular economy story earlier this year, LaaS deals also ensure that the supplier looks after recycling and other end-of-life issues.
Another key element of LaaS deals is that they often guarantee energy savings and the financial savings that go along with reduced electricity consumption associated with modern LED lighting and controls. In fact, it is the guaranteed saving that can qualify LaaS as a genuine service and crucially continue to keep it off the balance sheet, making it easier for companies to borrow money for other things when international accounting rules change in January.
As a Signify boss explained, the bank involved in financing on any LaaS deal does not examine the value of the lights per se. Rather, it looks at the potential for energy savings as the value in determining whether or not to finance a project.
“We sell state-of-the-art light, and we sell cash flow,” said Slawomir Huss, head of Signify Capital Europe, noting that the bank is invisible to the end user but is involved in an innovative manner. “You no longer finance the asset as such. You finance the cash flow that is generated via the project. So if you have the old electricity bill from the old traditional lighting and you get a saving thanks to LEDification of, let’s say, 70%, 75%, then this 70–75% is actually the asset that the financial institution will finance.”
In a benefit that will become especially pronounced with upcoming changes to both FASB (Financial Accounting Standards Board) accounting rules in the US and to IFRS (International Financial Reporting Standards) in many other countries, LaaS will enable end users to treat the financing as “off-balance-sheet,” a benefit that makes it easier for companies to borrow money they need for those other strategic projects. While operating leases today also qualify for off-balance-sheet treatment, that is set to change when the stricter regulations take hold on Jan. 1, 2019, when they will show as debt on the balance sheet.
At that point, LaaS arrangements can continue to proceed off the balance sheet. But any lease arrangements will have to return to the balance sheet, undermining a company’s ability to take out a loan because an on-balance sheet loan increases a company’s debt ratio and makes banks less willing to lend money.
“The real flag that will be raised as to whether it’s truly light as a service is it’s off the balance sheet,” said UrbanVolt head of marketing Edel Kennedy.
“In other leasing/financing deals, you’re carrying the debt for that asset,” she continued. “If it’s true light as a service, it’s off balance sheet. The more debt you carry on your balance sheet, the fewer loans you can take down. So if you want to get a loan to buy a new building, or perhaps to develop a new product or something like that, you’re carrying too much debt, you can’t do that. You can’t draw down more money because you’re too risky. So nobody wants to carry debt for something like lights, because they add no value. It’s just a depreciating asset. Now, unfortunately, they’re essential because nobody can operate in the dark. But nobody wants to carry that debt. It’s a fool’s game to carry debt on your balance sheet for lighting. In LaaS, somebody else will put up all the capital at their risk, and it will be truly off balance sheet.”
The off-balance-sheet issue is expected to take on more importance in early 2019, when it will enhance the value of LaaS by helping the end user avoid capital expenditures. It is the capital dodge, and the overall relief of handing over lighting maintenance and headaches, that many pioneering users cite as the reason they entered into a service deal.
“It was the ease of it all, and the no capital outlay, and the no borrowing,” said Griffin at Bikeworld, which inked its LaaS contract with UrbanVolt in early 2017 (Fig. 3). “No capital outlay was very attractive to us. We had just come out of a recession, so we were taking it one year at a time; so you don’t want to start to throw 15–20 grand when you’re not sure what the next month will bring. The whole process was very easy, very user friendly. There was no 30-page contract or hidden information or anything like that. They did all the work. We didn’t have to do anything, really.”
FIG. 3. “Our money is better invested in expanding our range of motorbikes, or on hiring new staff,” said Bikeworld’s Griffin, explaining his decision to avoid capital outlays on his new UrbanVolt lighting. (Photo credit: UrbanVolt.)
Another UrbanVolt LaaS customer, Cargotec’s Dundalk, Ireland facility, cited maintenance as one of the main drivers (Fig. 4).
“A major benefit for Cargotec is also the reduction in maintenance issues and cost, as the on-site staff no longer have to upgrade and fix light fittings daily,” said Ronan McClorey, energy manager at Dundalk for the Finnish maker of cargo handling machinery. “UrbanVolt has assumed that responsibility and will maintain all the LED light fittings for five years.”
FIG. 4. If any of these lights fail at Cargotec’s Dundalk, Ireland facility, it’s UrbanVolt’s responsibility. “A major benefit for Cargotec is the reduction in maintenance issues and cost, as the on-site staff no longer have to upgrade and fix light fittings daily,” said Cargotec’s Ronan McClorey. (Photo credit: UrbanVolt.)
Maintenance was also a big motivator for Praxis, which had developed “a lot of maintenance problems” on the old fluorescent tubes and bulbs that previously lit its stores. In addition to wanting to improve light quality and levels at its stores, the DIY chain also wanted to be sure that any new system would spare it maintenance headaches.
Given the relative newness of LED lighting, Praxis was nervous about taking on the unknown of maintaining the lights. So the LaaS contract places that responsibility squarely with Signify over the course of the five-year agreement.
“The supplier has the maintenance costs for themselves and that gave our board more confidence in this project,” said Schurink.
THEY JUST WANT LIGHT
The trouble-free facet is certainly a big part of what LaaS vendors are promoting.
“Let’s be honest, lighting is a core business of ours but not of our customers,” said Signify’s Huss. “Actually, what we want is exactly the opposite. We want our customers enjoying the excellent lighting and not having any problems related to this aspect of their activity.” Signify offers contracts that last for up to 10 years of monthly payments.
While it’s easy to get vendors and users to sing the praises of LaaS, it is more difficult to pry exact information on how much the user is paying. Answers to that question, though, quickly turn to energy savings where, according to UrbanVolt, Bikeworld is saving 70% and Cargotec is saving 73%.
Schurink said Praxis is saving 40% on energy. Another LaaS arrangement at Maxeda’s Brico Belgian operations is believed to be yielding similar numbers.
But whatever the actual monthly outlays are, there is an emerging aspect of lighting that is certain to alter the value and pricing of any deal: the Internet of Things (IoT).
For a quick review, IoT lighting embeds sensors and communication chips in luminaires and the lighting infrastructure in an effort to gather data that improves operations of cities, commercial offices, warehouses, factories, and you name it. Users and vendors are promoting IoT lighting for improving roadway traffic; monitoring noise, crime, and air quality; automatically adjusting lighting and heating levels; providing valuable insights on how to rearrange or even get rid of floor space and property; engage with shoppers in physical stores; and more.
THE VALUE OF DATA
These functions are only slowly catching on. But enthusiasts believe they represent the true value of lighting in the future, especially with the collection of data — a commodity as good as gold by some measures in the modern economy — at their core.
While they should alter the terms and conditions of LaaS agreements, they don’t seem to have had an impact yet, mainly because end users are not rushing en masse to embrace IoT lighting.
“We’re seeing very little demand from our clients for that,” said UrbanVolt’s Kennedy. “There’s a lot of noise in that space, and it definitely has a lot of potential value. But bear in mind that a lot of companies just need to be not in the dark. So their predominant drive is ‘I just need good quality light, I need to meet health and safety standards, I need to do the right thing by the environment, and I want to save money on my energy bills.’ They generally don’t want to look at something’s that going to build any additional cost into the project.” She concluded, “They may not want any additional data, or they may not see the value in it right now. So it’s not something they’re pushing for right now.”
At Praxis, Schurink said it’s too early for the DIY chain to pursue IoT lighting.
“We discussed it, but at this moment we don’t want to have it,” Schurink commented, noting that other projects have priority, such as retrofitting stores with a new look and feel.
Schurink is not ruling it out, though. For example, he noted that a lighting-based indoor positioning system could help customers find their way around the company’s large stores. “The most asked question in the store is ‘Where can I find this product?’ so indoor positioning could help,” Schurink said.
CASE BY CASE
Once LaaS customers begin to adapt IoT lighting, the pricing will change “on a case-by-case basis” depending on exactly how a particular client is using the IoT and the data involved, said Signify head of professional services Marie-France Crevecoeur. “It depends on the customer’s business, on the customer’s domain of execution, and which value we bring,” she noted.
Huss added that Signify already structures its LaaS deals so they can accommodate data in the future.
“So even if data is not yet part of the deal right now, we are ready to add it and also incorporate it in the billing model,” he said.
And with the ever-evolving world of solid-state lighting (SSL) in mind, Crevecoeur noted that future deals might specify human-centric lighting parameters as well as lux levels for minimum or maximum intensity. In HCL, lights alter not only their intensity but also their hues across the blue-to-red spectrum to suit whatever a situation requires, be it concentration, alertness, relaxation, or whatever.
While data, the IoT, and human-centric lighting await LaaS deals of the future, today’s LaaS benefits revolve around maintenance and, perhaps chief among them all, cash flow.
“That’s actually the reason that the larger companies that have buckets of cash love doing business with us,” said Kennedy at UrbanVolt, a company which claims to have invented the LaaS model, and which deals only in LaaS models. “It’s because they avoid that internal capital battle. There’s always demand for cash at those big companies. It would be better allocated to something other than lighting. And also the fact that it’s off balance sheet means it’s a whole lot easier for them to do a project with us than with somebody who’s trying to sell them a product.”
One irony of all of this is that with so much of the value hinging on energy savings, it is the energy providers who potentially are taking a big hit. That, in turn, can trigger an increase in energy prices, making it more difficult for LaaS vendors to live up to their guarantee of energy savings.
Then again, energy companies are responding to efficiency schemes by themselves getting into more services, which could in turn drive down service prices as the energy firms compete against lighting firms and others for service business. If capitalism works as advertised, the end user should benefit. Capitalism work as advertised? When has it ever failed to do so?
MARK HALPER is a contributing editor for LEDs Magazine, and an energy, technology, and business journalist (email@example.com).