How many entrepreneurs does it take to change 80,000 light bulbs? Kevin Maughan might tell you three.
Maughan is chief executive of energy company UrbanVolt, which he set up less than two years ago with friends Declan Barrett and Graham Deane to supply LED lights to small businesses.
As most potential customers were likely to regard LED lighting as too expensive to buy and would rather spend spare cash developing their businesses, the company took a different approach to simply trying to sell it: “We install the equipment into industrial buildings at no charge to the end user and we share the savings over five years,” Maughan explains.
UrbanVolt started in January 2016 and installed its lights in a little more than 100 companies in its first year, proving that its approach worked.
Along the way, Ireland rugby international Jamie Heaslip invested in the business, drawn by its ethos of bringing new technology to enterprises that might otherwise not benefit from it.
Based in a small office in Lad Lane off Baggot Street in Dublin, UrbanVolt will have installed 80,000 individual LED lights and fittings for clients across the Republic by the end of this year. It now has more than 200 customers and the number continues to grow. Many are now coming to the company rather than being canvassed by it.
LEDs – light emitting diodes – last longer and use less power than conventional bulbs or fluorescent lamps. Maughan says the three company founders looked at the technology and thought it was a once-in-a-lifetime opportunity.
“Candles went to oil lamps, oil lamps went to light bulbs; it’s that same step-change in an industry,” he says. “It saves 75 per cent in energy costs. Everything that comes after this will never have that same step-change again, so we saw that opportunity to use the energy savings to pay for the product.”
Once he and his colleagues got down to making the idea work, they realised that the value lay not in the equipment itself, which is not worth much once it is screwed into the ceiling, but in the savings it creates.
“When I thought about it, I realised that this was a net new cash flow for the business, so I thought how do you go about securitising that?” Maughan recalls. “Because that is the valuable piece, not the asset. I suppose that’s where the business was born.”
Then it was a question of how the company devised its offering so that it gives the equipment away free and uses the savings to fund the installation costs and make a profit. The answer was to provide the lights and share savings. Maughan says that this is generally a 50/50 split. If there are likely to be extra maintenance costs or risks over the five-year period, the company will ask for a greater share.
“It’s not rocket science,” Maughan stresses. “It’s the number of lights you have times the wattage they draw. So if you have a 1,000 watt high-bay light in a warehouse, we can reduce that to 150 watts, maybe 200. Then you multiply that by your variable cost of electricity and how many hours a-day the light is on. That is it.”
Risk transfer Five years seemed to the right length of time for the savings split. Any shorter would require Urban
Volt to take all the savings. The company guarantees the products for that time. If the lights stop working, Maughan and his team stop taking their share. This means that the company transfers all the risk to itself. To cover that, it insures the work with Munich Re.
The “back end” of what UrbanVolt does is what interests its chief executive most. It bundles up contracts with a number of its clients into a single package. The company then offers this as an investment to pension funds and financial institutions, allowing those backers access to the cash flows that the savings generate. That then frees up UrbanVolt’s capital, so it can continue to pay for more projects.
Swiss specialist investor Susi is the primary buyer of the client revenues that UrbanVolt packages up. Susi takes money from institutions and pension funds and channels it into energy projects and has been investing alongside the Irish company since 2015.
“The beauty is that the more projects we put in our portfolios, the less risk, which means the lower the yield that we have to give to the institutional investors,” says Maughan. “That means that we can do more projects.It truly is a sustainable business model.
“Our clients make money immediately, we make money and our lighting manufacturers make money, our investment funds make money, and the whole way along that value chain that we have created, no-one is asked for money up front. It’s all funded by energy savings,” he says.
Maughan calculates that the company has created about 200 jobs, directly and down the line. He also estimates that it will save between €30 million and €40 million for its clients over the five-year term of their deals.
UrbanVolt’s approach also allows it to do without the unwieldy structures of its competitors, established lighting suppliers. The idea has caught on faster than even they believed it would.
“It was designed originally for SMEs, people who didn’t have the cash or who weren’t interested in investing in energy efficiency,” Maughan explains. “But now we’ve found that that structure we have built has become more and more attractive to big multinationals.
“We’ve now completed our third project for a Fortune 50 company. We have four other Fortune 500 customers. So it’s turning very rapidly into an international offering.”
Those big clients are opening the door to new markets. UrbanVolt is looking to launch in the United States, Europe and Britain by the end of the year. It is already working on its first few projects in Britain and Europe and is opening a US office.
Contract manufacturers in Germany and China produce the lights and equipment, which is made to specifications that meet both technical standards and those demanded by the insurer. Local contractors fit the products, which have a 15- to 20-year lifespan.
Once the five-year revenue sharing period is up the hardware, and all the savings, belong solely to the clients.
None of Maughan, Deane or Barrett has technical backgrounds. Not surprisingly, given his interest in UrbanVolt's financial model, Maughan worked as a banker with Merrill Lynch in the US, having moved there as a teenager with his family in the 1980s.
Deane worked in logistics and supply chain management in manufacturing, so he looks after the operations side of the business. Barrett was in property management. He saw LEDs coming into the market and grasped what they could mean for clients.
Investors
While it is easy for customers to understand the concept, is it any harder to convince the investors who buy the portfolios? Maughan notes that pension funds and new energy funds have cash to invest but trouble finding a home for it.
“Because they have taken pension money, they can only take investment-grade risks,” he explains.
Along with that, they have high transaction costs. Those factors limit them to Fortune 500 companies and governments, which can already borrow money at 1 per cent. UrbanVolt’s approach allows it to turn revenues from client savings into investment-grade instruments. At the same time, it cuts transaction costs for backers by basing everything on one document, from which everything from energy savings credits to the securitisation flows.
A logical step for the business down the line is a flotation. The company’s need for capital to fund its projects, combined with the resulting steady revenue streams, make it ideal for stock market investors.
Maughan indicates that this has been at the back of the founders’ minds from early on. They have, he says, run it with this in mind, even applying the requiredaccounting standards to UrbanVolt’s finances. However, that is very much in the future. The focus now is on geographic expansion.
And UrbanVolt is not likely to stop at lights. It sees itself as an energy services company. And, as the contracts with its customers are finite – ending after five years – the company is already looking at how else it can apply the business model.
“We’ll go back and see those clients when we think battery storage becomes financially viable,” he says. “We’ll then offer them battery storage. They can then draw power at night for very little at the overnight rate, and we’ll run our lights at peak three hours a day for nothing. So we might extend the contract from five years to seven years.
“Then we’ll go back in when solar becomes viable. Because we have an already-installed battery, we can put solar on the roof and take them completely off the grid,” he adds.
“Everyone else in the business is in the megawatt business, we’re in the ‘negawatt’ business. Our ultimate goal is to take every Irish business off the grid.”
