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ARTICLE IN PRESS
Energy Policy 38 (2010) 3443–3452
Contents lists available at ScienceDirect
Energy Policy
0301-42
doi:10.1
n Corr
E-m
(N. Suh1 Te
journal homepage: www.elsevier.com/locate/enpol
Business models of heat entrepreneurship in Finland
Lasse Okkonen a,n, Niko Suhonen b,1
a North Karelia University of Applied Sciences, Yliopistokatu 6, FI-80100 Joensuu, Finlandb University of Eastern Finland, Department of Law, P.O. Box 111, FI-80101 Joensuu, Finland
a r t i c l e i n f o
Article history:
Received 13 August 2008
Accepted 8 February 2010Available online 23 February 2010
Keywords:
Wood energy
Heat entrepreneurship
Business models
15/$ - see front matter & 2010 Elsevier Ltd. A
016/j.enpol.2010.02.018
esponding author. Tel. +358 503423582.
ail addresses: [email protected] (L. Ok
onen).
l.: +358 405916080.
a b s t r a c t
This paper presents the business models of small-scale heat energy production in Finland. Firstly, the
development of heat entrepreneurship in the country is presented, including the remarkable growth of
small and medium size enterprises (SMEs) in the last 15 years. Secondly, the concept of business model
(business architecture of product/service flows and earning logics) is modified to the framework of
wood heat production. The business model concept, and its sub-concepts, is applied in a brief review of
current heat energy businesses in Finland. We arrive at a business model of heat entrepreneurships that
are public companies/utilities, public–private partnerships, private companies and cooperatives, Energy
Saving Company (ESCO), network model of large enterprise and franchising. Descriptive cases of these
models are presented. Finally, the paper concludes with a discussion on the applicability of the business
models in different operational environments and geographical contexts.
& 2010 Elsevier Ltd. All rights reserved.
1. Introduction
Renewable energy producers face challenges in designingbusiness models that enable the cost-efficient and competitiveproduction for substituting fossil fuel based energy systems. Thecapital invested in existing infrastructures of oil and gas, forinstance, also results in the incumbent firms possessing signifi-cant market power causing lock-in effects in energy markets(Wustenhagen and Boehnke, 2008). In addition, the switchingfrom fossil fuels to renewable energy forms may mean lower costsfor society, but not necessarily for the end-user of energy. Ready-made examples of applicable technologies and business models ofrenewable energy are needed because both technological andorganisational developments in this sector are time and resourceconsuming (Wustenhagen and Boehnke, 2008).
Transferring of know-how and technologies between regions isnot easy as processes are affected by several factors, such asoperational and demand environments, transferred objects,stakeholders involved in the processes as well as the transfermedia. However, the business models have several factors that areglobally valid, (such as economies of scale and risk allocation),and the transfer and application of models is possible with certainpreconditions.
This paper is inspired by the existing business modelontologies, especially BMO ontology (Osterwalder, 2004), and
ll rights reserved.
konen), [email protected]
constructs the heat energy business model concept based onexisting business cases in Finland. The objective of the paper isfirstly to construct a business model concept for heat energybusiness, and secondly, to apply the concept in a brief review ofFinnish heat energy businesses. The results are case-derived heatenergy business models including both descriptions of thebusiness architecture and earning logics. The relevance of thepresented business models is in increasing the understanding ofheat energy businesses, and providing a framework in the designof new heat energy businesses in other contexts. As a futurechallenge, the authors also recognise the need to evaluate theeconomic performance of the presented business models.
2. Heat entrepreneurship in Finland
A heat entrepreneur or enterprise can be a single entrepreneur,entrepreneur consortium, company or cooperative providingheating for a community. At the end of 2006 the number ofenergy entrepreneurship based heating plants in Finland was 330,with the boiler capacity for solid fuels being 176.7 MW (Alanen,2007). The number is growing rapidly and according to theFinnish TTS Institute2 the estimated potential is about 900 plantswith a total output of 300 MW (Nikkola and Solmio, 2004; Alanen,2007).
The average size of these heating plants was relatively small,530 kW, of which only about 25% is connected to the districtheating network. Since 2004, about 100 new heating plants have
2 TTS (Tyotehoseura) is a research, development and training institute.
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L. Okkonen, N. Suhonen / Energy Policy 38 (2010) 3443–34523444
been established; in addition the average size of the plants hasbeen rising. Nowadays, the typical new woodfuel heating planthas a production capacity of 1–2 MW (Alanen, 2007). Heatentrepreneurs operate locally, at a municipal level, producingheat from locally sourced wood fuels. In 2006 heat entrepreneursused approximately 510 000 bulk cubic meters of forest chips,among other fuels (pellets, briquettes and peat) producing350 000 MWh of heat, which is equivalent to the demand ofapproximately 14 000 medium-sized private homes (Helynenet al., 2007).
In Finland, municipalities have played a key role in theestablishment of enterprises that have taken the responsibilityfor heating public buildings, such as hospitals, schools, offices andlibraries, as well as private houses and industrial estates.
Finnish municipalities have been privatizing the municipalheating service since the early 1990s (Okkonen et al., 2005).Privatization of heating provides mutual benefits: for heatentrepreneurs (e.g. forest owners, local farmers and contractors)entrepreneurship provides extra income, benefits of improvedforest management, use for under-utilized harvesting equipmentand increased employment (Alakangas et al., 2004). While for themunicipality, a well-established heat entrepreneurship providesincreased security of heat supply, savings in operational andinvestment costs of energy production when fuel oil is replacedwith cheaper wood fuels, increased use of local labor and creationof new business opportunities, support for existing employment(e.g. contractors), environmental benefits and local direct, indirectand induced economic impacts of local spending (Madlener andMyles, 2000).
In this study our focus is on heating plants with 100–5000 kWof heating power. We construct a theory on the business modelsof heat production based on wood fuels and apply it to descriptivecases from Finland. The business models of fuel supply are notincluded in this study. However, the authors recognise the needfor such investigation in further studies.
4 For application of Stahler’s (2001) business model description in sustainable
3. Heat energy business model
3.1. Definition of a business model
Magretta (2002, 86–87) notes that ‘‘a good business modelremains essential to every successful organisation’’. In spite ofthis, business model is a concept with various user dependentdefinitions and contents. To increase understanding of thebusiness model ontologies and their interrelationships, Anderssonet al., (2006) utilize the concepts of the resource-event-actor(REA) ontology, the e3-value ontology and the business modelontology (BMO) for constructing the reference ontology forbusiness models.3
Stahler (2001) defines business model as description of aplanned or existing business including the elements of valueproposition, configuration of value creation and revenue model.Value proposition describes how products and services generatevalue for the customer or stakeholders (i.e. private benefit).Configuration of value creation means definitions of core parts ofthe value chain, in which business can be focused and company
3 The REA ontology describes business transactions as processes where actors
exchange resources (McCarthy, 1982). In these processes duality (both processes
of increase and decrease of money and goods), changes of control of resources, and
conversions of resources (to produce other resources) will take place. The e3-value
ontology focuses on the identification of exchange processes of value objects
between the actors in a certain business case (See e.g. Gordijn et al., 2000). The
BMO provides an ontology enabling the detailed description of business model of
an enterprise, and highlights its operational environment and meeting customer’s
demands (Osterwalder, 2004; Andersson et al., 2006).
can be distinguished from its competitors. Revenue modeldescribes how the business generates its sales revenue (e.g.selling of certain products or leasing contracts).4
Our conceptualisation for heat energy business modelsis much inspired by the BMO conceptualisation (Osterwalder,2004). Osterwalder defines a business model as a conceptualtool containing a set of elements and their relationships, withthese relationships allowing the expression of a company’searning logics. In other words, business model describesthe architecture of the firm and its network of partners forcreating, marketing and delivering this value and relationshipcapital in order to generate profitable and sustainable revenuestreams.
According to Timmers (1998) and Selz (1999) business modelis an architecture for the product, service and information flows. Italso describes the potential benefits and sources of revenues fordifferent business actors. Amit and Zott (2000, 2001) consider abusiness model as an architectural configuration of the compo-nents of transactions that are designed to utilize businessopportunities. Amit and Zott (2000, 2001) describe transactioncomponents as specific information, service or product that isexchanged, and/or parties that engage in the process. Thearchitectural configuration describes and characterises the lin-kages of components and also their sequencing. Hamel (2000)presents business model simply as a business concept put intopractice.5
A heat energy business model is defined here as amodel for:
1.
ene
stra
incl
reso
inte
uni
inte
firm
stra
and
Business architecture for product/service flows (see Fig. 1),including:(a) Establishing the heating plant and district heating net-
work.(b) Organising the wood fuel supply chains.(c) Defining ownership and responsibilities between all
stakeholders involved, such as sellers and buyers of theservice, subcontractors and fuel producers.
rgy,5 Ac
tegy
udes
urce
rmed
que
rrela
an
tegic
wha
2.
Establishing the earning logics, i.e. strategies to generate andmaintain profitable and sustainable business operations.The business model involves many stakeholders, such as
entrepreneurs, subcontractors, financiers and clients. The partspresented above are interrelated, not necessarily chronologically,and will have an impact on the overall business performance.Heat energy business differs from many other businesses because,in many cases, it is an external actor or customer who hasinvested in the unit of entrepreneurship, and therefore variousownership relations and overlapping responsibilities arepossible.On the basis of heat energy production contracts (NKUAS,2005), three main categories in organising municipal heatproduction in Finland can be identified: public companies,public–private partnerships and private companies/cooperatives.The business models presented later on will follow and detailthese main categories.
see Wustenhagen and Boehnke (2008, 70–79).
cording to Hamel (2000) business concept comprises components of core
, strategic resources, customer interface and value network. Core strategy
business mission, product/market scope and differentiation. Strategic
s are core competencies, assets and resources of a firm. Hamel calls
iating between core strategy and resources as configuration: it is a
way in which competencies, assets and resources are combined and
ted to support a company’s strategy. The value network surrounds the
d complements its own resources. A firm’s boundaries are between
resources and value network: the company needs to decide what it does
t is contracted out to the value network. (Ibid.)
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Fig. 1. The heating power (aggregated in each municipality) of the heating entrepreneurship units in December 2006 (based on Alanen, 2007).
6 We do not explore this aspect more since we do not employ it in the current
paper. However, this will be a topic of forthcoming research
L. Okkonen, N. Suhonen / Energy Policy 38 (2010) 3443–3452 3445
3.2. Investing in wood heat production
In Finland the heat energy business often starts with thecustomer, typically local municipality or industrial enterprise,making the investment and the entrepreneur running thepractical operation and maintenance work. In other words,customers make the investments because they were better ableto bear the investment risk. In addition, governmental supportdecreased the risks of possible financial loss. This again madeinvestment in new technology more attractive.
In the early stages heat energy business had many uncertain-ties including new technologies, heat pricing mechanisms, earn-ing logics and raw material handling. However, positiveexperiences changed the situation. Risks have decreased forseveral reasons: there is more experience in maintenance, fuelsupply and other practical operations; the price of fossil fuelshave increased thereby improving the profitability of wood fuels;technology has developed and become cheaper; customers’ trustin production has increased and the whole business has becamemore profitable. In the case of larger heating plants, entrepreneurshave established cooperatives or companies and have been able tosecure the delivery of raw material and share both the financialand technical risks.
As a result of the comprehensive development in wood energy,more and more entrepreneurs are willing to invest in both heatingplants and district heating networks. New and larger companiesare interested in the heat business. The larger heating units couldalso increase the potential profit because of the economics of scale(Silvestre, 1987).
The greater investment related to the use of wood fuels tie upcapital for longer periods. Profits will be gained after someunprofitable years. This is an essential factor affecting theinvestment decision since returns of investment are uncertain.This risk or uncertainty can be shared among the partiesdifferently depending on the business model. However, in thiskind of approach it is needed to estimate the profits over timewith the different risk-premiums. Fortunately, we have tools toinvestigate estimated profits, and therefore risk-premiums byusing present value methods (Haim and Sarnat, 1994) or realoptions approach (Dixit and Pindyck, 1994; Schwartz andTrigeorgis, 2004) In our cases of heat energy business, it mightbe suitable to use the latter because it is more flexible and it doesnot require the estimation of risk-adjusted discount rate and usesthe risk-free rate of interest as the discount rate.6
3.3. Organising the supply chains
The operational chain of heat entrepreneurship can be dividedinto two different parts: (1) heat production and (2) fuel supply(see Fig. 2). The fuel supply can also be divided into twocategories: (1) energy wood from forests, and (2) by-productflow of commercial timber processing. Forest chips originatemostly from final loggings or from small-diameter energy woodfrom thinnings. The supply chains have various stages and
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EARNING LOGICS:
Second/third party financing
Safeguarding the markets
Value added by holistic value chain management
Complementary partnerships
Networking and subcontracting
Heat supply to customer (e.g. municipality or industry)
Sub customer
Ownership, shared responsibilities and management
Energy wood harvesting
Communition (several alternative
structures)
Long-distance transportation
Forwarding
Sub customer
Sub custome
Sub customer
Wood fuel supplyBA
Commercial timber processing
By-products
Refining (wood chips, pellets and briquettes)
Transportation
Long-distance transportation
Forest ownership and management
Manual or mechanical felling
Standing sale or sale in delivery
Financing and investing
- Own finance- Grants- ESCo- Franchisee- Large company network- Customer
Heating plant and district heating network (operation, service and
maintenance)
Fig. 2. A graphical model of the business architecture and earning logics in wood energy production. The system includes two main parts: fuel supply and heat production.
Fuel supply can be divided into forest energy harvesting (A) and by-product flow of commercial timber processing (B). In heat production, several business options are
available to secure heat supply for end-users. There are also various finance and investment options both for fuel supply and heat production. Financing and investing has
an impact on defining the ownership, and sharing of responsibilities and management. Business models can be tailored to be case specific according to requirements,
depending on the available resources. Earning logics, presented on the right, are strategies to create revenues from wood heating.
L. Okkonen, N. Suhonen / Energy Policy 38 (2010) 3443–34523446
logistical options (for more detail see e.g. Hakkila, 2004). Theby-product flow consists of the residue material of the woodprocessing, or it can be refined as wood chips, pellets or briquettes.
Raw material can be bought from the forest owner as astanding sale or as a sale on delivery. Standing sale means that thepurchaser harvests the raw material from the forest. Sale ondelivery, in turn, means that the purchaser buys the wood thathas already been harvested. The harvesting can be done manuallyor mechanically. The raw material can be stems, small sizedtrees from thinning, logging residues or stumps. The harvestingconstitutes a major part of the costs of raw material collectionand delivery. The various stages of transport and the harvestingcan be managed as a subcontract, and then it constitutes apart of the business concept. In addition, transport machineryrequires major investments. After harvesting, storage, transportand chipping, the wood fuel is ready for use in the heatingplants.
By-product flow is also a significant alternative to acquire rawmaterial for wood heat production. Material is available throughwood processing. In this case, the costs of the harvesting are notdirected straight to the heat supplier, which makes it possible forthe costs per unit to be lower.
3.4. Defining ownership and responsibilities
As presented above, the investments determine much of theresponsibilities regarding the practical operations and ownership
of the heating plant and equipment. There are four main optionsfor ownership:
1.
Customer (e.g. municipality of industry) owns the heatingplant and network, and thus has the decision-making andcontrol over the heating service. Customer can also use anintermediate, such as company or public utility, to prevent riskrealization.2.
Entrepreneur owns and controls the heating and customerpays only for energy consumed.3.
Customer receives ownership of the heating plant and networkfrom an external investor (e.g. servicing company or thirdparty financier) with delay, i.e. after investor has received theinvested money back.4.
External network or concept provider has the ownership andentrepreneur will produce the heat according to contract.Defining the responsibilities requires detailed contracts be-tween the owners and users of the heating plant. Contract is a toolthat improves mutual confidence and also serves in negotiationsand problem-solving. According to Solmio et al. (2005), typicalbuilding-blocks of a heat production contract are: (1) the amountof heat that will be produced, (2) heat pricing and pricingmechanisms, (3) starting of heat supply, (4) measuring of heatsupply, (5) ownership of the equipment, service and maintenance,(6) ensuring the heat supply, (7) starting and ending of contract,(8) cancellation of contract and compensation. The contract
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should also cover changes in heat demand, temporary problemsand severe interruptions in heat supply (e.g. equipment break-down).
The contract includes the principles for calculating the heatprice per MWh. Good practice is to divide heat price into basic andusage fees. Several pricing mechanisms are available, and there-fore it is important to ensure that the selected mechanism issimple, transparent, cost correlative and equal for differentcustomers (Nuutila, 2003; Suhonen, 2005).
One recommended way is to connect the basic fee to indices(e.g. wholesale price index) and consumption fee with an index orother competing fuel prices (in accordance with the abovecriteria). Heat price can be adjusted in periods varying typicallybetween 1 and 6 months.
It is important to carefully define the ownership of heatingequipment and buildings to avoid any overlapping or mixedresponsibilities. Equipment reliability is usually the owner’sresponsibility, including e.g. normal service and maintenanceworks. Back-up personnel is also needed to ensure the continua-tion of heat supply.
A contract is periodic, for example, 2–10 years if theentrepreneur invests in heating plant and equipment. A contractperiod is often up to 15 years. The contract typically includes asection regarding negotiations for continuing the cooperationafter the contract period. If the entrepreneur cannot fulfil thecontract, it is possible that a guarantee fee defined in the contracthas to be paid.
Contracts between entrepreneurs include sharing tasks, rightsand responsibilities between the contract parties (Solmio et al.,2005)
�
Heat production and control shifts � Raw material supply, amount and timing � Back-up personnel � Sharing the costs of service and equipment repairs � Sharing the revenues3.5. Establishing the earning logics
Heat energy business can be established with various differentearning logics, i.e. strategies to generate and maintain profitableand sustainable business operations. We have identified thefollowing earning logics in Finnish heat energy businesses:
�
Second/third party financing � Safeguarding the markets � Value added by holistic value chain management � Complementary partnerships � Networking and subcontractingFor this paper second party financing means investment by anentrepreneur or enterprise, which saves customer’s resources forother uses. Those can be, for example, industrial production, or if amunicipality is the customer, health care or education.
Third party financing (TPF) is a contractual arrangementincluding capital provided by a third party in addition to energysupplier and beneficiary (Bertoldi et al., 2007). In the energybusiness the third party charges the beneficiary a fee equivalentto part of the energy performance achieved as a result of theinvestment.
Safeguarding the markets is an earning logic based on theestablished reliable demand of heat. This can be achieved, forexample, by investing in local demand (e.g. by ESCO model) andlong-term contracts with large reliable customers, such asmunicipalities.
The more operations entrepreneurs can manage, or in otherwords utilize the value added, the better is the profitability. Ofcourse, this requires efficiency in each stage of the process. As anexample of typical heat energy entrepreneurship, forest residuescould have a price of 1 h/MWh (paid to the forest owner), asproduced wood fuel the price in the silo could be about 14 h/MWh, while the price of sold heat could be 55 h/MWh. Therefore,the most value added is in the heat production stage, but also fuelsupply has business opportunities especially when supporting thecommercial timber harvesting.
Complementary partnerships refer to partnerships wherepartners take care of the practical operations according to theirmain areas of expertise. For instance, energy cooperatives havepartners who are specializing only in fuel production (forestowners and fuel suppliers), contractors with available machinery,personnel capable in engineering and operating the heating plantand also someone taking care of the accounting and bookkeeping.Operations are often part-time and thus also cost-effective.
Networking and subcontracting as an earning logic refers bothto the large main companies benefiting from subcontracting someof the tasks, as well as subcontractors benefiting from thenetworks, scale effects, and technical and economic reliability ofthe principal company.
4. Business models in practice
4.1. Public utility or company
Traditionally municipalities have taken care of heat productionas their own responsibility, as any other public service provision.Two organization models are applicable: public utility and publiccompany. Public utility is part of the municipal economy but hasmore independence compared to other departments. According tothe Finnish law on municipalities (365/1995), the municipalcouncil decides on the operational and economic objectives ofpublic utilities. The benefit of public utility, when compared to apublic company, is the absence of income tax. On the other hand,in their procurements, they need to apply public procurementprocedures.
Most of the municipalities have established public companiesfor making their businesses more effective. A municipality canestablish a heating company under its ownership or shareownership with another actor, such as a local electricity company,while still keeping control (Puhakka, 2005). The public company ispart of the municipal concern, but is still an independent legalentity and under the Limited-liability Company Act (2006/624). Apublic company is a flexible form for decision-making, because itcan independently decide about investments. The company is notlinked directly to municipal finances, thereby reducing invest-ment risks.
Case 1 (Public company produces low-cost heat in Nurmes). Thecity of Nurmes, located in Eastern Finland, has a district heatingplant constructed in 1985. Heating company, Nurmeksen LampoOy, is co-owned by the city of Nurmes and the energy companyPohjois-Karjalan Sahko Oy. The heating plant has solid fuel boilerswith heating power of 10 and 4 MW (with heat recovery system).In addition, there are 8 and 4 MW oil boilers for back-up and forservice and maintenance pauses. The second heating plant hadtwo heavy fuel oil boilers (6 and 3 MW), used only as a back-up. In2008 these boilers were replaced by a 4 MW solid fuel boiler, witha heat recovery system, and 5 and 2 MW liquefied petroleum gas(LPG) boilers. Total annual heat production in 2007 was about80 GWh (Nurmeksen Lampo, 2008).
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The two main customers of the heating company are the city of
Nurmes and Vapo Ltd. sawmill located nearby. These two customers
have total annual energy consumption of about 80 GWh. There are
two district heating networks; network of the sawmill and
municipal network. The municipal network already covers about
90% of the city centre and is continuously expanding. Total fuel
consumption in 2007 was 106.5 GWh. Most of the fuel used is
supplied by the Vapo Ltd. sawmill. Fuels composition is bark 37.4%,
sawdust 25.5%, fuel oil 12.1%, wood chips 13%, peat 7.3%, wood
industry residues (e.g. cutter shavings) 2.8% and forest chips 1.9%
(Nurmeksen Lampo, 2008).
The low amount of forest chips used indicates that the supply
chains of forest chips cannot compete with the by-product flow
from the sawmill. The sawmill is both the fuel supplier and
customer, which motivates supplying of low-cost fuel. However,
the supply chains of forest chips are maintained by paying over
the by-product price to the fuel supplying cooperative. This is
done to maintain the supply chains and security of fuel supply. A
private entrepreneur is subcontracted to take care of the fuel
supply from sawmill.
The heating company, owned by the city of Nurmes (88% share)
and energy company (12% share), made the investment in the heating
plant in 1985, with the ownership not having changed since. The
municipality is both owner and customer of the heating company; it
has also secured loans and mediated the loan, i.e. company has the
benefit of cheaper municipality loans without collateral costs. As the
main customers, both the city and the fuel supplying sawmill have
motivation to keep heat price at the low level.
4.2. Public–private partnership
Public–private partnership is a model in which the customer(e.g. municipality or industry) invests in and owns the heatproduction equipment while an entrepreneur takes care of thefuel supply and heat production for a set fee. In smaller units anentrepreneur runs the business usually on a part-time basis. Sincethe main investment is taken by the customer, the entrepreneurcan operate with small initial capital.
One way to organize heat production is through a group ofentrepreneurs, in which several entrepreneurs share responsibil-ities according to their strengths. The complementary partner-ships are suitable earning logics, especially on a small scale wherepart-time contributions are enough for the heat production.
In case of larger heating units cooperatives or limitedcompanies have been favoured. From the customer’s point ofview, the strength of the public–private partnership model is thefact that the heat production equipment and heat production willstay under the customer’s ownership and control. On the other
hand, the customer also needs to bear the financial risk. Sharing ofresponsibilities between the entrepreneur and the customerrequires detailed contracts.
Case 2 (Pyhaselka produces heat with pellets and woodchips).Pyhaselka municipality, located near and joining to the city ofJoensuu in Eastern Finland, has several heating units based onlocal wood fuels. An entrepreneur is contracted to take care of theoperation and maintenance works of (Hammaslahti municipalcentre of Pyhaselka) 1.6 MW solid fuel plant (with 3.8 MW oilboiler as a back-up) using mostly wood chips. The boiler wasinvested in by the municipality. The supply of fuel and theoperation/maintenance are subcontracted to the private entre-preneur. The annual heat production in Hammaslahti is about6 GWh.
The municipality has also been a co-owner and investor of an
industrial heating plant of Appolampo Ltd. with 2 MW solid fuel
boiler and 2.5 MW oil boiler as a back-up. The industrial heating
plant annually produces about 10 GWh heat for heating two
factory sheds, and also for drying of sawmill timber. The fuels are
by-products from a local sawmill and wood industry.
There are also five small-scale pellet heating plants in Pyhaselka
including schools of Suhmura and Rekivaara, day-care centre of
Niittylahti, community centre of Reijola, and an office building in
Hammaslahti. The biggest one is the heating plant of Reijola with
750 kW heating power. Pellet heating is managed by the
municipality.
In Pyhaselka, public–private partnerships have created benefits
both for the municipality and entrepreneurs/industry. Entrepre-
neurs benefit in terms of income and steady demand for the fuel
they can produce. In addition, industries have a reliable long-term
partner that is also sharing the investment risk. The municipality
has a cost-efficient heating service, and until recently, has
maintained the ownership and control over the heat production.
On the other hand, the municipality has slower decision-making
structures (according the law on municipalities 1995/365) and
also risks of investments and repairing costs in municipal
finances. As a result of Pyhaselka falling under the administration
of the city of Joensuu, the heat production will be privatized
during 2009.
4.3. Private companies and cooperatives
Nowadays an increasing number of private companies andcooperatives are willing to invest in heat production and bear thefinancial and technical risks. From the customer’s point of view,the outsourcing of the heating service saves resources for otherfunctions, such as health care or the main industrial businesses. Ifthe business is completely outsourced, the heat entrepreneuracquires a position comparable to a leading market position. Thiscan be avoided by a detailed contract including well-establishedheat pricing mechanisms.
On a larger scale the entrepreneur can work full-time andthere is better profit expectation. The customer pays only for theheating service, with the heat price consisting of joining fee, basicfee and usage fee. The entrepreneur purchases the heating plantand network, and also takes care of its operation and manage-ment. The raw material can be acquired by the entrepreneur or bysubcontracting. In small-scale businesses, subcontracting thesupply of the raw material could significantly reduce theentrepreneur’s revenues. On the other hand, in large-scaleoperations, the entrepreneur could reduce the risks as invest-ments in transportation equipment or chipper are avoided.
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In general, the more tasks the entrepreneur is capable ofhandling, the higher the potential profits are for the company. Ifan entrepreneur produces the raw material from their own forest(e.g. forest cooperatives or trusts), takes care of transportation,storage, chipping and heat production in his own heat plant,the cover from the sold energy is the highest. However, thisrequires efficiency of operations in each stage of the productionprocess.
Case 3 (Private cooperative produces wood heat in Eno). EnoEnergy Cooperative was established in 1999 after three years ofmeetings between entrepreneurs, the local forestry centre and themunicipality. An important back-up has been the municipalstrategy with a political statement supporting local wood energyproduction.
The main operations of the cooperative include the acquisition
of the raw material, communition, and service and maintenance
works of three district heating plants. In addition, a local
entrepreneur is contracted to take care of the communition.
In the very early stage, the cooperative used the Ylakyla heating
plant that was invested in and owned by the municipality of Eno.
After some years of gaining experience, the cooperative invested
in Uimaharju (2002) and Alakyla (2004) heating plants and
district heating networks (see Table 1). The annual heat
production, about 11 GWh, results in sufficient cash-flows to
make it a profitable business. The annual turnover of the
cooperative is approximately 650 000 h.
The cooperative has about 50 members, mostly forest owners.
In addition, there are people involved in forest machine contract-
ing, sawmilling, some with engineering and also administration
and management skills. This is consistent with the earning logic of
a complementary partnership.
The investment by entrepreneurs in the two heating plants and
networks, have saved municipal finances for other purposes. On
the other hand, as a result the decision-making power has shifted
more to the cooperative. However, any uncertainties can be
decreased by a detailed contract and well-established heat pricing
mechanisms.
4.4. Network model of a large company
According to the network model, heat energy entrepreneurscooperate with large-scale companies and gain advantage vianetwork and scale effects. A large-scale enterprise can organizeheat production in two ways: (1) an enterprise invests in andowns the production equipment and takes responsibility for heatproduction or (2) a customer invests in and owns the equipment,but the enterprise is responsible for heat production. In bothmodels the large company shares fuel supply and heat productionactivities and responsibilities between subcontractors.
Table 1Eno Energy Cooperative heating plants (Energiaosuuskunnat, 2008).
Ylakyla Uima
Boiler 0.8 MW 2�1
Plant supplier Vaasan kuljetuskanavat Vaas
Fuels Woodchips, peat, fuel oil (back-up) Woo
Produced heat/annum 2200 MWh 5500
Chip consumption/annum 3400 bulk cubic meters/annum 10 00
Heated building volume (m3) 47 500 90 50
Starting year 2000 2002
The network model usually requires large-scale heat produc-tion. The main company has the required experience in heatproduction, and also better investment capacity. The networkmodel is suitable for small-scale entrepreneurs in case they arenot willing to expand their operations. There is an additionalparticipant between a customer and a service producer andtherefore may reduce the entrepreneur’s business profit.
Case 4 (Ilomantsi relies on the network model of large-scale biofuel
company, Vapo Ltd.). The municipality of Ilomantsi had an11.4 MW heating plant (6.4 and 5 MW solid fuel boilers and 4and 6 MW oil boilers as back-up) until early 2000, when a largebiofuel company, Vapo Ltd. established a pellet factory of70 000 tons/anuum in Ilomantsi. The factory has a fluidizedbed combustion with 23 MW capacity, and can also produce8 MW of heating power for municipal district heating. Vapo Ltd.has rented the old heating plant as a back-up and also the heatingnetwork.
The role of the municipality has changed from being heat
producer to customer. However, the municipality has maintained
the ownership of the old heating plant and the network,
even if they have given Vapo Ltd. a long-term lease. The heat
production is agreed through a detailed contract and heat pricing
mechanisms, which has resulted in confidence between the
stakeholders. On the other hand, any major costs of repairs in
the old heating plant will actualise for the municipality. All
together, in Ilomantsi the large company has been considered as
technically and economically reliable partner (see e.g. Pietikainen,
2006).
The networks of Vapo Ltd. have a cost-efficient fuel supply. The
annual consumption of peat and wood chips is about 100 000 bulk
cubic meters of both. Peat is produced in Vapo’s peat production
fields, but so far the woodchips have been transported mainly
from Russia. This supply of foreign fuel also means small regional
economic impacts when compared to the local entrepreneurships,
for instance.
The cooperation between the municipality of Ilomantsi and
Vapo Ltd. has resulted in mutual benefits. Ilomantsi has avoided
large investments in heat production, and has a technically and
economically reliable partner producing heat at a reasonable
price. Vapo Ltd. has constant demand for surplus heat produced
by the factory. The long-term contracts, e.g. old heating plant
rental until 2025, indicate the company’s commitment to the
project.
The risks of the network model in Ilomantsi include the impact
of the forthcoming Russian timber tariffs potentially resulting in a
major decrease in imported timber volumes. When realised on a
full scale, the tariffs could have an impact on both the economics
of sawmilling, and thus the by-product flows of pellet factory, and
also on imported flows of woodchips.
harju Alakyla
MW (+1 MW oil) 0.8 and 1.2 MW
an kuljetuskanavat Vaasan kuljetuskanavat
dchips, peat, pellet, fuel oil (back-up) Woodchips, peat, fuel oil (back-up)
MWh 5500 MWh
0 bulk cubic meters/annum 10 000 bulk cubic meters/annum
0 114 000
2004
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4.5. Energy saving company (ESCO)
Energy Saving Company (ESCO) will not take only an energysaving concept to improve energy efficiency, but also to produceand utilize renewable energy. ESCO is a legal entity deliveringenergy services or energy efficiency measures to a customer’spremises. In doing that, the ESCO takes financial risks with itsinvestments. The payment for the services delivered is based onthe achieved energy efficiency improvements, reduced energycosts or other agreed performance criteria. (Bertoldi et al., 2006,2007)
Energy performance contracting (EPC) applies a contractbetween the beneficiary and the provider, typically ESCO, of anenergy operation, where the investment is paid according tocontractually agreed level of energy efficiency improvement(Bertoldi et al., 2007).
In heat production, the ESCO invests in heat productionequipment while the customer pays the same price for the heatas before the investment. The heat produced with the new system(e.g. wood fuel) is cheaper than the older (fossil fuel) system. Afterthe ESCO has recouped its investment, the customers get own-ership of the equipment and also lower heating costs.
The ESCO’s business model is suitable for customers who arewilling to keep the ownership of heat production equipment, butwho do not have resources for the large investments. For theentrepreneur, who has experience on profitability calculations,and also resources to make the necessary investment, the ESCOmay be a good option.
The ESCO’s operations are often difficult to apply successfullyon a small scale. The biggest problem from an ESCO’s point ofview is the long payback periods. If an ESCO makes severalinvestments, significant financial resources are needed. On theother hand, the ESCO will have ready-made concepts and skills torun the operations. A stable price level at the payback time alsoreduces the ESCO’s financial risk. From the customer’s point ofview, the strengths of this model are small investment risk, steadyheat price for an agreed period and ownership of the equipment.
Case 5 (Enespa Oy applies ESCO model in wood energy). Enespa Oy,established in 2000, is the first Energy Service Company (ESCO) inFinland. Enespa finances and manages energy saving investmentsand cooperates with technical specialists carrying out thetechnical operations (Enespa, 2003).
Enespa Oy has carried out the renovation of two energy
installations, where old oil heating systems of school buildings
have been replaced with wood pellet systems. The first unit,
located in Jamsankoski, saw the replacement of 220 MWh/annum
of fuel oil with pellets. In the second case, located in Pyhajarvi, the
replacement of an old oil boiler with pellet and solar heating
system was investigated (Enespa, 2003). The renovation, among
other energy performance operations in municipal buildings, was
carried out by TAC Finland Oy (Motiva, 2007).
The ESCO concept has only been tested in renewable energy
production, the main markets being still in energy saving
operations of energy intensive industries, such as metal, forest
and chemical industries. As long as the price difference between
renewable and fossil energy will increase, the performance of the
ESCO’s will also improve.
4.6. Franchising
Franchising is a business model where two independentpartners (franchiser and franchisee) have a contract. The fran-chiser has developed a business model and concedes the rights to
the franchisee to use this model according to the franchiseagreement. The franchisee operates according to the operationalinstructions, which are planned and looked after by thefranchiser. The franchisee pays the franchiser for the rights touse the developed business trademark.
In heat production, franchising could be organized in thefollowing way: franchiser gives the trademark, business conceptand operational principles, and the entrepreneur (franchisee)would work for both themselves and for the franchiser. Inpractice, the franchiser would support the franchisee in planning,investments, financing, contracts, maintenance, fuel supply andother practical issues. As compensation, the franchisee would payfor this support. For the entrepreneur franchising would provideprofessional support and economic reliability. In practice fran-chising would require full-time entrepreneurship. The customerdoes not need to invest in the heating plant, i.e. the entrepreneurtakes the risk of investments.
In the heating business, franchising is being investigated andalso applied, for example, in fuel trade in Austria (Kokkonen, 2005).However, currently there are no established cases in Finland.
5. Conclusions
5.1. Summary of the business models
The presented business models are constructions applicablefor transfers between regions with certain spatial preconditions(discussed in Section 5.2). As presented in the cases above and inthe summary of the business models (Table 2), theoreticalbusiness models have related counterparts in practice. It is truethat no pure counterparts are easy to find but rather there areaspects of the models appearing in several cases. The name ofeach model is then the most descriptive element of the case.
The business architectures for the heat production variedbetween the cases. There were both investments (and ownership)by municipality and by entrepreneur/enterprise. The privatizationof municipal heating service took place in Eno and Ilomantsi, andpartly also in Pyhaselka. The fuel supply chains also included bothoptions of forest fuel and by-product flows. In most cases a largebiofuel company, Vapo Ltd., was involved in the business. The by-product management (e.g. sawmill by-products in Nurmes and by-product heat of pellet plant in Ilomantsi) was also improving thebusiness profitability. Defining the ownership and responsibilitieswas not investigated in detail; we referred to the main parts of theheat production contracts. In Nurmes and Pyhaselka the munici-palities’ maintained control and ownership, while in Eno andIlomantsi the role of the public sector is mainly that of a customer.
Cases included several earning logics, i.e. strategies to generateand maintain profitable and sustainable business operations.Safeguarding the markets typically entail the inclusion of largeand reliable customers, such as municipality (district heating) andsawmills (drying of timber). Scale economics and networking wasfound in the Ilomantsi case and subcontracting was used in somescale in all cases. Value added logics included both value added bythe by-product management (Nurmes and Ilomantsi) and byholistic value chain management (Eno). A good example ofcomplementary partnership was found in the Eno case, wherethe local cooperative utilizes the expertise of its members bysharing tasks and responsibilities.
5.2. Three steps in applying the business models
The business models presented are aimed at raising new ideasand give new viewpoints to local, case-specific ways of action. The
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Table 2Summary of the business models.
Case Business
model
Investment Ownership Fuel supply Operation Earning logic
Nurmes Public
company
City of Nurmes Public company
(municipality 88% and
PKS energy company
12%)
Sawmill by-products
(Vapo Ltd.), peat (Vapo
Ltd.), wood chips
(various suppliers)
Public company Safeguarding the markets, networking
(scale economies), customer
ownerships, subcontracting, value added
by by-product management
Pyhaselka Public–
private
partnership
Municipality of
Pyhaselka
Municipality of
Pyhaselka
Vapo Ltd. (pellets),
private entrepreneurs
(wood chips)
Municipality
(pellet boilers),
entrepreneur
(wood chips plant)
Safeguarding the markets,
subcontracting
Eno Private
cooperative
Municipality of Eno (1st
plant) and Eno energy
cooperative (2nd and
3rd plants)
Municipality of Eno (1st
plant) and Eno energy
cooperative (2nd and 3rd
plants)
Cooperative members
and open markets;
communition is
subcontracted
Cooperative Safeguarding the markets, value added,
complementary partnerships,
subcontracting
Ilomantsi Network
model of
large
enterprise
Municipality (old plant),
large company (biofuel
integrate)
Vapo Ltd. owns the
industrial plant and rents
the old municipal plant
and network
Vapo Ltd., peat and wood
chips
Vapo Ltd. Networking, economics of scale,
safeguarding the markets,
subcontracting, value added by by-
product management
Enespa
Oy
ESCO ESCO ESCO and customer after
the payback
Market pellets Technical operator
in energy
renovation;
customer
Third party financing, subcontracting in
establishment phase
L. Okkonen, N. Suhonen / Energy Policy 38 (2010) 3443–3452 3451
introduced business models of heat energy production canprovide the starting point and general framework for new heatenergy businesses and can be complemented with case-specificbusiness planning.7
In the following three steps in applying the business models,we determine things that an entrepreneur should consider whenstarting a heat energy business and when applying the businessmodels on a regional level. As a starting phase we assume thatthere is demand, i.e. interested customers for the heating services.Demand can also be ensured by involving large-scale customers,such as municipality (via district heating) or industrial enterprises.
Step 1: Determining the business and profit targets
When investing in the heating plant and the network, theentrepreneur should determine business and profit targets,related to following questions:
�
bus
ma
inst
legi
the
obj
effi
What is the entrepreneur’s objective? – Full-time or part-timeentrepreneurship?
� What is the level of risks the entrepreneur is ready to accept? � How much and for what time period is the entrepreneur readyto tie-up capital in investments?
The objective sets the basis for entrepreneurship and businessmodel that will be applied. The business risk can be shared forinstance by joining into the network of a large company orfranchiser, forming a public–private partnership, or establishing ajoint cooperative. Financial risk can be reduced by includingexternal financiers in the project. Tying-up of the capital is also animportant factor, for instance in ESCO operations paybacks ofinvestments in energy efficiency or renewable energy may bemuch longer than originally expected.
7 Regional differences and conditions set constraints for directly applying the
iness models. There are regionally varying raw material bases, qualities of raw
terials and harvesting conditions (see e.g. Okkonen 2008). In addition,
itutional environments have differences (for instance in terms of policy,
slation, ownership structures, types of enterprises and available support). On
other hand, the heat energy businesses models aim towards the same main
ective, which is to organize the sustainable supply of renewable energy as
ciently as possible.
Step 2: Designing the business architecture for product/service
flows
To design robust business architecture, the entrepreneurshould ensure the availability of resources, including physicaland human resources in the forms of
�
physical capital (money, external financing, raw materials,machinery, equipment, etc.), � supply chain structure and supporting infrastructure (trans-portation, storage, delivery, etc.), and
� available business associates (e.g. business partners andsubcontractors) needed in different business models (e.g.franchising or networks of large companies).
� Human capitalJ In the establishment phase, the knowledge of cost-calculations, acquisitions and tendering, planning, con-tracts, available supporting measures, organising the fuelsupply, technology and equipment, among others, isneeded.
J In the operational phase, the entrepreneur needs skills inusing the equipment and machinery and organising thefuel supply and heat production.
Step 3: Constructing the earning logics
The earning logics, i.e. strategies to generate and maintainprofitable and sustainable business operations, are dependentboth on business and profit targets and business architecture. Incases of lack of resources, there are often many possibilities tofind external financiers, complementary partnerships, networksor subcontractors for filling in the gaps, generating the economicsof scale and improving both technical and economic reliability.Markets can be safeguarded for instance by creating local nichemarkets and forming long-term contracts.
Earning logics are often case specific and evolutionary and canbe modified according to the requirements of local actors,available resources, supply and demand conditions, competitorsand organisations and institutions. By appropriately designing thebusiness model (both business architecture and earning logics)heat energy enterprise can tune its operation to produce renew-able energy in a competitive and cost-efficient manner.
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Acknowledgements
This research is supported by the European Union NorthernPeriphery Programme (NPP) co-financed Northern WoodHeat andMicrE–Micro Energy to Rural Enterprise projects, and IntelligentEnergy Europe (IEE) co-financed Bio-Sol-ESCo project.
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