a b s t r a c tThis paper examines the role of innovative business models in the transformation of socio-technical systems. Focusing on decentralised energy technologies, we explore business model innovation in the context of a transition towards a more sustainable energy system. We conduct an empirical study of two Energy Services Company (ESCo) models for the deployment of combined heat and power with district heating (CHP/DH) infrastructure in the UK. Based on these case studies we illustrate the different ways in which Local Authorities develop business models to create and capture value from more efficient resource use and to deploy sustainable technologies. Drawing from systems theories in the business model and socio-technical literatures, we analyse the interfaces between business models, energy infrastructure and institutions. We propose that a systems based approach to the analysis of business models as embedded in their socio-technical contexts can offer new insights into the dynamics and governance of sustainability transitions.

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The amount of capital required to transition energy systems to low-carbon futures is very large, yet analysis of energy systems change has been curiously quiet on the role of capital markets in financing energy transitions. This is surprising given the huge role finance and investment must play in facilitating transformative change. We argue this has been due to a lack of suitable theory to supplant neoclassical notions of capital markets and innovation finance. This research draws on the notion from Planetary economics: Energy, climate change and the three domains of sustainable development, by Grubb and colleagues, that planetary economics is defined by three 'domains', which describe behavioural, neoclassical, and evolutionary aspects of energy and climate policy analysis. We identify first-and second-domain theories of finance that are well established, but argue that third-domain approaches, relating to evolutionary systems change, have lacked a compatible theory of capital markets. Based on an analysis of electricity market reform and renewable energy finance in the UK, the 'adaptive market hypothesis' is presented as a suitable framework with which to analyse energy systems finance. Armed with an understanding of financial markets as adaptive, scholars and policy makers can ask new questions about the role of capital markets in energy systems transitions. Policy relevanceThis article explores the role of financial markets in capitalising low-carbon energy systems and long-term change. The authors demonstrate that much energy and climate policy assumes financial markets are efficient, meaning they will reliably capitalise low-carbon transitions if a rational return is created by subsidy regimes or other market mechanisms. The authors show that the market for renewable energy finance does not conform to the efficient markets hypothesis, and is more in line with an 'adaptive' markets understanding. Climate and energy policy makers that design policy, strategy, and regulation on the assumption of efficient financial markets will not pay attention to structural and behavioural constraints on investment; they risk falling short of the investment levels needed for long-term systems change. In short, by thinking of financial markets as adaptive, the range of policy responses to enable low-carbon investment can be much broader.

This paper outlines how some UK Local Authorities (LAs) have opted to engage with the Energy Service Company (ESCo) model in a bid to enhance their influence over local energy system change and help them to deliver on their political 'public good' objectives. Three common approaches to LA ESCo model engagement are outlined: 1) LA owned 'arms-length' model; 2) private sector owned concession agreement model; and 3) community owned and run model. The LA's decision to establish its own ESCo, or alternatively enter into a partnership with another, predominantly depends on: its willingness to expose itself to risk, the level of strategic control it desires and the resources it has at its disposal. However, the business case is contingent on the extent to which the national policy and regulatory framework facilitates and obligates LAs to play an active energy governance role. Stronger alignment of local and national energy agendas through communication and coordination between different governance actors could help to remove critical barriers to LA ESCo engagement and their wider energy governance activities.