Financing energy-efficiency improvement works

Rising energy prices are foremost in people’s thoughts these days and although most are aware that investing in energy efficiency ‘pays back’, split incentives can be a barrier to investment. Environmental upgrade agreements (EUAs) are a new finance mechanism that promises to overcome this barrier.

Energy retrofits can save building owners and tenants money; improve reliability and occupant comfort; improve brand reputation by demonstrating leadership; help meet legal and corporate social responsibility requirements; attract and retain the best staff; improve NABERS ratings; and reduce greenhouse gas emissions. However, take-up is often limited by what is known as the ‘split incentive problem’.

A split incentive occurs in a transaction where the benefits do not accrue to the person who pays for the transaction. In a typical commercial office the following illustrates the problem. The owner invests capital in energy-efficiency improvements; energy bills go down; the tenant pays the bill, so the tenant receives the benefits. What’s in it for the owner? In this situation, no one wants to pay for efficiency upgrades because the incentives don’t align.

EUAs are a new way to fund energy-efficiency improvements at existing buildings. EUAs are a contract between a building owner, a financier and a local council to fund environmental improvements to an existing building.

Environmental upgrade finance provides upfront access to capital with repayments made via the savings achieved in reduced energy bills. The scheme creates a mutually beneficial outcome for both property owners and tenants, overcoming the split incentive problem by allowing owners to share upgrade costs with tenants who benefit from reduced energy costs.

The EUA process is initiated by a building owner engaging the professional services of a company such as NDY to identify, design and cost energy-efficiency improvements. Once the building owner knows what they want to do and how much it will cost, they can consider the variety of ways they can fund the works. If the building is in one of the participating local government areas, then the building owner should consider funding the environmental improvement works using an EUA.

An EUA is a voluntary contractual agreement between a building owner, a finance provider and a local council, whereby:

• the building owner agrees to implement a package of environmental upgrade works at their building (such as energy-efficiency improvements to the lighting, ventilation or cooling systems);
• a finance provider agrees to advance capital to the building owner to fund the environmental upgrade works; and
• the money is repaid to the lender through council rates. The local authority levies a charge on the land to the value of the environmental upgrade works, and then collects quarterly repayments as a line item on top of the normal council rates. The owner can pass the costs of the upgrade works onto the tenant.

EUAs are suitable for building upgrade packages for both tenants and base building systems.

EUAs offer many benefits to building owners including: improved cash flow by displacing the need for upfront capital expenditure on energy-efficiency upgrade works; addressing the split incentive issue by enabling tenant contributions; making available cheap capital at a fixed rate over a longer term than typical bank financing; the EUA runs with the land, so if ownership of the property changes, the structured repayments remain with the property; energy-efficiency savings can be used to service the debt; and the energy-efficiency improvements have the potential to improve the asset value and NABERS ratings, and help attract and retain tenants with a more efficient building.

EUAs also offer benefits to tenants as a cost-neutral way to improve the working environment, reduce operating costs and energy bills, and satisfy the desire for organisations and their staff to occupy energy-efficient workplaces. The amount of the EUA charge passed on to the tenant must be less than or equal to the energy savings they will realise - so that the tenant is guaranteed to not be put at a disadvantage under an EUA.

Legislation enabling EUAs is in place for the City of Melbourne and all of NSW. The Cities of Sydney, Newcastle and Parramatta are currently offering EUAs, with North Sydney Council, Penrith City Council, Newcastle City Council, Wollongong City Council and Lake Macquarie City Council expected to participate in the near future. Many other local authorities are watching with interest and may also join the scheme once the first few projects demonstrate the model is sound.

How NDY can help

A key element in making an EUA work is to have a package of energy-efficiency upgrade works that has been designed, costed and is ready to implement. This forms the starting point for entering into an EUA.

NDY can help existing building owners unlock funding through EUAs, by working with the building owner to develop a package of environmental upgrade works, which might include:

• understanding your current environmental performance (eg, BEECs, NABERS and Green Star ratings);
• identifying energy-efficiency opportunities at specific buildings and facilities;
• energy modelling to quantify the energy savings of selected measures (eg, to identify a package of works that would result in a NABERS Office Base Building Energy rating of 5 Stars);
• developing energy-savings calculations, cost estimates, and establishing payback periods;
• designing the proposed upgrade works; and
• helping you to enter into an EUA with a finance provider and the local authority.

If you are looking to retrofit your office or whole building, or improve business operations by investing in sustainable equipment, and you have a building in one of the participating local council areas, EUAs are an option that could help finance the greening of your office building or tenancy.

*Chris Nunn has 10 years’ experience specialising in sustainability and energy consultancy. Key areas of expertise include the development of sustainability strategies, integrated sustainable building design advice, carbon footprinting, options appraisal and prioritisation, the application of green building rating tools such as Green Star, BREEAM and LEED, and the implementation and operation of ISO14001 compliant Environmental Management Systems.