By Scott Bocskay, Sustainable Melbourne Fund
3 July 2012 An economist spots a $50 note on the footpath but doesn’t stop to pick it up. Why? The economist knows that it simply can’t exist. Economic theory dictates that in a world of complete and competitive markets it isn’t possible that a $50 note would be left on the footpath—somebody would have picked it up.
In the real world, of course, markets are plagued by imperfections and failures that routinely miss the $50 notes left around. The point of the joke is that the economist can’t distinguish between theory and reality.
Facility managers regularly face the reality that opportunities exist for improved efficiency but are not captured for a variety of reasons. Some of these reasons have to do with building owner and tenant investment decisions, engineering challenges, logistical issues, technology confusion and lack of communication between landlords and tenants.
Whatever the reason, economic theory does not hold true when trying to unlock the opportunity of improved efficiency in the built environment. The reality remains that building owners and tenants needlessly waste money on energy and water they do not need to be paying for. The use of this money is effectively as productive as tossing it into landfill or indeed letting it blow away in the wind, after not having picked it up off the footpath!
Energy efficiency, when financed appropriately, enables building owners and tenants to capture those wasted dollars and reallocate them to a productive purpose—improvement of the buildings they occupy and own.
Environmental upgrade agreements offer building owners and tenants the opportunity not only to finance energy efficiency and make productive use of this wasted money but also to enhance value, above simple productivity gains.
Historically, energy efficiency projects have been focused upon either tenant upgrades or base building upgrades—and generally never the twain have met. EUAs challenge conventional assumptions that the efficiency interests of tenants and building owners cannot be aligned and enable benefits to be realised by each party.
For tenants, EUAs provide an opportunity to replace their exposure to volatile costs—energy and water bills—with a fixed, non-escalating cost—the environmental upgrade charge. For example, a tenant may be able to have a tenancy lighting project undertaken and paid for through an EUA. Similarly, when base building projects that couldn’t previously be justified are combined with tenancy lighting projects, they may become commercially attractive to building owners because of the payments received from tenants.
EUAs were developed to assist in the real world of unlocking the opportunities of energy efficiency. They are a voluntary three-way agreement between a building owner, a financier and a council that provides access to funds for environmental retrofits. The funds advanced are repaid through the council rates system by a special charge—the EUC—which can be shared between building owners and tenants. The money to repay this charge is available from the savings achieved by the energy efficiency improvements and up to 100 per cent of the cost of the project can be advanced. The ability to make payment by savings forms the heart of the EUA model.
In Australia there are currently two pieces of legislation enabling parties to enter into EUAs.
The Victorian Parliament passed Australia’s first legislation to enable EUAs with an amendment to the City of Melbourne Act 2001 in September 2010. The New South Wales Parliament introduced and passed similar legislation, called the Local Government Amendment (Environmental Upgrade Agreements) Act 2010, which came into effect in February 2011. Both pieces of legislation enable building owners and tenants to work together to share the mutual benefits of improving the efficiency of buildings in which they both have an interest.
In Victoria, EUAs are available under the City of Melbourne’s 1200 Buildings program developed to accelerate the pace of retrofitting Melbourne’s existing commercial buildings. Sustainable Melbourne Fund was appointed by the City of Melbourne to set up and administer environmental upgrade finance for the program.
Broadly, EUAs can be used to finance projects that deliver an ongoing environmental benefit. Similar to other council rates and charges, an EUC is a charge on the land on which a building sits. Future building owners, and tenants where the EUC is being shared, will become responsible for meeting this charge. The only difference is that when a building owner purchases a property subject to an EUA, the new owner agrees to the terms of the previously established EUA. In the simplest terms, an EUC will stay with a building regardless of a change in ownership or lease.
As the charge stays with the building, it is important that the corresponding benefit also stays with the building. This ensures that the new purchaser will not hold a liability for which there is no benefit on the asset. All allowable improvements to a building proposing to use an EUA must therefore be permanently affixed to the property to avoid the risk of an over-encumbered building where efficiency benefits can be removed but the charge remains.
Sustainable Melbourne Fund has established two types of improvements that can receive funding through an EUA under the 1200 Buildings program—common improvements and custom improvements.
Common improvements have an established track record of producing energy or water savings. Common improvements include insulation, glazing, lighting control upgrades and HVAC upgrades. In order to make a common improvement, building owners need to undertake a level 2 energy audit (AS/NZS 3598:2000). The audit will provide a list of opportunities from which a building owner can develop a project scope for their retrofit. Any items that are on the common improvements list, available on the Sustainable Melbourne Fund website, qualify as pre-approved for financing through an EUA.
Innovation is an important aspect of optimising building performance and Sustainable Melbourne Fund encourages the use of new technologies and approaches through custom improvements. Building owners undertaking custom improvements need to provide more detailed information in addition to a level 2 energy audit to better ensure the retrofit’s environmental outcomes and performance. Sustainable Melbourne Fund has established an external panel review process to assess the appropriateness of custom improvements for inclusion under an EUA.
A common sense approach to utilise the information that would be generated as a matter of course in undertaking an efficiency or optimisation project underpins the assessment criteria for both common and custom improvements. Qualifying for an EUA simply requires that the information be presented in a straightforward manner to enable proposed retrofits to be assessed. The aim of the program is to finance projects that forward-looking building owners, tenants and facility managers would already be considering.
There are many factors providing major impetus for the use of EUAs to upgrade, including ready access to competitive, long-term, fixed finance with AU$60 million available from NAB, a sound legislative framework, support through the 1200 Buildings program, expansion of the Victorian Energy Efficiency Target to include the business sector and the Federal Government’s Commercial Buildings Disclosure program.
EUAs can help facility managers unlock a wide range of opportunities for improved efficiency within buildings, enable tenants to reallocate wasted money to improve their tenancy lighting systems without having to put money upfront and provide building owners with longer payback to pay for projects that may have previously been uneconomic. By working together, facility managers, tenants and building owners can deliver comprehensive retrofit projects with shorter paybacks that improve the performance of both tenancies and the base building.
With finance available at fixed rates for 10 years the optimal project is one where the simple payback is around six or seven years and financed over 10. This type of project would be a true representation of optimal reallocation of unproductive money to deliver positive, productive outcomes for buildings. Such a project would be cash flow neutral in year one and, as energy and water prices increase over time, the total cost of occupancy of that building would be less than if no action were taken.
Economists practice theory. Facility managers deal with reality. EUAs are a ground-breaking tool to help theory and reality meet and can achieve results on a scale meaningful to the problem for all parties. Facility managers can play an important role in assisting tenants and building owners to identify and pick up the $50 notes left on the floor of their tenancies and plant rooms.
Scott Bocskay is the chief executive of Sustainable Melbourne Fund, which administers the environmental upgrade finance mechanism for the City of Melbourne’s 1200 Buildings program.
“This article was first published in Facility Perspectives June 2012, and is reproduced with permission.”