FA VOURITES – 8 October 2010 – Property industry, roll up your sleeves. You have truckloads of work to do. At least if the government takes up some of the recommendations now on its desk.

On Friday, after months – no years – of prevaricating on the energy savings and carbon pricing, the Prime Minister’s Task Force on Energy Efficiency delivered its verdict. A resounding yes to broad and deep cuts to our energy waste.

And the property industry is central and fundamental to the job.

Here’s a snippet from the report to prove why: “According to the Australian Energy Network Association, 57 per cent of future energy network augmentation investments would come from the need to accommodate additional airconditioning demand.

“A 2004 study from the Western Australia Office of Energy also found that for every additional airconditioning unit worth $1,000, an additional investment of $6000 into generation and network infrastructure was required.”

There’s a clear understanding that the task of saving energy in buildings is beyond buildings: a city-wide, country-wide and industries-broaching task. And that means loads of co-operation and understanding that what we are dealing with here are highly interactive systems.

The sections on property include specific and broad recommendations: the need for more and better trained assessors; better measures to assess energy efficiency in buildings; financial mechanisms to enable long term green investments and paybacks, including a bias towards direct grants instead of tax write offs; government leadership with its own buildings; demonstration hubs for industrial and commercial buildings and “net zero-emissions” urban hubs that can showcase new high-tech, low emission housing and  precincts.

Magic words all round.

Sadly for those who want it, (The Property Council foremost) tax depreciation for greening buildings was considered but rejected, “Questions remain as to whether green depreciation is the most efficient and effective mechanism to encourage energy efficiency upgrades or innovations in the  buildings sector,” the report said. Other tax incentives were also discounted. Better perhaps, said the report, would be targeted competitive grants.

See below for a full extract on this.

And then, among all the talk of mandatory disclosure and minimum performance for appliances and such, were the specially potent words, there on page 149: that consideration be given to “provide a mechanism to investigate possible future minimum standards for existing buildings.”

Wow.

Well, we did it for water savings when the dams were running low: Level 3 restrictions, Level 4, Level 5.

It is worth going to the document and reading in full Chapter 10 on buildings, plus loads of related sections.

It’s easy reading and well worth it if you have a career in this industry.

Following are some key highlights relating to the property sector.

Foundation measures recommended are

  • A national energy efficiency target
  • A national energy savings initiative
  • An improved governance structure
  • Improved innovation, data and analysis
  • A long-term strategy to build a culture of energy efficiency

Options to support a step change

Given the remaining barriers to energy efficiency action and the opportunities outlined above, the Government may wish to consider the following areas as priorities for action:

  • establishing an energy savings initiative, which includes coverage of the buildings sector (see chapter 4)
  • supporting innovation in, and catalysing of, private sector finance for building upgrades
  • growing Australia’s energy services sector and improving energy efficiency government and community buildings
  • improving energy efficiency standards for appliances, equipment and buildings
  • developing a comprehensive long-term vision for the sector
  • strengthening Australia’s building energy assessor profession.

Competitive grants for energy efficiency

A competitive grants-based approach would provide a transparent mechanism to provide financial support for the owners of commercial buildings to invest in energy efficiency. The competitive nature of a grants process would be conducive to value-for-money investment by the Government, as proposals would have to meet predetermined selection criteria. Furthermore, a grants-based scheme would allow the Government to cap its funding commitment.

Chapter 11 put forward options for providing competitive funding support for innovation in district-scale energy efficiency solutions. An alternative could be to fund individual office (and/or non-residential) building upgrades (such as through extension of the Green Building Fund), however this approach would not be able to provide innovation support at the neighbourhood level.1

[See below for a full extract on tax and direct funding options]

Improving government and community buildings ?Improving Australian Government buildings and upgrading community facilities, such as hospitals and local government buildings, could further catalyse change in the built environment.

The Task Group suggests that the following initiatives could be considered as priority areas for action (see chapter 13):

  • further development of standard form contracts, education and training modules, professional accreditation services, and a performance auditing and monitoring regime for the energy services sector
  • a revolving financing mechanism to support building energy efficiency improvements across community facilities (such as education, health and other community buildings)
  • revising the current energy saving targets for Australian Government buildings and scoping possible financial mechanisms that could support necessary building retrofits.

Infrastructure
The way in which Australia’s infrastructure is planned, constructed and operated can promote energy efficiency or it can “lock in” poor performance for decades to come. It is important to ensure that the buildings, suburbs, towns, cities, and transport and energy networks we construct today help rather than hinder the transition to a lower-carbon future and facilitate a step change in our energy efficiency over the long term.

The barriers and challenges to constructing energy-efficient infrastructure include split incentives, information failures, and a complex supply chain. For example, the developers who design and construct new suburbs do not pay the heating or fuel bills of future residents. The maturing of a carbon price over time would help reduce these barriers.

Improved energy efficiency standards?Improving energy efficiency standards, ratings and labelling for appliances, equipment and buildings could provide further energy efficiency benefits to the built environment (see chapter 14). This process could go beyond simple minimum standards for new buildings, to possibly establishing a new high energy performance standards and ratings scheme. Such a program could both recognise industry leaders and help inform the purchasing decisions of consumers by making it easier to identify the most energy-efficient appliances, equipment and buildings.

Strengthening Australia’s capacity to assess building energy use
Industry capacity to provide advice on energy efficiency must be robust and reliable, so that investment decisions by businesses and individuals can be made with confidence. The decision support tools (such as energy assessment software) on which the industry relies must be credible and well supported.

Several current initiatives are aimed at improving the energy efficiency skills base, including those in the National Strategy on Energy Efficiency (the National Energy Efficiency Skills Initiative) and also under the Green Skills Agreement (see chapter 15). However, these measures have not provided a comprehensive package of support for people working in the building energy assessor industry to ensure they are ‘up to the task’.

Construction of new, more energy efficient buildings and the retrofitting of existing buildings will require a more skilled workforce. Government assistance is needed to overcome structural skills shortages in the building industry and to train workers in the new green building techniques that will be required.

To enable and fast-track building efficiency efforts, consideration could be given to strengthening the enabling mechanisms of:

  • building energy assessor skills and capacity
  • building energy assessment software tools
  • evaluating building energy efficiency codes

Energy efficiency hubs

The ambition of net zero-emissions urban hubs would be to smooth the pathway for new highly efficient residential developments — by lowering commercial risks of new business models, building up the necessary knowledge (based on improved data and trade skills) and creating successful project precedents. In doing so, it could help prove the case to (1) raise the bar for future minimum building codes and (2) demonstrate avoided costs of new electricity network infrastructure.

While there may be limits to the extent to which individual firms can quickly improve their own energy efficiency, there may be potential for production by-products to be used by others in ways that are not commonly found (such as the supply of by-product hydrogen from one chemical plant to a utility gas provider).12 By facilitating re-use, rather than waste, Australia may be able to reduce its energy intensity in aggregate even if individual firms’ energy efficiency is unchanged.

As such, there may be potential to draw together a range of industries and other groups in a defined geographic area to benefit from enhanced collaboration in the way energy is generated, transmitted and used.

Fortunately, Australia already has some experience in the efficient sharing of resources among users. Examples include the development of common-use infrastructures (see Box 11.2).

Programs such as Solar Cities (see Box 11.3) have shown the effectiveness of bringing together a range of disparate stakeholders to test, integrate, improve, develop and encourage new (and existing) energy technologies and business models, and by doing so, maximise synergies in energy use and energy efficiency.

Building on existing models, and complementing new programs such as Smart Grid, Smart City, well-targeted intervention by governments at all levels in energy efficiency innovation could help increase the scope of current private sector energy efficiency efforts and support the demonstration of innovative step-change energy solutions.

Energy efficiency hubs

Industrial hubs
The industry sector is a major user of energy in Australia. Even small energy efficiency gains across the 200 largest energy-using corporation would result in significant gains for Australia overall (see chapter 8).

Re-using waste heat or other energy by-products from one transformation process into another site can improve the energy efficiency performance of these facilities, even though the actual efficiency of each is unchanged.21 While this would seem to provide an incentive for industry to develop such ‘clustering’ arrangements, in practice collective synergies among sites can be difficult to achieve without shared vision and strong collaboration among users.22

The Government may, therefore, wish to consider facilitating the development of projects within industrial hubs to showcase:

  • recovery and re-use of resources that might otherwise be wasted between industrial, businesses and/or residential sites
  • energy efficiency and distributed generation technologies
  • innovative energy distribution solutions such as the private wire model. Action in this area would aim to test the benefits of industrial synergies, and explore options to create and exploit over time further energy efficiency improvements.

The Kwinana Industrial Park was founded in the 1950s when the state government secured 120 square kilometres of land to be dedicated to major resources processing activities. This helped kick-start relationships between companies located within the site, such as the Kwinana cogeneration plant located on a re?nery site.24

This cogeneration plant produces all the process steam required for the re?nery and generates electricity for the site as well as for the grid. The cogeneration plant is fired with natural gas supplemented with excess refinery gas from the oil refinery. This synergy led to the decommissioning of inefficient boilers —estimated to have saved the refinery in the vicinity of $15 million in capital expenditure

Trigeneration is the combined production of electricity, heating and cooling through recovery and re-use of waste heat, which helps maximise the use of the initial source of energy. Trigeneration can be particularly ef?cient in applications such as district cooling and data centres (through economies of scale and avoided start-up and shut-down losses).27 By installing a trigeneration plant in one of its data centres, National Australia Bank has reduced its energy demand from the grid by approximately 16 GWh of electricity per year. Avoided network losses and switching from brown coal electricity to natural gas have led to a reduction of carbon emissions (in the order of 20,000 tonnes per annum).28

South Australian Residential Energy Efficiency Scheme
The Residential Energy Efficiency Scheme (REES) was introduced on 1 January 2009. Electricity and gas providers with more than 5,000 customers in South Australia are required to meet targets to improve household energy efficiency. It runs in three-year phases, and the target in 2009 was 155,000 t CO2-e (35 per cent of which was to be achieved in low-income households).

Obligated parties (and their contractors) are required to offer incentives for householders to adopt energy-saving measures, such as installing efficient lighting, showerheads, heating and cooling systems, ceiling insulation, draught proofing and retiring second refrigerators and freezers. Each energy-saving measure has a set of minimum requirements with which energy providers and their contractors must comply. Energy savings are not represented by tradeable certificates.

The scheme has an additional requirement that energy providers must deliver energy audits to 13,000 low-income households over the next three years (2009 to 2011), as a priority. Energy providers and their contractors must comply with minimum requirements in delivering energy audits. The REES penalty amounts comprise a base penalty amount of $10,000, a shortfall penalty of $500 per energy audit not achieved and a ‘make good’ provision, and a shortfall penalty for the greenhouse gas reduction target of $70 per t CO2-e.

Funding methods
One method of funding, the PACE method of funding – or property assessed clean energy method – would work like this:

  • A qualified energy service company (ESCO) conducts a detailed assessment of energy efficiency opportunities in a residential building
  • The ESCO informs the building owner of identified opportunities
  • The building owner and ESCO apply to the city council for approval and funding of the selected opportunities identified
  • If approved, the ESCO is paid by a finance provider to conduct the work
  • The building owner does not pay any upfront costs
  • The building owner pays back the cost over time through increased land rates
  • The building owner benefits from increased leasing rates, higher efficiency rating and savings in energy costs—which exceed the increased land rates
  • The tenant enjoys a more efficient building and lower energy bills
  • If the building is sold, the increased land rates are transferred to the new owner

Tax incentives or grants?

The tax system could also be used to provide concessional treatment for capital expenditure incurred when improving the energy efficiency of an individual commercial building.

Australia’s tax depreciation system allows an asset to be written off (that is, deducted from a taxpayer’s assessable income) over its effective life. An asset’s effective life is the period over which it can be used to produce income.

For capital works, such as buildings and structural improvements, taxpayers can claim an annual deduction of either 2.5 per cent (over 40 years) or 4 per cent (over 25 years) of construction expenditure. The rate depends on when construction started and how the capital works are used.

Green depreciation
Several submissions called for more generous depreciation arrangements (so-called “green” depreciation) for expenditure that results in a significant improvement in the energy efficiency of the commercial building, or which brings the building’s energy efficiency to a certain, high, level.

The effect of such accelerated depreciation would be to allow eligible taxpayers to claim larger deductions early in the life of an asset (lowering their taxable income in those years), with lower deductions (and higher taxable income) in the
latter part of the asset’s life. In nominal terms, the overall size of the deductions that could be claimed would be unchanged, but the deductions would be brought forward relative to the standard tax treatment.

There would be a real cost to revenue because taxes would be collected later. This bringing-forward would effectively be an interest-free loan made by government to taxpayers, providing taxpayers with an additional incentive to invest in energy efficiency measures.

Designing factors for green depreciation
If the Government were inclined to pursue the option of green depreciation then a range of design factors would need careful consideration. Several of these factors were highlighted by the Property Council of Australia in its submission to the Task Group:

  • the threshold for expenditure eligible for accelerated depreciation
  • the depreciation rates which would apply to the eligible expenditure, covering both assets covered by the Uniform Capital Allowance regime (Division 40 of the Income Tax Assessment Act 1997) and capital works
    (Division 43 of the Act)
  • a mechanism for verifying ongoing eligibility for the concessional tax treatment.

The time period over which qualifying expenditure could be incurred would also need to be considered.

In setting a qualifying threshold, there are a range of possible approaches. In its submission, the Property Council of Australia suggested that eligibility could be linked to retrofits which see the building attain a certain NABERS or Green Star rating, or made dependent on the building’s carbon intensity being lower than a specified level, such as 100 kilograms CO2-e per square metre per annum.

Setting a qualifying threshold would also involve trade-offs. The Property Council of Australia suggested that the threshold should differentiate between building types and climatic zones. While such an approach could assist in targeting a concession, it would also make any scheme more complex.

Adopting a stringent test, which limited eligibility only to major retrofits resulting in the building reaching a very high level of energy efficiency, would contain a scheme’s cost and help to limit the extent to which building owners are subsidised for business-as-usual improvements.

Such an approach would need to consider how to avoid providing funding for major retrofits which are currently required to meet building code energy efficiency levels. The implication of limiting eligibility is that fewer building owners would be expected to be eligible for the concession than if a less stringent threshold were applied.

A verification mechanism would need to be designed to determine whether a retrofit met the criteria for a tax concession and to ensure that concessions were only provided to legitimate projects. This would involve additional administrative costs.

Green investment allowance
Accelerated “green” depreciation is not the only option for using the tax system to provide tax incentives for retrofits of commercial buildings to improve their energy efficiency. Rather than adjusting the rate at which capital expenditure is deductible, eligible taxpayers could be provided with a one-off bonus tax deduction—essentially a “green” investment allowance.

This would be analogous to the Small Business and General Business Tax Break, which formed part of the Government’s Nation Building and Jobs Plan in response to the global financial crisis.

However, such investment allowances have typically been used as broad-based measures designed to support aggregate demand in the economy, rather than to provide incentives for specific types of capital expenditure. Selective investment
incentives can also tend to push up the relative price of equipment that is eligible, which may have the adverse consequence of making energy efficiency improvements more costly for those not eligible for the incentive, such as those
owning residential property.

Summary
Irrespective of the specific design of a concession, using the tax system to provide encouragement for particular behaviour generally involves some additional drawbacks relative to providing a similar incentive through an expenditure program.

These include less transparency and less timely assistance for taxpayers, as the incentive is only received following the completion of their annual tax return. In contrast, direct grants programs usually involve more timely payments, depending on the design of the program. However, entrenching a concession in the tax law can potentially provide stakeholders with additional certainty.

Note 1 If a “single building” grants program was taken forward it would be important to consider how to maximise the impact on the broader industry, possibly through incorporating robust information gathering, communication, and skills development elements. Expanding the eligibility criteria to include all non-residential buildings, rather than office buildings only, should also be considered. Currently, NABERS assessments are available for hotels and shopping centres, in addition to office buildings. It seems reasonable to expect that there are opportunities to improve energy efficiency in commercial buildings beyond those used as offices. Broadening the eligibility criteria is likely to result in more cost-effective energy efficiency improvements becoming eligible.

The competition

A look at what other countries are planning

Austria – Planned social housing subsidies only for passive buildings as of 2015

Denmark –  By 2020 all new buildings use 75 per cent less energy than currently enshrined in code for new buildings. Interim steps: 50 per cent less by 2015, 25 per cent less by 2010 (base year 2006)

Finland – 30–40 per cent better than standard buildings by 2010; passive  house standards by 2015

France –  By 2012 all new buildings are low-energy buildings; by  2020 new buildings to be energy positive

Germany – By 2020 buildings should be operating without fossil fuel

Hungary –  New buildings to be zero-emissions buildings by 2020, and for large investments by 2012

Ireland – 60 per cent less energy than current standards by 2010, net zero energy buildings by 2013

Netherlands – 25 per cent less energy than current standards by 2010, 50 per cent less energy than current standards by 2015, energy neutral by  2020

United Kingdom (England and Wales)-  New homes to be 44 per cent lower carbon than current standards  by 2013 and zero carbon as of 2016. New non-domestic buildings to be zero carbon from 2019.

Source: European Commission, Low energy buildings in Europe: Current state of play, definitions and best practice, Brussels, ?25 September 2009, www.ec.europa.eu/energy/effciency/doc/buildings/info_note.pdf, accessed 23 June 2010.

United Kingdom: Carbon Emissions Reduction Target
The UK’s Carbon Emissions Reduction Target (CERT) requires energy suppliers to meet ambitious household carbon saving targets of 185 Mt CO2-e over the period 2008 to 2011. The CERT followed on from the Energy Efficiency Commitment (EEC), which began in 2002 as EEC1 and was modified to become EEC2.

Suppliers of gas and electricity are required to meet specified targets by promoting the take-up of energy-saving measures. Suppliers must install a combination of eligible measures that have a lifetime carbon saving score equal to their target.

The regulator defines standard energy efficiency measures acceptable for fulfilling
the target and quantifies the energy savings of these measures. Eligible measures
include behavioural measures such as real-time energy consumption display devices and home energy advice.

The CERT does not provide tradeable certificates; however, flexibility is offered in
that energy savings and individual obligations may be traded with the regulator’s
approval.

The UK Government argues that household energy programs are among the most
cost-effective measures available to reduce national emissions, as the financial
savings per tonne of carbon saved are greater than in other sectors. The CERT is
limited to household measures and has a specific requirement to realise at least
40 per cent of the carbon saving obligation in a priority group of low-income,
vulnerable and elderly households. The CERT works in tandem with another measure, the Decent Homes Standard, which requires all social housing to achieve a minimum standard of wind- and weatherproofing, warmth and modern facilities.

Evaluation of the CERT’s predecessor, the EEC1, identified that much of the target was met through home insulation.

Participants in EEC2 identified branding and customer loyalty as significant co-benefits of non-trading.

As the website of E.ON, a major UK energy retailer, states:

We’re an energy company. Our business is selling energy. The more energy
people use, the more money we make, surely? Except, for a forward-looking energy company with an eye on more than short-term profit, it doesn’t. Our ideal would be to have more customers.
All using less energy.

Analysis of EEC1 for the period 2002 to 2005 found that ‘energy suppliers have met their targets with an expenditure of 20 per cent less than the [UK] Government expected’. When costs to all parties were taken into account, it was estimated that the cost to the UK economy of saving one kilowatt hour of electricity through EEC1 was 1.3 pence, compared to the cost to the consumer of purchasing one kilowatt hour at that time of 6.7 pence.27

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