By Dr Vanessa Rauland, Curtin University
27 March 2014 — A range of new and existing funding mechanism could address financial issues associated with low carbon urban development, says Dr Vanessa Rauland.
In a recent short series on Decarbonising Cities, the significant carbon abatement available from urban development, particularly at the precinct-scale, was highlighted, predicated on alternative practices being adopted during design and construction of developments, and managing resources within them (energy, water and waste, for example).
However, numerous barriers currently prevent developers from pursuing this form of development, many of which result in additional financial burdens. Incentives are therefore required in the short term to reward progressive developers.
In addition to incentives, however, new funding models are needed to enable this type of development (characterised by higher initial upfront costs but lower long-term operational costs) to become commercially viable and thus mainstreamed in the Australian context.
Here, a range of new and existing funding mechanisms are outlined that could help to address some of the financial issues associated with low carbon urban development. A new funding mechanism – GRID (Green, Regenerative, Improvement District) is proposed as a means to help to provide an innovative way of financing the green infrastructure needed at the precinct level.
Existing funding models
Various funding models and financing mechanisms have emerged in recent years to deal with the high capital costs and issue of split incentives generally associated with retrofits, environment upgrades and energy efficiency improvements within the built environment. Many of the funding solutions have been tailored to assist individual building owners or companies and include property assessed clean energy (PACE) financing, environmental upgrade agreements, the use of energy service companies (ESCos) and a range of new leasing arrangements for energy efficient appliances and renewable energy systems.
The concept of “value capture” as well as business improvement districts (BIDs) could also potentially help to finance low carbon, green infrastructure at a larger precinct scale.
PACE financing and EUAs
EUAs are a recent Australian adaptation of the PACE financing mechanism, which was originally developed in the US. EUAs focus on commercial buildings and allow the cost of an energy efficient retrofit or upgrade of a building to be attached to the property rather than being borne solely by the building owner. EUAs were designed to overcome the concern of the building owner that they might not be able to pass through the additional costs associated with their upgrade to the next buyer.
The EUA mechanism allows low cost loans to be taken out by the building owner and used to retrofit a building, with the loans being repaid through an agreed special council rate attached to the building over a set period of time. This pioneering initiative has helped to overcome the split incentives problem facing existing commercial buildings by allowing the cost associated with the retrofit of building to be passed on to future building owners in the form of a loan.
ESCos
Using an energy service company to implement energy efficiency upgrades and decentralised renewable or low carbon energy generation projects is particularly useful in dealing with the high upfront capital costs associated with energy-related projects by removing the risk associated with the uncertain energy payback periods.
ESCos generally differ from standard utility companies by offering energy services (for example, thermal comfort or improved lighting) as opposed to solely providing electricity. They function predominantly at the small, decentralised level. ESCos can offer a range of lower cost energy generation options as they avoid many of the charges associated with large-scale operations, though their business model often involves paying for retrofits and upgrades through energy savings.
The scope of services that ESCos provide varies from lighting retrofits to installing and managing small-to-medium-scale onsite energy generation such as co- and trigeneration. ESCos are also often contracted to identify a range of other energy efficiency solutions in a building.
The ESCo model is particularly appealing at the precinct scale and could also be used in combination with a variety of other measures and models.
Leasing arrangements
A variety of new leasing arrangements for energy efficiency appliances and low carbon infrastructure have been created in recent years. Low Carbon Australia, an independent, public company funded by the Federal Government, joined together with Alleasing in 2010 to develop a unique leasing arrangement for energy efficient equipment called E3 Lease. It functions similar to an ESCo in that it requires no upfront capital as lease payments are financed through the energy savings. While the company leasing the equipment won’t usually own it (unlike with some ESCos), the leasing arrangement allows the company to regularly upgrade to the most efficient equipment.
Leasing equipment may be less suited to precinct-scale infrastructure, as it is likely to require someone to take responsibility for maintaining the equipment. An ESCo, which owns and operates equipment independently, may therefore be more desirable.
However, there are various new leasing arrangements for solar panels, which could be used at the precinct scale. These leases are transforming the solar market by eliminating the upfront capital costs associated with solar panels while offering a fixed lower electricity price for customers over a set time period.
Value capture
Value capture is a funding model that has traditionally been used to finance transport infrastructure. The model essentially captures a percentage of the land value uplift that occurs as a direct result of the public transit infrastructure being constructed nearby. The increased desirability to live in these areas (due to increased accessibility, improved walkability, decreased transport costs, decreased time spent in transit, increased productivity and other benefits associated with economies of agglomeration) increases property value.
This increase in value is generally captured through some form of land tax, which is then put towards paying off the infrastructure over a set time period.
The use of value capture in Australia is limited though various State governments and cities have recently been investigating opportunities.
Such a mechanism could potentially be used to pay for other types of green infrastructure if they could prove to have tangible community benefits such as reducing living and business operation costs, such as from improved energy, water and waste management.
Business improvement districts
A bBusiness improvement dDistrict (BID) is essentially a body created and funded by local businesses and property owners within a defined district of a city to manage the improvement of that district. They are generally funded by an increase in tax or a levy applied to businesses and property owners situated within the specified area of the BID.
The roles and functions of BIDs vary considerably between different districts, cities and countries, depending on the needs of the local area. BIDs have also been adapted to fit various other districts within cities, such as suburban mixed-use centres (Brisbane council introduced a BID-like program in 1996, called SCIPs), and residential and industrial areas. Various BIDs currently exist in Australia (see City of Fremantle and Gosford city).
BIDs use a highly participatory process, whereby the people contributing to the fund play a key part in deciding what the funds should be used for. BIDs are thus an alternative, privately funded, independent and participatory governance mechanism for improving specific precincts of cities, though have not focused specifically on greening or environmental improvements. Using the concept of a BID to facilitate the implementation of green infrastructure at a precinct level is discussed below.
From BIDs to GRIDs
The concept of a BID could be adapted to provide a promising new mechanism for assisting urban development to adopt the new green infrastructure discussed in previous articles.
Revitalisation and improvement of urban areas can be greatly assisted by the implementation of new green infrastructure, which will not only help to improve the attractiveness of the area, but also help districts to become more resilient in the face of climate change impacts and rising energy and water prices.
A new term has been given to this concept or mechanism – Green, Regenerative, Improvement District, or GRID, which aptly acknowledges that the new, emerging low carbon infrastructure is well suited at a smaller scale – a precinct-scale grid – rather than the large, centralised grids that have traditionally been used to manage resources. It also acknowledges that to be sustainable, urban areas need to be regenerative, that is, producing and managing as many of the resources that they consume as possible. This includes energy, water, waste and potentially food and other resources.
The issue of engaging multiple stakeholders, which has traditionally posed a problem for urban precinct development projects, is also well addressed through this mechanism, as stakeholder engagement and participation lies at the heart of the BID process.
A new not-for-profit organisation out of the US, EcoDistricts, has also been calling for the establishment of sustainability management associations within eco-districts or precincts, which would be responsible for the ongoing management of the areas.
Combining the use of ESCos and various leasing arrangements within the GRID model could potentially help to deliver the basic green urban infrastructure needed at the local precinct level, such as co- and trigeneration, community solar PVs and biophillic urban design (including local urban agriculture and precinct-scale stormwater management). Opportunities for value capture could also be explored.
This mechanism could potentially help to shift the high upfront capital costs associated with the green infrastructure away from the developer to the community by spreading the costs over a longer time period through an increased tax or levy within the area. The increased levy will be offset by the reduced operating costs associated with living and working in those precincts, thus increasing the overall affordability for those buying into the area.
An ongoing and active management association is key to the GRID, which needs to include all the key stakeholders in the precinct. This association or organisation will be responsible for managing the green infrastructure and sustainability projects within the precinct as well as continually seeking out new opportunities for revitalisation.
More research is needed to determine how exactly this could function. Please contact Vanessa if you would like to discuss or contribute to the development of this concept.
Dr Vanessa Rauland is a lecturer and project coordinator at Curtin University Sustainability Policy (CUSP) Institute. She recently completed her PhD on “decarbonising cities”. Dr Rauland is the co-founder of SimplyCarbon, which helps to reduce organisations’ carbon footprint and improve the efficiency of their operations.