Hospitals to suffer as Victoria axes Greener Government Buildings Program

27 March 2014 — The Victorian Government has axed its hugely successful Greener Government Buildings program, which was on track to save billions of dollars in energy bills for taxpayers, and replaced it with something the industry says won’t work.

The move will cost hundreds of jobs and trashes major investment by a range of energy efficiency services companies.

Energy Efficiency Council chief executive Rob Murray-Leach said the axing would cost “hundreds of job losses, devastate the industry and damage the Victorian budget”.

“Jobs have already been lost because of this decision. More jobs will be lost, with some of our members being forced to cut up to 70 per cent of their Victorian staff,” he told The Fifth Estate on Wednesday.

“Upgrades to schools and hospitals around Victoria, including in Frankston, Monash, Footscray and Geelong have now been put on indefinite hold. Communities around Victoria will lose out.

“This decision is economically reckless and financially irresponsible.

“It is shocking that the government would make a decision that would both damage a fragile economy and cost the budget $2 billion.”

One of the biggest losers is the health department and the Victorian Health Minister David Davis is understood to be “furious”.

Planned energy efficiency upgrades now ditched include to Austin Health, Monash Health, Northern Health and West Gippsland Health Services, Latrobe Regional Hospital, Peninsula Health, and Western Health, Alfred Health, Barwon Health and St Vincent’s Hospital.

Changing the program would cost the health sector well over $21 million a year, Mr Murray-Leach told a Senate committee last night.

The program was rolling out massive savings, and over-delivering on almost every metric.

Mr Murray-Leach claimed the Department of Treasury and Finance was aware that the program was projected to deliver over $2 billion in energy and maintenance savings within 25 years.

The government’s Performance Report 2009–2012 also showed the program had provided:

• annual direct cost savings in utilities and maintenance bills of $32.17 million
• projected avoided cost savings of $46.8 million by 2020 due to utility price rises
• estimated avoided capital expenditure of $81 million over the next four budget periods
• a net present value of $125 million for the first 19 projects
• average project greenhouse gas savings as a proportion of portfolio GHG emissions of 42.8 per cent, exceeding initial estimates of 25 per cent
• an internal rate of return of 14 per cent

The program was used for government buildings and by departments such as education.

The program was particularly important for the health sector, a huge consumer of energy.

The Victorian Auditor-General’s report Energy Efficiency in the Health Sector in 2012 found that Victorian heath services spent nearly $70 million on energy in 2010-11 alone. That’s money not going to hospital beds and other services.

The GGB found it could shave 30 per cent of the costs.

“Without additional funding or further energy efficiency initiatives, health services may need to allocate more of their budget to energy supply costs, or reduce other healthcare services,” Victorian Auditor-General said.

• See our article on a similar report in NSW Health audit report: too much energy waste; try harder

In an earlier report on The Fifth Estate, we found:

• A $12 million in GGB investment would deliver a 30 per cent cut in greenhouse gas emissions, with energy, utility savings and maintenance savings of $1.25 million a year
• Federation Square, in a $6.6 million project, was expected to cut emissions by 52 per cent, worth just over $800,000 a year, mostly in energy savings.
• Other GGB programs under way included the Melbourne Cricket Ground, museums, the National Gallery of Victoria and universities.
• In 2011 the program received the Premier’s Award for sustainability from then premier Ted Baillieu

It was widely agreed to have galvanised huge momentum in the energy efficiency industry, which was able to leverage the program’s long-term structure to invest in staff and new technology to build knowledge and capacity in the field. And make the overall work easier and cheaper.

A raft of companies selected for inclusion on pre-approved panels to handle the work were include: AG Coombs, AGL, Alerton, CarbonetiX, Cofely, Dalkia, Ecosave, Genesis Now, Honeywell, Schneider-Electric, Siemens and Total Energy Solutions.

The NSW government largely replicated the panels in its own energy efficiency programs.

Failure to understand?

Yet a series of urgent representations from the industry sector over the past few weeks has failed to dissuade the government from its decision. On Tuesday this week, Assistant Treasurer Gordon Rich-Phillips told Parliament the program would go.

His reasoning was that it would save money. But this appears to be a fundamental misunderstanding of how the system under his own department works.

The program had a net positive benefit over the longer term. Essentially the GGB program was a loan from Treasury to invest in energy savings, with payback to be within seven years.

It was not a grant. It cost the taxpayer nothing over the longer term and would save on operational expenses, such as outgoings.

Mr Murray-Leach said the decision suggests the government “doesn’t understand the difference between a loan and a grant”.

Mr Gordon Rich-Phillips put a positive spin on the decision. He told Parliament on Tuesday:

This program will provide a renewed focus and emphasis on delivering utility cost savings in government buildings. [Efficient Buildings Program] will provide government departments and agencies with greater autonomy to identify and choose those upgrades to their buildings that will produce the best efficiency savings, with the capital requirement funded either internally or through a budget capital bid. Importantly the savings that are generated through efficient government buildings will be recouped by the agencies that make the savings. This will remove the existing funding constraints on energy efficiency projects and allow those projects to compete on an equal footing with other capital bids.

I am pleased to note the launch this afternoon of one of the largest self-funded energy efficiency projects in Victoria under existing energy performance contract arrangements, RMIT University’s Sustainable Urban Precincts Project. It will deliver energy performance upgrades across RMIT’s campuses. It represents an investment by RMIT of around $70 million. RMIT recognises the value of its undertaking energy performance contracting.

An RMIT spokesperson told The Fifth Estatethe upgrade project had been funded by the GGB.

But would this proud achievement be possible when the program ends at the conclusion of the 2014-15 financial year?

“That’s a hypothetical,” the spokesperson said. “The project has been underpinned by GGB. That’s all that can be said.”

Why the GGB program was so good – and why the new version won’t work

While the GGB program was a net positive benefit to state revenue, the new Efficient Buildings Program changes all that.

It removes Treasury as a funding source, whittles back its role to providing some advisory and support services and makes each department or organisation responsible for its own project funding.

A serious flaw in the new scheme is that “vast majority” of departments are prevented from borrowing money from the general market and must borrow loans from the Public Account, which is administered by the Department of Treasury and Finance.

In its submission to the government the Energy Efficiency Council said the GGB program was world’s best practice and that It delivered financial benefits on a number of levels.

Key points regarding the GBC included in a public submission by the EEC on the Victorian government’s inquiry into the impacts of the carbon tax on the health sector include:

• Internal Rate of Return – The GGB program was structured to deliver an internal rate of return of 12 per cent, but in fact it was achieving an IRR of closer to 20 per cent
• Savings on energy bills were initially thought to be $1 billion over 25 years but were subsequently expected to be closer to $2 billion
• Short-term debt would increase but the program would have a positive impact from years eight to 15
• Ratings – “Although the GGB program increases short-term debt, the benefits to all other financial metrics mean investments of this type are generally viewed positively by ratings agencies,” the EEC said
• Balance sheet impact would be positive. “A project funded under the GGB Program would have net zero impact over the contract period (Year 1 to 7), as the uplift in the building value nets out the initial cost of the upgrade, and net positive impact from the end of the contract period until the end of asset life.”
• Outgoings to now rise – Dropping or reducing activity under the GGB program will “increase the Victorian Government’s outgoings, reduce the surplus and have a negative impact on the balance sheet”.

See more on the business case for Greener Government Buildings Program, co-authored between the EEC, Victorian and other government property experts, National Framework For Sustainable Government Office Buildings, Guidance Paper: Integrated Energy Efficiency Retrofits and Energy Performance Contracting

Can the Clean Energy Finance Corporation help?

It will be interesting to see if the Clean Energy Finance Corporation is considered the general market. Chief operating officer at Clean Energy Finance Corporation Meg McDonald recently told The Fifth Estate that the CEFC may be able to step in with loans to fill the gaps.

Some of the barriers to energy efficiency

Expecting furiously busy department heads or heads of any organisation to take on board energy efficiency programs is a tough call. Anyone who works in this field knows how hard it is to encourage a shift in focus from day-to-day operational issues to energy savings.

Industry observers say this capacity constraint is one of the most difficult barriers to overcome in energy retrofits, regardless of the savings on offer or even how easy the program can be delivered by the consultant.

The GGB program overcame these hurdles by designing a platform of protocols and systems that streamlined the delivery of projects, and could be replicated across any government organisation or institution.

It included a panel of pre-approved energy efficiency providers and a process to engage buy-in from organisational heads, which was essential to the success of projects.

Mr Murray-Leach, whose organisation had a key role in developing the platform, said each of the components of the platform was essential for success. Other states had started to look at the model, he said, and last year NSW announced an expansion of a similar government efficiency program, and a shared panel of energy efficiency contractors.

The government says the new program is better

A government spokesman said in response to a series of questions from The Fifth Estate that the new Efficient Government Buildings program would be an improvement on the GGB program.

It was a “new stage” in the Victorian Government’s “commitment to improving energy efficiency in government buildings”, the spokesman said.

The program, was “focused on ensuring that energy efficiency projects in Victorian Government buildings are targeted at cost savings to deliver improved value for money in the context of the state’s broader spending and investment priorities.

“The program is administered by the Department of Treasury and Finance and provides Victorian Government departments and agencies with assistance and advice on assessing and implementing energy efficiency projects.

“This will give greater autonomy to departments and agencies to prioritise energy efficiency projects in the context of other capital bids, to improve service delivery standards and reduce service delivery costs.

“The central funding arrangement for energy efficiency projects that was a feature of the Greener Government Buildings program will expire under the Efficient Government Buildings program from 2015-16.

“As a result, energy efficiency projects will no longer be constrained by central funding limits and can be considered as part of departments’ and agencies’ general capital program.

“Under the Efficient Government Buildings program energy efficiency projects will be treated on an equal footing with other capital program proposals within departments, having regard to overall priorities.”