Almost all focus in the report was applied to the option of pursuing renewable energy as a solution to our reliance on carbon based energy. This is fine for the longer term, but it ignores the commercial reality that a step by step approach is required and indeed will occur. 

Plainly, the process of reducing our reliance on fossil fuels must include the reduction in our overall demand for energy. Any decrease in demand for energy will also reduce Peak Demand. 

It is pleasing that the Federal Government’s announcements following the COAG meeting finally seem to be recognising this fact. But they still seem to be tinkering – one minute per hour less air-conditioning, is cute but not as effective as four less hours at the right times. 

Energy Efficiency is a huge key to achieving greenhouse targets. Energy Efficiency improvements in buildings can provide a quick, very predictable – and in some instances guaranteed – energy use saving. 

In the experience of Napier & Blakeley, energy use in an office building can be reduced by 40% – 50% via energy efficiency measures.  Each measure produces a positive return on investment, in many cases far better than the building owners’ so called “core business”. 

For example:

Office buildings are responsible for about 10% (1) of Australia’s greenhouse gas emissions. Thus a best – and plainly unlikely – outcome is that Australia’s collective energy use could be reduced by 5% overnight by the adoption of all energy efficiency improvement options.

 Plainly energy efficiency improvements in buildings should be a no-brainer environmentally and economically. 

But it’s not really happening. 

Whether decision makers can’t grasp the concept of spending money to save money, whether the energy costs are not considered material, whether CSR statements are simply that, statements, or whether there is too much confusion out there, it’s difficult to pin-point the reason why.

I suggest one reason for inaction on energy efficiency improvement is environmental fatigue caused by its constant political treatment and the uncertainties brought about by the myriad references around it.

We have VEET, ESC, M&V, GBCA, NABERS, BEEC, Green Star, Green Star Performance, LCAL, CEFC, Kyoto, Montreal, Copenhagen, signatories, non signatories, sceptics, carbon tax, DRM, Peak Demand, CTS, ETS, MWh, KWh, Energy Efficiency Opportunities Programme, Energy Efficiency Information Grants, Climate Change Commission, BREEAM, LEED, E3, MEPS, GEMS, GBF, EUA, EPC, EEC, Clean Energy Future, to name but a few.

Maybe another hindrance – as it appears from the recent Climate Commission Report – is that there are two camps? The first; the dull yet pragmatic supporters of energy efficiency measures and the other; the elite and well funded supporters of renewable energy?

I don’t for a moment suggest that we don’t pursue the development, or to not adopt, renewable energy options.

 Renewable energy can have less certainty and has far longer payback periods.

We see inexpert community groups pursuing the development of localised wind farms – although sometimes not too close to their own homes – perhaps for the benefit of being part of a community, rather than for economic or even environmental drivers, especially when considered against the energy efficiency improvement opportunities that no doubt lie dormant throughout their region.

Similarly, we see the power companies building renewable supplies, but some or perhaps all of this activity has been forced upon them by government regulation.

On the matter of the power companies, many query their push for their customers to use less power.

It is the reduction in PEAK DEMAND that the power companies pursue. A pursuit that we should all support.

Peak Demand relates to the eight or ten hours in the two or three hottest days of the year, when everyone cranks up their cooling. This tiny percentage of annual demand, requires 10%-20% of the power companies’ infrastructure.

Thus billions of dollars are invested for our collective comfort for a few short hours. Analysts suggest that the premium we all pay for this luxury is about 400 times the standard rate per MWh – although this is averaged across each one of our electricity accounts.

Perhaps Development Approvals should require a high rise to incorporate its own capacity to service its Peak Demand?

The introduction of ‘Time-of-Use’ metering would enable (i) the power companies to apply a more realistic price to these peak periods and (ii) consumers to reduce their energy consumption during these periods (in response to the high prices charged).

Over time, the requirement to carry under-utilised infrastructure will subside, enabling the gradual withdrawal of the requirement to subsidise the peak users and thus reduction in all others’ energy bills.

There does not appear to be the political will to allow the introduction of enabling metering in some of our States.

Coupled with statutory pricing mechanisms, we face the risk of more (short to medium term) superfluous infrastructure costs being passed on to us all.

There have been various Government programmes and grant moneys made available for energy efficiency improvements to existing buildings. However, they represent a bag mixed with expediency, cynicism and political targets, for example:

Green Building Fund, $120M directly supported energy efficiency in buildings, but went primarily to those at the front of the curve, who perhaps could afford to do the works themselves.

Low Carbon Communities, $330M seems to be a welfare handout disguised as environmentally driven grants.

$1B tax breaks for energy efficiency works. This large number was waved under our noses for some time and then claimed back by the Treasurer to balance his books. But the break was almost certain to NOT induce change in behaviour. The conditions and the time lags involved would have neutered its capacity to procreate.

It’s a similar story relating to the renewables sector but on a much grander – or perhaps cynical – scale, for example:

Carbon Tax; given the removal of much of the pain – via tax cuts and subsidies – required to induce change, this appears to be a redistribution of wealth disguised as environmentally driven ambition.

Clean Energy Finance Corporation; has been billed as $10B for driving the renewables sector. There is some talk of part of the finance to be speared into energy efficiency, but I am nor aware of any confirmation on this front.

Perhaps we should forget the acronyms and start from ground up now, to address Peak Demand by improving energy efficiency and give ourselves a better platform to consider the longer term options before us.

By Peter Frith, Joint Managing Director, Napier & Blakeley, Energy Efficiency Advocates.*
Published on the Property Review Website 13.12.12

Sources:  (1) Australian Government – Department of Climate Change and Energy Efficiency

In the last year Napier & Blakeley

It’s rare to find nothing that would be considered problematic for an incoming owner, but the last few years there have been a few issues that have become commonplace through either lack of ongoing investment and maintenance or as a result of new market legislation.

The GFC brought substantial financial constraints to the entire economy but for property owners it brought pressures through loan to value ratios (LVR’s), reductions in value and rental income. This created a catch 22 situation where many knew they had to keep maintaining and spending capital to keep their assets compliant, relevant and therefore rentable, but were unable to directly fund or borrow funds to do so.

We recently re-analysed an asset that we had prepared due diligence and capex forecasts for a few years ago, and the list of items that we identified in our initial report were almost completely the same as now. Nothing had been fixed, maintained or repositioned. So, many years down the track the asset has fallen deeper into redundancy and therefore costs more to rectify.

The other more recent trend that has pretty well become standard during due diligence is the of analysis of energy consumption and modelling future asset potential to reduce energy. This trend is driven by rent, NABERS disclosure legislation and also with the future cost of energy in mind.

Over the last 2 years the federal Government ran the Green Building Fund initiative which provided up to 50% of the expenditure required by an owner to sustainably retrofit their asset.

This initiative was worth approximately $120m so therefore an overall value of retrofitting projects of $240m. We estimate conservatively that there could be well in excess of $2b worth of retrofit requirements, especially when you consider that 35-40% of the rental marketplace are Government type tenants that require minimum 4 to 4.5 star NABERS rated assets to lease. As an example, there are many Premium and A Grade commercial offices that are substantially below that level of rating, some hovering at around a 1 star NABERS rating.

Contact

If you want further information on due diligence and capital expenditure forecasts, or any other Napier & Blakeley services please contact any of our offices below:

Melbourne - Rob Howells            03 9915 6300             rhowells@napierblakeley.com
Sydney – Gavin Peach                02 9299 1899              gpeach@napierblakeley.com

Napier & Blakely services:

• Technical Due Diligence
• Capital Expenditure Planning
• Quantity Surveying
• Strategic Asset Management
• Building & Sustainability Consulting
• Property Depreciation

Reduced Life Expectancy and Premature Capex
Recent technical due diligence and condition assessments have also found that the lack of R&M and Capex budgets for economic life driven plant and equipment overhauls and refurbishments has resulted in increased short and medium term Capex.

To put this in context, without appropriate R&M, major plant items may have an economic expected life of (say) 25 years, however the reduction of removal of maintenance can result in a major shortfall in expected life to around 15 years.

The Reaction
Astute purchasers have become aware of this risk and look for these patterns in their technical due diligence reporting to ensure that appropriate Capex costs are factored into the purchase price to account for a vendor’s R&M expenditure shortfalls. 

Condition assessments, maintenance reviews, energy assessments and risk weighted strategic Capex forecasts have become 2010’s essential tools for good asset and facility management and sustainable property solutions. 

Risk of Non-Compliance 
New legislation requires that most commercial office property will be required to have a formal energy performance rating in the next few years and many will require this imminently or in the next few months.  This Legislation has caught most by surprise.  The Building Energy Efficiency Disclosure Act 2010 has just been introduced with transitional provisions (1 November 2010 to 30 October 2011) requiring the disclosure of a building’s energy performance through a NABERS Energy base or whole building rating, for all commercial office property with a net lettable area of 2,000sqm or more that is offered for sale or lease. 

Anxious Vendors
With fines in excess of $100,000 for breaches of the Act’s obligations; including advertising the property for sale or lease, after November 1 2010 without an appropriate NABERS Energy rating, there is significant anxiety in the market place.  The latest information from the Department of Climate Change and Energy Efficiency (DCCEE) will surely increase anxiety levels, as they have confirmed that neither exemptions nor extensions will be granted for lack of knowledge or where assessments are currently underway but not yet completed.

 It will be interesting to see how owners, selling and leasing agents and DCCEE react. 

Astute Purchasers
The story doesn’t end once the rating has been achieved.  Purchasers want to know about the processes and procedures that owners have in place, the potential risks of maintaining the rating at the current level and what plans are in place, or could be implemented, to improve the rating, perhaps strategically in line with planned Capex or future lease expires.

Such initiatives are considered in terms of funding opportunities, reduced energy costs, pay back periods and commercial outcomes. 

Published in the Brisbane Legal Magazine November 25, 2010

If you are considering upgrading and applying for a Green Building Fund Grant for your Hotel then we can assist you in this process. Napier & Blakeley have been successful in obtaining over $5M in funding for our clients in the previous Green Building Fund rounds.

The Hotel NABERS Energy rating is not applicable for all hotels and you should consider the following when reviewing the requirements to obtain a rating.

Requirements For Completing An Assessment

NABERS Energy and Water for hotels is designed for business hotels within Australia. Business hotels have the following characteristics:

• At least 50% of rooms have little or no in-room cooking facility
• At least 50% of rooms are sold on the basis of a single guest per night, typically with short stays
• Heated pool facilities typically limited to less than 200m² surface area
• No dedicated on-site overnight accommodation for staff
• Often located within urban areas

These characteristics are not exclusive and it is not intended for Accredited Assessors to specifically assess these except if required in the interpretation of a rating. While it may be possible to rate other hotels types such as a resort hotel using NABERS for hotels, the resultant rating will not be a reliable indicator of the hotel performance.

NABERS for hotels is a comparative tool which measures and benchmarks hotels water and energy consumption against the market average. The rating includes energy and water used by all facilities provided for the utility of hotel guests and the associated back-of-house requirements and specifically includes:

• Hotel rooms
• Conference facilities
• Laundry services within the hotel either for back-of-house or guest use
• Food services within the hotel floor-plate that have charge-to-room facility
• Gyms and pools for guest use
• Other guest services, such as a beauty treatment or business centre within the hotel floor plate that have charge-to-room facility
• Hotel back-of-house areas including hotel-only offices, meeting rooms and staff facilities
• Hotel lobby
• All vertical transportation used in the access to the hotel lobby, facilities and rooms

NABERS for hotels exclude areas, services, functions and energy consumption that are associated with “non-hotel” activities. Therefore NABERS for hotels does not include areas, and the associated energy or water use associated with:

• Retail outlets that are separately leased and managed
• Café’s, restaurants and other food services that do not have charge-to-room facility
• General leased office space not used directly by hotel operations
• Car parks available to the public which are not provided for the specific use of the hotel
• Major equipment primarily serving non-hotel occupants or non-hotel uses (e.g. telephone exchanges, computer systems servicing external networks and specialist communications equipment).
  These are dealt with by exclusion of energy or water use by applying the various protocols during the assessment.

NSW / ACT / WA / NZ  -  Alastair Walker, Rod Clarke -  02 9299 1899
VIC /  SA  / TAS  -  Peter Frith, Rob Howells -  03 9915 6300

The short answer is yes it does, with direct financial support for improvements in emission reductions for commercial buildings.

Election promises impacting the commercial property industry were:

• Green Building Fund extension (now office, retail and hotels that can be NABERS Energy rated) with $30Million dollars available for funding for new application rounds from now until July 2011.
• Tax allowance bonus for Green building improvements, for office buildings, Retail Centres (over 10,000sqm) and Hotels. Conditions will apply, but if you meet them then this is a 14.5% reduction in project costs for improving energy efficiency.

With the details yet to be defined by the responsible departments we assume that the green building fund mark 2 will be delivered fairly quickly and with their previous rounds offering around $15million per round then another two rounds should be undertaken. Perhaps one for January and one for April 2011, which allows for time to set up and then for all funding agreements to be finalised before the tax allowance bonus commences in the following financial year.
The conditions of the tax allowance bonus for Green building improvements will need to be very clear to ensure the financial benefits can be guaranteed for an owner when undertaking a project. Industry consultation for this should commence straight away on the details for this legislation.

The main condition of performance to be eligible for the tax bonus in the election promise was that the works must move a building from a 2 star or lower NABERS Energy rating to a 4 star or higher NABERS Energy rating. Industry input into the criteria for meeting the tax bonus requirements will be required to ensure this policy does encourage investment. On the surface as it stands now, the cost to guarantee the energy improvements will outweigh the benefit received, so this may be as it states, a bonus, rather than an incentive to upgrade your property.

It all moves to NABERS Energy ratings

With the Commercial Building Disclosure (CBD) legislation in place from November 2010 we will see all advertisements for commercial office space over 2000sqm stating the NABERS Energy rating. The funding available federally under the Green Building Fund and tax bonus are dependant on NABERS Energy ratings. Commercial building owners must understand their portfolio energy performance and be working to a strategic NABERS performance strategy, embedding this in contracts with building contractors and building managers.

Costs to upgrade for energy improvements

From our work with environmental strategy and completion of a number of recent commercial building upgrades, when you isolate the energy improvement works the numbers vary from site to site and an order of costs is difficult to assess.

Projects we have recently completed or are under way which are targeting existing buildings to improve to 5 star NABERS Energy range from $50 to $150 psm. For an exemplar building targeted to be the lowest emission multi tenanted building in Australia the costs are coming in considerably higher with the tri-generation system and other emission reduction technologies added to the best practice upgrade. At the top end of the cost scale, would be an early 1970s building requiring new energy and HVAC systems throughout. The cost can be considerable and by this we mean around $600psm and you would want a vacant building to undertake the required work.

Technology and payback analysis

In assessing technology and payback you need to review not just the emission savings but also the impact on water use, outgoings, available funding and most importantly the impact on tenants indoor environment quality.

A review of indoor environment quality impact with the implementation of a dedicated outdoor air handling system with humidity control and energy reduction benefits has shown a significant impact to the improvement of the working environment to tenants but how you calculate the benefit for the payback analysis alters depending on a number of issues such as lease profile, tenant profile and existing NABERS Energy Rating.

A tri-generation system has a significant impact on emission reduction but should you be looking at a multi engine system with undetectable NOx and SOx such as Bennett Clayton engines and how can you size this to create an option for future tenants to obtain their low emission power? We selected this as a first for NSW Local Government Super at 76 Berry Street and as a first use of this technology for a tri-generation installation this gained the exemplar funding under the green building fund.

If you are looking at lighting improvements you need to assess the impact now of the Building Energy Efficiency Certificate (BEEC) and the tenancy lighting assessment within this which you will need to provide publically. Will a few watts per square metre make a difference to a tenant considering a lease or will quality and compliance to Australian standards be more important in their decision making process?

Rating and Funding Advice.

In the first 5 rounds of the Green Building Fund (Round 6 is yet to be released), Napier & Blakeley achieved great success with GBF applications for our clients, securing over $5M of funding for clients including obtaining one of only two awarded exemplar project funding.

Napier & Blakeley can provide you with strategic portfolio planning advice, applications for funding and complete your NABERS ratings for you.

For more info please contact your local office.