Consuming energy costs money. This is not just the sum charged by the utility provider; for many larger companies there is also the direct cost, or impact on costs, of carbon. These costs are set to rise year on year and will certainly outstrip inflation.
In addition, the UK has binding targets to reduce its carbon emissions by 80% (based on 1990 levels) by 2050 and property accounts for almost half of this. Property professionals now face a plethora of legislation and a rapid change in market sentiment on the subject of sustainability.
This has introduced new challenges, including defining and “monetising” sustainability, particularly in respect of energy and carbon. However, it has also introduced opportunities for raising finance paid for through energy savings. Once the cost of energy and carbon has been quantified, a return on investment can be calculated and installation financed.
There are tried-and-tested mechanisms for raising finance to pay for improvement works such as new mechanical and electrical plant or decentralised (often on-site) energy generation, with repayments met through energy savings (see below).
In the US, the Lawrence Berkeley National Laboratory estimates that revenues from such schemes will be worth as much as $15bn per year by 2020. In the UK, these schemes are still regarded by many as innovative and, as yet, it is still a relatively small market.
However, car park operator NCP is one company using this type of funding to raise £10m to install LED lighting in up to 149 locations. The UK Energy Efficiency Investments Fund, managed by Sustainable Development Capital LLP, is providing the finance and Future Energy Solutions is undertaking the installation and guaranteeing the energy savings. This is expected to generate energy savings of up to 65% in the car parks that are being retrofitted.
Gil Levy, a partner and fund manager at SDCL, says: “This investment demonstrates the commercial value our funding solutions offer. We can finance the up-front cost of a project from the savings generated. We can also mitigate implementation risk by working with high-quality delivery partners such as Future Energy Solutions. We encourage companies with high energy costs, such as NCP, to speak to us about how energy efficiency projects can create value.”
The potential for such financial products is enormous, particularly in the real estate industry, which is facing great pressure to reduce energy consumption and carbon emissions and often has limited capital for investment.
Alan Somerville, a director at DTZ and head of strategic energy and sustainability, says: “Smart owners and occupiers now realise that financial and asset performance can be driven from effective energy management. It is a rapidly changing marketplace where clients can now access innovative capital and clearly measure its impact on asset performance.”
Making money
The benefits of such schemes are obvious: improved energy efficiency reduces maintenance and FM costs, cuts energy bills and also helps maintain building value by deferring obsolescence as a result of legislation and changing market sentiment.
Research by the Carbon Trust shows that a 20% cut in energy costs represents the same bottom-line benefit as a 5% increase in sales in many businesses.
However, an investment in low- or zero-carbon technologies can also generate an income, guaranteed by government, for periods of 20 years with income linked to the RPI. Generating energy locally has the potential to be a sound investment and will also help business resilience as the UK faces an immediate future of power outages.
Jon Miles, director of sustainable energy finance at Royal Bank of Scotland, says an increasing number of businesses are seeking funding to ensure surety of supply because of concerns over energy security.
RBS is actively assisting its clients with resource efficiency, and is helping them “to buy better, use less or generate their own”, says Miles.
An investment in energy efficiency is fast becoming a “no-brainer” for many in the property industry. It is largely low-risk and it leads to savings and/or direct income. Growth is almost guaranteed, it helps to protect property values, ?improve business profitability and resilience, and finance is now available to ensure it does not compete with other forms of investment where funds are limited.
Finance mechanisms
Grant or subsidy funding
Grant funding tends to be periodic and limited in availability. One example is Grants4Growth, a two-year package of free, confidential, impartial support for SMEs to introduce efficiency initiatives.
Subsidy funding schemes were introduced to encourage long-term investment in low- or zero-carbon technologies, including the government’s Feed-in-Tariff and the Renewable Heat Incentive. Firms using eligible technologies can apply for a subsidy for each kWh of energy produced.
Financing based on actual or guaranteed energy savings
This type of financing commonly covers energy performance contracting (EnPC) or an energy service agreement. An EnPC is an integrated programme of measures. The model is traditionally a tri-party “partnership” between a financier, an energy services company (ESCo), and the beneficiary of the energy conservation measures.
The ESCo prepares an investment-grade audit to determine what energy savings could be made and recommends improvement works. The improvement works are paid for by the financier – this could be a bank or other financial institution. The works are undertaken by the ESCo, which in turn guarantees or shares the energy savings.
Financing based on predicted energy savings
The coalition promised to be “the greenest government ever”, and central to this pledge is the Green Deal – a “pay as you save” scheme based on the EnPC concept.
Unlike an EnPC, however, energy savings under the Green Deal are not guaranteed, making it a financial scheme based on predicted energy savings.
It is not yet possible to secure finance for commercial properties under the Green Deal, but the scheme is now applicable to the commercial sector, and the expectation is that finance is likely to become available in due course.
Financing backed by specific assets used to achieve energy savings
This is a loan made to a company or individual to buy an asset such as an efficient air handling unit. The financier has no real interest in energy savings, merely the ability of the applicant to meet the terms of the agreement.
Andrew Cooper is a commercial property and energy consultant
