Environmental Upgrade Agreements

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▪ New South Wales once enjoyed some of the lowest energy costs in the developed world; that has changed.

▪ Over the past four years regulated energy prices have more than doubled.

▪ The NSW Independent Pricing Tribunal’s approved energy price increase for the 2012/13 financial year of 16%, this will not be the last.

▪ Tenants now seek energy efficient space and buildings that do not meet a high NABERS rating are reducing the opportunities for building owners to attract corporate and government tenants.

▪ Energy efficient buildings attract higher rents.

▪ Energy efficient buildings have higher asset and sales values.

▪ Energy can equate to 25% of all variable building outgoings. Undertaking an environmental upgrade can not only reposition a building’s NABERS rating but energy costs can be dramatically reduced; and increasing energy prices mean there has never been a better time to act.

ENVIRONMENTAL UPGRADE AGREEMENTS GRANT BUILDING OWNERS ACCESS TO FINANCE FOR ENVIRONMENTAL IMPROVEMENTS TO THEIR ASSETS

A New Energy Future

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Council passes on repayment to lender

Funding Advance (Loan)

WTS & AVER assist building owner

Environmental Upgrade

Charge levied by Council

on the land

WTS & AVER engaged independently by the building owner to help plan & manage

upgrade works

Local Council

Financial Institution

Building Owner

What is an EUA??An Environmental Upgrade Agreement (EUA)1, is an agreement under which a building owner agrees to carry out environmental upgrade works in respect to a building, a finance provider agrees to advance funds to finance those works, and the council who agrees to levy a charge on the relevant land for the purpose of repaying the advance for environmental upgrade works to improve energy, water or environmental efficiency of the building to which the EUA applies.

It is an ideal way to reposition existing commercial, industrial and multi-strata residential buildings2 in the market and building owners are able to share the cost of improving the building with tenants through new, or existing lease provisions.3

1 Local Government Amendment (Environmental Upgrade Agreement) Section 54D & Government Gazette of the State of New South Wales, Number 16, Guidelines for Environmental Upgrade Agreements 18 February 2011

2 Must be in excess of 20 units (Office and Environment & Heritage EUA FAQ)

3 In an amount not exceeding reasonable estimates of energy cost savings resulting from the building upgrade.

Contractors

Enviromental Upgrade Agreement Process

Assistance to the Building Owner for the Upgrade Process

WTS & AVER

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How Does It Work?1. WT Sustainability, in collaboration with

AVER, assess the most cost effective method of upgrading a building’s environmental performance.

2. The building owner agrees to undertake the environmental upgrade works.

3. A finance provider agrees to advance funds to the building owner to finance the environmental upgrade works.

4. The council levies an Environmental Upgrade Charge on the relevant land for the purpose of repaying the funding advance.

5. A building owner may pass on part of the costs of the upgrade to the tenant(s) providing the amount does not exceed the financial saving the tenant can expect from reduced energy costs that result from the upgrade.4 5

4 In an amount not exceeding reasonable estimates of energy cost savings resulting from the building upgrade.

5 City of Sydney fact sheet Environmental Upgrade Finance: Unlocking Retofit Opportunities for Sydney’s Buildings

Stat

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ting

Expe

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Electricity

A/C & Ventilation

Other

Land Tax

Water & SewerageCouncil Rates

Electricity

A/C & Ventilation

Operating Expenses

Statuatory Charges

Operating Expenses

Statuatory Charges

Other

Land Tax

Water & Sewerage

Council Rates

EUA Charge/Levy

Without EUA With EUA

Note: EUA Charge offset by reduced energy costs.

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EUAs came into effect in February 2011 under the NSW Local Government Amendment (Environmental Upgrade Agreement) Act 2010.

A similar framework was introduced in Victoria in September 2010 when the Local Government and Planning Legislation Amendment Act 2010 amended the City of Melbourne Act 2001 allowing the City of Melbourne to enter into EUAs.

The Cities of Sydney and Melbourne both forecast the program could generate over $2 billion worth of investment with the ultimate outcome of reduced operating costs for building owners and tenants.6

6 City of Melbourne press release World’s First Environmental Upgrade Agreement signed 13 October 2011 & The Hon. Robyn Parker (minster for Enviroment & Minster for Heritage) press release NSW Buildings Set to Become More Energy Efficient, 30 September 2011

Sydney and Parramatta councils have adopted EUAs, whilst The City of Newcastle, Lake Macquarie City Council, North Sydney Council, Penrith City Council and Wollongong City Council are planning EUA programmes.7

The EUA programme is part of the City of Sydney’s own plan to cut carbon emissions by 70% by 2030.

The programme, administered by Low Carbon Australia, has $84.6 million in initial funding set aside following agreements with National Australia Bank, Macquarie Bank, Flexigroup and Eureka Funds Management, with other financial institutions looking into the scheme.8

EUAs are currently available for multi-strata buildings in the City of Sydney and Parramatta City Council.9

7 http://www.environment.nsw.gov.au/sustainbus/eua.htm8 www.lowcarbonaustralia.com.au9 http://www.environment.nsw.gov.au/sustainbus/eua.htm

EUA Background?

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The Economics for Building Owners

EUAs can unlock funding for cost effective upgrades that reduce operating costs and improve the capital value of a building.10

Higher building efficiency leads to higher NABERS ratings which are proven to increase asset values and rental yields. According to a recent study by the Australian Property Institute, lifting a building’s NABERS energy rating to 5 stars could increase its value by 9%, on average.11

10 NSW Office of Environment & Heritage A New Way to Finance Building Upgrades: Environmental Upgrade Agreements (EUAs)

11 The Australian Property Institute Building Better Returns: A Study of the Performance of Green Office Buildings in Australia (p. 27), September 2011

Further potential benefits of EUA retrofits12:

▪ It creates potential to further invest in core business activities by utilising leveraging opportunities arising from increased asset values

▪ EUAs can be cost neutral to owners

▪ Lower operating costs

▪ Increased marketability of retro fitted buildings

▪ Smaller environmental footprint

▪ Reducing a building’s carbon emissions improves its sustainability

▪ Improved indoor environmental quality

▪ The loan stays with the building when sold.

12 http://www.melbourne.vic.gov.au/1200buildings/Pages/GoodForBusiness.aspx

Implementing energy efficiency upgrades can improve the performance of a building’s engineering services by between 20% - 50%. In real terms this can equate to a 50% reduction in electricity costs.

The danger in doing nothing:

▪ Energy prices have more than doubled in NSW in the past 10 years13

▪ On 1 July 2012 electricity prices for many NSW consumers increased between 11.8 and 20.6%, network charges increased by 8.4% alone.14

13 Australian Bureau of Statistics, 6401.0 Consumer Price Index, Australia June 2012

14 Frontier Economics Pty Ltd Australia (for Independent Pricing & Regulatory Body) Energy Costs - Annual Review for 2012/13: A Final Report Prepared for IPART June 2012

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Our preliminary estimates indicate that taking a Sydney CBD ‘base’ building from 2 stars to 4 ½ stars NABERS energy, may deliver an annual saving of:

$88,000 for a 5,000 m2 building

$178,000 for a 10,000 m2 building

$260,000 for a 15,000 m2 building

$350,000 for a 20,000 m2 building15

15 These savings assume an all electric building where power costs an average 20c/kWh and the building is presently performing for 50 hours per week at the lower end of the 2 star rating band.

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The NSW division of the Property Council of Australia collected energy information on a range of buildings in the greater Sydney area. They found that the best performing buildings used 75% less energy per m2 NLA than the worst.

Why do some buildings perform well, and others poorly? Does a building have to be new to perform efficiently? It is certainly true that new buildings have a better chance of being energy efficient, not least because new technologies have been developed with low energy use in mind. But a review of published NABERS energy ratings indicates that there are many well performing older buildings.16

16 www.nabers.com.au

A base building energy rating of say 1 or 2 stars suggests there is plenty of room for improvement, whereas the opportunities are much more limited in say a 4 ½ star building.

The NABERS rating should then be married to an energy savings action plan, which combines the elements of an energy audit, with a proper management planning process that focuses on driving cost effective improvements.

The costs and benefits of upgrade opportunities can vary significantly from project to project. In poorly performing buildings there are usually a number of low and very low cost opportunities that can deliver big savings (often these relate to building management issues).

Energy Saving Opportunities & the Cost

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The following table gives some indication of potential returns on energy upgrade initiatives. Of course it is generic you need the right advice from the outset to determine what will work and not work in your buildings, WT Sustainability has these skills.

Description Rate of Return (%) (Range)

Window tinting 6-20

Install blinds/curtains 5-20

Upgrade of insulation 2-20

Layout changes 2-40

Variable speed drivers for regulation and variable flow control 15-30

High efficiency chillers 2-15

High efficiency boilers 2-20

Operation and calibration of economy air cycles 0-100+

Combined heat and power generation (co-gen) 2-15

Insulation of equipment, ductwork & piping 2-20

Hybrid conditioning and openable windows for cross ventilation 2-40

Fine tuning of the building management system 5-100+

Occupancy sensors 6-15

Master re-set control to switch off lighting 15-30

Replacement of dichroic globes with IRCs/Compact Fluorescents/LEDs 30-50+

Daylight control 2-15

Fixed range dimmers on fluorescent circuits 20-30

Fixed range dimmers on HID circuits 10-30

Review of temperature room set points 100+

Review of plant operating vs occupancy times 100+

Review of plant maintenance procedures 25-100+

Note: Table interpreted from Total Enviroment Centre Commercial Property and Climate Change Existing Buildings Project (p.9) April 2007

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The Opportunity

EUAs finance your environmental building upgrade in a way that the financiers consider lower risk and all or part of the cost can be passed on to tenants.17 EUA’s which cover the cost of environmental upgrades can be combined with non-environmental upgrades. The choice is yours

If you want a better asset and a better balance sheet then EUAs may be the tool you have been waiting for.

For further information on WT Sustainability and AVER, or the opportunity to discuss your options, please contact us:

17 In an amount not exceeding reasonable estimates of energy cost savings resulting from the building upgrade.

Dave Riddell Director AVER

T: 02 9380 8816 M: 0421 274 426 E: driddell@aver.com.au

www.aver.com.au

Steve Hennessy Director WT Sustainability

T: 02 8197 9140 M: 0412 963 031 E: shennessy@wtsustainability.com.au

www.wtsustainability.com.au

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‘While businesses are focused on the impending introduction of carbon pricing, they haven’t lost sight of the fact we are already in an era of rising energy prices that are increasing building operating costs, which can ultimately lead to an impact on valuation prices’Meg McDonald, CEO Low Carbon Australia

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This document is provided for marketing purposes only. The facts and figures included have been taken from published data, are general in nature and do not constitute formal cost and / or project management advice.