ENVIRONMENTAL UPGRADE FINANCE Briefing session Adelaide December 12 - - PowerPoint PPT Presentation

South Australia EUA Presentation December 2012

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ENVIRONMENTAL UPGRADE FINANCE Briefing session – Adelaide

December 12th 2012

Joint Presentation: National Australia Bank & Low Carbon Australia

South Australia EUA Presentation December 2012

Stakeholders in the EUA framework

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• Building owners and tenants
• Sustainability body
• Australian financial institutions
• Consultants and service providers
• Industry associations
• State Government & Councils
• Low Carbon Australia

There are a number of stakeholders in the EUA framework

South Australia EUA Presentation December 2012

• Broad message (and wording in Legislation) is that EUAs can be used for any water and/or energy efficiency works

being undertaken

• Tenant lighting is an easy win with short payback and immediate cashflow benefit to building owner and tenant
• Typical projects for the base building include:
• Car park, foyer, lift car, vestibule lighting
• Lift motors
• Improvements to heating, ventilation and air conditioning – variable speed drives on ventilation motors, floor

by floor shut off valves for chilled or heated air

• Glazing and façade improvements
• Co and tri-generation systems, renewable power generation
• Plant improvements: Chillers, Boilers, BMS, Cooling towers

What can EUAs be used for?

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Energy and Water Efficiency Project Examples

South Australia EUA Presentation December 2012

Grouping of Technologies able to be Financed

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Category Sub Category Equipment Expected Max. Simple Payback (Years) Soft costs : total costs HVAC Heating Air Handling 5 Low VSD Boilers 7 Heating & Cooling Pumps Heat exchangers Ventilation Fans 5 Cooling Chillers 7 Lighting Lighting Control Systems and localised controls 3 Low LED and Fluorescent Lights Street Lighting Electrical BMS / Controls BMS Controls 5 High Metering Meters Medium Distribution Systems Power control devices Low Refrigeration Refrigeration Refrigeration 5 Low Compressed Air 4 Building Fabric Light Skylights 5 Medium Glazing Insulation Insulation 8 Solar reflective paint 5 Ventilation / Infiltration Ventilation 7 Weather Sealing Shading Shading and Blinds 5 Low Energy and Renewables CHP CHP (Engine / Turbine) 10+ Low Solar Solar Technology (PV) Solar Technology (Thermal) 7 Low

Low 30% Med 50% High >50%

Indicative Soft Cost Ratings

South Australia EUA Presentation December 2012

EUAs attempt to resolve 2 key financing issues

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An EUA is a tripartite agreement between Local Government, Lender and Building Owner

Commercial Building

Lending Body pays for energy efficiency improvements

Lending Body

Council makes and levies Environmental Upgrade Charge to recover the cost of works Environmental Upgrade Charges paid

Council

Environmental Upgrade Charges paid through to Lending Body

EUA

Building Tenant

Recovery of Environmental Upgrade Charge from tenants without consent or signature NSW only Tenants Pay Environmental Upgrade Charge to the extent of savings

Addresses Issue 1 – Cost and length of financing Addresses Issue 2– Split Incentive + non aligned interest

At the same time as the provision of first funding to the Commercial Building Owner, a series of environmental upgrade charges (EUCs) are declared by the Council

South Australia EUA Presentation December 2012

Issue 1 addressed : EUA can reduce funding cost and increase term for funding

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An EUA is a tripartite agreement between Local Government, Lender and Building Owner

Commercial Building

Lending Body Council

Limited recourse**

*Other than a limited indemnity for adverse change in law ** Recourse is limited to the building only

Limited recourse

EUA

Key benefits:

• No security required
• No financial covenants
• Up to 10-year term
• No re-finance risk (fully amortising)
• Fixed rate
• Non recourse back to the lender*
• Limited recourse back to council**
• Able to be passed onto tenants
• Improved financial performance vs

using debt or equity

Structure reduces cost of financing and Increases length of financing

• Interest rate range = 6-7%

South Australia EUA Presentation December 2012

Issue 2 addressed: EUA removes the split incentive

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Year 1 3 5

Do Nothing Debt Equity EUA

• Do nothing: economics worsen as tenants

demand minimum NABERs ratings and potentially do not re-lease leading to lower rents

The case for EUAs versus 3 other alternatives (for a building under 5 year WALE net lease conditions) Year 1 3 5

Do Nothing Debt Equity EUA

No action does not work for tenants or building owners BAU investment does not work for building owners EUAs work for both investors and tenants BUILDING OWNER sustainability economics TENANTS sustainability economics

• Do nothing: economics worsen as tenants

pay higher unit costs for power consumption

• Debt/Equity: classic split incentive – owner

wears capital charge, tenant gains efficiency

• savings. By year 5, building owner starts to

recover via increased rents

• EUA: Building owner gains via recovering the

capital charge from the tenants and potential re-leasing at higher rentals

• EUA: Tenant no worse off than BAU (in fact,

legislative process of EUA ensures some benefit likely left with tenant), and over time they benefit more as escalating electricity savings outweigh the constant cost of the EUA servicing

• Debt/Equity: classic split incentive – owner

wears capital charge, tenant gains efficiency

• savings. By year 5, building owner starts to

recover via increased rents

South Australia EUA Presentation December 2012

Environmental Upgrade Agreements

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A comparison of the three privately-financed EUAs

123 Queen Street 470 Collins Street 10 Valentine Avenue Building Owner

Eighth Grange Malik Suleman Australian Unity

Council

Melbourne City Melbourne City Parramatta

Length of EUA

10 years 10 years 5 years

Size

~1.5million $800,000 $800,000

Works done

• Installation of Tri-

generation

• Lighting upgrade
• Facade upgrade
• Upgrade of plant room

(e.g. Boilers, cooling towers)

• Lighting upgrade

Savings

17% reduction in energy

• utgoings

22% reduction in energy

• utgoings

62% reduction in tenant energy outgoings

Tenant Pass-Thru

X X 

Value identifier for financing

Cost and Tenor of funds Cost and Tenor of funds Cost and Tenor of funds + Tenant Pass-Thru

South Australia EUA Presentation December 2012

CPs need to be satisfied: *know your customer form, *verification forms/evidence * signed purchase agreements/ construction contracts

EUA Process what happens when ?

Pag e 9 Process is not more onerous than conventional lending Step 1 Step 2 Step 4 Step 8 Step 7 Step 5 Step 6 Step 3 Step 9 B/o scopes out building and estimates works and power savings B/o and Council - 3 page application form Financier completes a credit process: - is abbreviated process as * low loan to value ratio, * repayment is via council * especially shortened if existing client of bank B/o and financier agree Letter of Offer - 10 page Letter of Offer (LoO) template B/o, council, financier agree EUA - 40 page EUA template - not designed to be amended - already negotiated ; Annexures are customised B/o finalises work scope and signs purchase agreements, as well as LoO and EUA Monies advanced based on contract terms Monies repaid each quarter from first Council date after works completed

Only additional steps required

Steps 1,3,4,6,7,8,9 all required for normal funding

South Australia EUA Presentation December 2012

EUA Agreement

EUA Example – 10 Valentine Avenue Parramatta

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A number of 1sts - first NSW EUA, first EUA with tenant pass through of a portion of the EUA charges

Funding Funding

Replacement of tenancy light fittings and lights

Installation & Maintenance

Tenancy Lighting Upgrade

Energy savings Benefits to Tenants

Key Transaction Details

Building Owner Australian Unity Tenant State Property Authority (NSW Government) – 16,000 square metres Scope of Works Tenancy space lighting upgrades Capital Cost ~$800,000 EUA Term 5 years Estimated Energy Savings $110,000 p.a.

Benefits to Building Owner

Key Takeaways Tenant driven  Cashflow benefit (see next pages)  Alternative to improve tenancy space without rent review initiation  Better occupancy space Building Owner  Cashflow benefit (see next pages)  Competitive cost of capital  Tenant engagement + retention  Potential valuation increase EUA appropriately shares and regulates the costs and benefits of the upgrade

South Australia EUA Presentation December 2012

EUA stepped out for 10 Valentine

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An EUA is a tripartite agreement between Local Government, Lender and Building Owner

Commercial Building

• ~$800,000 / 2

drawdowns

• 3 months works
• Fixed Rate 5

year funding

Lending Body

From Feb 2013 ~$45k per quarter for 5 years

Council

~$45k per quarter for 5 years

EUA

Building Tenant

From Feb 2013 ~$25k per quarter for Lease duration

Addresses Issue 1 – Cost and length of financing Addresses Issue 2– Split Incentive + non aligned interest

At the same time as the provision of first funding to the Commercial Building Owner, a series of environmental upgrade charges (EUCs) are declared by the Council

$25k is initial qtrly electricity savings for

• tenant. There is legislative protection that

tenant will not be charged more than they save on energy bill throughout 5 yr term

South Australia EUA Presentation December 2012

Alternatives to EUA for 10 Valentine Street – why they may not work

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× NSW Government funding constraints × Light fitting replacement being ownership of building owner complicates things × tenor of lease being less than payback requirements for expenditure

The EUA was the best choice when compared to other regimes or approaches

* The EUA brings TRANSPARENCY, GOVERNMENT PRECEDENT AND INVOLVEMENT to a delicate negotiation:  This gives COMFORT to the tenant to engage AND commit. * The EUA gives COMPETITIVE FUNDING COSTS to the owner and PARTIAL RECOVERY OF FUNDS FROM THE TENANTS PRIOR TO RE-LEASE EVENT leading to a CASHFLOW benefit (see next slide).

• The EUA gives some CASHFLOW benefit to the tenant also (see next slide)

The EUA regime at 10 Valentine Avenue motivated both tenant and owner to engage and to contract Tenant pays for lighting itself

× Split incentive – Owner would pay for works, but would have to wait for a re-lease event to recover, unless wanting to open up renegotiation of rent with tenant

Building Owner pays for lighting itself

× Tenant will (typically) pay to enjoy energy savings via rent increase:

• potentially pay more over time than the savings enjoyed as (unlike EUA) no statutory protection :
• Reliant on escalation assumptions for rent and power prices negotiated
• If upgrade does not perform, tenant could be exposed to performance risk
• For EUAs, Councils specify that works must be to Australian standards

Tenant and Building Owner negotiate to a regime outside of an EUA

South Australia EUA Presentation December 2012

EUA stepped out for 10 Valentine

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An EUA is a tripartite agreement between Local Government, Lender and Building Owner

Commercial Building

• ~$800,000/ 2

drawdowns

• 3 months works
• Fixed Rate 5

year funding

Lending Body

From Feb 2013 ~$45k per quarter for 5 years

Council

~$45k per quarter for 5 years

EUA

Building Tenant

From Feb 2013 ~$25k per quarter

Cashflow benefit for owner: $25k per quarter capital recovery + Cost/tenor of funds advantage Cashflow benefit for tenant:

• All maintenance savings plus electricity

savings above $25k per quarter

South Australia EUA Presentation December 2012

10 Valentine Street – Financing Perspective – Positives and negatives

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What went well ?  first example for NAB where there was legal counsel on both sides (financier and building owner), so a good test  EUA template held up well (no major changes)  all parties proactive due to commercial motive beyond lower interest rate What can be improved?

• EUA Template has too many annexures

– combine append 1+2 (finance schedules); – remove append 9 (finance terms + conditions); – reduce details required in tenant savings appendix

• A couple of changes to the EUA template itself

– legal typos – the layout of the EUA could be improved.

• From financiers side, clean up some of the CP requirements to reduce onus on

Building Owner

• More marketing for the product is required

South Australia EUA Presentation December 2012

The history of EUAs in Australia

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Facilitated legislative change Developed EUA template Building EUA pipeline NAB was a principle pioneer in the development of EUAs, from facilitating legislative change to creating the first privately financed EUA fund

NAB approaches City of Melbourne and Victorian Government NSW passes EUA Legislation NAB launches NAB Environmental Upgrade Fund with partners EFM and Low Carbon Australia City of Sydney adopts EUA Newcastle, Penrith and Wollongong expected to adopt EUA First EUA signed (460 Collins Street)

14 Sep 2010 26 Nov2010 18 Feb 2011 19 Sep 2011 13 Oct 2011 20 Dec 2011

Parramatta City Council adopts EUA

15 Mar 2012 Q1-Q2 2013 2009-2010

Victoria passes EUA Legislation

27 Aug 2012

North Sydney Council adopts EUA

Oct 2012

Third NAB funded EUA (10 Valentine Avenue)

Dec 2012

First NAB funded EUA (123 Queen Street) Second NAB funded EUA (470 Collins Street) Growing EUA Pipeline (circa $30-40m in 2013

South Australia EUA Presentation December 2012

EUA type financing options in other jurisdictions

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US:

• Property Assessed Clean Energy (PACE) Program

–Initially a residential scheme, but similar concept to EUAs –Some hurdles during global financial crisis –Comeback on track now, with more commercial focus

• December 2011 US$4 Billion Better Buildings initiative

–Mixture of public and private funds, announcement by President Obama –Obliges Government buildings to spend and capital to be repaid via savings UK:

• The Green Deal

–To be launched in late 2012 –Residential focused retrofitting, with energy savings repaying loan –Energy bill rather than council rates and charges used as mechanism to repay loan

South Australia EUA Presentation December 2012

Summary

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EUAs and South Australia

• Great deal of market enthusiasm
• Good pipeline of activity
• Mechanism is incisive and so positively disruptive
• EUAs are globally unique and are world leading

Final comments

• NAB and LCAL are very supportive of the development of

EUAs in South Australia

• NAB and LCAL has funds available for immediate

allocation to appropriate EUA opportunities in South Australia

• EUAs are suitable for:
• Office;
• Industrial / Hospital; and
• Retail assets.
• Anywhere where a council is participating (currently City of

Sydney; City of Parramatta; City of North Sydney and City

• f Melbourne), and hopefully in time South Australia
• Very useful for accessing cheaper costs of capital

compared to traditional financing mechanisms, and, in addition, the building owner can choose to unlock a new revenue stream through tenant recovery

EUA Applications

NAB and LCAL ready to fund and committed to the roll out of EUAs