South Australian Industry Session Scott Bocskay, Chief Executive - - PowerPoint PPT Presentation

South Australian Industry Session Scott Bocskay, Chief Executive Sustainable Melbourne Fund 12 December 2012

Presentation outline – Environmental Upgrade Finance, Why do it? – What is it? – Benefits – Administrative Models – The Victorian EUA model / approach – Current Status – Key lessons

– Wholly owned, independent trust established by Melbourne City Council in 2002 with an investment of $5 million - currently a $6.4 million fund – Expertise in energy efficiency, renewable energy and project management and delivery – We have two distinct roles 1. Through our investment program provide loans of up to $500,000 for up to 6 years; $8.1 million invested in energy generation, water savings and energy efficiency projects since inception 2. Administer environmental upgrade finance on behalf of the City of Melbourne

Sustainable Melbourne Fund

Why Environmental Upgrade Finance?

2020 Australia emissions reduction investor cost curve

• 150
• 200
• 300
• 350
• 100
• 400

250 100 50 200 150 150 200 50 100

• 50
• 250

SOURCE: ClimateWorks team analysis, derived from 2020 GHG emissions reduction cost curve

Power Transport Forestry Industry Buildings Agriculture Power Power Transport Transport Forestry Forestry Industry Industry Buildings Buildings Agriculture Agriculture

Residential appliances and electronics Gas T&D network maintenance Commercial new builds Commercial retrofit HVAC Large articulated truck efficiency improvement Improved forest management Coal CCS new build Solar PV (centralised) Aluminium energy efficiency Chemicals processes and fuel shift Anti-methanogenic treatments Wind offshore Car and light commercial efficiency improvement Gas CCGT new build Mining VAM oxidation Cement clinker substitution by slag CCGT increased utilisation Degraded farmland restoration Strategic reforestation of non-marginal land with environmental forest Commercial elevators and appliances Other industry energy efficiency Operational improvements to existing black coal plants thermal efficiency Reduced T&D losses Cropland carbon sequestration Onshore wind (best locations) Onshore wind (marginal locations) Solar thermal Commercial retrofit energy waste reduction Food, beverage and tobacco energy efficiency Reforestation of marginal land with timber plantation Industrial cogeneration Geothermal Capital improvements to existing black coal plant thermal efficiency Reforestation of marginal land with environmental forest Biomass co-firing Reduced deforestation and regrowth clearing Commercial retrofit lighting Residential lighting Commercial retrofit insulation Commercial retrofit water heating Iron and steel processes Wave/tidal Reduced cropland soil emissions OCGT retrofit to base-load CCGT Hybrid cars Pulp, paper and print energy efficiency Mining energy efficiency Residential new builds Electric cars Biogas Active livestock feeding Pasture and grassland management Commercial cogeneration Residential building envelope Biomass dedicated Solar PV (distributed) Gas CCS Coal IGCC with CCS

Emissions reduction potential MtCO2e per year

Traditional barriers to retrofitting

– Lack of available capital for environmental upgrades from traditional financiers because of a lack of security as collateral for a loan – Internal competition for limited capital – Split incentive - the building owner is not incentivised to invest in energy efficiency as the tenant pays the energy bills – Building owners’ perception that investment costs will not yield a sufficient return in savings – Returns achieved as savings – not an annuity – Lack of awareness of how to capture value and ‘business-as-usual’ mindset

Council drivers

– To retrofit 2/3rds of the City of Melbourne’s commercial office – 38% reduction in energy use in commercial buildings with 383 kilotonnes of CO2-e and five gigalitres annual savings – Drives investment at an accelerated pace – $2 billion in retrofit activity – Strengthens community through job creation – 8,000 new jobs

Where to focus our effort – Owners and NLA

785 293 132 38 31 30 25 16 10 100 200 300 400 500 600 700 800 900 Government Out of Government Other Professional Association Not for Profit Business Corporate Owners Corporation Individual & Family Owned / Small Businesses & Investor Portfolios 2,933,884 62,886 153,216 91,249 72,771 51,082 351,464 1,617,838 1,723,349

1,000,000 2,000,000 3,000,000 4,000,000 Government Out of Government Other Professional Association Not for Profit Business Corporate Owners Corporation Individual & Family Owned / Small Businesses & Investor Portfolios

57.72%

0.7% 1.2% 1.8% 2.2% 2.3% 2.8%

9.7%

21.5%

57.7%

0.9% 2.2% 1.3% 1.0% 0.7% 5.0%

41.6%

22.9%

24.4%

No of buildings NLA

Environmental upgrade finance

– Headlines – Access to Capital – Cheaper than otherwise available – Longer tenor, fixed interest – Detail – Access new cash flows to improve buildings – Alignment of incentives – Environmental upgrade finance developed by Melbourne City Council to overcome lack of access to capital – Makes it easier for building owners to obtain finance for environmental retrofits – Common and custom environmental upgrades stipulated by Sustainable Melbourne Fund

What is environmental upgrade finance?

How the process works

Key Features

– ‘Super’ senior – Attractive collateral for lenders – Charge attached to property - Finance is a council ‘special rate or charge’ and remains with the property – Tenant Pass Through – EUC’s are council statutory charge, can be passed through under triple net leases – differences in NSW and Victoria – Local Government rights unfettered – local retains statutory powers – Voluntary – The EUC’s are voluntarily entered into by the parties to the EUA Design Principles to Projects – Must deliver energy, greenhouse or water savings – “Nailed down”–charge and benefits to remain with building the improvements also remain with the building – Recognise long flat tail of technology performance and encourage innovation – Real opportunity lay in working with tenants to deliver comprehensive projects and new cash flows

Environmental upgrade agreements - Benefits

Environment Upgrade Agreement’s – Key Benefits

Building Owner

– Sharing the environmental upgrade charge with tenants unlocks greater savings for both parties and can open up new building cash flows – Improves asset value – Tenants also enjoy benefits of higher performing tenancies – Availability of capital with attractive terms, cost and tenure – Achieve energy efficiency savings sooner – Upgrade without carrying all the cost

Tenant

– Off balance sheet finance for tenancy projects –Hedge against future energy price rises – projects can be structured, at worst case, at nil net effect, best outcome, cash generative – reduced risk of occupancy – replace volatile costs with fixed costs

Industry

– up to 100% finance available for your

projects in buildings – new money not competing against limited capital, funded through new cash flows to a building owner

Financial Institutions

– innovative low-risk finance - ability to recover funds as a statutory charge de-risk retrofit investments – new pipeline of investment

• pportunity

– Sound underwriting principles – low hanging fruit – low cost compared to asset value

Existing Mortgagee

– improved asset fundamentals – better performing buildings appreciate more in value – ability to generate free cash in an asset – value greater than the cost of the upgrades

Benefits to municipality

– Drives investment at an accelerated pace – program projected to generate estimated $650+ million retrofit activity (Adelaide and surrounds only) – Strengthens community – program projected to create around eight jobs per $1 million in spending – No budgetary impact for upgrades – uses private capital for funding – Least cost administrative model for council budget – utilising 3rd party administrative model – No debt or credit risk – charge is secure – Voluntary participation – building owners and occupiers opt-in if they decide benefits warrant – Assists municipality achieve: – sustainability objectives , – meet emission reduction targets, and; – Local Economic development

Environmental upgrade agreements – Administrative models

Challenges for EUF program design

– High Legal and Administrative Setup Costs. – Fast Follower Benefits – like that to be gained by South Australia – can learn from Vic and NSW – Program Administration benefits – Need Significant Deal Flow. May not be appropriate for small towns and cities as scale is required to reduce costs. – Opportunities for 3rd party administration – Easily targeted municipalities – Project qualification

– 2 Models: – 3rd party administrator acting on behalf of multiple councils – Internal programmatic teams – In both cases Councils still need to be able to declare, levy, collect and distribute Environmental Upgrade Charges. However, once set up these processes are core business such as rates collection.

Administrative models

Role of Sustainable Melbourne Fund

– Work in partnership with City of Melbourne to set up the project underwriting criteria, program guidelines and application processes of the environmental upgrade finance mechanism – Third party administrator - Assess and process project applications on behalf

• f City of Melbourne

– Work with financiers to the program to make their products available to customers – Fee for service model – user pays, as benefits accrue to building owner and

• ccupiers

– Proven Least Cost for the City of Melbourne

Sustainable Melbourne Fund –National Consistency in EUA administration

– Currently exploring the demand for the establishment of a national 3rd party administration model – Making it easier for more councils to capture the Value of EUAs – even where a small pipeline may be perceived – Delivering national consistency for easier investment decisions by owners and tenants with a presence in multiple regions. – Enables new EUA lenders to enter the market with greater pipeline opportunities – Encouraging greater competition and origination efforts – Delivering greater environmental and economic outcomes for municipalities

Victorian Model

– Only available to the municipality of Melbourne – no other council areas – Buildings must therefore be located within municipal boundaries of the City of Melbourne – Signatory to 1200 Buildings program – Existing building (no less than 24 months old) on rateable land – Current on all rates and charges due to Melbourne City Council – SMF as the 3rd party administrator – Recent update to legislation to update underwriting criteria and clarify ambiguities Available to all non residential buildings – 4 deals signed to date with a growing pipeline

Key lessons

– A focus on simple language – EUAs are simple at the end of the day, the market needs to learn about them in the short run. – Tenant engagement is paramount. Opportunity to capture tenancy lighting upgrades – EUAs are the best (and one of the only) form of subsidy available in the market through: – Unlocking new cash flows for landlords and – Off-balance sheet finance for tenants – Requires a strong tenant landlord relationship / collaboration – Whilst this is a finance product at its core, EUAs are a solution that requires transformational change – Requires early engagement by financiers, rather than just last stage of engagement.

Resources

SMF Website www.sustainablemelbournefund.com.au The Fifth Estate EUA e-book

“Your Guide to Australia’s Finance Innovation for Building Retrofits.”

Thank you

Scott Bocskay, Chief Executive Sustainable Melbourne Fund

scott.bocskay@sustainablemelbournefund.com.au +61 3 9658 8666 www.sustainablemelbournefund.com.au