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
Sustainable Melbourne Fund – 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
Why Environmental Upgrade Finance?
2020 Australia emissions reduction investor cost curve Solar PV (distributed) Buildings Buildings Buildings Industry Industry Industry Transport Transport Transport Agriculture Agriculture Agriculture Forestry Forestry Forestry Power Power Power Coal CCS new build Capital improvements to existing Biogas black coal plant thermal efficiency Car and light commercial efficiency improvement Commercial retrofit insulation Chemicals processes and fuel shift Large articulated truck efficiency improvement Cropland carbon sequestration 200 Coal IGCC with CCS Hybrid cars Strategic reforestation of non-marginal Wave/tidal Residential appliances and electronics land with environmental forest Iron and steel 150 Commercial retrofit energy waste reduction OCGT retrofit to base-load CCGT processes Commercial retrofit HVAC Reforestation of marginal land with environmental forest Residential lighting 100 Commercial elevators and appliances Commercial retrofit lighting 50 Other industry energy efficiency Mining energy efficiency 0 0 50 100 150 200 250 Emissions reduction potential Anti-methanogenic treatments -50 MtCO 2 e per year Reduced deforestation and regrowth clearing CCGT increased utilisation Gas CCS -100 Mining VAM oxidation Solar thermal Electric cars Geothermal -150 Pasture and grassland management Wind offshore Reforestation of marginal land with timber plantation Solar PV Reduced T&D losses (centralised) -200 Cement clinker substitution by slag Onshore wind Commercial cogeneration (marginal locations) -250 Industrial cogeneration Biomass co-firing Operational improvements to existing black coal plants thermal efficiency Biomass dedicated Commercial new builds Degraded farmland -300 Active livestock feeding restoration Commercial retrofit water heating Onshore wind (best locations) -350 Residential new builds Gas CCGT new build Reduced cropland soil emissions Residential building envelope Gas T&D network maintenance -400 Improved forest management Pulp, paper and print energy efficiency Aluminium energy efficiency Food, beverage and tobacco energy efficiency SOURCE: ClimateWorks team analysis, derived from 2020 GHG emissions reduction cost curve
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 900 800 785 700 600 No of 500 400 buildings 300 293 200 25 30 31 38 100 132 10 16 0 Government Out of Other Professional Not for Profit Business Corporate Owners Individual & Government Association Corporation Family Owned / Small Businesses & 57.72% Investor 9.7% Portfolios 2.8% 0.7% 1.2% 1.8% 2.2% 2.3% 21.5% 57.7% 41.6% 0.9% 2.2% 1.3% 1.0% 0.7% 5.0% 22.9% 24.4% 4,000,000 2,933,884 3,000,000 1,723,349 2,000,000 1,617,838 1,000,000 351,464 62,886 153,216 91,249 72,771 51,082 0 NLA Government Out of Other Professional Not for Profit Business Corporate Owners Individual & Government Association Corporation Family Owned / Small Businesses & Investor Portfolios
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 Tenant Financial Institutions – Sharing the environmental upgrade – Off balance sheet finance for tenancy – innovative low-risk finance - ability charge with tenants unlocks greater projects to recover funds as a statutory charge savings for both parties and can open de-risk retrofit investments –Hedge against future energy price up new building cash flows rises – new pipeline of investment opportunity – projects can be structured, at worst – Improves asset value case, at nil net effect, best outcome, – Sound underwriting principles cash generative – low hanging fruit – low cost – Tenants also enjoy benefits of higher – reduced risk of occupancy – replace compared to asset value performing tenancies volatile costs with fixed costs Existing Mortgagee – Availability of capital with attractive terms, cost and tenure – improved asset fundamentals – Industry better performing buildings appreciate more in value – up to 100% finance available for your – Achieve energy efficiency savings projects in buildings sooner – ability to generate free cash in an asset – new money not competing against limited capital, funded through new – value greater than the cost of the – Upgrade without carrying all the cost cash flows to a building owner 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 3 rd 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 3 rd party administration – – Easily targeted municipalities – Project qualification
Administrative models – 2 Models: 3 rd 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.
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