Environmental upgrade financing vehicles in the City of Melbourne have funded AU$4.9m in energy and emissions efficiency retrofit programs and are projected to save 5350 tonnes of CO2-e emissions per year, according to the Sustainable Melbourne Fund.
In the approximately 12 months since the Sustainable Melbourne Fund has provided the administration of environmental upgrade agreements (EUAs), three agreements have been negotiated and signed, with the three projects demonstrating that the agreements can be used in all types of commercial developments, said Scott Bocskay, Sustainable Melbourne Fund chief executive.
“The projects themselves represent a vast majority of the buildings in Melbourne,” he said. “They represent the kind of activities that a lot of buildings can do within the city of Melbourne. The biggest challenge around this has been establishing a new innovative finance model within an environment of patchy confidence in the commercial property market. But these three projects represent a good pilot sample of the different opportunities that exist out there.”
EUAs are agreements between a building owner, local council and financier to finance environmental retrofitting projects. Under the terms, the building owner is advanced funds for the upgrade by the financier in exchange for having a new council charge, an Environmental Upgrade Charge (EUC), levied on the building by the local council. The council then collects this charge and passes it back to the financier. Because the charge is tied to the building, and not the building’s owner, it is considered less risky. Additionally, the structure of the EUA overcomes the “split incentive” where tenant enjoy energy efficiency savings whilst the building owner pays the charges associated with the upgrade.
The Sustainable Melbourne Fund is promoting these three projects – 460 Collins Street, Kings Business Park, and 123 Queen Street - as case studies to continue to educate potential
The retrofits have a total value of AU$4.9m, and include, variously, installation of a trigeneration system, high efficiency chillers, cooling towers, lighting system upgrades, heating and air conditioning units and controls, occupancy sensors and double glazing.
Approximately 50 owners have approached the Sustainable Melbourne Fund about EUAs – some have “gone cold”, but Bocskay said he expects “a number” to sign EUAs in the near future. ”With the amended legislation coming into force on July 1st we expect some of those cold leads to warm up again,” he noted.
The challenge for the fund has been to explain and promote the EUA structure and utility.
“If you say to a property CFO, you can finance this through debt, through equity or through an or EUA, they say, what’s an EUA,” Bocskay said. “You have to go into a complete and thorough assessment from their point of view and that’s been a big challenge, given current conservatism in capital and commercial real estate markets.”
Bocskay said that given a background of tighter lending conditions, EUAs can be effective as a way of increasing the internal rates of return available to retrofit projects for building owners, financiers and tenants.
“I think as a mechanism, it’s an attractive form of finance because it essentially enables increased internal rates of return on projects because you work with tenants to mutually exploit benefits,” he said. “The tax breaks for green buildings policy has been discontinued, but an EUA, by its very structure, is capable of delivering the same outcome to building owners, via increased IRRs.”
National Australia Bank, Low Carbon Australia and Eureka Funds Management have created an EUA finance product.
“The nature of the product that NAB has launched is a fixed interest product of up to 10 years in term,” Bocskay said. “That’s a powerful product. If you go to debt markets, terms have been shortened to three years and you’re pushing for five years. But some of these projects aren’t cash positive until year seven, so there’s no way to make the numbers work that way. An EUA can remedy that.”
Meanwhile, the South Australian government is considering whether to establish an environmental upgrade finance vehicle in the state. The South Australia Department of Premier and Cabinet is seeking comment on a discussion paper released this week. In the paper, the government asks for comment from stakeholders to see if environmental upgrade finance vehicles are necessary and effective in South Australia, and asked for submissions as to whether SA should follow the model of the City of Melbourne’s EUA or that of the state of New South Wales, which also has an EUA vehicle. The City of Melbourne’s EUA structure differs from the NSW structure in that in Melbourne, tenants have to give approval of the upgrade project for the building owner to receive funding. Whilst proponents say the Melbourne structure helps overcome the split incentive, critics point out that obtaining tenant approval for increased statutory charges brings risk to the project.