Energy efficiency initiatives and behind-the-meter solar PV installations are usually the most cost-effective way of reducing energy costs. Implementing these initiatives result in larger and more sustainable cost savings than simply negotiating with energy retailers for sharper prices or doing a Power Purchasing Agreement (PPA) with a third party whether you are an SME or a large business.
However, there are several significant barriers that businesses face in implementing energy efficiency measures and investing in solar. These barriers include:
1. The competition for capital inside a business (which I have written about here)
2. The strict payback period requirement for investment (often less than 2-years)
3. The business is not the owner of the premises (the owner has no incentive to invest)
4. Lack of time and resources to identify projects and develop and implement the business case
With barrier 1, each business has a limited capital budget each year and different projects compete with each other for those capital funds. Stay-in-business capital required to just keep the business going dominates the approved spend and safety and environmental compliance and some growth projects usually use up the remainder of the annual budget. That leaves little capital for cost reduction projects including energy efficiency cost reduction.
With barrier 2, assuming that there are available capital funds for cost reduction projects, they are usually ranked in order of their simple payback period. So a project that reduces headcount and has a payback period of one year will be approved ahead of an energy cost reduction project that has a longer simple payback of two years. Since the GFC, many businesses have had a two year simple payback period threshold for projects. The irony is that a project with a rate of return greater than 20% may not be approved as the payback period is greater than two years.
Another major barrier, barrier 3, has been that often the business does not own the building. There is usually little incentive for the building owner to invest in building efficiency upgrades when the tenant receives all of the cost reduction benefits.
Almost every business has scarce human resources and lacks the time and expertise to identify energy efficiency projects, build the business case and manage the implementation of those projects. This is the 4th major barrier to the lack of investment in energy efficiency.
A very clever solution to overcoming barriers 1 to 3 has been implemented and legislated by the State Governments of South Australia, Victoria, and New South Wales. This solution is called Building Upgrade Finance in SA and NSW and Environmental Upgrade Finance in VIC.
The legislation provides opportunities for local councils to support non-residential property owners and/or their tenants to upgrade their buildings to operate more efficiently and reduce operating costs with immediate positive cash flow.
The mechanism by which this done is a three-way agreement between a building owner, a finance provider and the local council where:
1. A building owner identifies environmental upgrade works to a building to improve environmental efficiency and agrees to implement those works
2. A finance provider agrees to provide the necessary upgrade funds to the building owner
3. The local council agrees to collect the loan repayments through a separate local council charge against the land using the council rates process and pay the financier
As the loan is secured by a local council charge, financiers are willing to offer attractive loan terms including competitive interest rates and longer terms, usually 10 years, but up to 20-years.
There are some eligibility criteria to accessing Building/Environmental Upgrade Finance. They are:
1. The building must be in a participating council area
2. The building must be older than two years (in SA)
3. The building must be used primarily for commercial, industrial or other non-residential purposes
4. The scope of works needs to meet the state-based criteria
Examples of works that can be funded by Building/Environmental Upgrade Finance include:
· Renewable energy (e.g. solar PV, heat recovery)
· Energy storage
· Water efficiency and reuse systems
· Energy use optimisation
· Air conditioning
· Waste management systems
· Electric Vehicle Chargers
As can be seen, this non-exclusive list is very broad and includes investment in solar PV generation. In South Australia, Building Upgrade Finance is also available for heritage building upgrades to maintain the heritage significance, ongoing occupation of the building or address building rules or disability access compliance.
Another unique feature of this type of finance is that it is possible for the owner of the building to gain a tenant contribution to the repayments through existing lease arrangements.
So how does the Building/Environmental Upgrade Finance facility overcome the major barriers to investment in energy efficiency?
Building/Environmental Upgrade Finance allows the investment in an energy cost reduction project to have an immediate positive cash flow impact. What is effectively a capital investment (Capex) is converted into operational expenditure (Opex) through a quarterly fixed council rates payment over the long term which is offset by a larger energy cost saving.
Barrier 1 – the project may not have to compete for Capex funds with other projects as it can be treated as Opex, not Capex and the operational expenditure (building upgrade charge) is more than offset by the immediate energy cost savings.
Barrier 2 – the repayments are funded out of the energy cost savings. The long-term finance that is much longer than the simple payback period means that the upgrade results in immediate positive cash flow.
Barrier 3 – a business tenant can identify the energy cost saving opportunity, for example, solar PV, then negotiate with the owner of the building to invest in the upgrade and share the costs and benefits of the upgrade. This allows the owner of the building to benefit either by retaining some of the cost savings and/or increasing the value of the property. The building owner is incentivised to upgrade the building.
Barrier 4 – in itself, the facility does not solve the problem of a lack of time and resource to identify and implement energy efficiency initiatives. However, there are many energy consultancies who can help in this regard. Building Upgrade Finance can provide 100% project funding including soft costs such as consultant fees. Of course, Altus Energy is very keen to assist businesses to reduce their energy costs by following our 9-step framework detailed here.
What are the key advantages to each of the parties to the Building/Environmental Upgrade Finance agreement?
– Immediate reduction in operating costs and positive cash flow impact
– No capital investment, the project is funded through operational expenditure
– Helps achieve sustainability goals
– Increase in value and competitiveness of the building
– Potential immediate positive cash flow impact (improved yield)
– No capital investment required
– Assist in achieving Local Council sustainability objectives
– Support local businesses to reduce costs and improve profitability
– Attract business investment in the region
– Long-term investment yield from very low-risk investments
It is not compulsory for local councils in each of the participating states to participate in the Building/Environmental Upgrade Finance program. Below is a list of the 40 participating Councils by State as at the end of 2018.
Baw Baw Shire Council
Brimbank City Council
Campaspe Shire Council
Cardinia Shire Council
Central Goldfields Shire
City of Greater Bendigo Council
City of Greater Geelong Council
City of Kingston
City of Monash Council
Darebin City Council
Greater Dandenong Council
Greater Shepparton Council
Hobsons Bay City Council
Horsham Rural City Council
Knox City Council
Macedon Ranges Shire Council
Maribyrnong City Council
Mildura Rural City Council
Mitchell Shire Council
Moira Shire Council
Moonee Valley Council
Moreland City Council
Mornington Peninsula Shire
Mount Alexander Shire Council
South Gippsland Shire Council
Warrnambool City Council
Wellington Shire Council
Wyndam City Shire Council
Yarra Ranges Council
City of Parramatta
City of Sydney
Blacktown City Council
North Sydney Council
Newcastle City Council
Lake Macquarie City Council
City of Adelaide
City of Salisbury
City of Marion
City of Onkaparinga
Town of Gawler
So, how can you make the first step to investigate the opportunity to reduce energy costs through the Building/Environmental Upgrade Finance facility?
Channel Power Group are a financier who has access to very long term finance of up to 20-years at very low rates and specialises in providing funding under the Building/Environmental Upgrade Finance programs in each of the three states.
Altus Energy is an energy advisory business that assists businesses to identify and implement energy cost reduction initiatives through applying a 9-step strategy framework.
Altus Energy is working with Channel Power Group to assist businesses to access long-term funding through the Building/Environmental Upgrade Finance facility to identify and implement energy efficiency initiatives to reduce costs.