Page 1 ENVIRONMENTAL UPGRADE FINANCE Briefing session – Adelaide December 12 th 2012 Joint Presentation: National Australia Bank & Low Carbon Australia South Australia EUA Presentation December 2012
Page 2 Stakeholders in the EUA framework There are a number of stakeholders in the EUA framework • Building owners and tenants • Sustainability body • Australian financial institutions • Consultants and service providers • Industry associations • State Government & Councils • Low Carbon Australia South Australia EUA Presentation December 2012
Page 3 What can EUAs be used for? Energy and Water Efficiency Project Examples • 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 South Australia EUA Presentation December 2012
Page 4 Grouping of Technologies able to be Financed Expected Max. Simple Soft costs : total costs Equipment Payback (Years) Category Sub Category Air Handling Indicative Soft 5 VSD Cost Ratings Heating Boilers Heating & Cooling Pumps 7 Low HVAC Heat exchangers Ventilation Fans 5 High Chillers 7 Cooling >50% Control Systems and localised controls Lighting Lighting LED and Fluorescent Lights 3 Low Street Lighting BMS / Controls BMS Controls High Electrical Metering Meters 5 Medium Med Distribution Systems Power control devices Low 50% Refrigeration 5 Refrigeration Refrigeration Low Compressed Air 4 Skylights Light 5 Glazing Insulation 8 Medium Insulation Low Building Solar reflective paint 5 Fabric 30% Ventilation Ventilation / 7 Infiltration Weather Sealing Shading Shading and Blinds 5 Low CHP CHP (Engine / Turbine) 10+ Low Energy and Solar Technology (PV) Renewables Solar Solar Technology (Thermal) 7 Low South Australia EUA Presentation December 2012
Page 5 EUAs attempt to resolve 2 key financing issues An EUA is a tripartite agreement between Local Government, Lender and Building Owner Tenants Pay Building Tenant Commercial Building Environmental Upgrade Council Environmental Upgrade Charge to the extent of Charges paid savings Council makes and levies Recovery of Environmental Environmental Upgrade Charge Upgrade Charge from tenants to recover the cost of works without consent or signature NSW only Environmental EUA Upgrade Charges paid through to Addresses Issue 2 – Lending Body Lending Body pays for energy Split Incentive + non efficiency improvements aligned interest Lending Body 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 Addresses Issue 1 – Cost and length of financing South Australia EUA Presentation December 2012
Page 6 Issue 1 addressed : EUA can reduce funding cost and increase term for funding An EUA is a tripartite agreement between Local Government, Lender and Building Owner Key benefits: Commercial Building Council • No security required • No financial covenants Limited recourse** • Up to 10-year term • No re-finance risk (fully amortising) EUA • Fixed rate recourse Limited • 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 Lending Body Structure reduces cost of financing and • Interest rate range = 6-7% Increases length of financing *Other than a limited indemnity for adverse change in law ** Recourse is limited to the building only South Australia EUA Presentation December 2012
Page 7 Issue 2 addressed: EUA removes the split incentive The case for EUAs versus 3 other alternatives (for a building under 5 year WALE net lease conditions) BUILDING OWNER sustainability TENANTS sustainability economics economics 0 1 3 5 Year 0 1 3 5 Year Do Do No action does not Nothing Nothing work for tenants or building owners Debt Debt BAU investment does not work for building owners Equity Equity EUAs work for both EUA EUA investors and tenants • Do nothing: economics worsen as tenants • Do nothing: economics worsen as tenants demand minimum NABERs ratings and pay higher unit costs for power consumption potentially do not re-lease leading to lower • Debt/Equity: classic split incentive – owner rents • Debt/Equity: classic split incentive – owner wears capital charge, tenant gains efficiency savings. By year 5, building owner starts to wears capital charge, tenant gains efficiency recover via increased rents savings. By year 5, building owner starts to recover via increased rents • EUA: Tenant no worse off than BAU (in fact, • EUA: Building owner gains via recovering the legislative process of EUA ensures some capital charge from the tenants and potential benefit likely left with tenant), and over time re-leasing at higher rentals they benefit more as escalating electricity savings outweigh the constant cost of the EUA servicing South Australia EUA Presentation December 2012
Page 8 Environmental Upgrade Agreements 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 • Installation of Tri- • Upgrade of plant room • Lighting upgrade Works done generation (e.g. Boilers, cooling • Lighting upgrade towers) • Facade upgrade Savings 17% reduction in energy 22% reduction in energy 62% reduction in tenant outgoings outgoings energy outgoings Tenant Pass-Thru X X Value identifier for Cost and Tenor of funds Cost and Tenor of funds Cost and Tenor of funds financing + Tenant Pass-Thru South Australia EUA Presentation December 2012
Pag e 9 EUA Process what happens when ? Process is not more onerous than conventional lending B/o scopes out building and estimates works and power savings Step 1 B/o and Council - 3 page application form Step 2 Financier completes a credit process: - is abbreviated process as * low loan to value ratio, * repayment is via council Step 3 * especially shortened if existing client of bank Only additional Step 4 B/o and financier agree Letter of Offer - 10 page Letter of Offer (LoO) template steps required B/o, council, financier agree EUA - 40 page EUA template - not designed to be Steps Step 5 1,3,4,6,7,8,9 amended - already negotiated ; Annexures are customised all required CPs need to be satisfied: for normal Step 6 *know your customer form, *verification forms/evidence funding * signed purchase agreements/ construction contracts Step 7 B/o finalises work scope and signs purchase agreements, as well as LoO and EUA Monies advanced based on contract terms Step 8 Step 9 Monies repaid each quarter from first Council date after works completed South Australia EUA Presentation December 2012
Page 10 EUA Example – 10 Valentine Avenue Parramatta A number of 1sts - first NSW EUA, first EUA with tenant pass through of a portion of the EUA charges Tenancy Lighting Upgrade Key Transaction Details Building Owner Australian Unity Tenant State Property Authority (NSW Government) – 16,000 square metres Funding Installation & Scope of Works Replacement of tenancy light Tenancy space lighting upgrades Maintenance fittings and lights Capital Cost ~$800,000 EUA Term 5 years Funding Estimated Energy $110,000 p.a. Savings Energy savings Key Takeaways Cashflow benefit (see next pages) Tenant driven Alternative to improve tenancy Benefits to Tenants space without rent review initiation EUA Better occupancy space Agreement Cashflow benefit (see next pages) Building Owner Competitive cost of capital Benefits to Building Owner Tenant engagement + retention Potential valuation increase EUA appropriately shares and regulates the costs and benefits of the upgrade South Australia EUA Presentation December 2012
Page 11 EUA stepped out for 10 Valentine An EUA is a tripartite agreement between Local Government, Lender and Building Owner $25k is initial qtrly electricity savings for tenant. There is legislative protection that From Feb 2013 From Feb 2013 tenant will not be charged more than they Building Tenant save on energy bill throughout 5 yr term ~$45k per ~$25k per Commercial Building Council quarter for 5 quarter for years Lease duration ~$45k per EUA quarter for Addresses Issue 2 – 5 years - ~$800,000 / 2 Split Incentive + non drawdowns aligned interest - 3 months works - Fixed Rate 5 Lending Body At the same time as the provision of first funding year funding to the Commercial Building Owner, a series of environmental upgrade charges (EUCs) are declared by the Council Addresses Issue 1 – Cost and length of financing South Australia EUA Presentation December 2012
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