Sustainability Risk

12 May 2010

Now the CRC has begun, the property market will becomes ‘energy-sensitised’ and poor performing assets will be penalised and suffer consequent loss of value. David Rees looks at how to balance cost against benefit, and model the investment options

ENERGY COSTS HAVE TRADITIONALLY been a housekeeping expense that for most organisations and lost within a host of other costs associated with running a business. But the direct and indirect costs of energy are now at to a level where they stand out as a key business cost - and therefore become a focus issue for the finance director. A probable outcome will be a direct requirement placed on the FM provider to find ways to achieve savings in this area.
There is often considerable scope for energy savings through more efficient use of assets by way of two key initiatives; firstly, ensuring that plant and machinery is properly maintained and programmed. Secondly, through engagement with building occupiers to secure their commitment to reduce wastage. Recently released figures from one of the UK’s major property companies showed that it was possible to reduce energy use in this way by an average of 17 percent across their portfolio – with one building reaching a 30 percent reduction in energy consumption.
If energy supply costs are going up – then this burden will be accentuated by the CRC which will require many larger property owners and occupiers to buy Carbon Allowances to reflect their carbon emissions.
At the time of writing in April 2010, most CRCaffected organisations are in the throes of preparing for registration and it will probably be only later this year that many will have calculated the cost of their Carbon Allowances bill. FM providers will do well to anticipate the potential problem that looms where clients begin to make demands for energy savings but with little idea of how they will be achieved.
Data on energy performance will be particularly helpful in identifying and targeting the buildings with the greatest opportunities for savings.
Davis Langdon’s new Carbon Assessor software, for example, is a simple do-it-yourself lowcost programme, that provides data for both CRC compliance – as well as clear graphical comparisons of performance across a portfolio (see www.checkmycarbon.com ) . The data can be presented as a cost per square metre, or per capita based upon occupier headcount.
The principal advantage to the FM provider is that it provides measured information and the most obvious candidates for early attention can be easily identified. This process becomes obvious for fairly new buildings where higher performance levels are to be expected, and thus excessive energy use immediately suggests poor discipline in operation rather than a defective building.
As early publicity surrounding Display Energy Certificates (DEC) showed, some almost new highprofile buildings have been significant underperformers and this been largely blamed on inefficient operation. This can be a combination of issues, in some cases, the sheer complexity of the building systems which through lack of planning during commissioning have become poorly programmed – but also perhaps that occupiers assume the building is already efficient and so they are not required to be vigilant in minimising waste.
However, 80 percent of our commercial buildings are over 20 years old and 50 percent date from pre-1939. This is not to say that we have a lot of buildings that are beyond redemption – in fact many solidly constructed older brick and stone structures are actually quite good at retaining heat. But they have single glazed windows, and older plant and machinery.
If the property market gradually becomes energy-sensitised over the next decade, it will start to penalise poor performing assets which will suffer consequent loss of value – for which a new term is gaining currency, that of ‘sustainability risk’. EPC and DEC ratings will start to count.
Thus a more strategic approach will become necessary. Firstly, reducing the unnecessary wastage and then using the savings generated, to fund the works to pay for improvements to buildings that are becoming obsolescent. A carefully considered ‘Spend to Save’ approach will be a mantra likely to appeal to most finance directors. On which note it is worth stating the obvious - that if a building is inefficient then putting photovoltaic or wind generators on the roof will not address this issue. The first objective must be to use scarce capital to improve performance and then use the resultant savings to pay for renewable energy equipment options.
For larger buildings the process will involve creating an energy performance model using one of the EPC softwares such as the Dynamic Simulation Modelling developed by Integrated Environmental Solutions (software developers for Carbon Assessor), which then allows options for improvement to be measured through running alternative specifications through the programme.
There are likely to be three levels of approach in this process:
● Light touch – minimum spend on better building management systems e.g. heating and lighting controls.
● Medium intervention – replacing existing main plant items such as heating and cooling, or adding improvements to glazing by way of replacement or high quality secondary glazing, and adding insulation where possible.
● The rebuild – where typically a 30 year old building has a good concrete frame that can be reused but little else to commend it, then stripping it back and replacing the external cladding with a new pre-insulated system and complete new services within effectively renew the asset to restart its working life.
In each case, an analysis is required to balance cost against benefit. Davis Langdon’s costplanning skills can provide the alternative budgets, and this can then be measured against the expected actual energy savings, the reduction in required Carbon Allowances, and for taxpaying owners or occupiers – the significant savings available under the UK’s Capital Allowances tax reliefs (see below).
Armed with the alternative approaches to the building, it should then be possible to consider the investment value of the asset so that a client makes the right decisions.Tax savings can produce considerable reductions in bottom line cost with refurbishment schemes sometimes seeing as much as 75 percent of the budget cost becoming allocated to tax relief.
The Enhanced Capital Allowances (ECA) scheme offers 100 percent current year relief on expenditure on qualifying energy saving items of plant and machinery. This represents a double bonus as it means the best energy savings as well as a tax perk. Lastly, the availability of 0 percent interest loans from the Carbon Trust to Small to Medium Enterprises of up to £100,000 over four years towards improving performance in existing buildings remains a well-kept secret within the economy despite extensive advertising.
Like it or not, energy performance is creeping onto almost everyone’s agenda and we all need to recognise that our business models may need to change in order to address this issue and continue to provide the service our clients seek.
● David Rees is a partner in Davis Langdon LLP – a global cost consultancy. Its new Carbon Assessor software can be viewed at www.checkmycarbon.
com and sampled in a 30 day free trial. Email: david.rees@davislangdon.com