Why banks and financiers are desperate to fund energy efficiency
Willow Aliento | 20 December 2016
The big four Australian banks and large equity funds are “desperate” to fund projects in the built environment energy efficiency and renewable energy space. They want low-carbon, low-risk, green endeavours, and this is giving rise to a whole new set of opportunities for getting green buildings across the line, according to Sustainable Future Group’s Marlon Kobacker.
One recent project Kobacker worked on involved a commercial building that had a $100 million budget. His company identified $2 million in cost-saving initiatives including mixed-mode ventilation, daylighting, energy efficiency measures, on-site renewables and strategic shading for glazing.
Much to the client’s delight, clean tech finance (CTF) was obtained for the whole package, reducing the budget by $2 million. The result was also an asset that uses 60 per cent less energy than Section J minimum.
On another $20 million project, a $400,000 package of energy efficiency measures including on-site renewables was put together and financed through CTF. The building’s NABERS rating increased from four star NABERS to 5.5 star NABERS at no added capital cost.
That’s what his company means by the term “value engineered”, he told The Fifth Estate.
It’s adding value and delivering an asset that performs more efficiently, has a reduced environmental footprint and reduced greenhouse gas emissions – all without ever mentioning the word “sustainable” or “green”.
A game-changing step
The game-changing step is to make the business case absolutely rock-solid by taking the energy efficiency elements out of the capital budget, and funding them through saved operational expenses through clean tech financing, Kobacker says.
It’s like a magic formula – the developer’s capex (capital expenditure) turns into the asset manager’s opex (operating expenditure), and the opex savings pay for the loan.
Kobacker says it starts with embedding environmentally sustainable design thinking from the very start of a project’s feasibility stage.
This means looking to passive design measures and energy efficiency initiatives from the outset and putting a clear value on them in terms of reduced operational expenditure and increased return on investment.
“It is a low risk loan as the savings finance it. It pays for itself.”
It’s also a kind of finance that delivers on corporate ESG commitments, giving the fund or bank something to tell shareholders that they can get excited about.
International investors responding to the lure of higher returns in Oz
The company is now starting to look internationally, particularly in countries with lots of money but low interest rates of around one per cent – where investors are attracted by the higher returns in Australia.
Pathways are in the book
In April this year Kobacker published a book, Removing the capital cost barrier to sustainable building design, which sets out the pathways, both passive and mechanical, for achieving better buildings and also explains the value proposition and the role of clean tech financing.
After giving a presentation on its contents at a recent public sector energy efficiency conference, he says he was “mobbed” afterwards by delegates wanting to undertake projects.
Among those keen to leverage clean tech finance to reduce operating expenses were schools, councils and hospitals.
Banks and ESD designers need to communicate – right now the lack of common language is a barrier
Kobacker says a key barrier to connecting the finance and the projects is that “the banks don’t know how to find projects and the designers and ESD consultants don’t know how to talk to banks”.
Another barrier is that while the top end of town sees the value in green ratings systems for new buildings, smaller developers and those building further outside the CBD don’t.
This is a problem because the big commercial properties in CBD areas are only a very small percentage of the built environment sector.
Some people still believe sustainability adds cost, not value
For the rest of the industry, there is a stigma that sustainability adds cost, not value, Kobacker says.
“So they default back to code minimum.”
We need some low rating stars – to fill the gap and rise above the minimum
“It hasn’t helped that the Green Building Council of Australia’s rating system doesn’t award one, two or three star ratings for new developments,” he says.
That’s created a gap, because most projects could achieve three stars at no additional capital cost. Instead, those projects “default back to minimum compliance”.
“The approach we take is to develop the strategy to achieve minimum compliance then look at testing various initiatives, and looking at the opex cost savings from onsite renewables and smart passive design.”
Good passive design is key, as that’s where there can be big opex savings in terms of lighting and HVAC use.
“You can add initiatives without adding capital cost to the budget.
“Clean tech finance is a great opportunity to have initiatives funded and pull capex [for them] out of the budget.”
When the ROI is made clear, clients will often take the proposal up, he says.
It’s about speaking the language of finance
“Sustainability is far too vague a term and only works against us in the industry,” Kobacker says.
“We’re moving more towards financial terminology.”
Ultimately, in this context, a sustainable asset is one that doesn’t make a loss, delivers increased return on investment and has decreased opex costs.
The most appealing ESD measures optimise an asset’s performance financially, while also delivering environmental and social benefits.
You need the sustainable design thinking embedded in the financial modelling
To ensure this is embedded, Kobacker says an ESD specialist needs to put the sustainable design thinking into the financial modelling and project brief before it goes out to market and an architect comes on board.
“The best projects I’ve worked on have had a very clear brief on what the project needs to achieve financially and in terms of the design brief.
“ESD affects the economics of an asset so it needs to be embedded.”
The whole “green buildings cost more stigma” has arisen from ESD thinking being done too late in projects. When all the passive design has been done by the architect, by the time the ESD consultant comes on board there are less opportunities to add no-cost initiatives.
That’s when the “bells and whistles” such as super-efficient HVAC plant, blackwater recycling and other technologies get proposed. These items that add capital cost are where the global perception green buildings are expensive came from.
And that’s when ESD initiatives get “value engineered out” because they are deemed as a cost, not as necessary.
Also, if projects are proposing putting in “gold-plated products” like recycled materials at a premium price, many developers will quite logically ask, “Why would I do that?”
“My approach is, don’t suggest anything unless it adds value or has an ROI,” Kobacker says.
The impact of science-based targets will mean change in the market. Is the building in line with Paris?
Kobacker says science-based targets for emissions reductions will probably create an adjustment in the market.
“Science-based targets are aligned with the Paris agreement. If [people] start adopting them as a design target, we will probably still build the same glass towers but they’ll be super energy-efficient.”
There will probably also be more uptake of carbon offsets, which Kobacker says are so cheap they provide a way for people to achieve low-carbon outcomes.
“It will become the norm to offset our big glass towers.”
The conversation then shifts, he says. People no longer talk about whether a building is sustainable, they say, “It’s in line with Paris.”
The bottom line for architects, engineers and ESD consultants is that the appetite in the financial sector for clean tech projects to invest in and the trend towards congruence with the Paris agreement generates a major opportunity.
People can basically get sustainability measures into buildings for free, Kobacker says.
“So let’s design it in!”