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News from the front desk: Issue No 221 – The ERF & why Santa’s stocking is not looking good

Here we are just before Christmas. Will Santa have something nice for the property industry? All the happy property campers are busily stretching out their Christmas stockings to take the extra booty. Last year the industry got a Direct Action promise pretty much on Christmas Eve. For a year now, the chorus line has been: “oh well, the carbon tax is gone, the Major Cities Unit is gone, the Energy Efficiencies Opportunities program is gone, scientist and …oh we’re getting bored now. But, here the bright sparks all jump to attention, and chant all together now: “At least we have the Emissions Reduction Fund!”

Right?

Wrong.

In the words of one insider, ERF for the property sector is a disappointment. In even fewer words, it’s useless.

So what’s this government been working on for 12 months? What’s this fresh faced and chirpy optimistic Environment Minister been doing when he fronts up to all the industry events, before crowds of hopeful business people and academics promising they can be part of the story of reducing emissions in this country?

Dozens of industry advocates and industry experts have donated time and effort to be part of working parties and industry expert panels to help the minister and his team find a fit for the ERF.

These earnest folk have come with good will, leaving aside their doubt, and told the minister everything he needs to understand about property. How important it is to our economy and productivity, how central it is to emissions reductions (all that lovely low hanging fruit) and how much power it has to change behaviour and thinking because, in one way or another, it touches nearly everyone.

The minister and his team have listened. They’ve cobbled together all the knowledge and insight. And then delivered the biggest barriers to entry to a scheme or program that anyone has every seen.

It’s hard to overstate the level of disappointment we found.

One industry insider said, “In my view it’s not worth a candle”.

First is the biggest hurdle. You need to abate 2000 tonnes of carbon in one year to qualify.

We’ve tried to get a sense of what that would take. The thinking is, “massive”.  Below is a table that indicates the scale.

table for erf

The table shows average kg of carbon emissions for each NABERS star rating per a sq m in  a 10,000 sq m building, in each state or territory. A 3 star NABERS building of 10,000 sq m building in NSW would emit 1350 tonnes of carbon each year. Source: industry

Using our calculations, we estimate that you would need to achieve the equivalent of a three to four star NABERS rating improvement over 62,500 square metres of building space. See a graph with the same calculations, below, from Energetics.

It’s possible to get an aggregator to do the work of collating the carbon savings.

“We’ve looked if we could do that but it’s a very unattractive role,” said our source who preferred not to be named. “You get paid in arrears if you’re lucky and you take all the upfront risk.

“It’s not an attractive proposition.”

“Property trusts could but on the whole it doesn’t strike me as a very attractive mechanism.”

A single property owner might want to aggregate across a large number of properties but the capital hurdle would be high.

“If you aggregate across different owners then it’s more complicated.” And that’s before anyone has even looked at the legal ramifications or the administration involved.

Don’t look to the government to provide any guidance here. The thinking is it sets the parameters –the industry can work out the mechanics.

But it gets more complicated.

The rule is you need to achieve a full one star NABERS improvement in the first year and then 0.15 stars for each of the years after in a contract of five years.

If your buildings are five star already or even four stars you would not qualify because you soon run out of stars.

“The bigger property trusts who have the better buildings won’t be eligible,” our insider said.

“You could apply if you had three star average but you would have to commit to go to 4 star and then 4.15 and 0.15 for each year you’ve signed up for.”

“And you have to do this for less than $10 a tonne of carbon.

“Why would you bother?”

Most of the Melbourne and Sydney property market are also ruled out of play.

First because that’s where most of the premium portfolios are – the ones that would not qualify because they are already at a high NABERS rating – and second because many owners take advantage of the white certificate schemes in each of those states and the ERF precludes double dipping.

The government is onto this. It’s creating even more methodologies that promise to closely resemble these schemes.

DEXUS

Take a look at DEXUS. Here is a company with 1.7 million square metres of property in its portfolio producing 120,000 tonnes of carbon a year. But reducing that to meet the parameters of a minimum one star NABERS in the first year and then 0.15 in each subsequent year doesn’t look very feasible.

Even worse is that most of the property is Sydney centric and already taps into the Energy Savings Scheme so the ERF would already be out of bounds.

Group sustainability and operations manager Paul Wall said he was not hopeful there was much in the ERF for his company.

“It’s not looking like there’ a whole lot in it for us. We’ve already done a lot of the heavy lifting, getting NABERS ratings to 4.5 to 5 stars so after that it’s hard to get anything but incremental change.”

The other issue is that the price of abatement is likely to be “not much different” to the energy savings scheme. “It’s nice to have it but it really doesn’t drive the project.”

“It’s been at $30 but it was at $13 yesterday,” Wall said on Wednesday afternoon.

Energetics

Peter Holt, principal consultant carbon strategies with Energetics, was also circumspect.

“There are limited opportunities for the built form. We see more opportunities outside of NSW and Victoria because they have existing white certificate schemes in place and that’s where about 50 per cent of premium buildings are located.”

To qualify for the minimum 2000 tonnes carbon abatement with a commercial lighting project for instance you would need in the order of 32,000 upgrades from T5 lighting to T8, he said. The accompanying graph shows Energetics estimate of projected emissions savings from improved NABERS ratings.

Environment Minister Greg Hunt told the annual CRC for Low Carbon Living forum recently that new buildings would not quality for the ERF because it would be hard to prove additionality – that is the additional emissions savings beyond the base line.

Holt said the definition of “new” was something that might have various interpretations. How to treat new plant and equipment qualify or expansion of a shopping centre, as pointed out by another source, were interesting questions to be addressed.

With potential aggregators the names of companies such as Telstra, AGL and EnergyAutralia are periodically mentioned.

Holt says Telstra is flagged because of the potential for technology to be used in the home to control energy systems. If you look at the price Google paid for Nest Labs, a company in this field, a cool $3.2 billion, you would assume the thinking is correct.

Aggregators would need to certify Australian Carbon Credit Units, which then could then become a type of financial product that could be sold to the government or the secondary market, Holt said. The secondary market could consist of say, a large power generator that failed to meet its baseline target emissions reductions but could make up for this by purchasing ACUs those created by another entity.

“The challenge would be in terms of having methods that are easy to administer with low transaction costs.”

Holt says some of these solutions could emerge, but right now, the scenario is not clear.

“The devil is in the detail. Each methodology is distinctly different and has a different set of reporting requirements. That’s the challenge. We’re not comparing apples with apples. Each is very different.”

NabersShopping Centre Council of Australia

The Shopping Centre Council of Australia executive director Angus Nardi said the Property Council and the Shopping Centre councils were hopeful the ERF could work for property.

“We accept it needs to be impartial. We were hoping the rules would be an enabler for property but it doesn’t look like that will be the case.”

“At the end of the day it’s all about emissions and they want it to come from the most cost effective source.”

“We were hoping it would be an enabler rather than a barrier.”

But barrier it is. One big red tape barrier.

“We’re speaking to the government but I can’t see it being an enabler for the property sector.”

Engineers

On the engineering side, an expert who has been closely involved in the methodologies and did not want to be identified said he was not impressed.

“Our assessment is not a highly attractive investment proposition and would be of interest only to a limited number of building owners.”

The Property Council of Australia

Not all may necessarily be lost. There is hope that some of the methodologies might be wrangled into a useable shape.

Charlie Thomas, national policy manager, sustainability and regulation at the Property Council of Australia told The Fifth Estate the methodologies might be able to provide big opportunities for the built environment sector, but the scheme overall still seriously flawed.

“The two methodologies [on industrial and residential energy efficiency] are where the rubber hits the road for the built environment,” Thomas said.

“The Aggregated Small Energy Users method will allow households to participate in collaboration with an aggregator (such as an energy retailer).

[Local government has ruled itself out based on information supplied to The Fifth Estate.]

Thomas says it’s possible those methodologies can be used for equipment upgrades and behavioural changes.

“Our members will be particularly interested in the Industrial Fuel and Energy Efficiency method. This is a flexible baseline model which draws heavily on the NSW Energy Savings Scheme. We’ve argued throughout the process for maximum consistency between those two schemes.

“The method is fairly agnostic as to project type, opening up an array of upgrades to building owners – from replacing boilers, fans and pumps, to improving control systems or fuel switching.”

However, he said, the perfect methodology would not overcome fundamental issues of the ERF design, most notably the minimum bid size of 2000 tonnes of CO2-equivalent a year.

“The threshold creates a barrier to entry for most building owners who aren’t in a position to upgrade multiple buildings simultaneously,” Mr Thomas said.

“We understand our members are looking closely at the opportunities available under the scheme and their participation will depend on the price delivered by the auction.

“Largely, it is a game of wait-and-see as to whether competition from other sectors prices-out energy efficiency projects.”

The Clean Energy Finance Corporation
Chief operating officer for the Clean Energy Finance Corporation Meg McDonald told The Fifth Estate this week the CEFC has been part of a series of working groups from a number of individual sectors providing input into the development of ERF methodologies.

“We’ve been providing technical input to those exercises. We’ve been particularly interested in the energy efficiency side.

“For a number of these the key to success will be organisations that achieve successful aggregation.”

However, McDonald was not sure who these aggregators could be.

“You need the facilities and the capabilities in place to successfully aggregate projects. And integrating into that the verification and as well as the capability of being able to fund these.

“I think it will be large organisations that have a significant base.”

McDonald is positive. “It’s good to see a large number of methodologies because it encourages people to look more widely than would otherwise be the case.”

Comments

One Response to “News from the front desk: Issue No 221 – The ERF & why Santa’s stocking is not looking good”

  • Paul Bannister says:

    All very valid points, and this is after all what one gets when imposing a government non-market mechanism onto industry – red tape. It’s hilarious coming from this particular administration and illustrative of their deep lack of….well anything really.

    That said, to me the real rub is the ACCU price. ACCUs currently trade at around $17/tonne, so one might reasonably consider that is where they will stay – after all the Government surely is not going to countenance paying more than the big bad carbon tax per tonne. So we are left with all of this fuss and bother for something that is at best a minor supplement to project funding. It is certainly not the game-changer that is needed.

    It would be an easy and obvious target to suggest that actually this is actually just more of the Government’s big coal agenda – because you need to be the size of a power station for it to be worthwhile participating – but this I think would be a lazy claim. I will admit I thought similarly of the GGAS/ESS when it was introduced and yet it ended up being widely adopted in the general market – although it is not, I believe, quite as restrictively encumbered as the ERF seems to be. However what I don’t have any idea of is whether the evidence supports the idea that the ERF (operating effectively as a national ESS) has any chance of achieving the required outcomes. Statistics anyone?

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