Melbourne Promotes Building Upgrades with Environmental Upgrade Finance USTRALIA

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1 BUILDING ENERGY EFFICIENCY Melbourne Promotes Building Upgrades with Environmental Upgrade Finance USTRALIA

2 RETROFITTING MELBOURNE Addressing barriers to investment through a Property Assessed Clean Energy financing model As part of Melbourne s plan to achieve carbon-neutrality by 2020, the city launched the 1200 Buildings Program to encourage energy efficiency retrofits and renewable energy projects in non-residential commercial buildings. This sector, which accounts for more than half the city s greenhouse gas emissions, offers significant opportunities for implementing carbon-cutting measures. In the past, major barriers, such as a lack of access to capital and the split incentive, by which property owners lack incentive to invest in energy efficiency because the tenants pay electricity bills, have discouraged investment. Working with commercial building owners and other stakeholders, the 1200 Buildings Program aims to encourage the retrofitting of more than two-thirds of Melbourne s building stock within the next 10 to 15 years. 1 To overcome obstacles to investment, the city is using a mechanism known as environmental upgrade finance, based on the Property Assessed Clean Energy (PACE) financing model. This system reduces costs for property owners and encourages financial institutions to make capital available for investment. The program aims to reduce greenhouse gas emissions from commercial buildings by about 38 percent (384,000 tons of CO 2 -equivalent per year) from business-as-usual levels by SYSTEM FACILITATES FINANCING AND PAYMENTS Through PACE, a form of environmental financing first implemented in the U.S. state of California in 2008, local governments provide loans to property owners for certain green investments, primarily energy-efficiency retrofits or renewable energy. 3 Instead of repaying these loans through traditional debt payments, PACE participants pay for upgrades through a special surcharge on their property taxes. This approach links debt to properties, rather than individuals. If a property using PACE financing is sold, the new owner assumes repayment of the investment, ensuring that only the beneficiaries of energy-efficiency retrofits pay for their costs. The Melbourne system uses a variation of PACE, in which financing is arranged directly by property owners with financial institutions, rather than being provided by a local government (which typically must issue bonds to fund such a program). This owner-arranged model allows property owners to secure more attractive rates and terms than with a traditional PACE model, because they can seek out commercial lenders independently and obtain loan terms that are specific to each project. 1

3 All existing non-residential commercial properties within the Melbourne city limits that have registered for the 1200 Buildings Program are eligible. Property owners or managers must obtain a baseline assessment of their buildings and submit a proposal describing their intended environmental upgrades to the Sustainable Melbourne Fund, an independently managed trust established by the city and responsible for implementing the financing scheme. The Sustainable Melbourne Fund evaluates the proposal and determines if the upgrades qualify. To qualify, improvements must achieve energy or water savings, in comparison to the baseline, or produce renewable energy. 4 Projects must also be linked to a system for measuring performance and accurately gauging the savings. The Sustainable Melbourne Fund provides a list of common pre-approved project types, including improvements such as building insulation, solar thermal water heaters, and efficient heating, ventilation and air-conditioning systems. Projects not on the pre-approved list require additional review and approval by an expert panel in order to qualify. Property owners then obtain financing from an Australian financial institution and enter into a contract with the city of Melbourne to participate in the scheme. The financial institution provides the upfront funds for the environmental upgrades, and the property owner begins scheduled property tax surcharge payments equal to the loan s principal and interest payments. The city forwards the payments to the lender. Figure 1: Structure of Environmental Upgrade Finance Transfer Payments to Commercial Bank CITY OF MELBOURNE COMMERCIAL BANK Property Tax Surcharge Payments City Levies Surcharge on Property Tax Loans for Energy Efficiency Improvements BUILDING OWNER Property Tax Surcharge Passed on to Tenants (Optional) Tenants Pay Property Tax Surcharge to the Extent of Savings Incurred BUILDING TENANT Source: National Australia Bank. The surcharge is a statutory charge, which the city collects as it would any other tax, and ranks ahead of other debts and obligations. Raising the seniority of this type of debt increases the likelihood that the loans will be repaid, allowing for reduced interest rates. If a property is sold, the new owner assumes the payments, reducing uncertainty about recovering project costs. 5 2

4 Environmental upgrade finance also helps overcome the split-incentive barrier by providing a framework for sharing surcharge payments between tenants and property owners. With the tenants consent, property managers may pass through a portion of the surcharge, as long as it does not exceed the savings from reduced energy use enjoyed by the tenant. Overall, environmental upgrade financing complements existing mandates such as efficiency standards for new buildings and building retrofits and minimum sustainable design guidelines. REDUCING EMISSIONS, SAVING ENERGY, CREATING JOBS The first contract was signed in October 2011 and is financing a USD 400,000 retrofit to install an efficient chiller unit and new building management system, which will result in a reduction of about 170 tons of CO 2 -equivalent annually. 6 Four agreements were signed by November 2012, with a combined project value of USD 5.6 million and estimated CO 2 reductions of 5,660 metric tons per year. 7 The city of Melbourne s annual report stated that building retrofits for another 180 buildings were planned or under way. Besides reducing greenhouse gas emissions, the 1200 Buildings Program and its environmental upgrade finance mechanism are expected to reduce energy costs for Melbourne s commercial buildings by 25 percent, create up to 8,000 green jobs and generate over USD 2 billion in private-sector investment through ,9 Melbourne s pioneering system has already shown that it could be emulated in other cities around the world. In March 2012, the Energy Efficiency Global Forum honored it with a Global Visionary Award in the Asia-Pacific region. 10 The United Nations Association of Australia also honored it with the 2012 World Environment Day Award for best specific environmental initiative. 11 Following Melbourne s lead, other cities, including Sydney, San Francisco and Los Angeles, are now implementing their own versions of owner-arranged PACE financing. REFERENCES Sustainable Melbourne Fund. Environmental Upgrade Finance: FAQ. Web. August < sustainablemelbournefund.com.au/euf/faq> NYC Global Partners. Best Practice: Green Buildings Retrofit Program. NYC Global Partners Innovation Exchange, July 14, Web. August < gprb/downloads/pdf/melbourne_greenbuildings.pdf> 3

5 ENDNOTES 1 NYC Global Partners. Best Practice: Green Buildings Retrofit Program. NYC Global Partners Innovation Exchange, July 14, Web. August < gprb/downloads/pdf/melbourne_greenbuildings.pdf> 2 Ibid. 3 Institute for Building Energy Efficiency. Property-Assessed Clean Energy Financing: Alive and Well in the Commercial Sector. Web. August < clean-energy-finance/pace-finance-commercial-sector.aspx> 4 Sustainable Melbourne Fund. Environmental Upgrade Finance: FAQ. Web. August < sustainablemelbournefund.com.au/euf/faq> 5 Ibid. 6 City of Melbourne. World s First Environmental Upgrade Agreement signed. City of Melbourne, Media Release, October 13, Web. August < melbourne.vic.gov.au/aboutcouncil/mediareleases/pages/ orldsfirstenvironmentalupgradeagreementsigned.aspx> 7 Australian Institute of Refrigeration, Air Conditioning and Heating Unlocking retrofit Potential. Web. December < EcoLibrium/2012/November%202012/2012_11_F03.pdf> 9 Deloitte Buildings - Analysis of Potential Economic Benefits. 10 Kweller, Ronnie EE Global Forum Honors Energy Efficiency Visionaries. Alliance to Save Energy. March 29, Web. August < news/2012-ee-global-forum-honors-energy-efficiency- %E2%80%98visionaries%E2%80%99> 11 United Nations Association of Australia. Winners of the 2012 World Environment Day Awards Announced at Awards Presentation Dinner. Media Release, June 8, < Announced_2012.pdf> Figure References Figure 1: Structure of Environmental Upgrade Finance National Australia Bank NAB Environmental Upgrade Funding Brochure. Web. December < com.au/wps/wcm/connect/5129f900496d0f8382c4b32e6bd 3f604/NAB-EnvironmentalUpgradeFunding-2012.pdf?MOD=AJ PERES&CACHEID=5129f900496d0f8382c4b32e6bd3f604> 8 Institute for Building Energy Efficiency. Melbourne s New Environmental Upgrade Agreement Program Could Provide a Model for Property-Secured Clean-Energy Retrofit Financing. Web. August < clean-energy-finance/melbourne-environmental-upgradeagreement.aspx> 750 First Street, NE, Suite 940 Washington, DC p CCAP CENTER FOR CLEAN AIR POLICY