South Australian Industry Session

Scott Bocskay, Chief Executive

Sustainable Melbourne Fund

12 December 2012

Presentation outline

– Environmental Upgrade Finance, Why do it?– What is it?– Benefits– Administrative Models– The Victorian EUA model / approach– Current Status– Key lessons

– Wholly owned, independent trust established by Melbourne City Council in 2002 with an investment of $5 million - currently a $6.4 million fund

– Expertise in energy efficiency, renewable energy and project management and delivery

– We have two distinct roles

1. Through our investment program provide loans of up to $500,000 for up to 6 years; $8.1 million invested in energy generation, water savings and energy efficiency projects since inception

2. Administer environmental upgrade finance on behalf of the City of Melbourne

Sustainable Melbourne Fund

Why Environmental Upgrade Finance?

2020 Australia emissions reduction investor cost curve

-150

-200

-300

-350

-100

-400

250100500 200150

150

200

50

0

100

-50

-250

SOURCE: ClimateWorks team analysis, derived from 2020 GHG emissions reduction cost curve

PowerTransport ForestryIndustryBuildings Agriculture PowerPowerTransportTransport ForestryForestryIndustryIndustryBuildingsBuildings AgricultureAgriculture

Residential appliances and electronics

Gas T&D network maintenance

Commercial new builds

Commercial retrofit HVAC

Large articulated truck efficiency improvement

Improved forest management

Coal CCS new build

Solar PV (centralised)

Aluminium energy efficiency

Chemicals processes and fuel shift

Anti-methanogenic treatments

Wind offshore

Car and light commercial efficiency improvement

Gas CCGT new build

Mining VAM oxidation

Cement clinker substitution by slag

CCGT increased utilisation

Degraded farmland restoration

Strategic reforestation of non-marginal land with environmental forest

Commercial elevators and appliances

Other industry energy efficiency

Operational improvements to existing black coal plants thermal efficiency

Reduced T&D losses

Cropland carbon sequestration

Onshore wind (best locations)

Onshore wind (marginal locations)

Solar thermal

Commercial retrofit energy waste reduction

Food, beverage and tobacco energy efficiency

Reforestation of marginal land with timber plantation

Industrial cogeneration

Geothermal

Capital improvements to existing black coal plant thermal efficiency

Reforestation of marginal land with environmental forest

Biomass co-firing

Reduced deforestation and regrowth clearing

Commercial retrofit lighting

Residential lighting

Commercial retrofit insulation

Commercial retrofit water heating

Iron and steel processes

Wave/tidal

Reduced cropland soil emissions

OCGT retrofit to base-load CCGT

Hybrid cars

Pulp, paper and print energy efficiency

Mining energy efficiency

Residential new builds

Electric cars

Biogas

Active livestock feeding

Pasture and grassland management

Commercial cogeneration

Residential building envelope

Biomass dedicated

Solar PV (distributed)

Gas CCS

Coal IGCC with CCS

Emissions reduction potentialMtCO2e per year

Traditional barriers to retrofitting

– Lack of available capital for environmental upgrades from traditional financiers because of a lack of security as collateral for a loan– Internal competition for limited capital

– Split incentive - the building owner is not incentivised to invest in energy efficiency as the tenant pays the energy bills

– Building owners’ perception that investment costs will not yield a sufficient return in savings– Returns achieved as savings – not an annuity

– Lack of awareness of how to capture value and ‘business-as-usual’ mindset

Council drivers

– To retrofit 2/3rds of the City of Melbourne’s commercial office

– 38% reduction in energy use in commercial buildings with 383 kilotonnes of CO2-e and five gigalitres annual savings

– Drives investment at an accelerated pace – $2 billion in retrofit activity

– Strengthens community through job creation – 8,000 new jobs

Where to focus our effort – Owners and NLA

785

293

13238313025

16100

100200300400500600700800900

Government Out ofGovernment

Other ProfessionalAssociation

Not for Profit Business Corporate OwnersCorporation

Individual &Family Owned /

SmallBusinesses &

InvestorPortfolios

2,933,884

62,886 153,216 91,249 72,771 51,082351,464

1,617,8381,723,349

0

1,000,000

2,000,000

3,000,000

4,000,000

Government Out ofGovernment

Other ProfessionalAssociation

Not for Profit Business Corporate OwnersCorporation

Individual &Family Owned /

SmallBusinesses &

InvestorPortfolios

57.72%

0.7% 1.2% 1.8% 2.2% 2.3% 2.8% 9.7% 21.5% 57.7%

0.9% 2.2% 1.3% 1.0% 0.7% 5.0% 41.6% 22.9% 24.4%

No of buildings

NLA

Environmental upgrade finance– Headlines

– Access to Capital– Cheaper than otherwise available– Longer tenor, fixed interest

– Detail– Access new cash flows to improve buildings– Alignment of incentives

– Environmental upgrade finance developed by Melbourne City Council to overcome lack of access to capital

– Makes it easier for building owners to obtain finance for environmental retrofits– Common and custom environmental upgrades stipulated by Sustainable Melbourne Fund

What is environmental upgrade finance?

How the process works

Key Features– ‘Super’ senior – Attractive collateral for lenders– Charge attached to property - Finance is a council ‘special rate or charge’ and

remains with the property– Tenant Pass Through – EUC’s are council statutory charge, can be passed through

under triple net leases – differences in NSW and Victoria– Local Government rights unfettered – local retains statutory powers– Voluntary – The EUC’s are voluntarily entered into by the parties to the EUA

Design Principles to Projects– Must deliver energy, greenhouse or water savings– “Nailed down”–charge and benefits to remain with building the improvements also

remain with the building– Recognise long flat tail of technology performance and encourage innovation– Real opportunity lay in working with tenants to deliver comprehensive projects and

new cash flows

Environmental upgrade agreements - Benefits

Environment Upgrade Agreement’s – Key Benefits

Building Owner– Sharing the environmental upgrade charge with tenants unlocks greater savings for both parties and can open up new building cash flows

– Improves asset value

– Tenants also enjoy benefits of higher performing tenancies

– Availability of capital with attractive terms, cost and tenure

– Achieve energy efficiency savings sooner

– Upgrade without carrying all the cost

Tenant– Off balance sheet finance for tenancy projects–Hedge against future energy price rises

– projects can be structured, at worst case, at nil net effect, best outcome, cash generative

– reduced risk of occupancy – replace volatile costs with fixed costs

Industry– up to 100% finance available for your projects in buildings– new money not competing against limited capital, funded through new cash flows to a building owner

Financial Institutions– innovative low-risk finance - ability to recover funds as a statutory charge de-risk retrofit investments

– new pipeline of investment opportunity

– Sound underwriting principles– low hanging fruit – low cost compared to asset value

Existing Mortgagee– improved asset fundamentals –better performing buildings appreciate more in value

– ability to generate free cash in an asset– value greater than the cost of the upgrades

Benefits to municipality– Drives investment at an accelerated pace – program projected to generate estimated $650+ million

retrofit activity (Adelaide and surrounds only)

– Strengthens community – program projected to create around eight jobs per $1 million in spending

– No budgetary impact for upgrades – uses private capital for funding

– Least cost administrative model for council budget – utilising 3rd party administrative model

– No debt or credit risk – charge is secure

– Voluntary participation – building owners and occupiers opt-in if they decide benefits warrant

– Assists municipality achieve:– sustainability objectives ,– meet emission reduction targets, and;– Local Economic development

Environmental upgrade agreements – Administrative models

Challenges for EUF program design

– High Legal and Administrative Setup Costs.– Fast Follower Benefits – like that to be gained by South Australia – can learn from Vic

and NSW– Program Administration benefits

– Need Significant Deal Flow. May not be appropriate for small towns and cities as scale is required to reduce costs.– Opportunities for 3rd party administration– Easily targeted municipalities– Project qualification

– 2 Models:

– 3rd party administrator acting on behalf of multiple councils

– Internal programmatic teams

– In both cases Councils still need to be able to declare, levy, collect and distribute Environmental Upgrade Charges. However, once set up these processes are core business such as rates collection.

Administrative models

Role of Sustainable Melbourne Fund

– Work in partnership with City of Melbourne to set up the project underwriting criteria, program guidelines and application processes of the environmental upgrade finance mechanism

– Third party administrator - Assess and process project applications on behalf of City of Melbourne

– Work with financiers to the program to make their products available to customers

– Fee for service model – user pays, as benefits accrue to building owner and occupiers

– Proven Least Cost for the City of Melbourne

Sustainable Melbourne Fund –National Consistency in EUA administration

– Currently exploring the demand for the establishment of a national 3rd party administration model

– Making it easier for more councils to capture the Value of EUAs – even where a small pipeline may be perceived

– Delivering national consistency for easier investment decisions by owners and tenants with a presence in multiple regions.

– Enables new EUA lenders to enter the market with greater pipeline opportunities

– Encouraging greater competition and origination efforts

– Delivering greater environmental and economic outcomes for municipalities

Victorian Model

– Only available to the municipality of Melbourne –no other council areas

– Buildings must therefore be located withinmunicipal boundaries of the City of Melbourne

– Signatory to 1200 Buildings program– Existing building (no less than 24 months old) on

rateable land – Current on all rates and charges due to Melbourne

City Council– SMF as the 3rd party administrator– Recent update to legislation to update underwriting

criteria and clarify ambiguities Available to all non residential buildings

– 4 deals signed to date with a growing pipeline

Key lessons

– A focus on simple language – EUAs are simple at the end of the day, the market needs to learn about them in the short run.

– Tenant engagement is paramount. Opportunity to capture tenancy lighting upgrades

– EUAs are the best (and one of the only) form of subsidy available in the market through:– Unlocking new cash flows for landlords and – Off-balance sheet finance for tenants

– Requires a strong tenant landlord relationship / collaboration

– Whilst this is a finance product at its core, EUAs are a solution that requires transformational change

– Requires early engagement by financiers, rather than just last stage of engagement.

Resources

SMF Websitewww.sustainablemelbournefund.com.au

The Fifth EstateEUA e-book

“Your Guide to Australia’s Finance Innovation for Building Retrofits.”

Thank you

Scott Bocskay, Chief Executive

Sustainable Melbourne Fund

scott.bocskay@sustainablemelbournefund.com.au+61 3 9658 8666

www.sustainablemelbournefund.com.au