Sustainable development – responding to the challenges of greener buildings

Claudia Watkins and Christopher Woolf

Sustainable development – responding to the challenges of greener buildings

“Development which meets the needs of the present without compromising the ability of future generations to meet their own needs”

Security of energy supply Climate change Sustainable production and consumption Increasing tide of policy and legislation Mandatory and voluntary measures = compliance,

commercial and best practice

Sustainability

Sustainability

EU 6th Environment Action Programme

UN Framework Convention

on Climate Change and Kyoto Protocol

1992 Rio Earth Summit

CSR

UK Climate Change Bill

EU Green Paper on Energy Efficiency

EU and UK SustainableDevelopment Strategy

Sustainability (cont’d)

Financial implications of climate change better understood

Mandatory measures EU ETS and Carbon Reduction Commitment Energy efficiency in Buildings/EPC Sustainable and Secure Buildings Act 2004

Voluntary or good practice Green leases Environmental Management Systems Sustainability codes

Energy Performance of Buildings

Introduction

Governments are trying to increase awareness of, and transparency in, the energy efficiency of buildings

BS:1999453.1

Energy performance of buildings

Energy Performance Certificates to be made available to prospective buyers and tenants on construction, sale or lease of building

Display Energy Certificates in large buildings occupied by public authorities providing services to the public

Regular inspection of boilers and air conditioning systems

Energy Performance Certificates (EPCs)

Information on potential energy performance of building

Asset rating from A to G Allows buyers or tenants to compare energy

performance of buildings Accompanied recommendation report Now required for all commercial and residential

buildings, upon trigger events

EPCs (cont’d)

Trigger events Construction of new building Sale, lease, sub-lease of an existing commercial

building – on the earliest of: seller/landlord providing written information following

request; prospective buyer/tenant viewing; or contract being entered into

Modifications to the building resulting in more or fewer units, and which affect or extend the fixed services

EPCs (cont’d)

Valid for 10 years May be revoked if a new EPC is issued for the

whole building Fine of £5000 for failure to provide Landlord may have difficulty in recouping cost of

producing EPC Tenants may press for reduction in rent if building

has a poor EPC rating May need to instruct energy assessors well in

advance

Display Energy Certificates (DECs)

DEC Based on actual metered energy use of building in

previous 12 months Advisory report listing recommendations Must be displayed in a prominent position

Who does it apply to? Occupiers of all new and existing buildings of more

than 1000m² of useful floor space Occupiers are either public bodies or institutions

providing a public service, and are frequently visited by large numbers of the public

DECs (cont’d)

DEC produced by occupier of building Typical tenant’s covenant to comply with statute

should pick up the obligation to provide a DEC DECs are valid for 12 months and must be renewed

annually

Carbon Reduction Commitment

Carbon Reduction Commitment (CRC) – an outline

Climate Change Bill and strict CO2 emissions reduction target

Carbon Reduction Commitment is a Mandatory UK-wide cap and trade ETS for large, non-

energy intensive businesses and public sector organisations using “core source” energy

2008 is “qualifying year” Starts 2010, introductory phase up to 2013 Announced 2007, Defra consultation June 2007 Consultation on draft regulations awaited Regulations should be in place by 2009 Many outstanding issues

CRC (cont’d)

Which businesses are covered? “CRC organisations” – offices, shops, hotels, rail

operators, hospitals, universities etc Who use “core sources”:

Mandatory half-hourly electricity meters Using >6 000 MWh pa Likely to be included if total annual electricity bill is

£500 000 or more

CRC (cont’d)

Definition of “CRC organisation” Highest UK parent Other arrangements – “counterparty to the energy

supply contract” The 90% requirement

At least 90% of organisation’s total emissions must be covered by either EU ETS, CCA or CRC

Include smaller emissions sources to reach 90% threshold

Once organisation reaches 90%, may voluntarily opt in all/any other sources

CRC (cont’d)

Cap set by government every 5 years Allowances to be auctioned (fixed price, then closed

bid system) in 5 yearly phases from 2013 Businesses to self-certify emissions Gateway into EU ETS but may not sell from CRC

into EU ETS CRC “performance table” and bonuses or penalties Scheme to be revenue neutral to Treasury

Issues for landlords and tenants

Who is responsible in the following situations? (A) – owner/occupier or long-term leaseholder (FRI)

invoiced directly → UK parent co of owner of building or tenant

(B) – sole tenant of large property → UK parent co of owner of property/tenant

(C) – multi-let properties with managing agent/property manager → UK parent of MA/PM co and tenant

Issues for landlords and tenants (cont’d)

Other arrangements being considered: Pass-through of CRC costs/benefits from landlords to

tenants – guidance requested Channelling of CRC revenue recycling payments into

dedicated fund for energy efficiency investment? If landlord and tenant agree before each phase, CRC

responsibility could fall to tenant Lease provisions will have to deal with this Lobbying DECC

Other outstanding issues

Effect of organisation change Subsidiaries/ overseas companies 90% coverage rule unclear Data collection Market design Disincentive to take energy efficiency action before

2009/10? No information on penalties yet Complex issues for companies who may be in EU

ETS and CRC

Issues for landlords and tenants (cont’d)

Actions: Consider if you are likely to fall within this scheme Look out for DECC consultation on detailed

regulations in “late Autumn 2008” Look out for awareness-raising events In early 2009, Environment Agency will send

registration packs to UK billing addresses with half-hourly meters

You may receive information from energy supplier Identify “CRC organisation” Consider how data collection on energy use could be

organised

Green leases

‘Green’ leases - introduction

What is a ‘green’ lease? a commercial lease that places obligations on both

landlords and tenants to use the property efficiently and in a way that promotes sustainability

there are various shades of ‘green’ that can be applied to commercial leases

BS:1999453.1

‘Green’ leases – a closer look

‘Light green’ leases: normal obligations in a commercial lease, but no

barriers to making the building more energy efficient, eg no prohibition on tenant carrying out alterations to improve heating efficiency

generally, no penalties or rewards on either landlord or tenant for achieving sustainable use

‘Green’ leases – a closer look (cont’d)

‘Mid green’ leases: some commitments on both parties, eg a general

environmental management plan to share information and monitor energy use in the building

common goals to minimise carbon footprint failure on either party to perform or maintain

obligations not actionable breach of the lease

‘Green’ leases – a closer look (cont’d)

‘Dark green’ leases: obligations to reach specific targets, eg on energy

and water use, or a target on the landlord to ensure the building achieves a certain energy rating on its EPC

failure by either party will have consequences, eg financial penalties or even forfeiture

landlord could adjust mechanics of the service charge to reflect good practice by tenants

‘dark green’ leases familiar in some US states, and particularly in Australia

‘Green’ leases – landlord’s incentives

Reducing size of air conditioning systems increases lettable space

Lower service charge and running costs – attractive to tenants

Brand enhancement for ‘green’ landlords ‘Future proofing’ Landlord’s own corporate social responsibility profile

‘Green’ leases – barriers for landlord

Inability to recover capital expenditure Uncertainty of covenants which are vague and

general – may not be enforceable in court Typical covenants not yet tested at rent reviews More time policing or liaising with tenant and

monitoring energy use Difficulty in introducing ‘dark green’ leases where

there is no green technology to introduce improvements

‘Green’ leases – barriers for tenant

Tenant with short term view of its occupation may not benefit in terms of lower running costs over a long period

Will ‘green’ lease covenants make lease less attractive on assignment?

Current service charge mechanics discourage energy efficiency

Utility bills small fraction of budget, so landlord charging premium on the basis of lower running costs must show significant energy savings

‘Green’ leases – barriers for tenant (cont’d)

No incentive for landlord to reduce energy usage where leases are on a simple FRI fully recoverable basis

Extra expenditure for tenant and fear that landlord is interfering with tenant’s use of building

‘Green’ leases – incentives for tenant

Potential for reduced energy and fuel costs ‘Green’ lease as part of overall corporate social

responsibility targets

Conclusion

Costs and incentives are a big stumbling block Easier to be ‘green’ in a new building than

refurbishing an existing building Landlords, tenants and advisers are nervous of

accepting unfamiliar covenants Lack of appropriate and widely accepted

benchmarks

Conclusion

Actions

CRC plans going ahead Climate Change firmly in government sights Good practice worth developing Consider how your organisation should respond

Questions?

These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources.

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Sustainable development – responding to the challenges of greener buildings

Claudia Watkins and Christopher Woolf