The Value of Energy-Efficiency in the Housing SectorTransforming Uncertainty around ‘Green’ intoMeasurable Value, Costs and Risk in the Marketplace

Andrea Chegut and Rogier HoltermansMay 15, 2014European Center for Corporate Engagement – Webinar Series

Carbon, Energy and Resource Costs within EuropeChallenges and opportunities

Buildings are a large source of carbon emissions• Europe’s buildings emit 36 percent of CO2 (ECF, 2014)

• Housing emits 630 billion kg of CO2 in 2010 (Eurostat, 2013; Bertoldi et

al., 2012)

Energy is costly• 27 percent of energy use in the EU-27 stems from the residential

sector• 2010 energy bill of €225 billion (Eurostat, 2013; Bertoldi et al., 2012;

Carbon Trust, 2013)

• Electricty prices increase by 3.9 percent and gas prices by 7.4 percent per year (Eurostat, 2014)

• Energy 10 percent of total housing costs

Real estate consumes resources (EPA, 2009)

• 30 percent of raw materials use• 30 percent of waste output• 12 percent of potable water consumption

Financial gains from existing buildings80 percent of buildings we need in 2050 are already built

Source: McKinsey, 2009

Uncertainty around “green” and its valueFailed coordination efforts

Lack of measuring and pricing…slows diffusion• Transparency requirements… energy labels• Pricing energy-efficiency in buildings…• Transforming R&D into real companies and commercially

diffused solutions…takes time

Disaggregate outcomes of energy-efficiency• The intensive calculations and design ideas that go into a

green buildings are lost…engineers keep them• Energy performance models and their role in operational

risks are missing…• Lacking the bigger picture, disaggregated outcomes of

property owners

Financial performance is missing• Investors will not move until they understand financial

performance• Green buildings are complex developments and

redevelopments…there is a learning curve• Long term performance experience is lacking

Regulatory nudges and R&D investment in the EUDiffusion of energy-efficiency measures for buildings

Framework• Energy Performance of Buildings Directive 2003, 2010,

2012– Minimum energy-efficiency requirements for new and existing

buildings– Certification of energy performance…EPC labels

• Energy Efficiency Plan 2011

Proving the concept…diffusing innovation• EU 7th Framework Programs for energy-efficiency

– Targeted at the existing building stock to generate new technology for retrofits

– At least 20 programs to execute R&D, investment in pilot projects and financing for the housing sector

• Horizon 2020…€80 billion stimulus package– 20% reduction in GHG emissions– 20% of energy from renewable resources– 20% increase in energy-efficiency

Building Energy-Efficiency for Massive Market Uptake (BEEM-Up)Energy-efficiency retrofits for social, public and cooperative housing

Product innovation• Large scale

retrofit of building units

• Insulation innovation

• Passivhaus standards in Sweden

Three pilot sites (339 units)• France: 87 dwellings• Sweden: 144

dwellings• The Netherlands: 80

apartments, 28 terrace houses

Financial performance• Lifecycle cost analysis• Market transaction

values for energy-efficiency

• Building scale modeling

• Financial challenges and opportunities for energy-efficiency retrofits in Europe

The Project

• 27 stakeholders in engineering, construction and finance join forces

• Three SPC building owners• Aim of energy-efficiency retrofits

with a 75 percent reduction in primary energy demand

Demonstration sites in the Netherlands, France and Sweden75 percent reduction in primary energy demand

Source: BEEM-Up

SwedenFrancethe Netherlands

Building sites

Financial challenges and opportunities – BEEM – Up PilotsLiving laboratory to achieve 75 % reduction in energy use

Today’s contribution: first results from the project:• Scale of the problem: size of the SPC stock is large (Wallbaum et al., 2014)

– Scaling the 75 percent reduction is viable in some housing cohorts…identifying these is critical

• Energy efficient dwellings transact for more (Chegut, Eichholtz, Hotlermans, van Marwijk, 2014)– Academic evidence around the globe suggests a premium for energy-

efficient properties– For Dutch social housing the same is also true – We estimate that the most efficient homes trade for 12 percent more

per square meter than a matched sample of energy-inefficient homes

• Learning about the financial performance of energy-efficient social, public and cooperative housing (Chegut, Eichholtz, Holtermans, Kok and Tausendschön, 2014)– Life cycle cost analysis discloses each demonstration sites sensitivity to

institutional risks within the SPC housing sector– Projected NPVs are zero or positive, but some scenarios expose the

project to higher downside risks

• Financing opportunities (Bastiaanssen and Zietara, 2014)– Financing gap for 75 percent reduction in primary energy demand for

the SPC housing sector is about €181 billion– Financial and economic challenges to overcome for massive market

uptake

Scaling the building stock to a 75 percent reductionAssessing the energy efficiency of the building stock

Social, public and cooperative housing in EuropeMarket share of the residential sector

Heterogeneous building stock

Typology and representative energy model

Extrapolation to country

level

-75% primary energy demand

Residential real estate marketEuropean building typology

Current situation (EIU, 2013)• 40 percent of the building stock constructed before 1960

and is in need of renovation • New construction represents only about 1 percent of the

building stock• Refurbishment rates are low at approximately 1 percent of

the building stock

Scaling up…building typology based on• Construction period• Building type: single-family housing, multi-family housing,

apartment blocks, terraced houses

European building stockPotential for massive market uptake

Applying the Swedish retrofit to Austria:• Total building stock of more than 400 million m2

• 16 percent of which is multi-family housing with more than 63 million m2

• Retrofit would reduce primary energy demand by 61 percent

The Residential Green StockEnhancing the economic efficiency of buildings

Statistical Evidence in Europe, Asia and the USCertified housing transacts and rents for more…

The Value of Energy Efficiency in Dutch Social Housing (Chegut, Eichholtz, Holtermans, van Marwijk, 2014)

Transaction prices for Dutch social housing (2003 - 2013)

Measuring “green” in social housingEnergy Performance Certificates for Dutch Social Housing Owners

Dutch Kadaster and National Brokerage Data (NVM)

Geocoded

Transaction characteristics

• Total trades: +44,000

• Labeled properties: +15,000

• Non-labeled properties:+29,000

Controlling for:

• Building characteristics

• Location, neighborhood

• Energy characteristics

Samples:

• Labeled vs. non-labeled

• Between labels

Distribution of dwellings with high energy-efficiencyTransactions of A and B labeled homes by region

Distribution across energy-efficiency metricsA and B properties are of higher quality

Evidence of Green Value within labelsDistinguishing between energy-efficiency and housing and neighborhood quality• Standard real estate valuation framework relating building

characteristics to the transaction value (Rosen, 1974)

• Where:– logPi = The natural logarithm of the transaction price per

square meter;– Xi = Building characteristics such as size, age, thermal quality,

etc.; – Gi = EPC variable indicating the energy-efficiency of the home;

– α, β, and δ are estimated coefficients;– ε is an error term.

Evidence of Green Value within labelsFinancial performance of A labeled properties is higher

Financing a 75 percent reduction in primary energy demandProjecting the financial performance of energy-efficient retrofits in the demonstration sites

Where does energy-efficiency show up?Breaking down the cash flow components

In the cash flows• Increased rents – stemming from increased demand from

tenants• Increased transaction prices – stemming from increased

demand in the capital markets• Decreased vacancy rates – higher occupancy rates in green

buildings• Increased cash subsidies – from governments and agencies

seeking carbon reduction

In the operational expenditures• The operating performance – decreased cost of energy• However, also in potentially other dimensions – water and

waste• Capital improvement expenditures – changing the extent of

maintenance

In the Interest, Taxes, Depreciation (new areas where research is moving)• Financing the building investment– the risk as the building

owner and the risk from the bank• Taxes – added tax shields from governments to support

green buildings• Depreciation rates – relative depreciation of buildings built

with more sustainable materials or with a different lifecycle in mind (real vs. projected)

Split incentives between tenants and landlordsShowing the risk and returns of energy-efficiency

BEEM-Up EU 7th framework program(Chegut, Eichholtz, Holtermans, Kok and Tausendshön, 2014)The returns to “green” in France, Sweden and the Netherlands

Measuring green returns through 300 plus building retrofits

75 percent improvement in energy-efficiency

Projected values of the pilot sitesAcross 37dimensions and simulated across 165,000

plus scenarios

3 pilot sites

• Projecting Future Cash Flows• Future Energy Risks• Future Changes in Subsidies• Future Cash Flow Losses and

Gains• Within each country’s

institutional context

DCF procedure across many scenariosProjecting the future value of “green” when the data is unknown

Geltner, Miller, Clayton, Eichholtz, (2013) application to real estate

• Mathematically, the DCF procedure can be written as follows where V = value of the investment today.

• Where: – CFt = Net cash flow generated by the property in period “t”;

– V = Property value at the end of period “t”;– E0[r] = Expected average multi-period return (per period) as

of time “zero” (the present), also known as “going-in IRR”;– T = The terminal period in the expected investment holding

period, such that CFT would include the re-sale value of the property at that time, in addition to normal operating cash flow.

Source: Luwoge

Net investment costs across 3 pilot sites75 percent reduction in primary energy demand

the Netherlands

France

Sweden

Cash flow projections across investment risks75 percent reduction in primary energy demand

Projecting the future value of “green”Exploring the upside and downside risks in the cash flows

Opportunities from energy-efficiency• Resale energy-efficiency unit

retrofits• Upside sharing in energy savings• Property taxes are deferred for the

property for about 5 years• Maximum decreases in energy,

waste and water inefficiencies in operating expenditures

• NPVs are 0/positive • Less potential for downside risks to

occur

Challenges from energy-efficiency• No rent increase because of

institutions• Energy cost could stay constant• No subsidies from governments

despite higher retrofit costs• Capital market demand is not higher

for energy-efficiency • NPVs are 0/positive, but these risks

expose you to higher downside losses

How do we get the BEEM-Up concept diffused across EuropeFinancing the gap in Europe

Energy refurbishment for sustainable housing in Europe (Bastiaanssen and Zietara, 2014)Results of a survey among national housing associations

• Questionnaire and interviews of national SPC housing associations– Investigating the supply of capital for energy-

efficiency retrofits– Actual and projected annual refurbishment rates by

housing associations • Covering 60% of EU-27• Supported by data from the BEEM-UP project

The survey reflects the best estimates by experts at the time of the interview, it does not reflect the formal position of participating experts, nor the organization they represent

€ 84 bil-lion

€ 181 bil-lion

Investment required to reach EU 2020 targets for energy demand

reductions

Expected investment from SPC housing sectorFinancial gap

Large gap in financing energy-efficiencyInvesting in European housing retrofits

Investing in energy efficiencyLarge gap in financing European housing retrofits

Social, public and cooperative housing institutions forecast• 1,4% refurbishment rate per

annum • Average reduction in

primary energy demand of 40%

• Investments up to €13,6 billion per year

Policy ambition: 20% energy reduction target by 2020• 2% refurbishment rate per

annum• Average reduction in

primary energy demand of 65%

• Requires an estimated investment of €37,8 billion per year

The economics dof “green” in EuropeFinance and real economy challenges and opportunities

Appraisals of ´green investments´ • Green investments not properly valued; asset-backed

investments limitedTraining for housing professionals • Financial engineering and retrofitting project managementApplied research • Low-costs technologies for the improvement of energy

efficiency and renewable energies in housing, focus on prefabricated modules

European Housing Fund• Facilitate low-cost, long-term financing of housing retrofitsReduce threshold to access financing• Many SPC entities invest in €10-25M rangeContinue ELENA grants for technical support• Current technical capacity limited in SPC companies

– ELENA successful in mobilizing major and more ambitious renovations

Making a dent in “green” uncertaintyTransforming uncertainty into value

Europe aims to prove the concept of energy-efficiency• Is investing another €80 billion in R&D

BEEM-Up project aims to combine stakeholders to achieve a 75 percent reduction in primary energy demand• Challenges and opportunities are present

Today, we addressed some outcomes of the project from a finance perspective• There is a large building stock that can undertake these retrofits• The performance of these retrofitted homes to at least a 75 percent

reduction transact for 12 percent more in the market place• Using this and other assumptions leads to on average zero or positive

NPV projects

Where do we go from here…• Address the financing gap in the EU of at least €181 billion• Reduce thresholds to access financing • Explore some non-traditional modes of financing…engineering

Thank you

Andrea Cheguta.chegut@maastrichtuniversity.nl

Rogier Holtermansr.holtermans@maastrichtuniversity.nl

The European Center for Corporate Engagement - ECCEMaastricht University, the Netherlands

This research is sponsored by the EU 7th Framework Program, within the Building Energy Efficiency for Massive Market Uptake (BEEM-Up) protocol for more information on project progress or

to visit the building sites:…

http://www.beem-up.eu