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The finance deals helping governments green city buildings

Climate policy might have stalled in Canberra, but state and local governments are still making efforts to find innovative ways to cut carbon emissions. Environmental Upgrade Agreements — finance for private organisations to install energy-saving retrofits — are catching on.

EUAs, first instituted in Australia in 2011, are available for projects like installing new lighting, water-saving measures, heating, air conditioning and other means of improving energy use.

EUAs involve three parties: the property owner, financial institution and local council. The financier provides an upfront sum to the building owner to make the upgrade, while repayments are collected by local government through a mechanism similar to council rates, which are then passed on to the financial institution.

The energy cost savings resulting from the upgrade will help offset ongoing costs, so that efficiency upgrades will be relatively cheap or cost-neutral, making it reasonable for building owners and tenants to share the upgrade costs. This helps to overcome the disincentive for building owners to make environmental retrofits when it is tenants who will benefit from lower energy or water bills.

Because the loan is tied to the building and collected by the council, EUAs are low-risk for financial institutions, allowing interest rates to remain low. If the property is sold, the loan remains with the building, and the obligation to make the repayments and benefit of reduced utility costs transfers to the new owner.

The Clean Energy Finance Corporation says that agreements it has financed have generally resulted in base building energy use reductions of up to 45%.

A 2009 Deloitte report commissioned by the City of Melbourne estimated that environmental upgrades of office buildings alone under the council’s 1200 Buildings Program would encourage between $0.8 billion and $1.7 billion in additional investment in retrofitting construction, creating on average around 800 full-time jobs in the building industry and the supply chain over 11 years.

EUAs must be enabled by state-level legislation. Currently they are available for Victorian buildings in the City of Melbourne area, and in New South Wales in the City of Sydney, Parramatta, North Sydney, Lake Macquarie and Newcastle council areas.

Owing to the potential for the idea, the Victorian government is considering changing the Local Government Act to roll out EUAs across that state more broadly, while South Australia is considering introducing EUAs for the whole state. The Draft Brisbane City Centre Master Plan 2013 has proposed investigation of the use of EUAs to achieve energy efficiency upgrades of Brisbane CBD’s existing building stock.

According to Meg McDonald, chief operating officer at the CEFC: “EUAs already have a track record improving the 0-star National Australian Built Environment Rating System buildings to perform as 4 and 5-star properties. Industry research shows that higher-rated buildings generate higher rates of return and have improved tenant attractiveness.

“EUAs provide a flexibility that makes them an attractive finance option for many in the property sector and they are one of the most cost-effective ways for the property sector to reduce energy costs, reduce ongoing operational expenses and reduce carbon emissions.”

The South Australian government’s consultation paper on EUAs highlights their potential advantages for governments:

“Environmental Upgrade Finance offers a number of benefits to all levels of government. Firstly it does not require large amounts of government funding to implement. It is a voluntary mechanism, and appears to be complementary to a price on carbon …

“Environmental Upgrade Finance also offers potential direct economic benefits to governments by generating operational savings in buildings they own or lease without the need to invest their own capital.”

Australia’s first EUA was signed in October 2011 as part of the City of Melbourne’s 1200 Building Program — a $400,000 agreement between the City of Melbourne, Sustainable Melbourne Fund and building owner Varga Brothers to retrofit 460 Collins Street (pictured). The agreement funded the installation of an energy-efficient chiller unit and a building management system upgrade. Expectations put the annual carbon reduction at about 170 tonnes of CO2-e per year.

More recently, the owners of St James’ Hall, at 169 Phillip Street in Sydney, have reached an agreement for a $700,000 upgrade to lighting, air conditioning and building management systems, which is expected to reduce base building energy use by about 30% once completed.

To date, the Sustainable Melbourne Fund — an organisation set up by Melbourne City Council to invest in environmental initiatives — has facilitated $12.6 million in energy and water efficiency finance resulting in annual cost savings of $571,000, and abating 6267 tonnes of carbon. The CEFC, in partnership with the National Australia Bank and Eureka Funds Management, has made $80 million available for EUAs.

Author Bio

David Donaldson

David Donaldson is a journalist at The Mandarin based in Melbourne. He's previously written for The Guardian and Crikey and holds a masters in international relations.