Melbourne Promotes Building Upgrades with Environmental Upgrade Finance - BUILDING ENERGY EFFICIENCY
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BUILDING
ENERGY EFFICIENCY
Melbourne Promotes Building
Upgrades with Environmental
Upgrade Finance
AUSTRALIARETROFITTING
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
1
than two-thirds of Melbourne’s building stock within the next 10 to 15 years.
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 CO2-equivalent per year) from business-as-usual
2
levels by 2020.
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
3
green investments, primarily energy-efficiency retrofits or renewable energy. 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.
1All 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
4
baseline, or produce renewable energy. 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
City Levies
Property Tax Loans for Energy
Surcharge on
Surcharge Payments Efficiency Improvements
Property Tax
BUILDING OWNER
Property Tax Surcharge Tenants Pay Property Tax
Passed on to Tenants Surcharge to the Extent
(Optional) 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
5
uncertainty about recovering project costs.
2Environmental 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
6
result in a reduction of about 170 tons of CO2-equivalent annually. Four agreements
were signed by November 2012, with a combined project value of USD 5.6 million
7
and estimated CO2 reductions of 5,660 metric tons per year. The city of Melbourne’s
2011-2012 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
8,9
through 2020.
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
10
it with a “Global Visionary Award” in the Asia-Pacific region. The United Nations
Association of Australia also honored it with the 2012 World Environment Day Award
11
for best specific environmental initiative. 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 NYC Global Partners. “Best Practice: Green Buildings Retrofit
Finance: FAQ.” Web. August 2012. 2011. Web. August 2012.
3ENDNOTES
1 NYC Global Partners. “Best Practice: Green Buildings Retrofit 9 Deloitte. 2009. “1200 Buildings - Analysis of Potential
Program.” NYC Global Partners’ Innovation Exchange, July 14, Economic Benefits.”
2011. Web. August 2012.
10 Kweller, Ronnie. “2012 EE Global Forum Honors Energy
Efficiency ‘Visionaries’.” Alliance to Save Energy.
2 Ibid. March 29, 2012. Web. August 2012.
Clean Energy Financing: Alive and Well in the Commercial
Sector.” Web. August 2012. 2012 World Environment Day Awards Announced at Awards
Presentation Dinner.” Media Release, June 8, 2012.
5 Ibid.
Figure References
6 City of Melbourne. “World’s First Environmental Upgrade
Agreement signed.” City of Melbourne, Media Release, Figure 1: Structure of Environmental Upgrade Finance
October 13, 2011. Web. August 2012.
Heating. 2012. “Unlocking retrofit Potential.” Web. December
2012.
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 2012.
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