Environmental Upgrade Agreements: An idea whose time has come (at last)?

Article first appeared in Sourceable online on 4th June 2020 at:
https://sourceable.net/environmental-upgrade-agreements-an-idea-whose-time-has-come-at-last/

As Victor Hugo famously stated, “Nothing is as powerful as an idea whose time has come”, so now is surely the time for Environmental Upgrade Agreements to be taken up across Australia.
Environmental Upgrade Finance (or Building Upgrade Finance – the terms are inter-changeable between states) can be explained as a simple loan used to pay for works that improve the energy, water or environmental efficiency and overall sustainability of the building; the loan is repaid through council rates over an agreed time period.
The finance can be used for a range of projects such as installation of renewable energy systems, new equipment or initiatives to improve energy and water efficiency, or projects that minimise waste, maximise resilience or improve resource efficiency; there just needs to be a measurable sustainability improvement over time.

​CASE STUDY: The Rye Hotel, Mornington Peninsula, VIC:
The hotel is a well-established business which includes a bistro, café, beer garden, bar, function rooms and hotel with conference facilities, 43 rooms and a swimming pool. The owner had been planning the installation of solar panels at the site for some time, but the main obstacle was the upfront cost. Environmental Upgrade Finance overcame this cost barrier, allowing the savings from reduced power bills to fund repayments, with the upgrade resulting in an immediate 25% saving on accounts, allowing the savings to cover the loan repayments. The expected savings over the 25-year asset lifetime are $560,000. Read more: https://sustainableaustraliafund.com.au/success-stories/rye-hotel/
Photo credit: The Rye Hotel, Mornington Peninsula, VIC

Environmental Upgrade Finance has been talked about around Australia for decades. The Sustainable Melbourne Fund was established back in 2002, with legislation passed by the City to enable the finance in 2010. The first agreement was signed in the City of Melbourne in 2011, with legislation updated to allow all councils in Victoria to offer the finance model from 2015. In NSW, the legislation allowed for Environmental Upgrade Finance in 2010, and South Australia passed legislation which also includes heritage upgrades, for Building Upgrade Finance in 2015. National expansion led to the Sustainable Australia Fund in 2019.
Once a council has resolved to offer Environmental Upgrade Finance, and a project and building owner identified, the finance is established through a three-way contract known as an Environmental Upgrade Agreement (often referred to as “an EUA”), drawn up between the building owner, local council, and lender. Once the loan has been used to pay for the building upgrade, the council takes repayments over the term of the agreement alongside the usual rates paid each quarter.
The building owner benefits from reduced utility bills, improved asset value and sustainability outcomes, increased comfort, indoor environmental quality or tenant attraction, as well as the long-term fixed-interest loan.
Although there is a broad range of finance alternatives available to building owners, there are four key differences between Building Upgrade Finance and ‘traditional’ loans:

1. No other finance options provide loans for up to 20 years at fixed interest rates;
2. Fixed interest rates allow for better financial modelling against expected benefits, making most arrangements cashflow positive from day one;
3. The loan can be passed on to the new owner if the building is sold before the loan is fully repaid; and
4. The benefits and the repayments can be shared with tenants where their benefits can be accurately measured, unlike other capital works restrictions.

In the US, where it is known as ‘PACE finance’ (Property Assessed Clean Energy, although the finance is now used for much more than energy), they have achieved over US$1.5 billion in investments since 2009, across over 2,400 commercial building upgrades and projects, creating around 18,000 jobs. PACE is now enabled in 36 US states and the District of Columbia, covering more than 80% of the population and including residential, commercial and industrial projects.
In Australia, the funds come from the private sector, where financial institutions can finance these projects. The Sustainable Australia Fund is the most active player in the market, valuing a partnership with Bank Australia to provide the funding for projects as well as a level of market and business development for each council area. As an open market solution supported by the Australian Renewable Energy Agency (ARENA) to help expand the market, other lenders are certainly encouraged to participate. Better Building Finance is a sister organisation to Sustainable Australia Fund, and acts as a third-party administrator for councils. They don’t charge council a fee for their services and, unlike earlier arrangements, the management and administration processes provided aim to remove most of the workload from councils.
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CASE STUDY: Food production and processing, Somerville VIC
Hussey & Co is a lettuce farm that delivers produce to Australia and overseas. With 74 acres of land, multiple sheds and industrial processing facilities, it relies heavily on energy to stay in business. After reviewing the cost savings from their first solar installation, Hussey & Co’s business owners were so impressed they decided to take out another Environmental Upgrade Agreement almost immediately. With another $1million in capital to install a second solar system, the company saves an additional $86,000 per year. Read more: https://sustainableaustraliafund.com.au/hussey-and-co/
Photo credit: Hussey & Co, Somerville, VIC

As of early May 2020, there are dozens of councils offering Environmental Upgrade Finance across Victoria including the City of Melbourne, City of Port Phillip and Mornington Peninsula Shire, and nearly a hundred successful projects with examples of funding from $15,000 to over $7million. With councils such as Kyogle in NSW now signed up with Better Building Finance, it’s definitely time for more leading councils across NSW, SA and VIC to leverage the private sector finance available to achieve better environmental, economic and social outcomes for their areas; targeting more sustainable outcomes for buildings, businesses and communities.
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CASE STUDY: Light industrial - 114 Bakehouse Road, Kensington VIC
Looking for ways to future-proof their light industrial warehouse building from rising energy costs, Australian company Covertel was interested in the installation of a solar system to save costs and increase the building’s re-sale value. Their upgrade works included the installation of 10kW solar array and an LED lighting upgrade and generated annual energy savings of $3,825 against annual loan repayments of $2,996. Read more: https://betterbuildingfinance.com.au/case-studies/114-bakehouse-road-kensington-vic/  

So why hasn’t Environmental Upgrade Finance been quite the success in Australia as PACE finance has been in the US? Well, there were a few barriers early on:

1. Complexity – early versions in Australia were seen as cumbersome and time-consuming, with complicated processes. However, the administration and protocols have massively improved, with independent initiatives like Better Building Finance offering third-party administration that takes most of the work away from councils and building owners. As with many sustainability examples, from NABERS to Green Star and further afield, each version has improved upon the last until today’s rating tools and finance instruments are barely recognisable when compared to ‘early models’.
2. Status quo – many of those working in local councils or sustainability roles may have encountered early versions of Environmental Upgrade Agreements and simply not want to change because of ‘old knowledge’ and the perception that more work may be involved. However, this is akin to not wanting to have a mobile phone because early versions were heavy and complex with short battery lives. Things evolve, fast. It’s important to re-assess such finance opportunities, given the changes made and the need for a range of options to help buildings and businesses with both climate change and COVID-19-related upgrades.
3. Risk appetite – Many councils have such low appetites for risk that ‘new’ or ‘improved’ finance solutions are not even considered in favour of existing models, however problematic or out-of-date existing models may be. All councils need to do a regular scan to ensure that available solutions match the needs and expectations of local building and business owners, and reconsider how to pilot or trial other finance or sustainability initiatives with minimal risk exposure.
4. Legislation - Early versions of legislation proved unwieldy making it difficult for businesses, installers and lenders to transact effectively. Over time, updates and improvements have been made to remove red tape and make it more user-friendly for all parties, particularly in Victoria, helping it lead the nation with more than 90 financed projects across 23 councils. Last month, Victorian legislation was updated to include residential properties and address climate change adaptation. With similar updates in NSW and SA, a huge new market of opportunities could be opened up.

Is this the time for Environmental Upgrade Agreements to be taken up across Australia? They’re certainly a great option for many non-residential upgrades, although they’re not right for every project; councils and building owners should consider them one of the simplest, steadiest finance options to have in the toolbox. As states and territories look to achieve widespread efficiency, climate change and resilience upgrades in line with state targets, the Paris Agreement and the UN Sustainable Development Goals, and as we need every single tool in the box to help businesses and building owners back on their feet again after the disruptions of COVID-19, any leading council or any strategic business owner should be making sure Environmental Upgrade Agreements are to hand.
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To find out more, read other case studies and to start the conversation, just visit https://betterbuildingfinance.com.au/.