Why didn’t I think of that?

The Carbon Reduction Commitment will be a godsend for landlords. Ok, maybe not. But there are certainly opportunities out there that should not be ignored!

The government has made some pretty aggressive commitments on our behalf and now we are starting to see the results in action. On the face of it, landlords are being singled out for unfair treatment: they cannot control the energy consumption behaviour of their tenants, but they are responsible for the consequences.

So where is the good news?

Energy efficiency makes sense. There are financial gains to be made and smart landlords are taking action today.

What is the CRC?

The CRC is a government scheme designed to reduce carbon emissions in large non-energy intensive organisations (including for example supermarket chains, hotel chains, office-based corporations, government departments and large local authorities) by 1.2 million tonnes of carbon per year by 2020.

Initially the CRC can be viewed as a cost-neutral balancing framework, rather than a taxation vehicle. Any organisation with an annual electricity consumption in excess of 6000 Mega Watt hours (MWh) will be required to participate fully with effect from April 2010. These organisations will need to provide evidence of their previous year’s carbon production and deposit a financial amount equivalent to £12 for each tonne of carbon they produce annually. 

At the end of each year, company performance, mainly based on absolute carbon reductions since the start of the scheme, will be summarised in league tables outlining the best and worst performers in terms of carbon emissions and reduction. Mid table performers will receive a full refund, but low table performers will be penalised in order to reward those at the top of the table.

It makes sense to be green, both from the social responsibility angle and for sound economics. The CRC is much more than a piece of restrictive legislation. The aim is to reward those who can demonstrate their willingness to take the business of carbon reduction seriously. By making incremental inroads into energy efficiency, an organisation can benefit at the cost of those who fail to make the grade.

The government is making a very clear statement of intent with this legislation and, regardless of the level of participation in this current scheme, the writing is very clearly on the wall.

What is the impact of the CRC?

One thing is for sure, this legislation will create pressure for affected organisations to improve their property stock; effectively setting the trend for a new standard for commercial properties. We will soon see innovation in the products and services that are designed to assist organisations in their efforts to improve.

Landlords have no legal control over their tenants' use of energy, but they're liable under the scheme for the energy use of the building if billed through the landlord. So it's in their interests – in the spirit of enlightened self interest – to promote good practice. Indeed there is an opportunity to turn the situation to their advantage. Good practice will reduce the liability of the landlord and may well increase the value of the property. Each case is individual, so there are no hard and fast rules, but if you take the right approach the CRC can be made to work in your favour.

The right approach
 
It is as much to the tenant's advantage as the landlord's to improve energy efficiency: The landlord ends up with an improved asset and the tenant gains the benefit of lower fuel bills. The real issue is the capital outlay. Why would the landlord make an investment that is so much in the tenant's interest?

If an organisation is in the category that is required to participate in the CRC scheme, then there is of course no choice, but there is still an opportunity to work with the tenants to seek mutually beneficial returns on the initial investment. Additionally there are some considerations such as the "Early Action Metric" and the "Early Action Adjustment" that can ease the burden and help to oil the commercial wheels.

For those organisations that are not compelled to comply it seems there is very little incentive for the landlord. On the face of it, however, the investment makes economic sense and the return is likely to be guaranteed and significant. The price of fuel is already at an unprecedented level and likely to increase further. Energy costs have forced a major revision in the way we construct our buildings to the point where most existing property stock would not pass today’s stringent building regulations. So we are now seeing a polarisation of the property market with energy efficiency as the major divisive factor.

Over time, all properties will need to be brought up to date. The good news is that – in most instances – the returns will be sufficient to fund the transformation. All you need is the right commercial model to make this work for both the landlord and the tenant, and NB Real Estate has done just that.

An innovative commercial model

We have developed a method that starts with the basics and moves through to the creation of an innovative commercial model. It removes the capital outlay from the fund or tenants and links it more to the asset, thus not restricting fund trading decisions and at the most basic level our approach is to help landlords to help tenants reduce their consumption. A partnership approach has the best effect. For example, to encourage tenants to replace existing lighting with low power equivalents, the landlord may offer to install energy measurement meters on the tenant's occupied space (as opposed to the common parts) and so monitor and reduce consumption – so everyone saves.

At the more sophisticated level we have a commercial arrangement whereby both parties can share in the payback, in some cases without the need for additional capital outlay. The landlord gains from an improved stock and a reduced liability, the tenant gains from a reduction in power costs and the whole deal is funded out of the overall savings. Once the cost of transformation has been recovered, the tenant will receive 100% of the energy cost savings. There are inbuilt safeguards that ensure the commercial model works regardless of the lease renewal date. The opportunity exists to substantially reduce power consumption and NB has a lot to say about that as well. We use a mix of established and innovative practices to ensure that savings are maximised without disruption to business operations.

You do need to be very selective in the way you approach this exercise. Energy efficiency projects can sometimes be anything but efficient. There are potential pitfalls, but careful assessment, categorisation and selection can avoid the issues and clear the way for ample rewards.

In a recent engagement, NB Real Estate produced over £110,000 savings in a single year for one of its clients. Maybe we can do the same for you. If we can, then there is everything to gain and nothing to lose. 

It only takes a telephone call to get the ball rolling. I'm Jonathan Lovejoy and I'd be delighted to hear from you. Call me on 0207 544 4205 for an informal chat, or if you prefer you could email me at jlovejoy@nbrealestate.co.uk.

I look forward to hearing from you.