Nils Kok

Energy Literacy, Awareness, and Conservation Behavior of Residential Households

with Dirk Brounen and John M. Quigley, Energy Economics

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The residential sector accounts for one-fifth of global energy consumption, resulting from the requirements to heat, cool, and light residential dwellings. It is therefore not surprising that energy efficiency in the residential market has gained importance in recent years. In this paper, we examine awareness, literacy and behavior of households with respect to their residential energy expenditures. Using a detailed survey of 1,721 Dutch households, we measure the extent to which consumers are aware of their energy consumption and whether they have taken measures to reduce their energy costs. Our results show that “energy literacy” and awareness among respondents is low: just 56 percent of the respondents are aware of their monthly charges for energy consumption, and 40 percent do not appropriately evaluate investment decisions in energy efficient equipment. We document that demographics and consumer attitudes towards energy conservation, but not energy literacy and awareness, have direct effects on behavior regarding heating and cooling of the home. The impact of a moderating factor, measured by thermostat settings, ultimately results in strong variation in the energy consumption of private consumers. Slideshow on this paper:  My colleague Dirk Brounen on this paper:

GRESB wins award for Outstanding Industry Contribution at IPE Real Estate Investor Forum

The Global Real Estate Sustainability Benchmark initiative received the Investment & Pensions Europe Platinum Award for Outstanding Industry Contribution for the second year in a row. The Award was handed to Guido Verhoef (PGGM) at the annual IPE Real Estate Investor Forum in Amsterdam on May 18th. Read more at the IPE website.

 

Financing Energy Efficiency 101 - Lesson 1

OK, I just had an 11hr flight and spent too much time looking at my MacBook. I've been thinking about financing energy efficiency retrofits for a while, did some work for Richard Branson's the Carbon War Room, talked quite a bit with the Clinton Climate Initiative, and I've come to the conclusion that external financing of energy efficiency investments is a bit of a "white elephant," it  consists of high (political) hopes, but it also offers real potential for making serious money. So, here is Lesson 1 of Financing Energy Efficiency 101:

In our quest to reduce the resource consumption in buildings, the well-capitalized building owners of this world (yes, they still exist) have started to invest in building retrofits, ranging from simply better monitoring to complete renovations. However, what can you do when liquidity is running low, LTVs are running high, and maintenance has been deferred for too long? (Sounds familiar?) Well, you start looking for external capital. The best-known mechanism, mostly applied to real estate owned by (semi-)governmental organizations, are Energy Service Companies (ESCos). Johnson Controls, Honeywell, Siemens, Automated Logic Corporation and many others are happy to retrofit owner-occupied properties with a creditworthy tenant. They'll even guarantee their engineering estimates of prospective energy savings. But of course, there's no free lunch: the guarantee is costly, saving estimates are often conservative, and efficiency measures are mostly confined to low-hanging fruit only.

And what about investment properties, with buildings in a limited liability shell, occupied by not-so-creditworthy tenants? Ideas abound, but floating they ain't (yet). A host of non-profits has asked themselves why no investor steps in to get rich. The Clinton Climate Initiative, recently merged with NYCs mayor Bloomberg's C40 Cities, is a strong believer in tax-lien financing for commercial buildings. Yes, tax-lien financing, also known as PACE, is dead for most residential markets, but the concept seems to face less hindrance in the commercial real estate sector. Read this recent status report of the Lawrence Berkeley National Lab, Renewable Funding and the Clinton Climate Initiative. As Scott Henderson, Finance Director of the Building Program asserts:

"To allay the concerns of the commercial mortgage lending community, it should be noted that the U.S. federal government strongly encourages all cities/counties developing pilot PACE programs to require written consent (on the imposition of a PACE assessment) from existing lien holders, as a requirement for any eligible project. We think this makes sense, as it will prevent potential legal problems/disputes down the road. It also gives the existing mortgage lender the full opportunity to assess the financial merits and risks of the transaction."

And:
 
"Generally, we would expect owners to make the following argument to their lender in order to get consent to a PACE lien:
 
1)      Our building has much needed repairs, capital equipment replacement that needs to take place in order to ensure optical financial performance of the asset
2)      We either don’t have the money to make these improvements or have decided that our existing cap ex reserves or other cash reserves are better spent on “core” activities (e.g. leasing, repositioning efforts, new “tangible” improvements such as marble in the lobby)
3)      PACE financing is probably the only way to finance the improvements at a reasonable interest rate, and with a long-enough term to not negatively impact existing cash flows
4)      The PACE assessment attaches to the property, not the owner, allowing us to implement a “deep” project with significant energy savings, without having to worry about our hold period on the asset. In other words, the benefits of the PACE project will accrue to us for as long as we hold the building, then continue accruing to the next owner after we sell it.
5)      The PACE assessment, in the event of a delinquency, can never fully accelerate. In other words, if we miss a payment, we (and other stakeholders in the property) would only ever be responsible for curing that current period’s assessment (which is di minimus compared to the size of the outstanding mortgage in most cases). The whole 20 year assessment amount would not be due. In the case of a delinquency, all major stakeholders in the property including the mortgage lenders would be notified. The mortgage lender would be given ample opportunity to cure the delinquency on their own (through a “protective advance”) and add that amount plus penalties to the mortgage balance. If this fails, then the PACE investors, acting through the tax collector, would have the right, after some grace period, to move towards a judicial foreclosure.
6)      Because PACE assessment can be levied over long periods of time, we can design the repayment schedule such that excess savings (total savings – current assessment due) drop directly to the bottom line. This results in an increase in net operating income (NOI), which results in a direct increase in building value and actually enhances the mortgage lenders’ position in the asset.
7)      There are contracting methodologies in the marketplace which allow you to guarantee that energy savings will materialize in the project over time. So that there is sufficient comfort around this cash flow “story”
8)      There are multiple other benefits to doing a comprehensive energy efficiency project which would enhance/improve the mortgage lender’s current position in the asset. Or put another way, the energy efficiency  project would reduce financial and legal risk to the owner and its creditors in a number of ways, including:
a.       premiums in building valuations have been demonstrated in the U.S. market for green buildings versus non-green buildings of similar size/type/market
b.      rental premiums paid by tenants for green versus non-green buildings are significant and likely increasing
c.       energy efficiency project allows the building owner to pro-actively comply with existing or impending local green building legislation and/or energy efficiency mandates. these mandates are becoming more and more common across the U.S. and legislation already exists in major markets such as San Francisco, Austin, NYC, Washington DC, and Portland."
 
I agree. Famous last words:

"Cities have the ability to design their own owner/building eligibility requirements for a PACE program. So they could only accept properties that have a combined LTV (current debt + PACE assessment) of less than [  ]%. They could dictate minimum DSCRs as well."

Scott's presentation on "PACE for Commercial" is here.

The next lesson of Financing Energy Efficiency 101 will be on equity investments and private insurance of energy savings.

Manage what you measure, CSR reports, and the value of human capital

One of the few Dutch Nobel laureates, Jan Tinbergen, once claimed that "meten is weten," which in plain English means nothing more than "you can manage what you measure". (So far for your first Dutch words.) Well, in the real estate sector, that's easier said than done. More often than not, property owners don't have any clue about energy consumption (let alone water or waste) at the level of the individual properties. Tenants may pay the bill (common in most countries, certainly for retail), energy is bought on an aggregated level, and (smart) submeters haven't been installed. Yet.

Measuring alone offers a massive business opportunity (well, that is if everything goes right. PG&E, the utility in the San Francisco Bay Area, has experienced a massive outcry from an unexpected side: the "greens" don't like their  recently installed 5.7 mln. smart meters, because of the radiation from the meters. Oh, and some homeowners have complained about higher energy bills. "Can I have my old, broken meter back?"). But, the real saving can start once meters are in place. BuildingIQ, an Australian start-up that's very active in the US commercial market, will be happy to optimize your building management system (BMS), as they've done for some 6.5mln. sq.ft (!) already.

Reporting on environmental metrics by property companies and fund managers is getting more mainstream, thanks to:

1) Pressure from regulators, e.g. the Carbon Reduction Commitment Order in the UK requires large property investors to report the aggregate carbon emissions of their portfolios, and then requires annual reductions, with a carbon tax as a stick

"The CRC Energy Efficiency Scheme will be simplified to reduce the burden on businesses, with the first allowance sales for 2011-12 emissions now taking place in 2012 rather than 2011. Revenues from allowance sales totalling £1 billion a year by 2014-15 will be used to support the public finances, including spending on the environment, rather than recycled to participants. Further decisions on allowance sales are a matter for the Budget process.

The Bad News - participants will still be required to purchase allowances, but they will not receive any recycled payments.

The Good News - participants have been given a budget to spend on energy efficiency measures over the next 12 months. By scrapping allowances payments in 2011, participants can invest that budget in direct energy-saving measures. (Is this "good news"?)

2) Some voluntary reporting guidelines, such as the real estate sector supplement of the Global Reporting Initiative -- GRI.

3) Some shameless self-promotion: I think the pressure from pension asset managers helps as well. The Global Real Estate Sustainability Benchmark (GRESB) Foundation, which represents the other part of my life, has recently signed up AXA Real Estate (€40 bln. in real estate) and is now endorsed by the United Nations Principles for Responsible Investment, the main SRI lobby. We're in the process of collecting data from the industry "universe" (it's not clear what the "universe" exactly entails), and our investor members are putting pressure on their fund managers to report. Deadline: July 1st.

Awareness is growing, and some real estate fund managers have started to integrate ESG issues into their daily operations. No dedicated "green" funds, but simply thinking beyond quarterly results, working with tenants to improve buildings, and developing smart buildings. I gave a talk for the senior management of Grosvenor yesterday (in good-old historic Cambridge, how sustainable can it get?), and the attention to energy efficiency in their global business is encouraging. Less walk, but more talk is is the fanciness of the "CSR" reports I recently received. Check out the GRI-compliant report of Bentall Kennedy, one of the largest North American fund manager, and the CSR report of Tishman Speyer (Download Tishman Speyer Sustainability Report). These slick reports are quite exceptional for private fund managers (even though some public real estate companies have published such reports for a while now), and I'm hoping to see a similar degree of transparency from other fund managers as well. My advice: spend less on looks, and more on content. And start thinking about employee health and satisfaction. Alex Edmans (Wharton) has written a great paper on employee satisfaction and corporate financial performance -- studying the list of "Best Companies to Work For in America", he finds that treating your employees well leads to stronger financial performance. The underlying mechanisms are still unclear, but think about productivity, less absenteeism and lower sick leave. In due time, these are issues that the real estate sector has to come to terms with. But, first things first: let's start with collecting environmental information and reporting it in a comprehensive way.