COLUMN-Efficiency programmes must get delivery right-Gerard Wynn

Tue Feb 28, 2012 7:45am EST

(The author is a Reuters market analyst. The views expressed are his own.)

By Gerard Wynn

LONDON Feb 28 (Reuters) - Efficiency upgrades of commercial buildings offer quicker paybacks than homes meaning diverging challenges for government programmes aimed at overcoming homeowner and business indifference to saving energy.

The challenge boils down to encouraging businesses to carry out upgrades that may deliver bigger returns than at first glance, while convincing homeowners suspicious of benefits from costly outlays.

Buildings account for about a half of all energy consumption, according to the European Commission which is driving for tougher European Union efficiency laws to curb rising fuel bills and carbon emissions.

On Tuesday, a panel of EU lawmakers approved new binding efficiency measures in member states, paving the way for European Parliament approval.

Member state ministers must agree on a similar text, far from certain, but Tuesday's vote was a stepping stone.

The main proposal was to force all European energy utilities to spend at least 1.5 percent of their revenues helping customers cut their fuel bills, by retrofitting their property, money they can claw back through higher fuel bills.

But public and business appetite is lagging.

PAYBACK

Uptake of retrofits is partly driven by the payback on investments, in other words how long it takes to get the money back through energy savings. Risk is also important.

Emerging data from pilot programmes and private investments suggest rapid payback in the commercial sector, where economies of scale are greater than homes.

The UK investment firm Climate Change Capital over the past three years has acquired four prime commercial properties for about 150 million pounds ($238 million), and aims to extract higher returns through efficiency upgrades.

In theory, lower fuel bills and carbon emissions could see higher rents, capital values and occupancy rates.

In a forthcoming audit the company reports rapid paybacks including systems to switch off machines like air conditioning outside office hours (less than six-month payback), to track energy use (1.3 year payback), and review and automate lighting (2.3 year payback).

They calculated even faster paybacks on raising occupier awareness of efficiency, at about 2 months (a 6,000 pound annual energy saving on a 1,000 pound outlay).

The findings echo those of Britain's Carbon Trust, which advises businesses on how to cut CO2 emissions.

It found commercial property payback periods were generally less than two years: for example, about one month on awareness-raising; 11 months on installing light sensors; 14 months on more efficient cooling equipment; and 18 months on changing light bulbs.

A common sceptic complaint, however, is that fuel bills are a small part of total revenues in the commercial sector (on average 3 percent, according to the Carbon Trust), meaning such savings don't entice boardroom attention.

Climate Change Capital was coy about returns on their first property sale last July (for 43.5 million pounds compared with a purchase price of 35.9 million pounds a year earlier).

Evidence of high returns, beyond mere quick paybacks on investment, could drive wider investor and corporate appetite.

HOUSEHOLDS

Homeowners may struggle to make such significant savings beyond basic insulation and changing light bulbs.

The Energy Savings Trust advises the British government on residential retrofits and is gathering data on savings including payback periods.

Such data includes cavity wall insulation, which plugs the gap between the inside and outside of a building fabric (one to three years); lagging lofts (four or more years for thicker layers); internal wall insulation, cladding an extra layer to the inside walls of the house (12 to 19 years); double-glazing windows (20-40 years).

In the case of double glazing that's a long wait to get your money back, longer than the expected occupancy, and ample deterrant.

RISK

Part of the trick is accounting for timing and risk, however, say experts at the U.S. Rocky Mountain Institute (RMI) which has a long history of trumpeting the benefits of efficiency.

The incremental cost of installing efficient windows or appliances can be negligible compared with standard equivalents, meaning paybacks are much shorter if the job is timed to the natural replacement cycle and lease turnovers.

In addition, the cost of individual items are trimmed if the whole home is addressed. For example, the cost of more efficient walls can be offset by downsizing the size of a new boiler required to heat the home.

Another consideration is risk.

According to the RMI's Director of Sustainable Finance, Scott Muldavin, a big hurdle is homeowners' distrust in the system supplying the upgrade, including data on savings, the reliability of suppliers and the robustness of contracts.

Britain and the United States are each embarking on similar initiatives to drive residential upgrades, called the Green Deal and Property Assessed Clean Energy (PACE) respectively, each relying on low rates of government borrowing for funds.

Their success will depend as much on how well they secure homeowners' confidence in utilities and builders, as finance.

($1 = 0.6313 British pounds) (Reporting by Gerard Wynn; editing by Jason Neely)

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