The incentives for renewable energy

Publication | July 2017

Introduction

This article was first published in Estates Gazette on May 19, 2017

The growth of renewable energy and its increasingly significant contribution to the world’s energy mix is undeniable. In 2016, global investment in renewable energy outperformed investment in fossil fuel generation for the fifth year in a row, with the trend forecast to continue in 2017. The UK has hit some significant milestones in its pursuit of clean energy: between July and September 2016, 50% of electricity generated was from low-carbon sources; in April 2017, the UK spent its first full day without generating any electricity from coal. However, with the uncertain political landscape, will this trend continue beyond the short term?

There are two key drivers to the deployment of renewables in the UK. First, at the European Union level, the UK has a binding target of 15% final energy consumption from renewable sources by 2020 and, at a national level, the UK has a statutory 2050 target to reduce emissions by at least 80% from 1990 levels. The Department for Business, Energy & Industrial Strategy has recently reaffirmed the UK’s commitment to the sector, despite Brexit. Second, generation capacity margins are tightening, with the government consulting on the closure of all coal-fired plants by 2025 and limiting scheduled replacements. New nuclear is currently not expected to commission until 2025 and we currently have limited interconnectivity with continental Europe.

The message is clear: renewable energy is here to stay and, in this context, the real estate sector is embracing the opportunity to adapt land use and adopt new technologies.

There are three key areas driving adoption of renewable technology – which may take the form of renewable electricity generation, renewable heat generation or a combination of both – in the real estate sector: financial, corporate social responsibility and de-risking.

The financial driver

The financial benefits are numerous: lower energy bills, the possibility of selling electricity back to the grid, energy price stability and, where available, subsidies derived from the governmental support regime. The latter is subject to changes of government policy and, as the UK has seen over the past few years, the benefit derived from subsidies has been cut back dramatically. However, as technology costs reduce, the need for direct subsidy diminishes. Indeed, market commentators have suggested that the decline in cost for solar PV is 90% when compared with 2009, a staggering achievement.

The key is maximising value and efficiency from existing assets by the installation of renewable technology or, on refurbishment or redevelopment, incorporating it into the project build. Value is unlocked from utilising available space or the installation of new technology in, under or on buildings or their surrounds.

Costa Coffee’s roastery on Old Paradise Street, London, is a good example of a new build incorporating sustainable features, including solar PV and thermal panels, air source heat pumps and rainwater harvesting. This has resulted in a 68% reduction in CO2 emissions and a 60.5% reduction in water consumption.

As subsidies are reduced for solar PV and wind, we are seeing a growth in private wire arrangements. These typically involve small-scale energy schemes generating energy on the site they are ultimately supplying, thereby reducing waste energy and introducing greater competition in the market. Through a power purchase agreement, a solar developer and a building owner (and its occupiers) can share value in avoiding grid charges and costs that are applied to electricity taken from the grid.

The manufacturing and industrial sectors are realising the benefits of unlocking value from on-site generation. A good example is the recent 3.42MW rooftop solar installation at the Rolls-Royce factory in Bristol. Power-heavy users such as these have been early adopters but they are not alone – the onset of digitisation and big data makes data centres a perfect match for on-site generation.

Corporate social responsibility

Wherever they sit in the property ownership chain, businesses increasingly must engage in sustainable behaviour by focusing on their low-carbon credentials and their long-term emission management strategies. Google received widespread coverage, with commentators praising the company’s forward-thinking policy, following its 2016 announcement to switch its data centres and offices to being powered entirely by renewable energy in 2017.

We are seeing investment in renewables as a necessary part of good estate management. In addition some landlords are “greening” their leases by including tenant obligations to comply with the landlord’s sustainability policy, limiting building operating hours, restricting alterations that would affect the environmental performance of the building, restricting energy consumption and encouraging data sharing. They might also allow the landlord the discretion to adjust the service charge to reflect resource efficiency at the building (intended to promote good environmental management by occupiers).

De-risking

Companies need to maintain continuous business operation and many are procuring energy from renewable generation sources for security of supply – elevating the role of renewable energy from an operational and technical exercise to a strategic and commercial priority.

The future is fragmentation

Necessarily the UK’s energy future requires a mix of low-carbon solutions. That will no doubt include new nuclear but it will also include a diverse range of renewable technologies deployed across a vast array of land uses.

Battery storage is on the rise, allowing generating owners to mould their generation profile to meet actual demand. This will certainly assist in the current move away from utility-scale generation towards a model of disaggregated localised generation. In March 2017 – and for the first time ever recorded – the sunny weather in the UK caused electricity demand in the afternoon to be lower than overnight.

The real estate sector has a big part to play in the disaggregation of energy generation and, while technology and regulations are a moving target, sustainability is a necessity, and will continue to forge new and exciting integrations of real estate with renewable technology.

Types of renewable energy

  • Wind power (small-scale wind energy): turbines are used to generate electricity
  • Solar electricity: photovoltaic (PV) panels convert sunlight into electricity
  • Small-scale hydro-electric power: water passes through a turbine to drive a generator that produces electricity
  • Solar water heating: a (typically) roof-mounted system absorbs energy from the sun and transfers it, using heat exchangers, to heat water
  • Combined heat and power (CCHP): generation of electricity and the use of the heat that is produced as a by-product
  • Biomass: organic material is used to generate energy by combustion, fermentation or distillation
  • Anaerobic digestion: biomass is converted to methane-rich biogas that is combusted to generate electricity and heat
  • Ground-source or air-source heat pumps: low-level heat which exists underground or in the air is converted to high-grade heat by a heat pump

Key considerations for landlords and tenants

Third-party operation and maintenance

We often see third-party solar developers taking leases from property owners to allow them to install solar panels. Typically the tenant will benefit from any subsidy payments but will supply the building owner with electricity (with surplus electricity exported to the grid). With the right lease, this arrangement can work well, and it allows the property owner to divest the responsibility of installation and maintenance of the renewables equipment to a third party, while benefiting from the electricity generated (and perhaps heat) for on-site use and (depending on the deal) additional rental income.

Ownership

If you are looking to install rooftop solar PV, then it is worth considering who owns the rooftop space and/or airspace. If a building is let as a whole to a tenant then the lease most likely includes the airspace above the building and allows (perhaps to a certain height limit) the installation of plant on the rooftop. In that scenario the installation of solar PV is likely to be a consideration for the tenant rather than the freehold owner. By contrast, in a multi-let property the landlord will usually retain the structure and airspace above, allowing it to install renewable technology for the building as it sees fit.

Planning

Consider whether the installation is dealt with under permitted development or whether it will require planning permission.

Maintenance

For rooftop installations, a key point to be wary of is maintenance of the building and access to the rooftop while the solar equipment is installed. A solar tenant will seek to include a compensation mechanism if the solar equipment is disconnected for a certain period of time. There is a balance between the tenant’s income stream through subsidies (if that is the commercial arrangement) and that of the property owner in maintaining its building and receiving a supply of electricity.

Tax

It is important to be clear that the owner of rooftop solar equipment has a sufficient interest in the roofspace in order to be able to claim capital allowances on the equipment. Business rates are another consideration, with a split in treatment between solar installations that export most of their electricity and those that generate electricity for use on-site, which are faced with much higher rate increases. There is ongoing pressure to resolve this disparity, which inordinately penalises self-generation (often used by institutions such as schools and local authorities).


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