Environmental Upgrade Agreements (EUA), also known as Property Assessed Clean Energy (PACE)
An EUA or PACE financed sustainability upgrade to a building involves not just the building owner and the financier, but the local government (council) that collects property rates and charges. The obligation to repay the loan remains with the building, not the owner who undertook the sustainability upgrade.
The diagram below, courtesy of Siemens, explains how an EUA works visually. Siemens is an Energy Services Constractor (ESCO) that delivers guaranteed energy savings, its name on the diagram below could be substituted with that of any ESCO.
Where it has been used
U.S.A (PACE), Australia (EUA).
EUA/PACE financing essentially transfers sustainability investments made by the building owner into cash-flow positive income and expense streams attached to the property. This reduces financial risk for the property owner (making it easy for the owner to sell at any time without losing their investment), and can also be used as a way of breaking down the “split incentive” between tenant and landlord when council charges can be passed on as an expense to the tenant.
In many real estate markets sustainability investments do not (yet) add much if any value to the asset value of a property.
So even with a good return on investment, unless the building owner is planning on keeping the building for the long term, there is still reluctance in making an investment that will reduce energy costs and emissions, as the value of that investment will not be recognised on sale of the property.
Example 1: Without EUA or PACE financing. You own and occupy a “C” grade commercial building. A lighting upgrade worth $100,000 with a 5 year simple payback (i.e. saving $20,000/year) is made, but does not increase the building value. Assume that you borrow the $100,000, and pay it back over 6 years with $20,000 in interest.
- After 6 years you have broken even. An ROI of 0%
- After 10 years you are $80,000 in front, providing an averaged ROI over 10 years of 8%.
Example 2: As above, but an EUA is entered into. Under the EUA you get financing for the energy efficiency upgrade, but your council rates increase to $15,000 a year over 10 years to payback the $100,000 upfront investment.
- After 6 years you have saved $30,000 (Energy cost savings of $120,000 less repayments of $90,0000)
- After 10 years you are $50,000 in front.
Which would you prefer?
- Borrowing and then spending $100,000 now, getting your money back and repaying the loan after 6 years. If you sell the building a year from now you lose more than $80,000! Only if you stay more than 6 years will you start getting $20,000 a year.
- $5,000 a year now, growing to $20,000 a year after 10 years. You can sell the building at anytime.
Only suited to countries where there is high certainty that council charges will be collected (for example in Australia over 99% of council rate charges are collected).
Only suited to buildings where the remaining lifetime of the building exceeds the loan term of the financing provided.
Cash flows to enable the repayment of additional council charges incurred from an EUA typically rely on the building being used or occupied. If the building becomes vacant then over the period that it is vacant then an EUA is cash flow negative. The only exception to this would be where rooftop PV was installed and the feed-in tariff was the same or higher than the consumption tariff.
Example 3: As per example 2, but the building is vacant for one year during the term of the EUA. With the building vacant, and it lights not used, there are no energy savings from the lighting upgrade. In this case the council rates are still $15,000 higher for that year but there are no energy savings to pay the additional council rates.
The take up of EUA/PACE financing has been relatively slow, and requires enabling legislation which allows for the collection of financing charges from council rates. However if this legislation is in place, it is a very attractive way of driving sustainability initiatives that provide a reliable and certain ROI under the repayment term of the underlying loan. This increasingly applies to rooftop solar PV, and applies to a range of energy efficiency measures such as lighting upgrades.
There is hope that EUAs will become more prevalent, and certainly in the USA the rate of PACE financing has been picking up.
PaceNow PaceNow‘s mission is to promote improved energy efficiency in buildings and use of PACE. Our strategy is to be a trusted source for information and resources to a growing coalition of PACE stakeholders that includes local governments, businesses, industry service providers, labor and trade organizations, environmental groups and private individuals nationwide.
Sustainable Melbourne Fund.A body established by the City of Melbourne, Australia, which promotes Environmental Upgrade Agreements to make Melbourne’s buildings more sustainable.