Meeting in the middle: How building owners and tenants can both benefit from energy upgrades

Energy prices have risen sharply, putting pressure on the margins of small and large businesses alike. Upgrading to new efficient equipment can slash businesses’ bills; however, building owners have little incentive to undertake costly upgrades to save tenants money. Is there a mutually beneficial solution for tenants and owners?

It will come as no surprise to any bill payer that energy costs are going up considerably. Over the last ten years, the cost of electricity and gas has risen drastically for households and businesses everywhere. Australian consumers and industry are now paying some of the highest prices globally and as one of the OECD nations, our electricity prices have the highest volatility.

In July 2017, the nation’s power prices increased again, by greater than 20 percent in some cases. The causes of such increases are many, from network costs to big industry transitions (such as the closure of large coal fuelled power stations and gas export commitments driving down available national supply).

While prices will likely stabilise, this upward trend is unlikely to reverse. Energy prices won’t drop significantly anytime in the foreseeable future, with neither competition, technological innovation, regulation nor privatisation successfully lowering costs. Going forward, other industry issues besides cost will continue to compete for focus and investment, including lowering emissions and improving supply reliability.

As the price tag for each kilowatt hour goes up, profits for businesses sink accordingly. In malls, offices and industrial spaces across the country, old HVAC systems, inefficient lighting, and many other pieces of aging, energy-intensive equipment, are severely increasing businesses’ operating costs.

Who’s footing the bill?

In commercial properties, tenants, as the primary bill-payers, are finding the cost of operations rising rapidly with no productivity ballast to offset it against. This unavoidable expense is squeezing margins and putting a strain on cash flows.

Unfortunately, the only way to ease these costs, is improving existing setups to achieve energy efficiencies and is generally out of a tenants’ control. For those whose responsibility it is (building owners who own the technical assets that drive energy consumption), there are clear, if indirect, benefits to doing so. These include factors such as improved NABERS ratings and lower asset life cycle costs. Energy-efficient fittings can also generate improvements in the capital value of the building through lower outgoings and increase its attractiveness to new or existing tenants, improving the tenant experience and providing the potential for rental yield enhancement.

Despite this, upgrading mechanical, electrical or hydraulic fittings can be a long-term and costly project that’s unlikely to be undertaken by owners until absolutely necessary. In practice, this means equipment often remains in place until the very end of its life cycle, regardless of accompanying overheads.

For tenants, though, new equipment can make all the difference — and not just financially. Bills should be significantly lower, but new equipment can also mean knock-on effects such as productivity increases, improved working environment and better customer-facing aesthetics.

Efficiencies aren’t the only way to lower bills. Energy supply can also be addressed with improvements such as solar arrays, which can mean lower tariffs and savings on peak time prices.

Finding common ground

All over the country, tenants struggling with hefty energy bills, and owners considering expensive and optional upgrade costs, are at a stalemate. For building owners considering a capital works programme, the initial outlay and balance sheet implications are often daunting or insurmountable, and the pay-off slow to come. But apart from the initial capital hurdle, there are potential benefits on both sides.

There is a solution that aligns the interests of building owners and tenants. If owners outsource the problem, and simply pay routine fees for the outcome instead, they can access the benefits for themselves and their tenants without having to come up with the capital or make a case for long-term ROI.

Changing the lightbulb

Rather than waiting until equipment wears out or breaks down, or trying to fund large and long-term capital upgrades themselves, owners should consider ‘as-a-service’ solutions. Many industries are moving to this model — and in some areas, like cleaning, data storage or security, it’s already the preferred solution.

With a managed service agreement, the owner doesn’t have to pay for an expensive HVAC refit or a lighting overhaul, or worry about ongoing maintenance and unforeseen future costs or upgrades. Instead, they just pay for the cool air or LED-produced light itself. As well as allowing for otherwise costly or unfeasible works, this lets owners focus on their own core business, without trying to be contractor, maintenance man and manager in one.

Start to finish

The asset-as-a-service solution means guaranteed ongoing delivery of better conditions for tenants, and property improvements for owners. An early impediment is building owners’ lack of visibility over tenant costs and issues, so the first step is starting a dialogue. Looking at historic bills, tenant operating hours and other relevant data will illuminate major pain points. Once opportunities for improvement are identified, owners can speak to a specialist partner to plan a service-model solution, thus initiating improvements that will drive financial, environmental and social benefits for all.

By Rad Krvavac
Managing Director, Infrastructure and Energy, Northquest