Environmental Upgrade Agreements (EUAs) are as close as you can get to a silver bullet solution for financing NABERS or ‘brownfield’ retrofits. As of December, building-owners will be able to finance their energy efficiency projects using long-term, low-cost capital and pass the loan costs onto the tenants, assuming they are on net leases.
An EUA is formed between a building-owner, a financial institution and local council and is used in parallel with a standard loan agreement. Through the agreement, the council levies ‘environmental upgrade charges’ to recoup the costs of the loan for the financier. This results in the project loan being priority debt and being superior to all other creditors. Put simply, the project financier gets paid first if the building-owner goes bankrupt, making it less risky to lend. This allows banks to loan project funds at a reduced rate.
Agreements and loans are also transferable, so a building-owner can sell the building at any point and take advantage of a higher-rated NABERS star building.
As mentioned earlier, a further benefit to building-owners is that EUAs provide a mechanism to pass costs on to the tenants through the outgoings. However, it is provisional on the savings to the tenants being greater than or equal to the costs passed through.
Effectively, this means no more ‘free lunches’ for tenants. It ensures that tenants, who benefit from energy-saving retrofits through reduced utilities charges, pay their share of the project costs.
But without a fully transparent method of introducing these costs, the relationship between owner and tenant risks being damaged.
“We strongly recommend that building-owners consider an advanced performance contract that provides for guaranteed savings via transparent savings verification, using internationally-accepted saving protocols,” says Siemens Energy Efficiency Marketing Manager James Allston, an authority on EUAs. (see our earlier article: How to maximise your NABERS or brownfield retrofits).
“The last thing anyone wants is to end up in court for failing to demonstrate the project savings sufficiently” Allston says.
Important things you need to know about EUAs:
- In the first round, only 10 agreements will be allowed by City of Sydney. This means that building-owners will have to move quickly to ensure they don’t miss out.
- A EUA can only be entered into if the project is saving energy, water, waste, pollution or greenhouse gas.
- Retrofits are only allowed in commercial buildings (and multi-tenanted residential buildings, but not in the first round)
- The building-owner can only pass the environmental upgrade changes (which include the loan costs) through the outgoings to the tenants if the savings to them are greater than the costs.
- Energy performance contracts is the ultimate way to implement EUA projects where the costs are being passed onto the tenants.