Toby Horne, smart infrastructure financing partner, Siemens Financial Services UK looks at retrofitting non-residential buildings stock.
Decarbonising non-residential buildings stock worldwide will play an important part in meeting 2030 and 2050 climate targets. Existing stock covers offices, hospitals, factories, warehouses, educational establishments, and more commercial buildings.
According to the International Energy Agency (IEA), the operations of buildings account for 30% of global final energy consumption and 26% of global energy-related emissions[i]. The agency stresses that, “…the sector needs more rapid changes to get on track with the Net Zero Emissions by 2050 (NZE) Scenario. This decade is crucial for implementing the measures required to achieve the targets of all new buildings and 20% of the existing building stock being zero-carbon-ready by 2030.”[ii]
To achieve this goal, an annual deep renovation rate of over 2% is needed from now to 2030 (and indeed beyond).[iii] Yet although comprehensive retrofits of commercial buildings can reduce their energy use by up to 40%, this is currently not happening anywhere near the scale needed to meet climate goals, according to a separate report released by the American Council for an Energy-Efficient Economy (ACEEE).[iv]
Mandatory standards grow globally
There has been some progress in driving transition to smarter, more energy efficient buildings. The global buildings sector investment in energy efficiency increased by around 16% from 2020 to a total of approximately USD 237 billion [v].
Nevertheless, even greater official pressure is widely seen as the key to accelerating progress. Mandatory standards for energy-efficiency in buildings already exist in Europe, the UK, and China, with strong enforcement regimes and non-compliance penalties. For instance, minimum building energy performance standards in the UK mean that it is now unlawful to let (lease) properties in England and Wales that do not meet an ‘E’ level of energy performance.
Additionally, in April 2024 the European Commission formally adopted a directive[vi] mandating members to cut building emissions and energy use. For non-residential buildings, member states must renovate 16% of their worst-performing buildings by 2030 and the 26% worst-performing buildings by 2033.
Apart from such legal obligation, initiatives to reduce carbon emissions through lower energy consumption are commercially compelling on two fronts.
Ethical and commercial benefits of decarbonisation
Firstly, companies are increasingly issuing green bonds to raise capital, making it necessary to implement carbon footprint reduction initiatives. Alongside this, businesses and consumers are increasingly looking to buy from more environmentally-friendly companies making green credentials a key competitive advantage in global markets.
Secondly, in a world that has recently experienced a major fuel crisis, reductions in energy usage save money. Reducing energy consumption, through the enabling digital technology, has therefore become a major driver of investment in ‘smart’ commercial buildings, ‘smart’ hospitals, ‘smart’ campuses and ‘smart’ public buildings.
Many elements of the smart building are also the foundation for reduced energy consumption. The main contributors to energy use reduction and decarbonisation focus on energy-efficient insulation and door controls, smart HVAC (heating, ventilation and air-conditioning controls), and sensor-driven LED lighting.[vii] Smart buildings controls that activate usage only when needed also clearly play a crucial part.[viii]
Flexible finance as an enabler
Decarbonising the non-residential buildings sector does require considerable investment. For instance, the retrofitting of buildings is a significant challenge since at least 40% of buildings floor area in developed economies was built before 1980, when the first thermal regulations came into force[ix].
A lack of free capital or risk concerns about energy investments can mean a substantial number of buildings owners missing out on the deliverable operational cost reductions, carbon emission reductions and supply security that can be gained. However, flexible financing arrangements can secure these operational cost reductions without putting pressure on capital resources, avoid putting capital at risk, and ensure expected savings are realized. Such financing tends to come from specialist financiers, such as Siemens Financial Services (SFS), who have a deep understanding of the technology and its practical applications.
Specialist financing arrangements
Public sector initiatives need to be matched by private sector support, in particular private sector finance. Financing for ‘smart’ buildings can take a variety of forms, depending on the business processes that need to be enabled. At the technology component level, financing tools are available to help vendors and distributors add value with cash flow capabilities for their buyers. For larger installations or systems, specialist financing arrangements can be flexed and tailored to align costs with the rate of benefit gained from the energy-efficient technology.
At the most complex level, as-a-service financing arrangements provide the solution, with future expected savings from energy efficiency being harnessed and used to pay for the capital investment and more. Often, these arrangements can be made budget-neutral for the building owner, avoiding the need for any capital spending at all. Arrangements known as energy-efficiency-as-a-service have already enabled the energy-efficiency transition for many organisations, even in challenging economic conditions.
Measuring the opportunity
For CFOs looking at managing their property portfolio, it is helpful to assess just how much decarbonisation of existing buildings is susceptible to energy-efficiency-as-a-service techniques. The graph below shows highly conservative estimates[x] of the baseline annual emissions reduction that energy-efficiency-as-a-service arrangements could enable between now and the end of the decade – the first phase target date for most climate planning around the world. The model is based on official emissions data and calculates just 50% of the available emissions reduction potential.
A high priority for decarbonisation
40% of global greenhouse gas emissions come from buildings and, if left unchecked, they're set to double by 2050[xi]. This means that energy efficiency in the built environment is critical to achieving 2030 and 2050 climate targets.
Commercial and public buildings are more energy intensive per m2 than residential property, making energy-efficiency initiatives for non-residential buildings a high priority for meeting decarbonisation targets. In challenging economic times, flexible, specialist financing techniques (such as EaaS) are important enablers to help the investment in energy-efficiency maintain its required momentum.
To learn more about the topic, visit the smart buildings area at Siemens Transform on 17th-18th July at Manchester Central. Transform 2024 is a free two-day conference and exhibition focusing on the challenges organisations are facing in the UK & Ireland and how they can accelerate digital and sustainable transformation. Find out more here: https://www.siemens.com/uk/en/...
Siemens is able to offer building owners and businesses an integrated value proposition: technology financing solutions, including energy-efficiency-as-a-service, as well as technology expertise and the technology itself. If you would like more information about accelerating your investment in energy efficiency without the need to find large amounts of capital, please visit: https://www.siemens.com/infras...
[i] https://www.iea.org/energy-sys...
[ii] https://www.iea.org/energy-sys...
[iii] https://www.iea.org/energy-sys...
[iv] https://www.greenbiz.com/artic...
[v] https://globalabc.org/sites/de...
[vi] https://ec.europa.eu/commissio...
[vii] IEA, Toolkit: Energy efficient building technologies, 2018
[viii] IEA, Energy Efficiency: Buildings, 2020
[ix] https://www.iea.org/reports/re...
[x] Methodology: Data from national/regional statistical institutes on annual energy consumption by non-residential buildings built prior to 2010 was used to model CO2 emissions of buildings likely to benefit from deep retrofit for energy-efficiency. This was then reduced by highest likely implementation levels of such deep retrofit. Likely energy savings from deep retrofit were calculated using the lowest end of official average ranges. The resulting figures provide a highly conservative annual estimate of the energy savings achievable through deep retrofit, which can be financed through energy-efficiency-as-a-service financing techniques.