MELBOURNE, Australia—The octagonal office tower that sits above a Maserati dealership here has seen a lot of change since it was built for an airline tycoon in the late 1970s.
For one thing, the helipad on the roof has been replaced with a black “plant room.” This space houses the mechanical guts of the building’s new heating and cooling system—a much more energy-efficient version than its predecessor.
The current owners also installed new elevators that use a regenerative braking system to generate power for the building. These upgrades were part of a retrofit completed earlier this year. The changes cut the building’s energy bills by 25 percent, producing energy savings equivalent to removing the carbon emissions of 55 homes a year.
“We wanted to update the plant and the lifts so we effectively had a ‘brand new building’ with a shell from 1979,” says Barry Calnon, chief financial officer at PDG Corporation. PDG is a large developer and manager of commercial and residential buildings in Melbourne. It co-owns the tower at 501 Swanston with Bobby Zagame, who owns the Maserati dealership as well as an Audi dealership downstairs.
Calnon, looking sharp in a navy blue suit with a set of little silver cars for cufflinks, explains that the retrofit was part of a larger refurbishment meant to attract premium corporate tenants. It cost a few Maseratis’ worth, and was paid for with a US$5 million loan through a Melbourne City Council fund for financing energy-efficiency upgrades in commercial buildings.
The retrofit at 501 Swanston is just one of many undertaken through the city of Melbourne’s 1200 Buildings program. It’s a multi-pronged strategy launched in 2010 to encourage energy-efficiency upgrades to commercial buildings so that they guzzle less water and electricity. The office buildings that dot the skyline in Australia’s fastest-growing and “most livable” city produce more than half of its greenhouse gas emissions. That needs to change if Melbourne is to reach its ambitious goal of being carbon-neutral by 2020.
Melbourne is not the only city zeroing in on commercial buildings. Hong Kong, New York, Singapore and Sydney are among the many cities experimenting with new building codes, energy ratings systems, financial incentives and other strategies for encouraging building owners to install energy-efficient upgrades. Tokyo even has a local cap-and-trade system for reducing greenhouse-gas emissions from office buildings.
Melbourne’s approach is considered one of the world’s leading local efforts, winning a climate leadership award from the C40 Cities Climate Leadership Group and Siemens in 2013. While it hasn’t been a universal success, it represents progressive climate action at the local level at a time when Australia’s national government is going in the opposite direction. Last year, Australia Prime Minister Tony Abbott abolished the country’s carbon tax and declared coal “good for humanity.”
“Even in the absence of national leadership, cities around the world are getting this done,” says Councillor Arron Wood, chair of the City of Melbourne’s Environment Portfolio. “Instead of getting involved in all the arguments, we’ll keep building case studies that people can touch, feel and see.”
Signing on to save energy
For building owners, participation in 1200 Buildings is voluntary. Building owners sign a letter of commitment pledging to reduce energy use, draw up a retrofit action plan, and report on the retrofit to the city. In exchange, they get publicity attached to being part of the program; better performing buildings also tend to attract top-grade tenants and sell for premium prices.
A key element to Melbourne’s approach is an innovative financing mechanism called an Environmental Upgrade Agreement, or EUA. The goal is to help owners of existing commercial buildings overcome the barriers to making big upfront investments in upgrades that can take years to pay off through lower energy bills.
An EUA is a loan involving an agreement between the building owner, a bank and the city. The bank loans the upfront money for the energy upgrades. The payback flows through the city via property taxes on the building. This allows building owners to pass retrofit costs on to a new owner if they decide to sell the building. It also makes it easier to pass costs along to tenants. PDG Corporation took advantage of this tool to finance the upgrades at 501 Swanston, although Calnon says the owners carried the costs themselves.
Figures show a mixed outcome. Fifty-seven buildings have officially signed on, not a great participation rate for a program named after the goal of impacting 1,200 buildings. The number of EUA deals done so far is even lower at seven.
On the other hand, many buildings that aren't officially part of the program are being retrofitted anyway. A city survey in 2013 found about a quarter of the 2,256 buildings that have office space in Melbourne were either in the process of a retrofit, or had done one since 2008. Councillor Wood credits the city’s outreach and the fact that office tenants are starting to drive demand for better performing buildings.
“In terms of ground-truthing a new model [1200 Buildings] has proven its worth,” Wood says. “But there are also other ways to go about it and we’re just happy to see any kind of retrofit taking place with the buildings in our city.”
One thing Melbourne has found is that the type of building ownership makes a big difference. The bulk of energy retrofits have come in buildings like 501 Swanston—owned by real estate corporations, large property trusts or institutional investors.
Corporate owners have the resources to handle the logistics and financing. They also often have a motive, whether out of corporate social responsibility or to deliver efficiency gains to shareholders. An Australia law passed in 2010 provides another incentive: It requires commercial building owners to disclose energy-efficiency information when selling or leasing office space of 2,000 square meters (21,500 square feet) or more.
It's been more difficult getting buy-in from private owners who might own just one of the city’s older, smaller buildings. The city’s 2013 retrofit survey showed that 42 percent of corporate owners had done a retrofit since 2008, compared to just 18 percent of private owners. At that time, 21 percent of corporates were in the process of retrofitting while only 4 percent of private owners were doing so.
One small privately owned office building that has overcome the challenges is called Ross House. It’s an historic five-story building located near Melbourne’s busy Flinders Street rail station. In contrast to 501 Swanston just a few blocks away, the tenants at Ross House are mostly nonprofits in the social justice and environmental advocacy field. A bookshelf in the modest foyer holds copies of Deliverance—the newsletter of the right-to-die group Exit International.
Doing a lighting upgrade and replacing the clunky heating and cooling system at Ross House has cut energy use by 37 percent. That sliced US$7,000 off the building’s energy bills each year, and helped the building achieve a respectable four out of six stars in Australia’s NABERS system for measuring the environmental performance of buildings.
“The goal of carbon neutrality by 2020 fits with the Ross House ethos,” says Michael Griffiths, general manager of the Ross House Association, which manages the building. “And we’re just wanting to do our part.”
The retrofit cost more than US$770,000. As a nonprofit, making the finances pencil out was tough. Amber Moore, the association’s development program manager, recalls that on her first day of work in January 2012, the then-general manager asked her to find around US$560,000 to pay for the heating-and-cooling system replacement. Over time, Moore managed to secure funds, pooling money through a combination of federal and city grants, as well as the association’s own funds. Capital works programs are challenging, says Moore. "To fund an air conditioning upgrade—it’s not really that sexy.”
Lessons for other cities
Melbourne’s experience so far with its 1200 Buildings program offers lessons for other cities looking to make their buildings work better.
Melbourne has moved away from the model of signing on building owners to make large specific commitments. The efforts now are going into educating the private owners of smaller buildings about the benefits of retrofitting. The 1200 Buildings website offers "how to retrofit" videos and case studies of buildings that have done it—including the city’s first carbon-neutral hotel. The program also hosts retrofitting seminars with industry experts, and offers advice on how to access EUA loans as well as city and state grants.
Another key learning is the need to simplify the messaging around energy efficiency programs—particularly when it comes to financing. For example, the slow uptake on the EUAs has the city sharpening the way it markets them.
Scott Bocskay is chief executive of the Sustainable Melbourne Fund, a city-chartered body that among other things is in charge of brokering the EUA deals. He says mid-tier building owners can be overwhelmed by retrofit projects such as changing lighting or upgrading the heating and cooling systems. The actual process of getting quotes and managing the retrofit is a big job, he says. “The sector is sometimes guilty of selling 15 problems and not one solution,” Bocskay says. “It’s a complex kind of project to engage with.”
Putting a new form of finance on top of that adds another layer of complexity. Typically, owners just prefer to pay for upgrades themselves, Bocskay explains. Or they don’t do a retrofit at all because they don’t have the cash on hand and aren’t seeing tenants complaining or leaving.
Instead of trying to sell finance for a general retrofit, the Sustainable Melbourne Fund is now promoting loans for specific projects: solar and lighting upgrades for small- and medium-size enterprises, over half of which are tenants. The idea is to have a clear proposition—“Do you want to do solar, yes or no?”—that tenants can take to owners, along with the option to pay for it with a loan. Bocskay says the Fund has signed off on two solar loans and has another 30 solar projects in the pipeline, not all of them in Melbourne.
The EUA model has been adopted in other Australian states. And since September, the loans are available to all local governments in the state of Victoria, of which Melbourne is the capital. For other cities looking to use EUAs, or something similar, Wood recommends changing the nomenclature by dropping the word “environmental” from the loan’s title.
“I think the perception of it being an ‘environmental’ upgrade was sometimes a bit of a misnomer for those private building owners that would be less inclined toward corporate social responsibility,” he says. “This is actually about making your building perform better.”
This story originally appeared on Citiscope, an Atlantic partner site.