Tom Sharp, Senior Sustainability and Energy Analyst  

Financing building optimisation: the path to retrofit

Investment in building optimisation is required to move existing building stock towards net zero and decarbonisation pathways. Implementations to achieve greater energy efficiency can be expensive, so planning and financing retrofit projects effectively is crucial to achieving emission goals and maximising asset value. The first step is always to understand the costs, paybacks, and impacts of implementations for your buildings. From there, evaluating and easing the CapEx burden of retrofit projects becomes easier using the project financing options and tools available, such as grants to encourage investments in emissions reduction, discounted lending distributed by a developments bank or other sources of funds dedicated to climate action.

Energy efficiency ‘easy wins’

Many of our clients ask us about the energy efficiency ‘easy wins’ which can be achieved for their assets. These are the implementations which not only have short payback periods, but are also clearly necessary to keep up with best practice and to avoid having obsolete and difficult to maintain systems in the future. With 75% of EU building stock considered energy inefficient, most buildings present opportunities for easy-win implementations, including upgrades which can be simply included in a standard business plan. The trick to making the most of these opportunities, is to carefully choose and, where necessary, tender the right options for your assets.

LED Lighting

LED lighting upgrades are a common example of a quick payback, not-if-but-when, easy-win implementation. LED lighting can save 50-70% on electricity costs for lighting versus equivalent fluorescent lighting, while also having lower maintenance costs. On top of that, the costs of keeping outdated lighting systems running are rising. LED lighting is expected to reach almost 100% market share in the next few years following the International Energy Agency’s net-zero roadmap, squeezing older technologies out of the market. For larger LED upgrade projects, tendering available options can not only ensure you are getting the most value out of your investment, but can allow you to choose options which are compatible with your buildings’ other systems. This maximises the energy saving benefits for many years to come.


Electrifying heating systems

Electrifying the heating systems of buildings is often the most important and also one of the most expensive steps to reducing emissions. For buildings on track to reach net-zero 2050 targets, electrification is expected to play an even larger role than energy efficiency measures in reducing GHG emissions this decade. The future costs of electricity and gas both play a role in the payback period for electrifying heating from gas boilers, which makes establishing the return on investment challenging. While we cannot control energy prices, minimising the CapEx burden of electrification with well-planned heating upgrades will always improve the investment prospects while shielding the business from future volatility in gas prices.

Heat Pumps

Heat pumps are the go-to choice for highly efficient electrified heating for the majority of buildings, especially in combination with solar PV arrays. Future electricity grid decarbonisation aside, heat pumps can reduce GHG emissions for heating by 65 – 70% right now. Subsidies for heat pumps are sometimes available but are not necessary to justify the investment for a well-scheduled upgrade from gas boilers to heat pumps. If installing heat pumps can be scheduled to coincide with required heating and cooling maintenance and upgrades, the marginal CapEx of upgrading can be much more manageable than the upfront cost. Combine this with the cost benefits of selecting the correct type and size of heat pumps through a competitive tender, and such upgrades can be fitted into a more palatable CapEx plan.


Onsite renewable energy

Unlike heat pumps and lighting, onsite renewable energy is less likely to be pursued as part of routine building upgrades. The design of the renewable system should be considered alongside local legislation and third-party financing options to determine the optimal approach for your buildings. Longevity Power’s guide to effective solar photovoltaic (PV) system sizing is available here and gives an insight into how to get the most out of your investment in solar PV.

A combination of decreasing equipment costs over the last decade and rising energy prices mean that rooftop solar PV projects offer strong returns on investment without the need for subsidies. If, however, the initial CapEx is still too much of a barrier to installation, third-party power purchase agreement (PPA) options are now available in many countries to remove the CapEx burden entirely. Third-party investors can cover the full cost of installation and in turn will receive the lion’s share of the return on investment through selling the electricity back to the landlord and tenants. This approach is only available for larger rooftop systems, but, where available, it allows building owners and users to reap the environmental benefits of green power without the large upfront costs.


Green loans

The principle of ‘Sustainable Financing’ has grown in popularity for building optimisation works with a relatively high CapEx. Tapping into sustainable finance, and specifically LMA aligned Green Loans, real estate actors can finance or refinance projects that yield significant quantitative improvements in the environmental performance of an asset. As the standard becomes more popularised, and the value proposition clearer, we are seeing sustainable financing options become more widespread. An investment aimed at building optimisation, which is found to be eligible for a Green Loan, sees a clear benefit in its credit spread when compared to traditional financing agreements. This is seen in a discount on interest rate margin (typically 10 to 40 bps) and discount on exit fees (typically with a step-up/ down range between 0.2% and 1.5%). Measures to boost energy efficiency, reduce GHG emissions, and improve waste and water management all deliver the kind of quantifiable environmental benefits required to apply for a Green Loan. As such, Green Loans will service your large implementations by providing a marginal premium on the CapEx, softening the impact on your cashflow going forward, and capitalising immediately on your positive environmental outcomes.


How Can Longevity Partners Help You?

Financing buildings optimisation projects is always easier once you understand the specific challenges and options of your assets. At Longevity Partners, our Building Optimisation services can evaluate the energy savings, returns on investment, and project financing opportunities for buildings around the world. Our in-house expertise on building energy systems, renewables, ESG policy, carbon accounting, and sustainable finance could help you make the most of these opportunities with project financing options which work for you and your business.

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