Sustainability is no longer an option: it is key for profitability
07 September 2016
By Etienne Cadestin
The impact of the government’s cuts to financial support for renewable energy has been immediate and profound.
These changes were announced by energy secretary Amber Rudd in December, and took effect in January. Already there has been a significant cut in the number of projects. Some of the thousands of people working in the UK solar industry have lost their jobs. More will do so in the months ahead.
But does this spell the end of UK solar investment, or are people finding ways to make it work?
It’s true that property owners wanting to improve the environmental performance of their property assets can no longer enjoy substantial returns. Prior to the cuts, investors could enjoy IRRs of up to 13% in the most southern parts of the country. That figure has fallen to 6%.
But despite cuts in financial support, the industry will continue to invest in and install rooftop solar photovoltaics in order to sell the electricity to tenants post-construction.
You just have to look at companies such as Marks & Spencer, which has developed the biggest roof-mounted PV installation on top of its distribution centre in Castle Donington, Leicestershire, with more than 24,000 panels. The retailer is continuing to push ahead with the panels, which generate 5,000 MWh per year. As Adam Elman, head of delivery for M&S’s eco/ethical plan, says: “Renewable energy makes absolute business sense: it reduces our carbon emissions, increases resiliency and has a strong financial business case.”
Indeed, for many, including former energy minister Lord Barker, the removal of subsidy signals a tipping point for UK solar energy: “As the industry starts to sign commercial long-term power purchase agreements based on PV without any form of government subsidy we can expect a further leap forward. Add into that mix the prospect of affordable batteries for home and business use, coupled with smart meters and smart home technology, and the opportunities for further deployment become enormous.”
Non-domestic buildings are responsible for 19% of the UK’s CO2 emissions and energy efficiency is the cheapest way to reduce carbon emissions with negative net-societal costs.
The income from installations is valued at a cap rate of 8% by valuation experts, although there is an urgent need to institutionalise this as many more buildings with rooftop PV installations will be sold in the future.
With the cost of electricity increasing by around 200% over the last 20 years, it is clear that global resource depletion and the future price on carbon is only heading in one direction.
In the years ahead, no doubt the market will adjust and it is very likely that installation costs will decrease – especially if Europe waives the sanctions on Chinese manufacturers.
Property investors, and especially listed REITs, want their products to remain investable, but there is a risk that investors will not include products that have a high climate impact in their portfolios. Sustainability and asset liquidity are correlated. BlackRock chief executive Larry Fink, for example, recently stated that investors are looking for companies with a long-term sustainability plan. If you don’t have one, get one.
Rather than focus on quarterly financial returns and reports, which encourages short-term thinking, what property developers and investors need now is longevity of income through long-term and responsible investments. Sustainability is not an option anymore – it is key for business survival and profitability.
Even if the subsidies are not as high as they used to be, the UK property market is ripe for green investment. There are truly remarkable energy efficiency technologies available on the global market. The key is to find which ones are the most suitable to your business.
The sun will never stop shining – now is the time to scale up the transition to a lower-carbon economy in a global economy that will require seven planet Earths by 2050 if we do not change our modus operandi.