On Thursday 30 January, Howard Kennedy hosted a panel session with key players in the energy sector. The panel looked at the energy opportunities in mixed-use developments.
Jonathan Cohen, Head of Energy at Howard Kennedy, opened the debate by commenting that a week is a long time in politics, but even more so for the energy sector, which has been constantly evolving from both a policy and regulatory perspective over the past few years.
Achieving net zero carbon by 2050
Jonathan outlined some of the key challenges, opportunities and achievements thus far for the UK on the road to achieving net zero carbon by 2050. 2019 was a landmark year and saw the UK Government become the first major economy to legislate for net zero. It was also a record year for renewable energy generation on the system, which led to negative wholesale electricity pricing on a number of occasions whereby renewable energy generators were paid to reduce their output. There have been great strides in phasing out coal generation with only 2% of total UK energy generation deriving from coal compared to more than 30% only five years ago.
Challenges in the real estate sector
For the real estate sector, as more homes are being built, there are increasing challenges for property developers – all new homes built post-2025 must be connected to a district heating network or have heat pumps installed. Further, all new homes built from now must be "electric vehicle ready".
In the UK, real estate accounts for over 40% of the UK's total carbon emissions. Therefore, there are a number of challenges for real estate developers in incorporating decarbonised electricity, heat and transport infrastructure serving their developments to facilitate this energy transition whilst at the same time ensuring that their real estate assets are future proofed to mitigate against the risk of stranded assets and to maximise their site's potential.
Richard Quartermaine, Environmental Manager at Hammerson, commented that it is easier to put in the appropriate infrastructure in new developments, but the real challenge is how you "convert" existing developments to bring them into line with an energy strategy. Hammerson aims to be net positive in carbon by 2030, meaning their net emissions will be zero.
Transforming energy strategy into assets
Howard Mapperley, Founder of Inventa Partners, explained the shift and increased complexities of energy strategies involved in property developments. Howard explained that the basics for energy strategies are the same from five years ago to now, but the key difference for Inventa's clients now is how they can transform their energy strategy into assets that can produce income and to assist in the recovery of development costs. Emerging revenue streams include electric vehicles charging points or other local developments plugging in to shared energy infrastructure.
Howard believes the market is opening up and assets are no longer reviewed in isolation. Not every project is going to have all of the components, but there will always be a mixture of them.
Evolving consumer attitudes
Mike Reynolds, Managing Director of Vattenfall Heat UK, Europe's fifth largest energy company, explained that demand is changing as consumers are asking questions surrounding energy that have never been asked before. Consumers now expect zero carbon, which is changing the demands on property developers. Mike explained that change can happen quickly. One of the projects Vattenfall was involved in was in Amsterdam. In 1994 all homes in Amsterdam had boilers. Now, over 20% of homes are connected to a district heating system.
The fact that expectations are rising is good for the industry and may lead to more innovative solutions. There is a significant amount of waste heat in London; in fact there is more waste heat than heat demand. Mike questioned whether companies like Thames Water would be able to produce clean energy through waste heat.
Mike's advice was to instruct an energy partner at the earliest stage possible when planning a real estate development as it will be both cost efficient and time effective. Energy service providers are, for the first time, becoming tier 1 Partners across the board, as opposed to just a service provider.
Self-funding district heating
The panel took some interesting questions from the audience which led to a discussion on whether district heating would ever be self-funding. Howard explained that not all costs will be recovered; developers can hope to recover a proportion of the costs, but attaining a full cost recovery is unlikely. Developers instead should think of their energy policy as both a means to achieve their land values and a strategy to create additional and potentially valuable assets.
Mike argued that this is not just an energy problem but a societal and particularly a buildings problem. Given that the average margins for energy companies are small, but for property companies they are much larger, property companies can afford to contribute to the cost of decarbonisation rather than just passing it through to consumers on their bills.
What lessons can be learnt from Europe?
Mike Reynolds suggested that we should be bolder with our implementation zoning – in which certain technologies are backed as preferred solutions within specific geographical areas. The implementation of zones has been successful across Europe and the government is looking to expand this. For example, if there is district heating zone, tenants and occupiers would be incentivised to connect. It also needs to be a national strategy to prevent developers cherry picking developments outside of low carbon zones. Zoning can work for different technologies within different zones.
Changing the future
Now is the time for a change of mindset – policies cannot be tinkered, there needs to be wholesale change. In order to meet net zero, national infrastructure must fundamentally change in the way we heat our buildings and homes. These are the same challenges and obligations developers and builders faced when they had to connect to water and utilities in the late Victorian age.
A further suggestion from Mike was that the Government could subsidise the cost of developments connecting to district heating sources rather than underwriting demand with a floor price as they do in the electricity markets. It would not be too different to Government subsidies for broadband in rural areas. Howard suggested there needs to be more joined up thinking from Local Authorities. Anecdotally, he has worked on schemes whereby three developments had their own energy sources, when they could have easily and efficiently connected to one network, given their close proximity and achieved efficiencies.
Whilst the challenges ahead for clean energy are substantial, it was clear from our event that the Energy industry has the will, drive and desire to meet the net zero targets and all panellists believed this was achievable ahead of time... Now it is time to be bold – with policy, infrastructure and ambition to achieve it.
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