In terms of green energy, building owners and occupiers need to consider how the different rooftop solar models fit into the CRREM framework. Joost Leendertse explains.

Everyone has experienced the enormous volatility in electricity and gas pricing over the last two years, and so there is a general understanding of a need for action.

Occupiers are also increasingly putting pressure on investors and owners to decarbonise their buildings as part of negotiations for new leases or lease extensions. Energy-efficiency measures support this decarbonisation, but becoming self-sufficient in terms of green energy is a significant positive step.

The question is not if investors need to take action, but rather when and how? In today’s evolving energy landscape, adapting buildings to meet ESG regulations and occupier demands is paramount.

The question for many investors and building owners is: are they willing to take the risk of diminishing the value of the building, and of it potentially becoming a stranded asset, by opting for the convenient rooftop lease model?

The key element for building owners and investors to consider is CRREM analysis (Carbon Risk Real Estate Monitor), which assesses the carbon risk of a real estate portfolio in relation to the goals of the Paris Agreement. It provides insights into how well a real estate portfolio aligns with the decarbonisation targets necessary to limit global warming.

The framework looks at CO2 emissions and the energy consumption of buildings and portfolios, resulting in two pathways.

The CRREM CO2 Reduction Pathway

The CRREM CO2 reduction pathway is a framework that outlines the necessary steps and targets for reducing carbon dioxide (CO2) emissions in the real estate sector. It provides a structured approach for aligning real estate investments with the goals of the Paris Agreement, which aims to limit global warming to below 2 degrees Celsius above pre-industrial levels.

The CO2 reduction pathway involves measures to decrease the carbon footprint of buildings and includes strategies for energy-efficiency improvements and the integration of renewable energy sources.

Key elements of the pathway include:

1) Energy efficiency: Implementing energy-efficient technologies and practices within buildings to reduce energy consumption and, subsequently, CO2 emissions.

2) Renewable energy integration: Incorporating renewable energy sources, such as solar panels or wind turbines, to generate clean energy on site and reduce reliance on fossil fuels.

3) Carbon accounting (compliance and reporting): Accurately measuring and reporting carbon emissions associated with real estate assets to track progress towards reduction goals.

4) Emission-reduction targets: Setting specific targets for reducing CO2 emissions from real estate portfolios, often in alignment with international or regional climate agreements.

5) Building retrofitting: Upgrading existing buildings to improve energy efficiency and reduce carbon emissions.

6) Sustainable construction: Ensuring that new construction projects adhere to green building standards and sustainable design principles.

7) Occupant engagement: Encouraging building occupants to adopt energy-efficient behaviours and practices.

Elements 1, 5 and 6 concern the construction phase of the asset, but if your focus is on solar or renewable energy, the key CRREM elements related to electricity produced on site and electricity consumed on site are elements 2, 3, 4 and 7.

While the typical rooftop lease model may comply with element 3, there is a real challenge with elements 2, 4 and 7.  These elements require an integrated approach between building owner and occupier and this is not reflected in the rooftop lease model.

Energy Reduction Pathway or Energy Intensity Pathway

This pathway concentrates on reducing the energy intensity of buildings (kWh/sq m). Energy intensity refers to the amount of energy consumed per square meter of building space. It aims to lower energy consumption in buildings and enhance energy efficiency, irrespective of the energy source.

This pathway acknowledges that reducing energy consumption is a critical element in addressing climate change and aligns with energy-saving measures in real estate portfolios.

“Investing in self-sufficient green energy production is simply part of good governance.”

Joost Leendertse, VerusSol

For this second pathway, for now, it doesn’t matter who generates on-site energy, whether it’s the owner of the installation, the tenant, or a third party leasing the roof.

It is, however, important that the electricity produced on site can be factored into the reduction of electricity consumption per square meter of the building, even if this on-site generated electricity is exported and not actually used within the building itself.

There is no direct correlation between the electricity generated on the roof and whether it is actually used within the building. What matters is the overall energy balance within the building.

What else should you consider?

When a solar installation is owned by a third party instead of the owner of the building or the occupier, it can introduce complexities in the CRREM analysis.

1) Attribution of emissions reduction: In a CRREM analysis, it is important to properly attribute the emission reductions from renewable energy sources. If the solar installation is owned by a third party, the emissions reduction may not be directly accounted for in the building’s emissions profile, which could lead to an underestimation of the building’s sustainability performance.

2) Lack of control: In a rooftop lease model, the property owner leases their rooftop to a third-party solar provider. This means that neither the building owner nor the occupier have any control over the PV system and its energy production.

However, the development within CRREM registrations may require direct control over the decarbonisation process and energy production in order to meet carbon-reduction targets for the building owner or occupier.

3) Flexibility for future adaptation: Depending on the terms of the lease, the building owner may have limited flexibility to modify or upgrade the solar system. This could impact the ability of the building to adapt to changing energy-efficiency standards or advances in technology.

4) Financial considerations: A rooftop lease involves long-term commitments and financial arrangements, but there is a risk that these may not align with CRREM. Building owners may need more flexibility in how they invest in renewable energy.

5) Long-term viability: The longevity of the third-party ownership arrangement should be evaluated, as if there’s uncertainty about the continued ownership or operation of the solar panels, this could affect the long-term sustainability outlook for the building.

6) Resource efficiency: CRREM may seek to redefine and maximise resource efficiency by integrating renewable-energy systems seamlessly with real estate assets. This creates a challenge for the rooftop lease model, as it was never designed to provide the maximum level of integration and efficiency.

7) Ownership and liability: With a rooftop lease, the ownership of the PV system and associated liability lies with the third-party provider, but CRREM could potentially decide to have ownership and liability more closely tied to its definitions for operations and sustainability goals.

Investing for the long term

Often, the primary reason real estate companies opt for the rooftop lease model is to avoid upfront investment or because of concerns over regulatory issues. There are now solutions to deal with regulatory issues even for investors with REIT status and so every building owner should now be looking at the optimal solution for their building or portfolio.

We advise investors and occupiers to look at the most efficient approach to investing for the longer term in the green energy production of your buildings. Ownership and control are paramount, and it should be done sustainably, without third-party involvement, ensuring that annual production matches consumption and that tenants directly consume this on site.

We recognise that the real estate market is undergoing challenging times, primarily due to rising interest rates. The upcoming refinancing rounds are poised to present significant obstacles, with the market’s focus squarely on these challenges.

However, real estate owners are required to meet ESG targets and the safest way to ensure compliance with existing CRREM, and future, stricter, ESG regulations is through controlling their green-energy production, integrated efficiently with occupiers.

There’s no longer any excuse not to invest in your building’s green-energy production. Not only is it good governance but the risk, described in CRREM, of an asset becoming stranded or receiving a brown discount is always greater than the cost of investing in a high-quality PV system. And, if done correctly, a PV system as a new addition to the building makes complete financial sense.

Joost Leendertse is founder and chief executive of VerusSol