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CBD program review final report

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Executive summary

ACIL Allen Consulting (ACIL Allen) was commissioned by the Department of Industry and Science, previously the Department of Industry (the Department), to undertake a review of the Commercial Building Disclosure (CBD) program.

CBD program

The CBD program was introduced in 2010 and fully implemented in 2011 as part of a combination of measures employed to drive energy efficiency improvements in commercial buildings. The rationale for the CBD program was to address two market failures in the commercial building sector, namely:

  • a failure in the provision of information on the energy efficiency level of an office space being leased or sold, resulting in information asymmetry (with the seller/lessor having much more information about the efficiency level than the buyer/lessee)
  • the different incentives facing those who take the decision of adopting energy efficient practice (e.g., building renovations) and those who might benefit from using them (known as split incentives).

The CBD program requires building owners to disclose information about the energy efficiency of large commercial office floor spaces (2,000 square metres or more) at the time of sale, lease or sublease. An estimated total of 5,000 buildings with approximately 26 million m2 of Net Lettable Area (NLA), housing one million office workers, are expected to be covered by the scheme.

To meet the program requirements, building owners need to obtain a Building Energy Efficiency Certificate (BEEC), which consists of a National Australian Building Environment Rating System (NABERS) rating; information about the energy efficiency of the office lighting, contained in the Tenant Lighting Assessment (TLA); and generic guidance on how the energy efficiency of the office could be improved. NABERS star ratings must also be included in sale or lease advertisements for covered floor spaces.

The BEEC enables potential purchasers or lessees to include consideration of a building’s energy efficiency as part of their decision-making processes. In so doing, the CBD program provides the market with information that would, over time, encourage energy efficiency improvements to be made voluntarily. By encouraging the market to appropriately value energy efficiency, rather than forcing the adoption of particular energy efficiency measures, the CBD program is a light-handed form of regulation.

Key findings

The review involved an assessment of the appropriateness of the CBD program, its effectiveness, its interaction with related programs, its benefits to date, likely benefits going forward, cost recovery options and consideration of possible changes to the scheme. The review has assembled and analysed the available evidence, developed a methodology for modelling past and future impacts and consulted with a broad range of stakeholders. To ensure that the review findings are robust and defensible, appropriately conservative assumptions have been adopted where there is significant uncertainty.

1. The Commercial Building Disclosure program is an appropriate program that complements a suite of related government policies and programs, including the Emissions Reduction Fund (ERF).

ACIL Allen considers the CBD program to be an appropriate one that aligns strategically (and in practice) with related government policies and programs. It is complementary to a significant number of government programs and initiatives that target building energy efficiency. While some other programs also target split incentives, they primarily apply to newly constructed buildings, whereas this program applies to both existing and recently constructed buildings. A number of programs also target inadequate and asymmetric information; however, this information provision is primarily targeted at building owners, while CBD complements these programs by providing information to tenants and prospective buyers.

2.The CBD program has been effective in inducing positive behaviour change in relation to commercial building energy efficiency in affected buildings, resulting in significant benefits.

ACIL Allen’s cost-benefit analysis indicates that the CBD program has been successful in inducing a change in the behaviour of building owners, operators and tenants in relation to commercial building energy efficiency.

ACIL Allen’s cost-benefit analysis indicates that the CBD program has been successful in inducing a change in the behaviour of building owners, operators and tenants in relation to commercial building energy efficiency. This was particularly evident in buildings with relatively low initial levels of energy performance.

Our analysis suggests that the resultant improvements in base building energy performance, as measured by the NABERS rating, have enabled the program to achieve cumulative benefits in excess of costs to date of $44 million between 2010 and 20141, even though not all buildings covered by the program have triggered disclosure in that period. The benefits include a reduction in end-use energy consumption of 10,020 terajoules (TJ) and greenhouse-gas (GHG) emissions of 2,051 kilotonnes of CO2-equivalent (ktCO2-e) over the period 2010 to 2023.

This figure does not take into account the potential benefits associated with workforce productivity gains. Those benefits are estimated to be approximately $168 million cumulatively2. However, they have not been included in the net benefit numbers because of the higher level of uncertainty associated with them.

3. The CBD program is expected to deliver further benefits in energy reduction and greenhouse gas abatement.

Continuation of the CBD program is expected to deliver significant benefits.

ACIL Allen’s forward-looking analysis of the CBD program indicates that retaining the NABERS component of the program will continue to deliver substantial net benefits. Assuming a 5-year program duration from 2015 to 2019, the cumulative net benefits (not including the value of GHG reductions) are estimated to be $53.3 million3. The cumulative net benefits are estimated to be $76.0 million if GHG reductions are valued at $23/tCO2-e.

ACIL Allen’s analysis of the TLA component of the program suggests that it has yet to deliver significant benefits. This is in part due to the newness of the TLA, which results in a lower level of awareness about the TLA (compared with the more well-established NABERS). Consequently, a relatively small proportion of tenants have taken advantage of the information generated by TLA assessments.

ACIL Allen estimated the costs and benefits for retaining the TLA under two cases. The first is based on retaining the TLA in its current form. The second is based on extending the validity period of the TLA from one year to five years. Extension of the validity period is recommended as it is estimated to reduce industry burden (by approximately $2.0 million cumulatively) with negligible impact on the scheme’s effectiveness.

ACIL Allen’s analysis suggests that retaining the TLA in its current form will generate a net cumulative cost of minus $3.9 million4 excluding the value of GHG reduction, and a net cumulative benefit of $6.9 million5 including the GHG benefits (at $23/tCO2-e). ACIL Allen’s analysis suggests that if the validity period of the TLA is extended to five years, these NPV estimates improve to minus $1.9 million excluding the value of GHG reduction, and $8.9 million including the GHG benefits (at $23/tCO2-e) respectively. The net benefits of retaining the TLA are likely to be significantly higher if measures that accelerate awareness and understanding of the TLA by tenants are adopted.

Through both the NABERS and TLA components, continuing the program is projected to reduce end use energy consumption by 14,565 TJ and GHG emissions by 3,116 ktCO2-e (equivalent to installing about 50,000 rooftop solar panels at an indicative cost of $350 million6) over the period 2015 to 2028.

4. CBD remains the principal Commonwealth Government program for driving energy efficiency improvements in the office sector.

The CBD program is expected to be complementary to the ERF rather than duplicative. This is mainly because the purpose of ERF is to provide funding for emission reduction projects, whereas the focus of the CBD is to provide information to potential tenants and buyers.

As such, CBD remains a low-cost, high-value program that drives significant energy efficiency improvements within the commercial office sector. The CBD is a light-handed form of regulation, which supports the market to value energy efficiency through greater information. This contrasts with heavy-handed regulation or non-regulatory approaches, both of which are not supported by industry.

5. There are several viable options for the future funding of the CBD program.

There are a number of options for how the costs of running the CBD program might be recovered. Each option has its own advantages and disadvantages. A two-tier BEEC pricing scheme is likely to be perceived as fairer than a single flat fee. However, it is less transparent and would be more complex to administer. Conversely, a single flat fee is more transparent and is likely to result in a more predictable revenue stream. Maintaining the no fee status quo is extremely simple and transparent, but it may not be financially sustainable over the longer term.

The choice of which option to adopt is a question of striking the appropriate balance between the disadvantages and advantages of the various options, and the government’s deregulation agenda. ACIL Allen therefore does not have a recommendation on the recovery of the costs incurred by the Department in administering the CBD program, or indeed if there even should be any effort to recover costs.

6. Future evaluations of energy efficiency programs would benefit from improved data relating to pay-offs of energy efficiency upgrades and workforce productivity improvements.

Key data gaps encountered by ACIL Allen included the pay-off from energy efficiency upgrades and the valuation of improved workforce productivity in more energy efficient buildings.

Pay-off estimates used in the analysis, referred to as the ‘net benefits of energy efficiency’, were derived from abatement cost curve analysis, cross-checked against multiple sources and tested with industry stakeholders. Extensive sensitivity analysis was also performed to ensure the review’s conclusions were robust in light of the uncertainty around project pay-offs.

Nevertheless, future evaluations would benefit from a greater resolution and diversity of data related to project pay-offs. Available data was used to construct low, medium and high estimates of project pay-offs applying to buildings performing upgrades from a low, medium and high initial level of energy efficiency respectively. This captured the effect that returns from energy efficiency are relatively higher for poorer performing buildings. However, further data would allow greater differentiation of project pay-offs, if necessary, based on current star rating, building characteristics, jurisdiction, climate zone and tenants etc. It would also allow greater precision in economic benefit estimates.

Improvements in workforce productivity were found to be potentially significant. ACIL Allen estimates that this improvement could be higher than the combined benefit of project pay-offs and GHG reductions, even under conservative assumptions about productivity increases. However, there is a high level of uncertainty surrounding the valuation of productivity benefits due to the paucity of robust data on the productivity benefits of energy efficient buildings.

Recommendations

1. The CBD program should continue.

ACIL Allen finds that the CBD program has delivered benefits that significantly outweigh its costs but has yet to reach its full potential.

With expected robust growth in the number of commercial buildings in major cities around the country (commensurate with projected population and economic growth) and an increasingly urgent need to address the climate change challenge, the program is as relevant to Australia’s needs today and in the future as it was at conception.

A significant proportion of the building stock is yet to be rated given that the mandatory obligations to disclose are only triggered on offer to sell or lease. The rating of as yet unrated stock is expected to occur in the coming years. Our analysis suggests that the program will continue to deliver benefits that exceed costs if the program’s life was extended for five years.

2. The focus for the CBD program should remain on office buildings.

ACIL Allen does not believe that mandatory disclosure should be extended to other types of commercial buildings at this time. At present, the NABERS rating tool for data centres is still relatively new and not yet widely embraced by industry. In addition, some data centre operators might be unwilling to allow access to energy consumption data due to the commercial sensitivity of that information.

The split incentive market failure may not be as acute for tenants of retail buildings, as they are more likely to be concerned with site size, configuration, location and rental price and conditions (rather than energy costs), as these are the key determinants of a tenant’s profitability. In the hotel sector, the split incentive issue does not arise if hotel operators are also the building owners. Even if they do not own the building, they still have a natural incentive to seek out buildings that are more energy efficient and have lower energy costs

3. The CBD program should be expanded to include smaller office spaces.

Lowering the threshold for mandatory disclosure to 1,000m2 will generate additional economic benefits.

ACIL Allen’s analysis suggests there is merit in lowering the threshold for mandatory disclosure from 2,000m2 to 1,000m2. The projected net benefits of lowering the disclosure threshold are estimated to be $24 million cumulatively7. This is based on an estimated 1.5 million m2 of additional floor space being captured by the CBD program if the threshold was reduced to 1,000 m2. Lowering the disclosure threshold is also expected to result in a further 707 ktCO2-e reduction between 2015 and 2028 (cumulative).

ACIL Allen recommends lowering the disclosure threshold to include the sale or lease of floor space between 1,000m2 and 2,000m2.

4. The CBD program should continue to harness opportunities for further process and administrative efficiency improvements.

There are well-established mechanisms for making ongoing improvements to the CBD program. These include measures for improving the administrative efficiency of the program and the NABERS assessment process. For example, the NSW Office of Environment and Heritage has implemented multiple automatic checks that have streamlined the work of assessors by preventing the most common mistakes found in audits. The Department has also adopted recommendations from a review of the program’s operational efficiency conducted in 2013, strengthening requirements for conducting TLAs and improving administrative IT systems.

ACIL Allen recommends that these process improvements should continue.

5. There are clear opportunities to improve the TLA component of the CBD program.

ACIL Allen believes that much can be done to accelerate awareness and appreciation of TLA by tenants, and recommends the following:

  1. Requiring some information on tenancy lighting performance be provided when advertising for sale or lease.
    • Where a single functional space is being leased, this could simply be the power density8 and control system capacity for that space.
    • Where a number of functional spaces or the entire building is being sold or leased, an ‘aggregate’ measure will need to be devised that is meaningful and useful to the tenant. An aggregate measure is preferred over listing TLA information for all functional spaces for simplicity and because there is limited space in some media, such as billboards. This information should include an indication of the potential ‘dollar difference’ in lighting operating costs between the rated space(s) and an appropriate benchmark.
    • Stakeholders consulted by ACIL Allen noted potential challenges with this proposal include the ability to devise a meaningful aggregate figure, potential confusion with NABERS if star ratings are also used to represent tenancy lighting performance, and limited understanding of power density by tenants.
  2. The TLA certificate should have provision to include a proposed (and binding) commitment of tenancy lighting upgrades for new tenancies. This information should be prominently displayed on the TLA certificate.

The implementation of these measures to accelerate awareness and appreciation of TLA would result in both costs and benefits. While costs have not been estimated, ACIL Allen estimates cumulative benefits of $4.2 million.

Extending the validity period of the TLA from one to five years will generate additional net benefits with no adverse impact on energy efficiency outcomes.

ACIL Allen also believes that the validity period for the TLA should be extended from one year to five years. This is because tenancy lighting performance is unlikely to change unless lighting systems are changed, which generally only occurs during a period of vacancy prior to a new tenant occupying the space. Therefore, requiring building owners who wish to maintain an up-to-date BEEC to re-assess lighting systems annually imposes an unnecessary cost on them.

ACIL Allen’s analysis suggests that an extension of the validity period from one year to five years increases the net benefits of the TLA by approximately $2 million9. It also represents a reduction in regulatory burden for owners of disclosure-affected buildings.

Summary of results

The results from ACIL Allen’s analysis of the benefits of the CBD program to date and the benefits going forward are summarised in Table ES 1.

Table ES 1 Summary of benefits of the CBD program

Analysis conducted

Estimated economic benefit excluding GHG reductions (NPV )

Estimated economic benefit including GHG reductions (NPV )

Reduction in end use energy consumption (cumulative TJ)

Reduction in GHG emissions (cumulative ktCO2-e)

Backward-looking

Net benefits to date (2010 to 2014)

$15.4

$44.0

10,020

2,051

Forward-looking

Net benefits of continuing NABERS component of the program (2015 to 2019)

$53.3

$76.0

12,122

2,504

Net benefits of continuing TLA component of the program (2015 to 2019)

-$3.9

$6.9

2,444

612

Total net benefits of continuing program in its present form (2015 to 2019)

$43.3

(after deducting $6.2m in program administrative costs)

$76.8

after deducting $6.2m in program administrative costs)

14,565

3,116

Additional net benefits from reducing threshold to include office space between 1,000 – 2,000 m2

$23.9

(additional)

$34.9

(additional)

3,684

(additional)

707

(additional)

Additional net benefits from extending validity period of TLA to 5 years

$2.0

(additional)

Change would not affect energy or GHG emissions reductions

Change would not affect energy or GHG emissions reductions

Change would not affect energy or GHG emissions reductions

Total net benefits of continuing program with reduced threshold and extension of TLA validity period

$69.2

$111.7

18,250

3,824

Indicative further net benefits through improved TLA visibility

$4.2 minus costs of improving visibility

(additional)

$8.5 minus costs of improving visibility

(additional)

1,222

(additional)

918

(additional)

Note: The backward-looking analysis is based on the period of CBD operation between 2010 and 2014, but includes benefits of the program to 2023 to encompass the ongoing benefits of projects undertaken during 2010-2014. Analysis of forward-looking benefits is based on continuing the program from 2015 to 2019, but includes benefits of the program to 2028 to encompass the ongoing benefits of projects undertaken during 2015-2019.

Source: ACIL Allen

1 In 2014 dollars under a seven per cent real discount rate. Includes ongoing benefits to 2028 from upgrades projected to be undertaken between 2015 and 2019.

2 The power output per square metre (measured as Watts per m2).

3 In 2014 dollars under a seven per cent real discount rate.

4 As above.

5 As above.

6 This is an indicative cost for 50,000 4.5 kW rooftop solar panels, based on the economic costs of installation (excluding GST and benefits from the government Small Scale Renewable Energy Scheme). Taxes and subsidies have been excluded as these are not economic costs but simply transfers between the government and installers/households.

7 In 2014 dollars under a 7 per cent real discount rate. Includes ongoing benefits to 2023 from upgrades undertaken between 2010 and 2014.

8 As above.

9 In 2014 dollars under a 7 per cent real discount rate. Includes ongoing benefits to 2028 from upgrades projected to be undertaken between 2015 and 2019.