Retrofitting public buildings with energy-saving technology – including low-energy lighting and high-efficiency boilers – presents one of a number of opportunities for government to ‘move the dial’ on infrastructure, growth and supporting local job creation within the next couple of years. As it reduces energy usage, retrofitting also offers an attractive route to making savings in departmental budgets. Where local councils have taken this approach, for example, the result has been a cut in energy bills of up to 29% within 10 months.
While retrofitting initiatives are moving forward in some parts of the public estate, progress across central government is not being made at the pace at which it could.
By promoting, or at least approving, new retrofitting projects, finance professionals play a vital role in making retrofitting happen. Here we set out several key considerations to bear in mind when assessing these projects.
Firstly, an innovative and approved financing model for retrofitting exists in the form of RE:FIT, which was introduced by the Greater London Authority and the Mayor of London in 2008. Using this model, private framework suppliers invest in individual retrofitting schemes and thereby guarantee the savings for public bodies; they then make their own return through sharing the lower energy bills. To date, over 100 buildings have been subject to RE:FIT, with 71 public bodies (including local authorities, universities and NHS bodies) signing up. In addition, the Department of Energy and Climate Change announced it would be rolling out the RE:FIT scheme nationwide. This was put forward as one of three strands of its energy efficiencies strategy, to quote: “A drive on financing energy efficiency for business and the public sector. As well as a guide to help public sector organisations cut their energy use, the government will fund a nationwide rollout of RE:FIT.”
Secondly, RE:FIT and similar retrofit models have the opportunity to make a significant, and timely, impact in the ‘infrastructure space’. RE:FIT projects are very much ‘shovel ready’ in that they can be progressed very quickly. This will support jobs, and unlike big infrastructure projects, the jobs will be nationwide. Also, given the nature of RE:FIT solutions (such as insulation, lagging, boiler and building controls, glazing, renewable energy generation), many of the jobs could be for young, lower skilled people, whereas some infrastructure projects require only highly skilled workers.
Another consideration is that RE:FIT, like certain other retrofit programmes, is selffunding – meaning the savings made in energy bills pay for upfront property interventions. There are two points to bear in mind here. Firstly, as energy prices rise, making savings becomes more worthwhile. Secondly, many central departments spend hundreds of millions of pounds a year on energy; the Department for Education, for example, spends almost £500 million, covering 24,000 schools. With this in mind, it is striking that payback periods for some of the projects suitable for RE:FIT can be as low as 18 months, with an average payback of around five to seven years.
We know that, for central departments, their agencies and non-Foundation NHS Trusts, borrowing is not possible. However, there are a number of possible approaches to progress retrofit projects without impacting borrowing targets and capital budgets. Looking at accounting models where the retrofit spend is treated as a resource cost, aligned with the budgetary heading where the savings will be realised.
RE:FIT will help departments achieve reductions in carbon emissions, counting towards the meeting of its target of a 34% reduction from 1990 levels by 2020. When the current RE:FIT programme in London has been completed in 2015, for example, it will have had a significant impact on carbon emissions in the capital. The current pipeline of projects in the city means that carbon dioxide emissions will have been reduced by nearly 47,000 tonnes a year – the equivalent of 5,402 flights between London and Paris.
Three to five years down the line, many retrofitting projects have still not progressed. For the many cost and environmental benefits of this activity to be realised, finance professionals need keep the facts front of mind.
Mark Williams is a government finance and commercial expert at PA Consulting Group
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Find out more about the scheme here.