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Embracing the energy transition: where next for the real estate sector?

  • United Kingdom
  • Real estate
  • Energy and infrastructure - Clean energy


Eversheds Sutherland Property Column: April 2019

Real estate might be the oldest asset class in the world, but there has always been plenty of room for innovators and opportunists amongst those who own, develop and use it. As with other assets and products, opportunity comes for those who recognise the changing tectonic plates and apply their strategy accordingly. So it is with real estate and its relationship with energy.

For many years now, the real estate sector has embraced sustainable development: some of it driven by new legislation, some of it by market requirements and perceived opportunity and competition. "Green" leases might vary in definition, but "greener" buildings have been driven by planning requirements, BREEAM ratings, energy performance certificates and minimum energy efficiency standards. This has been a present business reality for some time.

Our sector market leaders have been driving the agenda. The UK’s two biggest REITS, Landsec and SEGRO, are certainly embracing this trend. Whilst recognition for corporate social responsibility is a benefit, their embrace of technologies and contracting structures to drive energy efficiency goes far beyond that. For evidence, just look at Landsec’s White Rose or SEGRO’s Navigation Park developments. The former has one of the largest arrays of solar panels on a shopping centre in the UK, helping Landsec to achieve their energy intensity reduction target. Phase 2 of Navigation Park was London’s first "carbon neutral" industrial scheme, and utilising solar panels allowed Camden Brewery to sign up to a power purchase agreement, providing significant savings. These are organisations who understand the energy world as much as the real estate one, and believe in the need for the two to be fully integrated.

But whether you believe in revolution or evolution, there is no question that a new energy system is emerging. At Eversheds Sutherland, we are fortunate to have market-leading clean energy and real estate practices. We seek to ensure as much crossover between the two for the benefit of our clients.

So, what are the present trends which we are seeing? The "3 Ds" are a start:

  • Decarbonisation: not only does the world need to secure its future by decarbonisation, there are legal obligations to achieve that.
  • Decentralisation: the expression "energy transition" is now common. This encompasses the increased need for flexible demand, generation and storage, and understanding the way local people and businesses are rewarded for being more flexible with their energy usage.
  • Digitalisation: connectivity and new technologies mean different market platforms are now available, an example being the way demand response technology creates a market based on shifting energy consumption from one point in time to another, to increase system efficiency.

Siemens conducted a recent study in which they concluded that 40% of all electricity is being consumed by buildings globally and, of that, more than 30% is wasted. Unsurprisingly, much of the real estate sector, owners and occupiers alike, are investing in technology which helps them manage energy use across their portfolios. Smart metering may not have been rolled out to the satisfaction of many, and certainly its (lack of speedy) coverage and advance is the subject of critical debate; but there is no question we now have monitoring systems in play that can refine and define our energy usage. These monitoring systems can now ensure the redistribution of energy usage across a cluster of buildings for maximum efficiency. Landlords operate in a competitive market, and the opportunity to offer their tenants energy efficient buildings has never been so important. Whichever side of the "lease contract" you are on, balancing initial construction capex against long-term maintenance, cost savings are highly relevant to current pricesetting and subsequent rent reviews.

Power purchase agreements are no longer the preserve of the energy companies and, over the last decade, many corporates have moved into this space. It is an area which is evolving quickly, with corporates buying electricity directly from the generators, either through a private wire scheme or via the grid network, sleeving the electricity into their existing supplies. 

Smart tech is everywhere and won’t just be used to monitor and rationalise our use of buildings. Increasingly, it is at the core of the infrastructure template. We are looking at a number of potential projects involving models to deliver large settlements. Particularly fascinating is the proposed new CaMKox corridor: a million new homes linking Cambridge and Oxford as a new silicon/tech corridor. The Infrastructure & Projects Authority within HM Treasury is leading on elements of this. Clients such as Homes England are looking at delivery strategies that focus on how smart tech can be deployed to deliver a step change in urban developments (rather than simply doing more of the same) to act as a template for our future towns and cities. This is likely to see a revolution rather than evolution, beyond the typical Energy Service Company (ESCO) model, such that we see the development of microgrids supported by blockchain solutions. Welcome to the world of grid resilience and independence, not to mention cost benefit.

Most real estate professionals are considering battery solutions and electric vehicles. Many recognise the need for strategies for both. Battery technology is the subject of dedicated investment and refinement, and with good reason. Batteries will become an integral part of our everyday lives: they will drive us (literally) and power our homes, and represent perhaps the most obvious embodiment of the energy transition. Financing models are not yet sufficiently developed, but are poised to take advantage of massive aggregation. Developments will increasingly have regard to the need to locate large batteries which provide an embedded energy solution, or smaller individual units which interact with our homes. Similarly, electric vehicles will become the everyday rather than the exception. Property developers are looking beyond the need to secure charging points to satisfy specific occupiers and planning requirements, towards designing electricity supply connections with sufficient "headspace" to allow for significant electric vehicle deployment. They are also looking to a raft of new companies to help them with the design, procurement, installation, commissioning, maintenance, back office and data management of this new product. Current models see all of this dealt with by way of a single "rental-esque" fee with no upfront capex: the solution is just delivered for them.

The landscape is changing without doubt. As the Australian investor Paul Clitheroe has said, "Before you start trying to work out which direction the property market is headed, you should be aware that there are markets within markets." He may not have had the energy market at the forefront of his thoughts, but he certainly could have done so.