California Building Owners See Green in New Regulation
by Adam Wiskind: The 2006 California Solar Initiative and the Greenhouse Gas Emissions Bill (Senate Bill 1 and Assembly Bill 32) set goals to increase solar generated electricity and reduce greenhouse gas emissions in California. The new laws have prompted the California Legislature and the Public Utility Commission (CPUC) to remove regulatory obstacles for commercial building owners to implement energy efficiency measures and install solar energy infrastructure. One of the changes extends favorable tax treatment for solar installations and allows alternative energy providers to continue to forge valuable agreements with building owners. Together the government’s recent efforts have revealed the significant opportunities for building owners to attract tenants, reduce costs and generate cash flows in an otherwise tight real estate market. This article outlines the recent regulatory changes and the opportunities they provide for building owners.
In September 2007 the CPUC approved an agreement to allow electrical sub-metering of commercial tenants. Prior to this decision, building owners were prohibited from charging tenants based on a tenant’s actual electricity usage. Instead, electricity bills were generally allocated on a square footage basis. A tenant who used a lot of energy might pay the same as another tenant that managed to operate more efficiently. With the new rule in place tenants can receive price signals and information about their energy usage and costs which may encourage them to participate in energy efficiency and load management programs. Building owners win in two ways. The more accurate billing allows owners to anticipate and pass on costs to tenants and it allows owners to maintain good relations with tenants who think they are being overcharged, which can happen when billing is estimated on a square foot basis. While both building owners and tenants must consent to sub-metering, an effective agreement can open discussions between parties on how to leverage alternative energy technology or behavioral change to lower overall energy bills.
In another measure Assembly bill 1103 requires that by January 1st 2010, commercial building owners provide to all their prospective tenants and buyers, standardized information on the energy efficiency of their buildings. This legislation, which is the first of its kind in the country, will likely be copied by other states. Most building owners will satisfy the requirements of the law by participating in the Environmental Protection Agency’s Energy Star Benchmarking Program. The Energy Star Program compares the energy consumption data of each building to the energy consumption data of other buildings in a similar class across the country. The result is a single metric from 0-100 that rates commercial buildings’ energy performance. A building that scores 75 or more merits an Energy Star award and has, on average, a 35% lower energy bill than a typical building in its class1. Leasing office space would then be similar to buying a car where customers base their decision on both a sticker price and a fuel efficiency rating. Tenants will be able to compare not just the lease rate of a building, but it’s Energy Efficiency Benchmark. This additional information will provide tenants a relative measure of their energy costs and it will create a more transparent real estate market in which building owners compete for tenants not just on lease rates but on the energy efficiency of their buildings. Eventually energy efficient buildings will command higher lease rates than buildings that are energy hogs.
The Legislature has also tried to meet the alternative energy and greenhouse gas emissions goals set out in Senate Bill 1 and Assembly Bill 32 by assuring that market conditions exist for the integration of solar energy technologies into the commercial real estate sector. Building owners are increasingly looking to solar energy systems to provide their tenants with clean energy while generating additional cash flows for themselves. The owners either commit to managing the systems themselves or they strike deals with Energy Service Companies (ESCOs) that pay the owners rent for roof space and the privilege to sell electricity to their tenants. The Legislature that wants to encourage the adoption of solar energy systems on commercial buildings has passed rule changes that remove obstructions to these types of transactions.
The California Solar Initiative originally required all utility customers that installed solar systems on their buildings to be on a Time of Use2 electricity rate. Under certain conditions these solar energy system owners might end up paying higher energy bills under Time of Use rates than if they had a flat rate and didn’t have the systems. The customers hurt by the Time of Use rate mandate are those who would have high daytime demand but solar systems of insufficient size to meet the entire demand. AB2768 passed by the legislature gives building owners interested in installing solar energy systems the option to use time-variant pricing structures if it benefits them but does not require it. Allowing building owners this choice greatly improves the financial feasibility of solar energy systems.
AB 1451 clears another obstacle to the development of solar. Although additions made to a building generally increase the value of the property for tax purposes, Proposition 7 passed in 1980, allowed the exclusion of solar energy installations from these increased assessments. That important exclusion was set to expire at the end of 2008 but the passage of AB 1451 extends the current property tax exclusion for solar energy systems until 2016. The extension sends a clear message that the legislature does not want to create disincentives for building owners to adopt solar technologies.
One real estate company that has recently taken advantage of the new solar rule changes is Prologis. The world's largest owner, manager and developer of distribution facilities entered into an agreement to lease roof space in Southern California to Southern California Edison (SCE). This historic deal which will not only net Prologis income from roof leases, it will generate 250 Megawatts of clean, renewable energy to the local energy grid. The deal would not likely have been conceivable, without California’s recent energy legislation. Although the rule changes are too new to anticipate their full impact on greenhouse gas emissions, they will no doubt help to reveal the significant financial opportunities for building owners to implement energy efficiency measures and integrate alternative energy systems into their commercial buildings.