The 13th Edge Debate: 7th November 2001

Bright Eyed and Bushy Tailed

Neil Pennell, Engineering Director for the Development Business Unit at Land Securities Development

Slide 1

Good Evening Ladies and Gentlemen, my name is Neil Pennell and I work for Land Securities Development. My role is Engineering Director for the Development Business Unit. My responsibilities include the design and procurement of all services installations within the group's major development projects, both new build and refurbishment.

In addition, I represent the Development Business Unit on Land Securities Corporate Environment Group, which is charged with implementing the group's Environmental policy, through the individual business units' activities.

I have been asked to speak this evening to articulate the position of the commercial property client body within the UK, with regard to the Carbon Trading opportunity presented by the framework, developed by ETG.

I have entitled my talk, 'To Trade or Not to Trade - That is the Question', which perhaps illustrates to some degree the current lack of engagement with the property industry to look seriously at whether or not we can make this trading system work in the commercial building environment.

Slide 2

I thought first it would be useful to say a little bit about Land Securities, what it does and it's operations, just to give a flavour for the sort of areas that UK property companies are involved in.

We are the UK's leading quoted property group. A FTSE 100 company and we have property assets valued in excess of £7.5 billion.

Slide 3

Our major property holdings’ interests are in the following sectors:

Commercial Offices, Shops and Shopping Centres, Retail Warehouses and Food Superstores, Warehouse and Industrial Sheds, Hotels, Leisure and Residential.

Slide 4

From an Environmental perspective, I believe that we are relatively well informed, with an established track record. We are a founder member of the Property Environment Group and we are also members of the Business and Environment Group and Central London Energy Management Group. We are represented on various committees and bodies, representing the property industry generally, the BCO and the BCSC and we have been involved in various initiatives with other bodies including the CBI.

Slide 5

We have recognised the importance of Carbon Emissions and this year is the first year that we have published our Environmental Report. For a long time, we have carried out monitoring and targeting regimes on our managed portfolio properties and we estimated our aggregate carbon emissions for the year 1999/2000 to be some four and a half million kilograms of CO2. We are also signatories to 'Making a Corporate Commitment 2' to reduce CO2 emissions by 10% per metre squared of our managed portfolio by 2010.

Having covered the specific commercial property sectors which we are active in and our own environmental approach, I would now like to look at the overall opportunity within commercial buildings to address the carbon emissions reduction targets which form part of the UK's commitment to the Kyoto protocol.

Slide 6

Approximately 14% of the UK carbon emissions are from commercial and public sector buildings. Carbon trading provides a financial incentive to reduce those emissions. It gives the commercial sector an opportunity to enhance company reputation and environmental profile.

An additional benefit of the early adoption of the voluntary scheme is that assets can be assessed on current baseline emissions and credits can be banked. Finally there are the benefits associated with voluntary participation in advance of any compulsory scheme.

Slide 7

However, there are a number of hurdles to participation from a commercial property perspective.

The commercial property industry is divided into various stakeholders: investors, developers, occupiers and asset/ facilities managers. There is a general lack of knowledge about the scheme and understanding of the process and the draft framework document itself is seen as a complicated and difficult to make work in a commercial property environment. It is my understanding that the scheme was initially aimed at large energy users and the utility providers.

Generally, within the commercial property industry there is a degree of inertia to change, particularly on a voluntary basis and then there is the question of the risks involved, versus the potential rewards. Are property owners individually or even acting together sufficiently large enough users of energy to participate actively in the trading arena? Does the type of energy usage that takes place offer sufficient potential for significant carbon emissions reductions and can we justify the necessary expenditure to reduce carbon emissions? Who are the winners and losers from the scheme when the energy is generally paid for by the occupiers in the buildings, rather than by the owners? Will the administration required to participate in the scheme, be rewarded by the value of the incentives and tradable carbon credits?

Slide 8

There are many logistical challenges – the number of different types of buildings for example (as you have seen from the example of our own portfolio). Some companies do specialise in certain sectors, but a number, like ourselves, cover a whole range of different types of buildings in different locations.

Within the individual buildings, there are limits to the area which we can have a direct influence on how they are operated and therefore have only limited opportunity to impact on the energy use in those use in those areas. Typically, in a managed building, we would be responsible for the common parts, in a shopping centre, this would be the back of house areas, car parking and mall areas, but the individual shop units themselves, would probably have their own direct connections to utility suppliers and deal with their own energy use. Similarly, in an office building, on many occasions we have responsibility for entrance halls, staircases and plant rooms areas, we provide some central services to the offices, but use of small power and lighting within the office space generally is under the control of the tenant themselves. As mentioned previously, a significant infrastructure and management overhead will be required to measure, collate and report on emissions, obviously in our case, we have already started down that road and have some of the mechanisms in place to provide the information that we would need, but many property companies would not be in the same position as ourselves and would find it difficult to put this sort of information together. There is also investment required to fund the energy saving initiatives. Although there are incentives from participation in the scheme to invest, there would have to be a judgement made on whether a payback can be gained on the investments to justify the investment.

Slide 9

Other areas of concern:

There is a possible impact of the liquidity and value of property assets. How would the impacts on any caps on carbon emissions be affected by the sale or purchase of buildings in and out of a particular portfolio? The adoption of an absolute cap on carbon emissions could be seen to restrict business development and flexibility within a particular building, if you take the example of an office which moves from a twelve hour a day operation to a twenty four hour operation, the amount of energy used would obviously increase.

Similarly if a different occupier was to move into the space, who had a much more intensive use of computers in their business, this would result in increased power requirements. If the building use was changed, from say an office type use to some form of manufacturing, any absolute cap based on a previous activity, would have to be able to be adjusted to take changes of this type into account. A lack of flexibility in this regard could significantly impact on the way that businesses can operate within the buildings that they occupy. There needs to be a greater understanding of how new building developments will be treated. I know there is a new project element to the trading scheme, but I believe details are still to be issued on how this part of the scheme will work. I believe there has been a lack of input into the trading mechanism to date from the property industry, which is maybe why the mechanism, as it is drafted at the moment, does not appear to address a number of these issues. Also, being very cynical for a moment, it may even be perceived that there is a disincentive to build carbon efficient buildings, so that when there is a requirement to introduce commercial buildings into a statutory scheme, the owners and developers of those buildings could make significant reductions in carbon emissions with some relatively low cost changes and amendments. Particularly when compared with carbon efficient buildings where a more significant investment would be needed to make any perceptible improvement to their performance as they are already very energy efficient.

Also, there is the risk to a company’s reputation through participation in this scheme if they are not able to meet their targets.

Slide 10

How do we take this forward? This is obviously the main reason for tonight's debate. I would offer the following suggestions to the floor:

More focussed consultation with property industry representative bodies
Simplification and clarification of the trading arrangements for both the core scheme and emissions trading project proposals
Greater recognition of the property industry concerns. I am sure there will be many more issues identified in tonight's debate and in the wider audience when a greater number of people get interested in participating in the schemes.

Thank you.