In the first of two articles looking at the retrofit market in the UK, Chris Hill explores the reasons why the market is stalling and points out some examples to follow

Improving the energy performance of commercial buildings by retrofitting new plant and equipment has been slow to take off. This is surprising, considering all the factors in its favour.

The market is huge - up to £50bn for the UK alone over the next 20 years. The work also must be done. Existing buildings are responsible for 45% of all carbon emissions in the UK and more than half of these buildings will still be in use in 2050; by which time carbon emissions in the economy as a whole need to have halved in order to meet international targets.

Retrofit work is - or should be - self-financing from reduced energy bills. There is plenty of spare capacity in the construction industry (so costs are historically low) and energy savings contracting organisations have been formed and are ready for work. However, so far they have had little to do. A report by the World Economic Forum is due to be published in October this year, examining what needs to be done to unlock the retrofit market. Lack of capital to fund the work is certainly one problem. In the UK, current retrofit activity tends to take the form of individual projects on a local scale or experimentation on a pilot project basis. In order to attract finance, projects need to be scalable.

Retrofit work is - or should be - self-financing from reduced energy bills

The tax incentives for retrofit work in the UK have so far been ineffective. Although 100% capital allowances on energy saving plant and equipment are available for the first time in almost 20 years, they apply only to a very limited list of items. The government is currently reviewing the list with a view to extending it substantially. It might also consider zero-rating retrofit energy efficiency work for VAT, although there is resistance to this from the Treasury.

Disclosure of energy performance information for buildings could be made mandatory for building owners. Currently, UK Energy Performance Certificates contain little information and are not maintained in a single database. By way of contrast, in California, energy consumption and building use statistics are required to be compiled annually (as opposed to once every 10 years in the UK). Climate change has made the energy performance of commercial buildings a matter of public interest but the public cannot exert pressure to improve the performance of individual buildings unless it has accurate data.

The inertia can also be ascribed to the unwillingness of occupiers to suffer disruption to their businesses. In London, for example, energy costs are relatively insignificant to businesses when compared with (say) rent or staff costs, so if a building retrofit leads to business disruption, it probably won’t happen. The understanding among building owners of the risk in owning an asset that has not been retrofitted for minimum energy and sustainability measures is growing, but it has not yet reached the point where it is significantly affecting value.

There are a few major cities that are leading the way. Their example suggests that the key to unlocking the market is positive interaction between the key players and the active participation of city councils.

Berlin has formed a public/private joint venture company, the Berlin Energy Savings Partnership, which has already refurbished 1,300 commercial buildings. A separate, central co-ordination unit, the Berlin Energy Agency (BEA), offers building owners financial and technical assistance to put together viable energy saving schemes. The BEA will help building owners combine to form pools of buildings with a minimum energy bill of about €250,000 (£213,000). It will then act as independent project manager, arranging finance, preparing projects for tender and negotiating with contractors. Building owners face no upfront costs and benefit from energy and cost reductions immediately. Payback is over an agreed period - usually 10-12 years. Interestingly, the scope of energy performance work in Berlin is limited to replacement of plant and equipment and improvement in building management efficiency. Work to the fabric of the building, such as replacement windows and wall insulation, has too long a payback period and is too intrusive for occupiers.

Melbourne’s “1,200 Buildings” programme will refurbish two-thirds of the city’s commercial buildings, creating 800 jobs and AU$1.3bn (£847m) in economic activity. Melbourne has adopted a retrofit financing model whereby the city council, the building owner and the lender enter into a financing agreement. As in Berlin, projects are being bundled together to create economies of scale.

The retrofit market will take off in London and other major cities in the UK but stakeholders appear to be waiting for a stable regulatory environment and a signal from the government that it is behind the retrofit programme before making investments.

Chris Hill is a partner in Norton Rose

This article was originally published under the headline ‘Going retro’