Scoping the environment issues - Resources, materials and energy efficiency
Increasing media focus and public concerns about climate change, energy efficiency and environmental sustainability are affecting the way we do business, and taking into account a broad range of environmental concerns is becoming more and more part of everyday business and contract negotiations - not least in the building and construction sector.
'Building green' is no longer just a seminar marketing buzzword or a far-off long-term business aspiration — it is now gradually becoming an imperative demanded by the legal regulatory system, the market, and our builder and developer clients.
Requiring green building standards can impact everyone in the build and supply chain: the property developer, builder, buyer, seller, as well as the user (customer or tenant), financier and investor.
Green building is associated with the principles of ecologically sustainable development (ESD). It involves incorporating energy and water efficiency in the design and specification of a building and an overriding objective to minimise any adverse impact of the building on inhabitants and the environment [Green Building Council of Australia, Green Building Market Report 2006, p. 4]
Other speakers today will be talking specifically on the GBCA rating tool and I do not propose to cover that here, except in relation to the overall framework which it provides to the construction industry.
The Easy Part
On one view, building green is an easy ambition to achieve as the framework is laid out before you. The comprehensive manual prepared by the GBCA and the rating tool developed by the ABGR set the framework for what is required under to achieve a 'green' rated building by these organisations.
Therefore in order to consider what is required by way of resources, materials and energy efficiency for a green building, an organisation can go straight to the GBCA handbook.
The Hard Part
The hard part is achieving the buy-in from all involved in the project. In a recent development by GPT with Buildcorp, there was complete buying from the whole organisational team of the builder to achieve the first 6 star Green Star office design building in NSW, known as "Workplace 6". This was achieved because every person involved in the project (within reason) had achieved accreditation by the GBCA and was acutely aware of what was needed to achieve to a 6 star rating.
Therefore when we talk of resources, we must also include the people involved in the project as one of the most valuable resources in delivering a green building outcome.
Unless those involved understand the process of certification, the people involved will not be able to achieve in the end the desired or appropriate Green Star rating.
The most significant development occurring in green building developments has been the need to consider, apply and incorporate ESD principles into building development and contract arrangements. Coupled with this has been the realisation and acknowledgment that a properly drafted "green building" process can result in financial benefits for clients (such as cost savings or reduced maintenance costs from using better quality or sustainable materials in construction) and also benefits for (or at least not further harm or damage to) the environment.
However, to apply the green building and ESD principles in practice, lawyers are developing and drafting new types of ESD-specific provisions, terms and conditions and adding them into conventional construct and design/construct/operate/maintain contract documentation, negotiations and advice.
With the focus on reductions to greenhouse gas emissions at the top of the current political agenda, the demand for energy efficient buildings is set to grow. This requires us to come to grips with new technologies being applied and trialed to make buildings 'cleaner and greener'; and to also prepare our clients and our legal practices for increased regulation of both new and existing building developments and to appreciate the commercial advantages and opportunities of 'going green'.
As the debate about climate change intensifies, commercial reality is driving change in the construction industry - for both developers of new builds and building owners wanting or needing to retrofit existing buildings to meet new greener standards.
What should you expect in today's construction and development market?
- Major tenants mandating green initiatives.
- More sophisticated and demanding buyers and tenants, with green expectations.
- For a capital city office block hoping to generate good returns, a 5 star Green Star rating is now considered the minimum standard.
- There may be some resistance from consultants, contractors and suppliers in changing their tried and true methods or their contractual terms and conditions
- especially when building green is a voluntary option, not compelled by regulation or legislation (at this point in time).
- There may be substantial additional costs of construction for developing new buildings or for a major retrofit/retro-greening of existing buildings.
- In some buildings, there may be cost savings in operations, maintenance or energy consumption, including reduced whole-of-life costs from using recycled, sustainable materials.
Once the Government's emissions trading scheme, is established and operational (expected by 2010), there will be further issues to be discussed with clients who own, develop or manage green buildings to determine and account for what emissions credits/permits they need to buy, what costs would be involved in obtaining, buying or selling those credits/permits, how to pass on the costs to their customers or along the supply chain, what energy reporting, monitoring and measurement obligations would be involved, and how to incorporate all these new concepts into transactional negotiations and contractual documentation. Legal advisers must prepare clients for the realistic cost and additional effort involved in upgrading their property projects to the new green energy efficiency standards.
For a construction lawyer, in practice, this means that the project documentation must provide for ESD principles and energy efficiency targets and objectives to be properly implemented in building design, construction and operations and subsequently addressed in the tenant's lease. This brings stronger emphasis and attention on compliance, due diligence, definition of terms and conditions and clear project definition and structure, careful contract drafting of limitation clauses and exemptions, and probably drafting different indemnities and warranties provisions.
In green building contracts, there will be certain additional prescriptive requirements which address energy and environmental issues that must be adhered to; and in the event of failure to meet these requirements, some provisions for a stipulated penalty or compensation.
As with any building and development, green building documentation needs to clearly set out the expectations of each party. An effective approach is to include incentives for environmental and energy efficiency performance and specify the penalty or consequences for falling to meet the standards or agreed measures.
The contracting objective is based on reducing energy consumption, pollution, water and waste and achieving smarter energy use and efficiency.
In new or retro-fit construction contracts, it is important to draft proper contractual terms to ensure the building receives the appropriate green building rating for your client's business purposes and objectives.
With a commitment to green energy, there are a number of significant challenges in successfully bringing a green building project on line. At the end of the day, the revenues generated by the new build or retrofit project must be sufficient to finance the risks assumed and the costs incurred during the process, including the cost to operate and maintain the project once completed.
These challenges can be grouped into the categories of assumption of risk(s) and of managing costs.
The smaller the green building project (from an energy production, operational capacity and energy efficiency perspective), the more susceptible it will be to failure in the event of unacceptable risks or unforeseen costs. For this reason, project proponents seek to aggregate smaller projects to take advantage of economies of scale to spread out costs, or to manage risks.
Legal advice is not required to initiate the green development planning process, and is usually only necessary when considering environmental requirements proposed out of the consultation process. However, proponents can avoid delays and cost overruns if they are prepared for the various information requests and processes and ensure that their planning and construction proposal is well defined and specified in its commitment to green energy and to reducing greenhouse gas emissions once built and operational.
In order to effectively build green, it will be necessary to have the scope of works for the subcontractors mandate the benchmark they must achieve in their materials, in order to maintain a consistency with the GBCA rating tool.
By way of a practical example, the installer of the curtain wall to a major office block should be told the tolerance of the glass the owner requires to be installed in the building so as to ensure that transfer of heat is consistent with the rating which the building is try to achieve. It may not be necessary to explain the "why" to the subcontractor, but as long as they achieve that level of tolerance in the glass, that will be where the installer subcontractor's involvement in the whole rating process begins and ends.
The use of energy efficient technology is an important component in green buildings. Some of the technology for green energy projects is new or cutting edge, and even if traditional technologies are used, they are subject to constant design review in the quest to maximise energy and capacity generation or to adapt to the building's specific circumstances, condition, layout, structure or position.
Some design risk may be mitigated if you are able to negotiate remedies in the contracts with technology providers/equipment suppliers. However, realistically, in my experience, it is almost impossible to obtain robust agreements from technology providers/equipment suppliers which would compensate owners for all of their indirect damages for such things as ancillary costs associated with removal, repair and replacement of defective technology/equipment or loss of net income arising from loss of generation or capacity. Therefore, the client developer or building owner must carefully consider the advantages and disadvantages of accepting design risk in exchange for improved generation revenue or opt to accept lower production/capacity in exchange for little or no risk on the technology design.
This represents an area where legal advice and review of equipment contracts can be invaluable. Standard "boilerplate" agreements should not be used for providing for warranties, guarantees, and the consequences of technology/equipment failure or not meeting specifications.
In our overheated construction market, cost increases in labour, materials and equipment are occurring. As a result, and particularly with green energy building projects where margins are already challenging (and some additional costs are unforeseen when experimenting with new green energy technology or design), the building proponent must strive to manage and control costs in their contract documentation and negotiations.
Steering a green building/energy efficient project from the regulatory planning and consultation stage, through to construction and tenancy, is not for the faint-hearted or the unsophisticated. Getting a lawyer involved in the green building project early is important, and will enhance the developer's or owner's ability to manage risk and costs. Lawyers can assist in the early planning of the project, the identification of all legal requirements and risks, and ensure that advice is timely and cost-effective. It also optimises the value a lawyer can bring to the project - rather than providing piecemeal advice along the way, a lawyer involved from the outset of a green project can ensure that no single strategy or initiative results in counter-productive or conflicting actions or exposure to unnecessary risk or potential for liability or damages.
Green Rating Systems: A quick overview
Building green means requiring the developer or building owner to meet particular environmental or energy rating standards, targets and market benchmarks (in line with a commitment to reduce their carbon footprint).
To assess the sustainability of an existing building or new building development, you can refer to several rating systems and apply them to developing or maintaining green buildings. These include Green Buildings Council of Australia's Green Star Rating, the Australian Building Greenhouse Rating (ABGR), the National Australian Built Environment Rating Systems (NABERS) and the Building Code of Australia's requirements for increased energy efficiency in commercial buildings.
These ratings issues will be dealt with by other speakers today.
Energy Efficiency - What it takes to reduce a building's carbon footprint
I will aim to give a snapshot of the regulatory environment in New South Wales and the Commonwealth and look at the short term and long term focus of sustainable policies and strategies as well as what actions will be needed to reduce a building's carbon footprint.
1.1 New South Wales State Policy Position
(a) Verity Firth Presentation on 16 July 2008
Verity Firth the New South Wales Minister for Climate Change and the environment speaks of a new "federalism" based on environmental concerns.
Verity noted a four pillar approach that the New South Wales Government would take, namely:
- Improving energy efficiency;
- Designing solutions for less;
- Taking care of vulnerable people; and
- Developing jobs growth.
Verity also acknowledged that the "carbon price" in the Commonwealth Carbon Pollution Reduction Scheme (CPRS) will not be enough to drive sufficient change to avert catastrophic climate change.
So how do the States and Commonwealth interact to enable effective and timely change?
Legislation driven by effective policy is the core driver in any environment where major change is being implemented. It is the responsibility of the Department of Environment and Climate Change (DECC) to coordinate for NSW Governments responses to climate change.
(b) NSW Government Action Plan for energy Efficiency ('Energy Efficiency Action Plan') was introduced on the 18 June 2008 which is a Set Step Plan
Step 1 - Supply Low Income Households
Step 2 – Improving Business Energy Efficiency
Step 3 – Energy Efficiency for Trades/Professionals
Step 4 -
Step 5 – Energy Saving Trading Scheme/Target
Step 6 - Community
1.2 New South Wales State Energy Efficiency Legislation
(a) NSW Energy Efficiency Trading Scheme (NEET)
- NEET consultation paper for $150m scheme released: 10 July 2008 (to reduce growth in energy use and greenhouse emissions); and
- submissions on NEET discussion paper due: 6 August 2008;
(b)The NSW Greenhouse Gas Abatement Scheme (GGAS) is created under Part 8B of the Electricity Supply Act (1995) NSW. Much of the specific detail of the scheme is then implemented under the Electricity Supply (General) Regulation (2001).
- GGAS's objectives are to reduce GHG Emissions associated with the production/use of electricity, and to develop and encourage activities to offset the production of GHG Emissions. GGAS requires NSW Electricity Retailers and certain other parties ("Benchmark Participants") to meet mandatory targets for reducing or offsetting.
- 18 June 2008: announced new targets for energy efficiency under GGAS to be introduced from 1 January 2009 (NSW Dept of Water & Energy and Dept of Environment and Climate Change)
- Greenhouse Gas Abatement Certificates (GACs) are certificates created under:
- Act: Division 5 Part 8A of the Electricity Supply Act 1995 (NSW) (as amended by the Electricity Supply Amendment (Greenhouse Gas Emission Reduction) Act 2002);
- Regulation: Electricity Supply (General) Regulation 2001 (as amended by the Electricity Supply (General) Amendment (Greenhouse Gas Emission Reduction) Regulation 2002, the Electricity Supply (General) Amendment (Greenhouse Gas Abatement Certificate Scheme) Regulation 2003 and the Electricity Supply (General) Amendment (Reduction of Greenhouse Gas Emissions) Regulation 2003.
- Rules: Greenhouse Gas Benchmark Rules issued through the Department of Energy, Utilities and Sustainability and approved by the Minister for Energy & Utilities. There are currently five Rules, addressing Compliance (Rule 1), Generation (Rule 2), Demand Side Abatement (Rule 3), Large User Abatement Certificates (Rule 4) and Carbon Sequestration (Rule 5).
- Impact of CPRS: the NSW Government intends to terminate non-energy efficiency elements of GGAS upon the commencement of the CPRS. However, because the Demand Side Abatement component of GGAS has been successful: this will be maintained in respect of energy efficiency. A new energy efficiency target will apply to NSW Electricity Retailers from 1/1/09. A separate calls of tradeable certificate will be established to support the target.
(c) Renewable Energy (NSW) Bill 2007, known as NRET, son of MRET.
NSW announced, in November 2006, it would introduce its own mandatory renewable energy target scheme (NRET). The Renewable Energy (NSW) Bill 2007 is currently awaiting "Agreed in Principle" Debate in the NSW Legislation Assembly 27 June 2007.
The object of this Bill is to establish a mandatory renewable energy target in relation to all electricity consumed in New South Wales. It is intended that the NRET target will operate in parallel with the GGAS on the national CPRS.
This Bill closely follows the form and structure of the Victorian renewable energy scheme implemented under the Victorian Renewable Energy Act 2006 of Victoria and is similar in principle to the Commonwealth renewable energy scheme implemented under the Renewable Energy (Electricity) Act 2000 of the Commonwealth. The Government is keen to ensure that the VRET and NRET operate consistently so as to reduce compliance costs: options include two schemes operating together as a single scheme or independently (but with a single regulator).
To comply with the renewable energy target, it is necessary to surrender certificates that are created by energy generators that generate electricity using renewable energy sources (such as hydro, wind and solar). If a power station generates electricity using renewable energy sources, the power station must be accredited under the Act before certificates can be created in relation to the generation of the electricity. A simplified procedure applies in relation to small generation units that use renewable energy sources.
It is intended that the NRET target will operate in parallel with the NSW Greenhouse Gas Reduction Scheme (GGAS) or a future national emissions trading scheme. Essential elements of the NRET are:
- It is designed to be a scheme operating in the National Electricity Market (NEM) and accordingly renewable energy supplied to NSW from the NEM will be eligible;
- Renewable generators accredited under NRET will be able to create certificates for each megawatt hour (MWh) of electricity generated (above pre-scheme capacity) but not where a certificate has been created under another scheme for the same MWh;
- Electricity retailers supplying customers in NSW, as well as customers purchasing directly from the NEM, will be required to meet specified targets based on their proportional end use consumption;
- Retailers will be required to surrender sufficient renewable energy certificates each year to meet their target or pay a stiff penalty for noncompliance; and
Trade exposed, electricity intensive industries will not
have an obligation to surrender renewable energy
November 2006 the Premier of NSW, the Hon. Morris Iemma MP, announced the following NSW renewable energy targets:
- 10 per cent of NSW electricity consumption by 2010 (an additional 1,317 GWh); and
- 15 per cent of NSW electricity consumption by 2020 (an additional 7,250 GWh).
The NRET target is to be imposed on all holders of NSW electricity retail licences and will require them to purchase the target proportion of their electricity supply from accredited renewable generation sources. Interim target levels will be set, with the first target level to be met in 2008. NRET will operate alongside the NSW Greenhouse Gas Abatement Scheme.
The NSW Government has indicated that it will seek to align NRET with the Victorian scheme, as a possible precursor to a potential national State-based renewable energy target. It is keen to have the schemes function as consistently as possible in order to reduce the costs of compliance for industry. The NSW Government will discuss with the Victorian Government the possibility of NRET being administered by the Victorian ESC (who administers VRET). This might involve the two schemes operating together as a single scheme. Alternatively, the schemes may operate independently, but with a single regulator.
Under NRET, renewable generators in any part of the National Electricity Market (not just NSW) will be able to generate renewable certificates. The NSW Government will also discuss with the Victorian Government recognition of NSW renewable energy projects under the Victorian scheme, but NRET recognition of renewable projects in other States will not be dependent on reciprocal recognition.
or more information, see the NSW Government's Explanatory Paper (November 2006) on proposed design, implementation and administration of NRET. NSW Renewable Energy Target: Renewable Energy (NSW) Bill 2007 and Supporting Information (June 2007)[http://www.deus.nsw.gov.au/Publications].
1.3 Commonwealth Policy
(a) Garnaut Draft Report (released 4 July 2008).
- Energy Efficiency Policies may be warranted and will be examined more fully in the final report.
- Abatement in sectors not covered by the CPRS should be encouraged through a domestic offset regime.
- The Draft Report suggests that there are potentially large and early gains from better use of known technologies, including energy efficiency and low-emissions transport options. However, certain "externalities" currently inhibit the use of some energysaving opportunities.
- The Review's final report will recommend policies to address these issues. The Draft Report sets out some preliminary findings in this regard, including the following:
- There is a strong case for the application of mandatory disclosure obligations for goods (such as mandatory energy efficiency labeling requirements), where it is cost effective. This will depend on the administrative cost of the scheme, its accuracy, and the potential savings to consumers.
- There is a case for a national mandatory energy efficiency rating scheme for buildings.
- There may be a case for policies such as the Commonwealth's mandatory Energy Efficiency Opportunities program early in the transition to a carbon-constrained economy. However, in future these may be unnecessary, as new energy management processes become integrated into standard business practices.
- There may be a place for minimum performance standards, such as minimum energy efficiency standards for appliances, after other policy options have been considered.
(b) Carbon Pollution Reduction Scheme ("CPRS") (Green Paper released July 2008)
- The government believes that the CPRS is the best way to limit carbon pollution while minimising the impact on business and households. There are two distinct elements to the CPRS: the cap on carbon pollution; and the ability to trade. The cap achieves the environmental outcome of reducing carbon pollution. The ability to trade ensures carbon pollution is reduced at the lowest possible cost.
- Mechanics of the cap and trade CPRS:
- Government sets a cap on the total amount of carbon pollution allowed in the economy by covered sectors;
- The government will issue permits up to the annual cap each year;
- Industries that generate carbon pollution will need to acquire a 'permit' for every tonne of GHG that they emit;
- The quantity of carbon pollution produced by each firm will be monitored and verified;
- At the end of each year, each liable firm would need to surrender a permit for every tonne of carbon pollution the firm produced in that year;
- Firms compete in the market to purchase the number of permits that they require. Firms that value the permits most highly will be prepared to pay the most for them, either at auction, or on a secondary trading market. For some firms, it will be cheaper to reduce emissions than to buy permits;
- As a transitional assistance measure, certain categories of firms might receive some emissions permits for free. These firms could use these permits or sell them
- The price of permits is not set by the Government, rather, it emerges from the market. If a firm can reduce carbon pollution more cheaply than the prevailing market price of permits, it will chose to reduce carbon pollution rather than buy permits. Therefore, this kind of scheme provides a strong incentive for participants to reduce their own carbon pollution. By making this business decision around whether to reduce carbon pollution or trade in permits, firms operate within the overall cap at least cost.
- In this way, the scheme gives firms the flexibility to choose the most cost-effective way to meet the carbon pollution cap. At the same time, the carbon pollution market provides a greater financial incentive for firms to develop and adopt technologies to reduce emissions.
- The CPRS will cover the six Kyoto Protocol Gases (i.e. Carbon Dioxide; Methane; Nitrous Oxide; Sulphur Hexafluoride, Hydrofluorocarbons; and Perfluorocarbons).
- The Federal Government believes that broad coverage will increase opportunities for low-cost reductions in carbon pollution and will ensure that the cost of achieving these reductions is shared equitably across the economy. Broad coverage will also ensure that competing firms and sectors operate within equivalent market rules. The overall cost to the Australian economy of reducing carbon pollution will be minimised with a scheme that has maximal practical coverage of GHGs.
- The Government proposes that emissions from stationary energy; transport; industrial processes; waste; and fugitive emissions from oil/gas production could be covered from scheme enforcement.
- The Government's preferred position on coverage would mean that the CPRS includes around 75% of Australia's emissions and applies obligations to around 1,000 entities.
- As such, the great majority of Australia's 7.6 million registered businesses will not face new regulatory obligations as a result of the CPRS.
- The Government also proposes to include reforestation in the scheme from commencement on a voluntary basis. Reforestation differs from other activities covered by the scheme because growing forests are likely to sequester more carbon then they emit. Where other entities covered by the scheme would have to surrender permits for their emissions, forest owners could receive permits for net sequestration.
- The Government does not consider it practical to include agriculture emission in the trading scheme at commencement. Given the importance of broad coverage, the Government is disposed to include agriculture in the CPRS no earlier than 2015. A final decision on coverage of agriculture emissions will be made in 2013 following consultation and work with the industry to identify practical methods for inclusion and to develop reliable and cost-effective methods or emissions estimation and reporting. The Government also does not consider it practical to cover emissions from deforestation. Australia's deforestation emissions have reduced markedly since 1990, largely due to government restrictions on landclearing.
(c) Expanded National Renewable Energy Target ("RET")
- RET will supervene the Mandatory Renewable Energy Target (MRET);
- RET will aim to:
- Ensure the equivalent of at least 20 per cent of Australia's electricity supply - approximately 60,000 gigawatt-hours (GWh) is generated from renewable sources by 2020 (increased from 9500 GWh by 2010 under MRET);
- Increase the MRET to 45,000 GWh to ensure that together with the approximately 15,000 GWh of existing Renewable Energy capacity, Australia reaches the 20 per cent target by 2020;
- Bring both the national MRET and existing state based targets into a single national scheme;
- Count only renewable energy towards the target and keep the same eligibility criteria as in the current MRET scheme;
- Phase out the RET between 2020 and 2030 as emissions trading matures and prices become sufficient to ensure a RET is no longer required;
- Retain the eligibility of all renewable energy projects that have been approved under existing state based schemes.
- The RET scheme is being designed in cooperation with State/Territorial Governments through the Council of Australian Government (COAG) Working Group on Climate Change and Water. The Design work is due to be completed in September 2008, with legislation in place by mid 2009;
- The Australian Government is introducing the CPRS to provide incentives to reduce GHGs in a cost effective way.
- The CPRS is the economically responsible way to tackle climate change because it will move us from the high emissions economy of the past to the low emissions economy of the future, at the lowest possible cost to families and business; and
- The RET is a transitional measure to assist Australia's transformation to a low emissions economy.
To veiw part 2 of this article click here.
Swaab was recently named winner 'Best Law Firm in Australia (Revenue < $20m)' and 'Attribute Award for Exceptional Service (Australia Wide)' and at the 2008 BRW- Client Choice Awards.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.