Archive for September, 2008

At a meeting last week, the message from BERR’s side of the table was that the consultation on Zero Carbon (originally planned for summer, then autumn) is now unlikely to come out until 2009. That’s going to give industry at most 6 years to tool up to delivering zero carbon. Given that ministers are long past the point of no return on this, it’s extraordinary that by delaying this consultation they’re making things even harder for themselves and for developers.

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This is the second time that I have written this post, as I had not saved the first version and then browser magic lost it… I haven’t posted for a long time and wanted to avoid a negative post for my return, but unfortunately events have determined this otherwise.

Last week I undertook BREEAM for Offices training to plug some holes in my various accreditations, but was woefully underwhelmed by the quality of the BRE Training. (more…)

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Over on Zero Champion, Phil brought up the subject of payback periods, citing some examples from clients: 12 months, or 18 months, or 39 months.

Those periods equate to ridiculously high rates of return! 100%, 67%, and 31%! Are there so many fabulous investments out there that clients can justify hurdle rates like this?

Could it be that clients are being deliberately obstructive? Or maybe they just want to carry on doing things the way they’ve always done them? By demanding short payback periods they ensure they won’t be lured out of their narrow comfort zone. But this approach is completely unjustifiable.

Ignoring the inherent benefits and taking a purely financial view, a client ought to evaluate low carbon technology in the same way they would look at any other potential investment. Let’s assume our client is a developer with a weighted average cost of capital of 12.5%*. That means they should seriously consider investments that will achieve better than this rate of return. Being conservative, let’s bump it up to 15% – a very attractive investment. We’re still talking nearly 7 years before you’ve recouped your money.

There’s an issue of risk, but only with immature technology. CHP, solar thermal, PV, wind, hydro, biomass heating: these are all tried and tested and, given good site data, their performance can be predicted with a high degree of accuracy. Even with something trickier like biomass gasification, you can factor things like increased downtime into your figures and take a pessimistic view when predicting performance. But that doesn’t mean your hurdle rates suddenly leap into the stratosphere.

So it’s disappointing to hear that client’s are requiring payback periods like 12 months or even 39. They’re taking a distorted view of technology and, in the mean time, promoting the impression that low carbon is somehow so shoddy, so flawed, such a special case, that it should only used if it promises a financial miracle.

* For this example, assume of our developer’s capital, 40% is equity and 60% is debt. Assume cost of debt is 7.5% (LIBOR of 5.5% plus another 2%) and cost of equity is 20%. I’ve ignored tax.

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I’m not just not blogging. I’m also on holiday. Back to the office on the 22nd and looking forward to getting back into the swing then.

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