How to generate new income opportunities with energy?
Across the world real estate developers and cities are planning, building and retrofitting buildings and urban districts with the aim of reducing the environmental impact of the built environment. The path to net-zero requires the development and implementation of a renewable energy strategy. In this article, we will discuss the challenges associated with integrating green energy production on-site, and how innovative technologies can address those challenges while opening new opportunities.
The challenge – How to create a sustainable, economically viable and reliable decentralized energy system?
Producing green energy on-site was until recent years expensive and complex. This has fundamentally changed thanks to technical advances in renewable generation and storage technology.
The key drivers for growth and adoption of decentralized energy systems
Renewable and battery storage prices
First, it has become a lot cheaper to produce and store clean energy. Across the board, the cost of renewables has fallen globally over the last decade. The cost of solar photovoltaics, for example, has seen a 82% cost decline over the last decade1. At the same time, the rise of electric vehicles is driving down the cost of batteries and storage technologies, which dropped by more than 50% since 2013 and is expected to decline further2. For example, battery manufacturers such as Voltfang develop energy storage solutions based on second life car batteries creating sustainable and cheap storage capacities.
Substantial increase in decentral energy sources
Secondly, the drop in prices has driven fast adoption of decentralized renewable energy sources. By 2027, the installed power capacity of solar photovoltaics (PV) is expected to exceed that of coal, establishing itself as the world’s largest. Cumulative solar PV capacity is anticipated to nearly triple, experiencing a growth of approximately 1,500 GW over the specified period. This growth trajectory will surpass that of natural gas by 2026 and coal by 2027. Furthermore, annual additions to solar PV capacity are set to increase consistently over the next five years3.
Evolution of grid management technology
Finally, innovation in building and grid management software and communicative devices have enabled the emergence of decentralized energy systems (DES), helping to integrate renewables in the energy infrastructure. DES are energy systems, containing both energy sources and consumers, in which production and consumption of energy are balanced and optimized to reduce the overall CO₂ content of the energy supply. By now, there are a multitude of different software providers of which PT1 Ventures keeps a close eye on and cooperates with corporate partners interested in these.
The solution: Smart grid technologies and affordable energy storage represent a paradigm shift for real estate development
From a technological standpoint, a DES encompasses a diverse array of generation, storage, energy monitoring and control solutions. These technologies, often referred to as “smart grid,” are dramatically increasing the access to real-time data, allowing for monitoring and optimization of the energy system.
For a DES to fully function, energy storage plays two crucial roles. First energy storage systems are essential to compensate for the intermittency of renewable energy production from solar or wind. Secondly, energy storage enables carbon and cost savings when used as an optimization asset.
The integration of smart grid technologies and affordable energy storage not only addresses the challenges posed by intermittent renewable energy sources, but also opens up new possibilities for sustainable real estate development.
An example of how these technologies are implemented in an innovative way is the use of waste heat from industrial processes. In a recent project developed by Siemens, the complete annual heat consumption of a 600 residential units project will be provided by a nearby industrial plant. The project, which will recover the waste heat from the industrial plant, combines a central heat transfer station and cogeneration station with individual heat pumps and batteries into an intelligent DES. The heating concept is supplemented by regenerative energy generation through photovoltaics.
The business case behind it:
While the project was an easy win for the factory, which will be able to reduce its energy costs by selling heat it otherwise wasted, real estate developers need to be a little creative to make it work. In order to realize this project, the real estate developer created a separate legal entity, which owns and operates the DES. This “Energy GmbH” insulates the development from the risks associated with the energy project while allowing him to benefit from the future revenues generated by the sales of heat to the residents. After including significant subsidies, about 30% of the total costs, and working with Siemens to finance the infrastructure investment and equipment purchase via a leasing model, the project is expected to return positive cash flows after only 4 years.
This type of waste heat projects are currently very popular with data center developers and shows how to transform a real estate asset into an income generating energy asset.
Finally, in addition to the economic benefits, the implementation of smart grid technologies fosters a more environmentally friendly approach to real estate development. By optimizing energy consumption through advanced monitoring and control systems, developers can minimize the overall carbon footprint of a project.
The opportunity: Increasing the project marketability, resilience and generating new income
Smart grid technologies offer building owners significant opportunities to reduce cost, improve reliability and secure additional revenue through on-site generation.
1. Improving project sustainability
An increasing number of real estate investors and large corporates4 are setting net zero targets, leading green buildings to rent or sell at a market premium5. Furthermore, green building certification schemes reward the incorporation of renewable energy use, helping developers achieve a higher certification rating6.
2. Lowering energy costs
With the energy crisis building efficiency has become a selling point for leasing buildings. DES can help building owners with reducing the building energy consumption. For example, the implementation of a DES by Siemens Smart Infrastructure at the Sello Shopping Center in Finland reduced the energy consumption by ~20%. In addition, the shopping center is also active in the electricity market via a virtual power plant, which allows the building to optimize its purchase of electricity from the central grid.
3. Improving resilience
Utility infrastructure in many regions is under stress, leading to black out events. During the winter 2021, for instance, Texas suffered a major power crisis, leaving more than 4.5 million homes and businesses without power, some for several days7. The ability to store excess energy during periods of low demand and release it during peak times enhances the reliability and stability of the power grid. This not only contributes to grid resilience, but also reduces the need for additional infrastructure investments to meet peak demand, resulting in significant cost savings for both developers and consumers.
4. Generating new income
On-site renewable energy projects can generate additional income through the sale of power to tenants directly through Power Purchase Agreement (PPA) or back to the grid. Several real estate actors, especially in the logistics and industrial space, have created subsidiaries to take advantage of this new business opportunity. For example, GARBE Industrial Real Estate recently set up a separate company, Garbe Renewable Energy (GREEN), with the aim of bringing together all activities relating to decentralized energy generation, such as the use, transfer and sale of electricity8. In the meantime, asset managers such as Macquarie are also leveraging smart grid technologies to attract infrastructure investments9 in real estate projects.
Conclusion: Why are such projects not yet common practice?
CAPEX requirements, tax issues and a lack of know-how in this area are often cited by developers as the key barriers to the implementation of smart grid projects. Real estate developers often find it difficult to manage the risks around project execution, performance and financing.
These challenges require us to define new collaboration models. The realization of a swift transition to a sustainable decentralized energy system is most attainable when key stakeholders collaborate synergistically, leveraging the expertise of established incumbents like Siemens, the innovation of technology pioneers such as startups like Voltfang and the facilitation prowess of VC platforms such as PT1, collectively forging a path towards a more efficient and resilient energy landscape.
To explore this topic, get in touch with us!
Authors
As a Director with Siemens Smart Infrastructure, Arnaud Cipierre supports real estate developers and asset managers with the sustainable transformation of their projects and assets. From the conception of carbon neutral districts to the decarbonization of building portfolios he leverages Siemens’ expertise to develop innovative solutions. Having worked in real estate transactions for J.P. Morgan and the City of New York he is always interested in exploring new fields to create sustainable urban communities.
Fabian is Investment Manager at PT1 – focussing on the nexus of real estate and energy infrastructure. He aims to bring CO2 neutrality to the built environment. With a track record of being involved in impactful investments including autarc, 42Watt and Voltfang, he brings a wealth of expertise at the intersection of finance, data science and design thinking, shaped by his prior role as CFO of a VC-backed seed stage startup.
- See report the International Renewable Energy Agency (IRENA) – See link ↩︎
- Rocky Mountain Institute (RMI), “The economics of grid defection”, February, 2014, – See link ↩︎
- Renewables 2022 report by iea – See link ↩︎
- Investors pledged that $16 trillion of assets to be managed in line with achieving net zero by 2050 – See link ↩︎
- JLL found that “Green buildings achieved an average capital value premium of more than 20%” – See link ↩︎
- According to the ULI’s report Renewable Energy Strategies for Real Estate, LEED certification awards up to three points for renewable energy production and up to two points for green power See link ↩︎
- See link ↩︎
- Union Investment, Overcoming obstacles to decentralised energy – See link ↩︎
- Siemens and Macquarie’s GIG Launch Distributed Energy Venture Calibrant Energy – See link ↩︎
