- There is a big opportunity to turn traditional real estate assets into energy assets
- Assets will play a crucial role in updating the energy infrastructure as the current one is developed for centralised energy generation
- More and more Start-Ups are developing new value propositions along this value chain; fueld by economic incentives and heavy regulatory tailwinds
The energy landscape is undergoing a transformative shift towards sustainability by establishing decentral grid approaches, prompting a new focus on the integration of real estate assets as active participants in the energy system. By leveraging smart buildings and their interaction with smart grids, substantial added values can be realized, including a reduction in CO2 emissions, grid stability, and new revenue streams from the participation in energy markets. In this article, we will explore the concept of turning real estate assets into energy assets and the potential it holds for the asset class real estate.
The Context: Energy infrastructure is one of the biggest levers for driving down emissions from real estate assets
Buildings have emerged as significant contributors to global CO2 emissions. In 2021, the utilization of fossil fuels in buildings contributed to approximately 8% of worldwide energy-related and process-related CO2 emissions. An additional 19% of these emissions resulted from the generation of electricity and heat used in buildings . The increasing demand for energy in commercial buildings, driven by various factors such as heating, cooling, and appliances, exacerbates this issue. Climate change and extreme weather conditions further intensify the need for heating and cooling, posing significant challenges.
At the same time, the built sector is one of the most challenging sectors to decarbonize, even after implementing energy efficiency measures as carbon neutral construction and operation of assets is costly. According to the international energy agency, the Net Zero Scenario milestones to 20230 are achieved thanks to improved building envelopes that reduce thermal energy needs; the shift to best available appliances, lamps and air conditioners; more efficient and clean technologies, such as heat pumps and district energy; and increased flexibility. Accordingly, the decarbonization of the energy used to power buildings is crucial; establishing an optimal mix of grid-sourced or on-site generated energy.
The Starting Point: Real estate assets are transitioning from passive consumers to actively embracing roles within the energy market
Real estate assets can play a pivotal role in the energy market by recognizing and embracing their potential. Currently, electricity is predominantly sourced from centralized power plants, such as those fueled by coal, gas, and nuclear energy, and delivered to consumers through transmission networks. This unidirectional energy flow is being reshaped by decentralized energy systems, characterized by distributed energy generation and optimized distribution. However, this decentralized approach presents challenges in accurately predicting and rapidly adjusting electricity generation as the infrastructure was not build for this new context. It also requires intelligent organization of electricity flows. Smart buildings can start becoming an active participant in this energy network, turning into a small scale energy marketers and contributing to the required new infrastructure set up.
Implications on the industry: Asset operators need to view energy supply from a holistic perspective
Buildings need to move beyond sole reliance on grid-supplied electricity and gas for running their operations. In the traditional energy economy, the grid focuses on large-scale power generation from fossil or nuclear energy, while consumers passively receive and consume energy at the downstream end. In the emerging energy systems, however, buildings have the opportunity to engage with low-carbon energy sources, such as wind and solar power, which are often located nearby or even on-site. Additionally, the rise of battery storage systems and electric vehicles further contributes to the creation of new energy flows that can be integrated into and drawn from the grid at a local level. Through this active participation in the grid, buildings can transition from passive energy consumers to grid-responsive participants.
The Smarter Grid: Both grid and buildings need to be updated for this new infrastructure
To address the intermittency issues associated with decentralized energy systems, new and innovative technologies are essential. One example is the integration of on-site battery storage in smart buildings. By implementing advanced Building Energy Management Systems (BEMS), building operators can gain insights into and manage the energy consumption of individual electrical loads within the building. This capability enables buildings to participate in the demand response market by offering flexible use of their energy demand to alleviate grid stress caused by supply-side intermittency. Notably, companies like Voltfang, a PT1 portfolio company dedicated to producing batteries that reduce CO2 emissions through the utilization of Second Life EV batteries, play a crucial role in this process.
Over the past decade, digitalization has significantly advanced in buildings and facilities, enabling enhanced connectivity and management of various systems, including energy, ventilation, cooling, security, and operations. Digitalization empowers building managers to gain transparency into electrical loads, usage patterns, and energy utilization, enabling informed decisions on load optimization and flexibilization. Consequently, smart buildings that actively manage and optimize their loads are well-positioned to meet their decarbonization goals while contributing to grid balancing.
The new standard: Smart Buildings within the grid edge
The convergence of smart grids and smart buildings occurs at the Grid Edge, where energy supply and consumption are intelligently and efficiently managed. The grid edge refers to the point where energy generation, distribution, and consumption intersect. It represents the decentralized and distributed aspects of the electricity system, where various technologies, such as renewable energy sources, energy storage systems, electric vehicles, and smart meters, are integrated at the end-user level. The grid edge allows for greater control, flexibility, and optimization of electricity flow, enabling more efficient and sustainable energy management at the local level.
By utilizing technologies such as renewable energy sources and energy storage within or in proximity to buildings, along with advanced energy management systems, assets can adapt their behavior and become more responsive. The COVID-19 pandemic highlighted the potential for rapid behavioural shifts, and in the context of evolving energy systems, this allows buildings to become smarter, more connected, and agile in meeting occupant needs. Furthermore, there are substantial regulatory tailwinds further pushing the adoption of these this new electricity grid organisation:
- Net metering and feed-in tariffs: Policies that allow for two-way electricity flow, enabling prosumers (consumers who also produce energy) to sell excess electricity back to the grid, encouraging the deployment of distributed generation technologies.
- Time-of-use pricing and demand response programs: Tariff structures and programs that incentivize consumers to shift their electricity usage to off-peak periods, reducing strain on the grid and promoting demand-side management.
- Interconnection standards: Standardized rules and procedures that streamline the process of connecting distributed energy systems to the grid, reducing barriers to entry for edge grid technologies.
- Energy market reforms: Regulatory changes that enable participation of decentralized energy assets in energy markets, allowing prosumers to sell electricity directly to consumers or participate in demand response programs, fostering a more dynamic and competitive energy ecosystem.
- Supportive policies and incentives: Government subsidies, tax credits, grants, and other financial incentives that encourage the deployment of edge grid technologies and facilitate their cost-effectiveness, driving their adoption.
These regulatory tailwinds play a crucial role in driving the growth and integration of edge grids, enabling the transition to a more decentralized, sustainable, and resilient electricity system while providing significant potential for new value propositions by start-ups and technology developers.
Convergence to a new asset class: The new real estate energy asset
The transition towards a new energy organization empowers real estate assets to become prosumers—actively consuming and producing energy. To facilitate this transformation, several key factors must be considered:
- Load Management: Understanding, tracking, and forecasting electrical loads in buildings to identify consumption sources and optimize usage patterns.
- Asset Optimization: Maximizing energy utilization in relation to electricity production and pricing.
- Flexibilization of Consumption: Interacting with the grid through demand response mechanisms, responding to signals such as energy tariffs and financial incentives, and adjusting electricity consumption accordingly to maintain grid balance.
- Demand Understanding and Tools: Gaining insights into demand patterns, critical energy consumption periods, and leveraging appropriate tools to effectively utilize flexibility. Smart buildings with robust load management capabilities are well-positioned to contribute to grid balancing while meeting their own energy needs.
A substantial opportunity for asset managers: The path to turning traditional real estate assets in energy asset
Asset managers must analyze their unique situations and real estate portfolios. Understanding the evolving needs and potential changes in building usage over the next decade is crucial. Based on these insights, discussions can be initiated on the adoption of relevant technologies available in the market, such as optimized physical and digital infrastructure, energy management systems, on-site electricity generation and storage, grid tariff optimization, and load management solutions. Concrete measures could evolve around new technologies
- Energy Efficiency,
- Renewable Energy Generation,
- Energy Storage,
- Smart Energy Management,
- Grid Connectivity,
- Demand Response Participation,
- Energy Monitoring and
Embracing innovative start-ups in this value chain and actively participating in shaping the future energy market can be facilitated through platforms like PT1 Investment Platform for Real Estate.
The opportunity to transform real estate assets into energy assets holds significant upside potential. By leveraging smart technologies, integrating renewable energy sources, and actively participating in the energy market, buildings can play a pivotal role in driving sustainability, reducing CO2 emissions, and ensuring a stable and reliable energy system. Furthermore, a whole new revenue stream can be accessed by participating in the energy markets. Embracing this paradigm shift requires a comprehensive understanding of energy needs, adopting relevant technologies, and collaborating with innovative stakeholders. As the energy landscape continues to evolve, real estate assets have the potential to become key contributors to a more sustainable and resilient future. To explore technology or participate in the PT1 Investment Platform for Real Estate, get in touch!