Could property hold the key to renewable energy production?

When Derwent Valley bought London Merchant Securities in a £1bn deal in 2006, it not only created a powerful London offices specialist in Derwent London, but also – perhaps inadvertently – set it up to be a potential energy supplier, a purveyor of renewable energy and a solution to the UK’s power and net-zero conundrum. Included in that deal was several thousand acres of land in Scotland, some 107 acres of which will shortly being turned into an 18.4MW solar park – the last few bits of planning pending. Caledonia solar park, says Derwent’s head of sustainability John Davies (pictured below), will enable the company to “round the circle”. By creating its own energy, it will be able to help its customers – and itself – on the journey to net zero by ensuring the electricity it uses across its portfolio is authentically renewable. And, of course, it makes good business sense. “The biggest hurdle for a lot of our occupiers is actually claiming some kind of genuine providence over the power they receive because they are buying it through a service charge through us or from another company,” says Davies. “It’s not that common for individual tenants to have their own supplies and when they do have their own supplies, the supplies are quite small, which pushes them way down the list if they are trying to set up an agreement with a solar or wind farm.” “By us doing this,” he adds, “we can reconcile both those requirements. For ourselves and our occupiers. So why wouldn’t you do it?” Derwent did try to find a reason not to do it, but whichever way it cut it, the numbers always stacked up. “If you do you sums to work out what sort of financial profile a solar farm or wind farm might get you, the numbers start to look pretty good because you are supplying into a heavily demanded market,” says Davies. “You would be mad not to” John Macdonald-Brown, chief executive of real estate decarbonisation consultancy Syzygy, obviously agrees. He has built a business advising real estate owners such as Landsec, Abrdn and others on how to utilise their portfolios for energy production and says anyone in the sector would be mad not to be looking at the opportunity. “You have the opportunity to reduce the cost of power for you and your occupiers and increase how green that power is,” says Macdonald-Brown. “And in terms of future-proofing, the stronger those credentials, the better the rent will be.” And it seems that more and more real estate owners are looking at the opportunity. Derwent is leading the way off-site, partly through its entrepreneurial nature, partly though luck of being landed with acres of space through the LMS deal. But SEGRO too has cottoned on to the idea that it can be an energy as well as a space provider. Just like Derwent has set up Derwent London Green Energy, SEGRO has established a specialist vehicle, SEGRO (UK Energy), the principle aim of which is to develop and install photovoltaic panels on its UK assets and to receive income from selling the energy generated. SEGRO currently generates around £2m in annual revenue from the sale of on-site renewable energy to its customers or back to the grid. That number excludes energy provided by it as part of some tenants’ rent. Compared with SEGRO’s overall UK rental income, which was £271m last year, the revenue from energy is minimal, but in a world where energy costs are spiralling, the savings are not to be sniffed at. And for Macdonald-Brown, it is not just about the revenues secured for landlords in the here and now, utilising your portfolio for energy production is future-proofing your portfolio. It adds value and it ensures that your estate is sustainable – in the fullest sense of the word. Research undertaken by Syzygy showed that on-site generation of green energy had a huge impact on achieving net zero, reducing emissions by more than 60%. And while landlords across the country are working hard to improve the energy efficiency of their buildings, the electrification of real estate and mobility will increase demand, with EV charging points becoming a must-have, particularly at logistics sites, business parks, shopping centres and retail parks. Off-site opportunities So the argument for real estate becoming a tool for energy production is clear, but what about the ability? As Derwent’s Davies points out, for a Zone 1 and 2 property owner like his firm, utilising its London portfolio for energy production is not quite as easy as it might be for a logistics, business park or shopping centre owner. And while planning authorities – and policy in general – may be pushing developers to include on-site regeneration for any new or refurbished builds, off-site generation should not be dismissed. “I’m hopeful people will start to take the off-site a bit more seriously than they are at the moment,” says Davies. “It’s a very, very sensible way of dealing with what is quite a problematic thing to deal with.” It was the only way for Derwent to “round the circle” and move forward on its own net-zero pathway and help its customers do so too. Though a sleeved power purchase agreement, where it is both the energy generator and the customer, it can ensure its energy from Caledonia solar park is utilised in its buildings. “You do need a contractual way of saying, ‘we’ve got it here and we’ve got it here as well’. And that’s what we will say to our occupiers,” says Davies. “They will get uniquely provenanced, grade A++ energy on the grid at market price through the service charge, with full transparency. They get to tick their RE100 box, net-zero carbon journey box and if they still don’t believe us, we can take them to the meter and we can show them with their invoice that this is where their energy comes from.” For Macdonald-Brown, off-site offers huge opportunities for real estate and landowners. While roof space is a great option for those that have sizeable ones, land – low-grade pastureland, floodplains and brownfield land – can provide for much bigger installations. And while those fields provide the energy for a real estate operator’s portfolio, the value paid for the land – around £1,000 an acre – offers a much better returns than an empty field. Using a valuable tool It is not just on-land and on-property generation that well-known real estate names are getting involved, however. The Crown Estate, owner of London’s Regent Street, W1, is also the UK’s largest landlord to our seabed, owning virtually all the seabed around the UK out to 12 nautical miles. It has been investing in renewable energy for years. Its renewable estate was valued at £4.3bn in 2021-22, accounting for almost a third of its total assets, up from less than 10% in 2018. Soon, it will surpass the group’s land-based portfolio as its largest asset class. In its most recent annual report, Crown chief executive Dan Labbad said: “At its heart, the Crown Estate is a landowner. Our role is to make that land work as hard as possible for the benefit of the country, both today and into the future. “How we do this may vary across our diverse portfolio but in all cases this means taking a sustainable approach, partnering with those around us and determining how best value can be derived, ensuring that any short-term financial returns both complement and provide a pathway to longer-term financial, environmental and social goals.” The Crown doesn’t operate wind farms itself but provides leases on the seabed. It is, however, utilising its assets to enable the generation of green energy for more than 11.5m homes across the UK, using its property to power the country. In 2022, UK offshore wind produced 45Twh of electricity, enough power to supply 41% of the nation’s home. This year that figure is expected to grow to 47% or 13.1m homes. Offshore wind generated 14% of the UK’s total electricity last year, saving some 17m tonnes of carbon. Canary Wharf Group has recently joined the wind farm game too, and through its owner Brookfield – which alongside real estate has a sizeable investment in renewables – is investing in a new UK wind farm which it says will provide Canary Wharf with more than 70% of its electricity consumption. The firm will supply its 150-acre estate through a 15-year power purchase agreement. And while most of the UK’s real estate and landowning community may not have a portfolio quite like the Crown’s or a multi-sector investor private equity parent like CWG, it is clear that energy generation and real estate should be intertwined. It makes financial sense and is a valuable tool in enabling real estate – and its customers – to reach their net-zero targets. With every opportunity, however, there are, of course, some challenges. Access to the grid remains one of the biggest, says Macdonald-Brown, and any investor or landlord thinking about entering the energy game better start applying for a grid connection now. There are a finite number of connections and getting one can be troublesome, expensive and very slow. Connection will also come with some caveats, from the amount of energy you can put back on the grid – if any – and just when you might get that connection. It can be years in the future. But it is worth the effort. Wind, says Macdonald-Brown, costs 3-4p per unit, solar 4-5p. The current cap on electricity cost is 34p/kWH. The numbers really do stack up. Pause for thought But before real estate operators rush in, a number of questions remain, especially for those within the REIT regime. Currently, for entities in the UK to sit within the tax efficient REIT regime, at least 75% of their gross assets and profits must relate to the property rental business. Renewable energy is currently not listed as a “good asset class” for REITs to invest in and no REIT will want to fall foul of those rules and be kicked out of the regime. The British Property Federation is currently working on a bid to get clarity around the issue. Rachel Kelly, finance policy officer at the BPF, says investment in renewable energy for the purpose of supplying energy to a portfolio should be considered auxiliary to the leasing process and therefore allowed to count as relating to rental income. In the BPF’s response to Chris Skidmore’s Net Zero Review, it called on government to allow for investment in off-site renewables, saying broadening the asset classes REITs can invest in to include renewable energy generation infrastructure would “unlock finance for additionality and support the decarbonisation of the grid”. Word back from HMRC has been muted so far, but real estate is an innovative sector and where there is an opportunity to turn commercial advantage into net-zero gain, those forward-thinking asset owners will find a way. “We – buildings and real estate – will be expected to be much more involved in energy infrastructure in the UK,” says Derwent’s Davies. “We will be expected to play a greater part in that and if we are able to help the sector more broadly with providing other propcos of varying different shapes and sizes to enable that, or we joint venture with our various different cohorts in the group to create some kind of vehicle or way of providing energy, which is mutually beneficial, then nothing really should be off the table.” Maybe the solution to greening the grid and enabling a swifter journey to net zero really can be powered by property. To send feedback, e-mail samantha.mcclary@eg.co.uk or tweet @samanthamcclary or @EGPropertyNews