Consider that China and India each have to add 2,000 gigawatts (GW) of power generation capacity over the coming 30 to 40 years. This is the amount currently generated in Europe and the U.S. Its impact on global pollution will be staggering.
And a gigawatt of fossil fuel power costs approximately $1 billion to build, so 2,000 GW will cost $2 trillion. And that’s just the CapEx (capital costs) for each country. The $100s of billions annually in OpEx (operations and maintenance costs) to pay for fuel feedstock, maintenance, etc. are on top of that. Contemplate for a moment that pretty much half of that power generated is solely for HVAC.
It is also important to note the for each kWh (kilowatt hour) of energy we consume unnecessarily, we need to produce three kWh worth of energy, so saving one kWh can in reality save three kWh of energy at the source.
In the current real estate business model, profits are privatized (i.e. the financial returns are retained by the investor), while pollution and its impacts are socialized. In other words, ultimately, we all are paying for it.
If pollution’s costs were truly reflected in a building’s financial model, buildings will, overnight, become the paragons of efficiency.
It all starts with the investor/developer in an extremely competitive market with high land values, where often the only differentiators are location and price.
To maintain a respectable return in an environment of high land acquisition costs, construction costs come under pressure. So, in most cases, their financial models drive them to search for the lowest construction cost, which they believe ensures the highest gross profit margin per metres-cubed of space.
The focus on cutting CapEx has decoupled the project’s true life-cycle cost from the decision-making process. Consequently, OpEx has been relegated to an unwelcome distraction. Over the years, short term financial return targets (that also influence the remuneration of real estate professionals) have made CapEx develop an outsize influence on the financial model, creating an unrelenting march towards lower and lower CapEx. While OpEx is significantly discounted in net present value terms in the financial model, and so becomes more and more inconsequential.
So, from a short-term perspective, ignoring OpEx may seem like a rational choice, as many developer/investors are neither exposed to the ongoing OpEx (which includes energy consumption for heating and cooling, as well as related facilities maintenance costs, but their tenants are), nor will they own the project for too long. Their exit strategy may dictate disposing of the asset, monetizing their investment and using the proceeds to develop more projects.
This creates no immediate incentive to reign in future OpEx, for example by spending a bit more upfront on higher quality design, products and construction. OpEx does not come out of their pockets, but CapEx does. OpEx does not influence their compensation, but CapEx does.
And even for the developers who seek to retain the asset (e.g. a government building a school or hospital), the project procurement process has one focus: the lowest possible construction cost, as the CapEx funding allocated for the project is usually totally separate from the funding for facilities management. Therefore, there is no incentive to make a wise CapEx decision that benefits a lower OpEx. OpEx “is not in my budget” is a common but perversely faulty response when a project owner or their consultant is asked about the importance of OpEx in their decision-making process.
If we think about things rationally, the main task of the developer should be to ensure a successful long-term project where both CapEx and OpEx are optimized.
Because looking at the total life-cycle costs, CapEx comprises only 20 to 25 per cent of the project cost, and OpEx 75 to 80 per cent. This four (OpEx) to one (CapEx) ratio should force the developer to adopt measures that helps save money from the OpEx on a recurring/annual basis, even if the CapEx costs a bit more on a one-time basis.
For example, if we spend approximately 10 per cent more on CapEx but can save 20 per cent on OpEx over let’s say a 30-year project lifetime, the total lifecycle cost goes down approximately 15 per cent. This is significant, as that 15 per cent lifetime savings comes close to covering the entire CapEx costs in the first place.
Developers are part of the problem, but they’re not the only ones. Bankers, lenders, architects, engineers, contractors, government regulators, as well as tenants and end-users are also part of the mix.
This op-ed is the second in a series from Eco-Structures International’s founder and director Ghassan Nimry which focuses on innovative sustainable engineering solutions to today’s climate change problems. He believes that technology can solve many of today’s seemingly intractable problems, but to make it work we need collective work, personal acknowledgement of our role in the problem and our ability to be part of the solution. Send comments to editor@dailycommercialnews.com.
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