ON-SITE RENEWABLES

AN APPRAISAL OF THE COSTS

AND BENEFITS OF DELIVERING
EMISSIONS REDUCTIONS IN
CENTRAL LONDON OFFICES
SEPTEMBER 2012
ABOUT THE BCO IMAGES
The British Council for Offices’ (BCO) mission is to COVER
research, develop and communicate best practice Heron Tower, 110 Bishopsgate, London
in all aspects of the office sector. It delivers this by Courtesy of Heron International
providing a forum for the discussion and debate of
relevant issues. PAGE 16
Heron Tower, 110 Bishopsgate, London
Courtesy of Heron International

ABOUT THE AUTHORS PAGE 18

101 New Cavendish Street, London
Gareth Roberts MRICS FRSA MSc BSc, Research Courtesy of Peter Durant
Director, Sturgis Carbon Profiling

Glen Irwin CEng BEng (Hons) MCIBSE, M&E

Sustainability Manager, Stepnell

ACKNOWLEDGEMENTS
June Taylor, Patrick Dwyer and Simon Sturgis of
Sturgis Carbon Profiling, Sarah Cary of British Land,
Daniel Winder of Sheppard Robson, Jenny MacDonnell
of the British Council for Offices and Steven Clark and
David Selby from Hopkins Architects.

COPYRIGHT © BRITISH COUNCIL FOR OFFICES 2012

All rights reserved by British Council for Offices. No part of this publication may be reproduced, stored or transmitted in any form or by
any means without prior written permission from the British Council for Offices. The BCO warrants that reasonable skill and care has
been used in preparing this report. Notwithstanding this warranty the BCO shall not be under liability for any loss of profit, business,
revenues or any special indirect or consequential damage of any nature whatsoever or loss of anticipated saving or for any increased
costs sustained by the client or his or her servants or agents arising in any way whether directly or indirectly as a result of reliance on
this publication or of any error or defect in this publication. The BCO makes no warranty, either express or implied, as to the accuracy
of any data used by the BCO in preparing this report nor as to any projections contained in this report which are necessarily of any
subjective nature and subject to uncertainty and which constitute only the BCO’s opinion as to likely future trends or events based on
information known to the BCO at the date of this publication. The BCO shall not in any circumstances be under any liability whatsoever
to any other person for any loss or damage arising in any way as a result of reliance on this publication.
 ON-SITE RENEWABLES

CONTENTS

Terms of reference 4 Question 2: What are the dominant factors

affecting the financial cost of using on-site
Executive summary 5 renewables to reduce building emissions? 25
Introduction 5 Question 3: How do these costs and benefits
Findings 5 compare with other policy alternatives? 27
Recommendations 6 Question 4: How do these costs compare
with the forgone environmental damage? 30
Introduction 8
Conclusions 33
Aims 8
Key conclusions 33
Report structure 9
Key recommendations 33
Policy background 9
Summary evaluation of renewable References 35
technologies 12
Appendix 1: Defining costs 37
Case studies – the use of renewables on
five buildings 13 Appendix 2: Regression model 40
Ropemaker Place 13 Appendix 3: Modelling the costs per tonne
The Peak 14 of a policy alternative 42
Heron Tower 16 Appendix 4: Calculating the value of forgone
Portcullis House 17 damage 44
New Cavendish Street 18

An evaluation of the costs and benefits 19

Question 1: What are the financial costs
and benefits to developers and occupiers
of reducing emissions using on-site
renewables? 19

© BCO 2012 3
 ON-SITE RENEWABLES
TERMS OF REFERENCE
This research was commissioned by the British
Council for Offices (BCO) to follow up its 2007 report
on the Greater London Assembly’s (GLA’s) policy
for achieving emissions reductions through on-site
renewable energy provision.
Specifically, it set out to:
I quantify the impact of the GLA policy on the
environment (represented by the opportunity cost of
alternatives that could yield higher carbon savings)
and on developers (represented by the additional
costs of building and operating renewable measures)
I examine whether this policy may have had
secondary effects on the City of London property
4 © BCO 2012
market, for example by acting as an incentive to
retain and refurbish older stock
I identify alternative policy structures that would offer
different compliance costs and generate additional
emissions reductions
I identify building types that are more capable of
compliance, to aid investment decisions and offer
guidance to design teams
I advise on which measures yield the greatest carbon
returns on financial investment
I examine whether and to what extent the 2007
report’s predictions have been fulfilled.
 ON-SITE RENEWABLES

EXECUTIVE SUMMARY

INTRODUCTION
This research was commissioned by the BCO to follow
up its 2007 report on achieving emissions reductions
through on-site renewables. That report was written in
the context of the GLA’s proposal to increase its target
for the proportion of emissions reductions delivered by
on-site renewables from 10% to 20% of a building’s
regulated energy demand. It expressed concerns over
whether the policy offered an effective way of achieving
emissions reductions, and called for a more flexible
approach. This report seeks to identify whether these
concerns were justified.

The less prescriptive emphasis of the current GLA policy

is welcomed by this report, as it offers an opportunity
to review strategies for achieving emissions reductions,
Figure 1 Evacuated tube solar collectors used on
focusing investment on those offering the greatest
Ropemaker Place.
potential for cost-effective reductions. However,
as the Building Regulations demand more stringent Courtesy of Sturgis Carbon Profiling LLP
energy-reduction targets in the coming years, the
use of on-site renewables will continue to be an
ever-increasing challenge for developers and designers
to accommodate in dense urban environments.
This report offers a crucial insight into the implications
In this report we explore the issues involved in the use of using on-site renewables, identifying the factors
of renewable technologies, by analysing the costs and driving performance and the potential to cut costs and
benefits of their use in central London office development increase environmental benefits from reduced emissions
projects over the period 2006 to 2010. in the future.

FINDINGS
This report includes five case studies that suggest I many technologies can be integrated within building
valuable lessons for other developers: services design.

I there are many discrepancies between modelled
energy use and actual use
I more attention should be paid to renewable cooling
solutions in commercial buildings
I occupiers should be given advice on optimising and
monitoring their energy use
Costs and benefits to developers
The report analyses 77 central London commercial
office developments, and finds that:
I on-site renewables can generate modest financial
returns to investors and occupiers in the presence

© BCO 2012 5
 ON-SITE RENEWABLES

of subsidies, but in most cases represent a financial
burden once indirect losses have been accounted for
I the range of costs and benefits varies widely across
the sample (Figure 2)
I the cost per tonne of emissions reduced also varies
widely, from a net present value (NPV)1 of £145 per
tonne gain to a loss of £2800 per tonne, with an
average cost of £380 per tonne even with the aid
of subsidies.
I Cost is extremely sensitive to external factors – for
example, increasing by £208 if a building is subject
to conservation area status (based on statistically
significant evidence at the 5% significance level
(P < 0.005)).
I The cost per tonne is £360 higher where subsidies
have been claimed (based on statistically significant
evidence at the 5% significance level (P < 0.005)).

Comparing costs with other policy

Dominant factors driving costs
I Saving one extra tonne of CO2 on a project reduces
the absolute cost per tonne by £20 (based on
statistically significant evidence at the 1%
significance level (P < 0.001)2).
I However, the relationship between the quantity of
emissions reductions and cost is not linear.
alternatives
I Switching to an alternative policy mechanism such
as combined heat and power (CHP) could achieve
savings of £335 per tonne, or £153 million if applied
across the UK.

1,000,000
Benefit to developer: 10-year payback period, 8% discount rate
Benefit to developer: 7-year payback period, 13% discount rate
800,000
Benefit to developer: 3-year payback period, 33% discount rate
600,000 Total costs (PV)

400,000

200,000

–200,000

–400,000

–600,000

–800,000

–1,000,000

Figure 2 Costs and benefits of on-site renewables by project.

Courtesy of Sturgis Carbon Profiling LLP

1 Figures for NPV profit and loss take account of all carbon saved by a measure, and the associated financial costs and benefits, over its
lifetime.
2 The P value is the probability of the null hypothesis that the effect detected is due to random variation of the sample and does not
represent the population. A low P value indicates that there is a very small chance that the null hypothesis is correct, and so the
regression coefficient is significant.

6 © BCO 2012

Cost to taxpayers
£59
million
454,000
tonnes
£174 million
CO2 saved
Cost to developers
Comparing costs with forgone
environmental damage
I Aggregate net costs to developers are approximately
£174 million, which exceeds the forgone damage to
the environment (approximately £18 million) by a
factor of ten (Figure 3) every year in the UK.
RECOMMENDATIONS
This report recommends working towards higher
emissions reductions by:
I acknowledging that, economically, renewables have
more in common with conventional energy generation
processes than previously considered (returns to
scale and high fixed costs).
I carrying out a wider examination of the costs and
benefits of achieving emissions reductions across
the built environment – i.e. comparing the social
and financial benefits from renewables on a level
playing field with other alternatives such as embodied
carbon reductions, decentralised power, community
retrofit and better metering initiatives
I reviewing the efficiency of subsidies applicable
to on-site renewables – i.e. questioning whether
it is possible to target subsidies more effectively
to large-scale developments and thus encourage
developers to profit seek by using renewables
rather than through achieving minimum levels
of compliance
I examining the scope for district power solutions or
large-scale renewable installations, and the barriers
to their implementation
ON-SITE RENEWABLES
£18 million
Figure 3 Aggregate costs and benefits
Social value
of on-site renewables.
Courtesy of Sturgis Carbon Profiling LLP
I It is acknowledged that these figures represent
early stage implementation costs. However, as
illustrated by comparison with other policy
alternatives, many other similarly early stage
technologies can deliver carbon savings much
more cheaply.
I investigating more flexible policies, such as allowable
solutions or market-based alternatives, which can
provide a mechanism for delivering emission
reductions in the most cost-effective way
I making a more detailed enquiry into how these findings
relate to other land markets and commercial building
types across the UK. (Currently, in the majority of
circumstances, in the office sector renewables are
being installed simply to secure planning consents. This
has the negative impact of leading the renewables
market through false market signals, and thus of
diverting resources from areas of technological
development that are more cost-effective.)
As such, this report should be taken as a scoping
study for a wider review of the economic and
environmental benefits of low-carbon legislation
affecting commercial property in the UK, with the aim
of delivering the greatest carbon reductions at the
least cost to developers, building owners and occupiers.
© BCO 2012 7
 ON-SITE RENEWABLES

INTRODUCTION

AIMS
The construction and use of the built environment is
one of the largest sources of greenhouse gas emissions
in the UK, accounting for about half of total emissions
(CABE, 2007). Every year, construction of commercial
buildings in the UK produces over 80 million tonnes
of carbon dioxide (CO2) emissions (United Nations
Statistics Division, 2012), more than the combined
CO2 emissions of the Irish, Kenyan and New Zealand
economies.

Over the past decade the need to reduce the emissions

associated with buildings has become increasingly
clear, given the contribution they make towards global
warming. The UK government’s Low Carbon Transition
Plan has set a target for the non-domestic buildings Figure 4 Fuel storage reduces lettable area.
sector (including both existing and new-build stock) Courtesy of Arun Woodfuels
of achieving a 13% reduction on 2008 levels by 2020
(Department of Energy and Climate Change, 2009).

Responses to this challenge have included the
formulation of policies that directly or indirectly require
developers to include on-site renewable energy
generation capacity in all new developments.
To date, various studies have been conducted to quantify
the emissions reductions delivered by these policies
(Day et al., 2007, 2009) and the predicted capital
cost of meeting the emissions reduction targets they
specify (BCO, 2007). However, there has been limited
progress in understanding either the actual capital
costs or the wider indirect costs. Likewise little work
has been done to quantify the benefits of on-site
microgeneration in terms of reduced running costs
and forgone damage to the environment.
This study makes a unique contribution, by investigating
and developing an understanding of the fuller3 picture
surrounding the use of on-site renewables. Crucially, we
consider the full range of costs and benefits, including:
I tax benefits
I the indirect cost to taxpayers of subsidies
I loss of lettable area (e.g. storage of fuel such as
wood chips can take a considerable amount of
space (Figure 4))
I sensitivity of future financial savings to occupiers’
perceptions
I hidden costs such as maintenance, repair and
replacement fuels
I forgone damage to the environment.
The study is based on a sample of 77 commercial
buildings in London in which on-site renewables were
installed during the period 2006–2010.

3 The authors acknowledge that defining the range of relevant factors affecting costs is as much a subjective judgement as an empirical
question. To help clarify this stuation, only those items that have been shown to have a statistically significant impact on compliance have
been included.

8 © BCO 2012

REPORT STRUCTURE
First, a brief review is given of the policies driving
the adoption of on-site renewable energy generation
capacity in new London developments. This is followed
by a brief summary evaluation of the most widely
available renewable technologies. The installation
of these technologies in five case study buildings
in London is then described, with an explanation
of the project teams’ rationale for choosing specific
technologies and a review of their performance.
To investigate the issues surrounding the use of on-site
renewables, four key questions have been identified,
and these are addressed in sequence. Each question
is accompanied by a brief description of the data and
methods used in answering it, the results that arose,
and a discussion of the implications of these results.
The four key questions identified by this report are:
Question 1: What are the financial costs and benefits to
developers and occupiers of using on-site renewables
to reduce emissions?
POLICY BACKGROUND
The primary factor driving the adoption of on-site
renewable energy generation capacity in new London
developments is the London Plan.4 It does so through
an explicit requirement for a reduction in building
emissions to be achieved using on-site renewables
wherever feasible.
The origins of this requirement can be traced back to
Merton Council’s introduction of a planning policy in 2003
(Figure 5), requiring at least 10% of building energy to be
delivered by on-site renewables wherever feasible. This
requirement subsequently became known as ‘the Merton
Rule’, and was incorporated in the 2004 London Plan
as part of a wider range of policies aimed at reducing
building emissions. The Plan was revised in 2008,
when the required proportion of emissions reductions
from on-site renewables was increased to 20%.
Despite the more challenging target for emissions
reductions from on-site renewables introduced in the 2008
4 The London Plan is a set of policies developed by the Mayor of London, which together make up London’s spatial development strategy
(Mayor of London, 2004, 2008, 2011b).
5 No definition of what constitutes ‘feasible’ is provided in the London Plan. Where a developer believes that compliance with the full
percentage requirement is not feasible, the onus is on him to justify his position and to provide evidence of having investigated possible
solutions.
ON-SITE RENEWABLES
Question 2: What are the dominant factors affecting
the financial cost of using on-site renewables to
reduce building emissions?
Question 3: How do these costs compare with those of
other policy alternatives?
Question 4: How do these costs compare with the
forgone environmental damage delivered by using
on-site renewables?
These questions were selected to provide insight into
the efficiency of policies requiring the use of on-site
renewables in central London, a topic not yet addressed
in other reports in the public domain.
The report concludes with a discussion of the broader
implications of the study’s findings.
Plan, there is evidence to suggest that the intended
reductions did not materialise (London South Bank
University, 2009). A study by London South Bank
University (2009), reviewing emissions reductions through
on-site renewables over progressive 12-month periods
across 147 developments, found a significant reduction in
the average emissions reductions achieved, particularly
in early 2009 (Figure 6). This trend is partly explained
by the fact that since the 2008 Plan, other alternatives
have been allowed to be considered towards targets.
The most recent revision of the Plan, issued in 2011, is
less prescriptive, stating only that: ‘major development
proposals should provide a reduction in expected CO2
emissions through the use of on-site renewable energy
generation, where feasible’.5 Although it is no longer
stated as an obligation, the policy's supporting text
includes a presumption that major developments will
achieve a reduction of at least 20% through using
on-site renewables.
© BCO 2012 9
 ON-SITE RENEWABLES

Reviews Policies
2001 Enhanced capital allowance scheme introduced
2002
2003 Merton Council introduces 10% renewables requirement
2004
BCO first report 2005 The London Plan adopts the Merton Rule
2006
LSBU first review 2007 Feed-in tariffs scheme introduced
2008
2009 London Plan renewables requirement increased to 20%
LSBU second review
2010
2011 New target emission rate in the Building Regulations
2012
GLA monitoring review 2013 No requirement in the London Plan, but a presumption of 20%
2014
2015 Target date for 20% reduction on 2010 TER
2016
2017 Target date for 40% reduction on 2010 TER
2018
2019 Target date for zero-carbon commercial buildings

Figure 5 Policy timeline.

Courtesy of Sturgis Carbon Profiling LLP

12 However, the Mayor of London’s Energy Strategy

(Mayor of London, 2011a) proposes a move away
10 from prescriptive technological targets. Where
Emissions reduction (%)

meeting emissions targets is not economically viable,

8 the strategy allows developers the alternative of
London Plan renewables contributing to offsetting funds that will be held by
requirement increased to 20%
6 local boroughs. The purpose of these funds will be to
achieve further emissions reductions, for example by
4 developing large-scale decentralised energy networks
or investing in retrofitting poorly performing existing
2
stock, which can also yield significant carbon
reductions. However, in practice, few of these
schemes have materialised as yet.
0
2007 2008 2009
The use of renewables is seen as the third in a
Figure 6 Average percentage emissions reductions hierarchy of three generic strategies for reducing
across 147 developments. emissions (Figure 7). As such, developers are
Courtesy of Sturgis Carbon Profiling LLP expected to consider it after having achieved

10 © BCO 2012
 ON-SITE RENEWABLES

reductions by reducing demand for energy and by

increasing the efficiency of energy supply.
Use
Although the requirements of the London Plan have renewables
been relaxed, revisions to Part L of the Building
Regulations6 continue to drive a reduction in building
emissions rates. Figure 8 illustrates the impact of Improve energy efficiency
successive revisions to Part L on the permissible rate
(referred to in the Regulations as the ‘target emissions
rate’ (TER)).
Reduce energy demand
Achieving these rates is vitally important, given the
need to reduce the future contribution of buildings to
global emissions. However, as Figure 8 illustrates, after Figure 7 The energy hierarchy in the 2011 London
2013 developers will be unable to design compliant Plan.
buildings using energy-efficient design alone. Once Courtesy of Sturgis Carbon Profiling LLP
the design threshold has been exceeded, unless more
flexibility is introduced into how emissions reductions
can be delivered (such as through allowable solutions),
generating energy from on-site renewables will be the increasingly find that on-site renewables are a necessary
only remaining means of meeting the emissions rates component of their development plans, even where
permissible under Part L. Developers may, as a result, these are not financially viable.

2002 2006 2010 2013 2016 2019

Target emissions rate Emissions saved through energy-efficient design

Emissions saved through renewables Possible role for allowable solutions

Figure 8 Potential likely future changes to the Part L target emissions rate.
Courtesy of Sturgis Carbon Profiling LLP

6 The scope of Part L covers only regulated emissions (fixed services), while the London Plan covers all emissions within a building.

© BCO 2012 11
 ON-SITE RENEWABLES

SUMMARY EVALUATION OF RENEWABLE TECHNOLOGIES

Table 1 Summary of the advantages and disadvantages of the most common renewable energy technologies.

ICON DESCRIPTION CAPITAL ONGOING CARBON

COSTS COSTS FOR YOUR
MONEY
Relatively easy to integrate developments but does not £CAP £OTHER £/CO2
suit all architectural styles £CAP
£CAP
Cost-effective relative to other technologies £CAP £OTHER £/CO2
but needs space for the boiler and for fuel storage £CAP £OTHER £/CO2
£OTHER
Better suited to rural locations, as wind speeds in £CAP £OTHER £/CO2
built-up areas are usually too low and roof shape can £CAP £OTHER £/CO2
dramatically affect performance
Cost-effective assuming year-round demand for hot £CAP £OTHER £/CO2
water, but requires roof space and provides only minor £OTHER £/CO2
emissions reductions £/CO2
Can provide very efficient cooling but depends on £CAP £OTHER £/CO2
suitable geology, and cost of preparing and connecting £CAP £/CO2
to heat source is high £CAP
Slow to fire up and better suited to wider area £CAP £OTHER £/CO2
developments with continuous heat and power base £CAP £OTHER £/CO2
loads; requires space for boiler and fuel storage £CAP £OTHER £/CO2

CAPITAL ONGOING CARBON

COSTS COSTS FOR YOUR
MONEY
LOW £CAP £OTHER £/CO2
MEDIUM £CAP £OTHER £/CO2
Source: Sturgis Carbon Profiling LLP HIGH £CAP £OTHER £/CO2

12 © BCO 2012

THE USE OF RENEWABLES ON FIVE BUILDINGS
ROPEMAKER PLACE
Architects: Arup Associates
Developer: British Land
M&E: Balfour Kirkpatrick
Photo courtesy of British Land
ON-SITE RENEWABLES
CASE STUDIES
Location: 25 Ropemaker Street, London EC2
Floorspace: 52,183 m2
Use: Office
Rationale for installation: Following intensive design
efforts to reduce energy use, particularly cooling
loads, three renewable technologies were selected to
meet planning requirements and further demonstrate
the building’s green commitments.
Renewable technologies installed
Performance of the systems: The solar thermal and
photovoltaic (PV) panels function well and integrate
easily with the base building M&E, the former providing
hot water for toilets in one main core and the latter
providing electricity towards base building usage such as
car park and lift lighting. The biomass boiler was sized
for full heating load, and so its use was initially delayed
until the building was fully occupied. It has now
undergone a month’s trial, and British Land is working
towards an approach where it is used in winter months.
Biomass fuel costs (when used only for full building
load) are not significantly different to the costs of gas.
Lessons learnt: Energy modelling done at design
stages to meet Part L and EPC requirements can be
significantly different from actual energy consumption
during building use, and planning for the installation and
future use of renewables should take account of this.
Heating demand in city centre offices tends to be
very low, and greater energy savings can be found in
improvements to the cooling and ventilation system
than by installing renewable technologies that generate
hot water. There have been significant teething issues
with the delivery and hopper mechanisms for the
biomass boiler, which have hampered its use.
© BCO 2012 13
 ON-SITE RENEWABLES

THE PEAK

Architects:Sheppard Robson Location: 5 Wilton Road, London SW1

Developer: Heron International Floorspace: 9105 m2
M&E: Foreman Roberts Use: Office and retail

Rationale for installation: To comply with the London

Plan requirements for carbon savings from
renewables (an 11.7% saving in energy and a 7.1%
carbon saving delivered) and Part L (2006) TER
requirements and to assist with the Energy credits for
BREEAM (a rating of ‘Very Good’ was achieved). The
renewables were also seen as an important element
of the environmental sustainability credentials of the
building, which was seen as an important issue by
target tenants.

Renewable technologies installed

Performance of the systems: The Peak incorporates

250 m2 of monocrystalline PV arrays to generate the
equivalent of 2.0% of the building’s total annual
energy consumption. The electrical output from the
PV cells is converted to alternating current and fed
directly into the building’s main low-voltage electrical
switchgear panel in parallel with the incoming utility
electrical supply to feed all the electrical services
throughout the building. The PV cells have been
generating electricity since the building was
commissioned and, with the benefit of the Feed-in
The Peak was awarded ‘West End Development of Tariff Scheme (FITS), this has dramatically shortened
the Year’ at Property Week’s Offices 2010 Awards. payback periods. The building is currently only partly
occupied, and so the solar thermal and ground-source
Photo courtesy of Heron International heat pump systems have not yet been fully used.
The Peak incorporates 50 m2 of flat panel solar thermal collectors integrated in the south-facing façade to
generate approximately 60% of the summer hot water demands for domestic use at teapoints and toilets.
Solar thermal is also likely to become popular with the impending introduction of the Renewable Heat
Incentive, although this project is not able to claim this tariff.
Groundwater is extracted by a pump located in a 140 m deep abstraction borehole and typically has a constant
year-round temperature of 12–14°C. After passing through a plate heat exchanger where it cools the neutral
water temperature loop, it is returned to the ground via a recharge borehole. The lack of consumption of
groundwater in this process minimises any environmental impact.
This technology reduces the use of fossil fuels in cooling the building by using the ground and groundwater as a
renewable heat sink. The amount of electrical energy used to drive the heat pumps is less than that traditionally
used for an air- or water-cooled chiller installation, thus reducing the amount of CO2 emitted into the atmosphere.
(continued)

14 © BCO 2012
 ON-SITE RENEWABLES

THE PEAK – continued

Lessons learnt: The incorporation of PV cells onto buildings is becoming more common due to the FITS.
Relatively easy installation, coupled with minimal maintenance, makes PV cells a perfectly viable technology.
Although solar thermal is less common on office buildings, The Peak does have catering facilities, and so good
carbon savings are expected.
The Colt Colaris system is designed to use the near-constant year-round temperatures of chalk aquifer water
to improve heat-pump efficiency in both cooling and heating modes. When considering the constrained site
footprint in Victoria, the system made sense in terms of integrating services design with renewables requirements.

Photo courtesy of Heron International

© BCO 2012 15
 ON-SITE RENEWABLES

HERON TOWER

Architects: KPF Location: 110 Bishopsgate, London EC2

Developer: Heron International Floorspace: 66,629 m2
M&E: Foreman Roberts Use: Office and retail

Rationale for installation: To comply with the London

Plan requirements for energy from renewables (2.2% of
building energy supplied by PV) and Part L (2006) TER
requirements, and to assist with the energy credits for
BREEAM (a rating of ‘Excellent’ was achieved).

Renewable technologies installed

Performance of the system: This project incorporates

1153 m2 of glass/glass-laminated PV cells. This was
the only feasible renewable technology for the highly
constrained city centre site. The cells are positioned
in the vertical south-facing lift core, which offered the
largest area for mounting the largest number of cells,
and thus the greatest possible carbon saving. They
also offer a shading function to the lift core void, and
a commitment to the use of renewable energy that is
highly visible to occupants and visitors.

Lessons learnt: Although representing a high capital

cost, the PV cells have successfully helped to raise
the environmental credentials of the building, and to
achieve other benchmarks such as the BREEAM
‘Excellent' rating. This is demonstrated by the fact that
the carbon management firm Eco Global Markets has
taken up a tenancy specifically because of the tower’s
environmental credentials. Target tenants would be
expected to have corporate social responsibility
policies requiring them to rent low-impact office space.

The PV cells have been generating power since

commissioning in spring 2011, and there have been
no significant maintenance issues with the system.
Photo courtesy of Heron International

16 © BCO 2012
 ON-SITE RENEWABLES

PORTCULLIS HOUSE (not part of the study sample, as it was opened in 2001)

Architects: Michael Hopkins and Partners Location: Bridge Street, London SW1
Developer: Parliamentary Works Directorate Floorspace: 20,000 m2
M&E: Crown House and Kaverner Rashleigh Weatherfoil Use: Parliamentary Offices

Rationale for installation: The borehole cooling system was a part of a pre-BREEAM ground-breaking sustainable
design approach backed by EU-funded research. It entailed passive elements of thermal mass, solar shading
and daylight enhancement.

Renewable technologies installed

The landmark ventilation chimneys of the natural ventilation utilise borehole ground water cooling,
and the exhaust allows pre-heating of the incoming air. It was designed to use one-third of the
energy consumed by a conventional high prestige air-conditioned building.

Performance of the system: Some initial teething issues were evident before the building management and
occupants were able to ‘get the best out of the building’, which is not surprising as the system had not
been experienced before. After this initial period
of familiarisation with the building’s sustainable
features, dynamic seasonal variations etc., the use
of more sophisticated controls than those originally
utilised when the building was occupied enables
the building management team to make significant
reductions in the use of energy and water.

Lessons learnt: Monitoring of performance and

occupant engagement is essential to understand
and control the environmental performance and
‘swings’ of the building fabric and thereby maintain
the effectiveness of the ground source cooling. For
such a large building with a complex range of uses
and a greater occupancy than anticipated, borehole
groundwater, used in combination with the building’s
other sustainability elements integrated into the
fabric and façade, continues to be effective as the
only means of cooling the building.

Photo courtesy of Sunil060902

(http://en.wikipedia.org/wiki/File:Westminster_station_building_Portcullis_House.JPG)

© BCO 2012 17
 ON-SITE RENEWABLES

NEW CAVENDISH STREET

Architects: Sturgis Associates Location: 101 New Cavendish Street, London W1

Developer: City Office Real Estate Floorspace: 1300 m2
M&E: JB&B Use: Office, retail and residential units

Rationale for installation: Solar thermal heating and PV cells were installed during the refurbishment of the
building to improve its environmental performance.

Renewable technologies installed

These technologies were selected because they could be easily integrated into the building
services and resulted in no loss of lettable area. The design also incorporated measures to
reduce solar gains, including chilled beams and external louvres. The constraints of working
on an existing building in a conservation area, while residential units remained occupied, also
influenced the choice of technologies, and the residential component guaranteed a high level of demand for heating.

Performance of the system: The system has remained fully functional since its installation, delivering heating
and hot water, and significantly reducing the carbon footprint of the building’s occupants.

Lessons learnt: Solar thermal and PV cells were found to be cost-effective methods of improving the
environmental performance of a mixed-use building undergoing refurbishment, given the constraints of existing
structural loads and restricted floor-to-ceiling heights.

Photo courtesy of Peter Durant

18 © BCO 2012

AN EVALUATION OF THE COSTS AND BENEFITS
QUESTION 1:
WHAT ARE THE FINANCIAL COSTS AND BENEFITS TO DEVELOPERS AND
OCCUPIERS OF REDUCING EMISSIONS USING ON-SITE RENEWABLES?
Motivation
Understanding the separate costs and benefits of
on-site microgeneration helps to examine whether
efficient decision-making is possible in the context
of energy efficiency. This is especially relevant given
the incentive misalignment problems that frequently
result in non-optimal outcomes in this sector. These
problems include:
I Landlord/tenant issues – capacity installed by the
landlord delivers benefits to the tenants, and the
developer may not capitalise these benefits in rents.
I Allocation of risk – energy savings generated can
be subject to heavy discounting due to policy and
energy market uncertainty, which may not align with
the risk profile of the building’s owner.
I Developer/resale issues – capacity installed by the
project’s developer may not result in capitalisation in
the building’s value at sale, if it involves additional
complexity in facilities management (as is often the
case with biomass).
Because of these misalignments, building owners
frequently fail to consider ‘net’ costs attributable to
renewable technologies, and simply seek methods of
compliance with policy requirements for renewable energy
installation that minimise upfront capital expenditures.
By examining the costs and benefits separately, we
can begin to develop a simple picture of the impacts
of this policy before introducing assumptions that are
necessary for more detailed analysis.
Data
Over 3354 buildings in central London, for which
planning applications were made during the period
2006–2010 were reviewed as part of this study. Of
these buildings, only commercial office buildings
ON-SITE RENEWABLES
involving the application of renewable technologies
were included in the sample, reducing the sample size
to 82 in total. A further five buildings were removed
from the sample as they used highly visible renewable
technologies, and thus valuing their aesthetic benefit
with any certainty was considered to be too complex.
In total, 77 buildings were examined. Given this
relatively small sample size, generalisations made
later in this report to other office markets should be
treated with some caution.
Defining costs
The specification given in Figure 9 was used to define
the present value of financial costs. It incorporates the
main ongoing cost elements involved in using renewable
technologies, over the lifetime of the renewable measure:
loss of rent derived from loss of lettable area; materials
and labour used in maintenance; and replacement
fuel. Appendix 1 provides a more detailed description
of the methodology, discount rate and variables used
and the sources of data.
Defining benefits
The specification given in Figure 10 was used to define
the present value of financial benefits. It incorporates
the value of renewable obligation certificates and other
subsidies for which the building is eligible, and the
price of the electricity and gas usage that has been
displaced by the renewable energy generated, over
the lifetime of the building. Appendix 1 provides a more
detailed description of the methodology and variables
used and sources of data.
Findings
The total costs and benefits for each building in the
sample are illustrated in Figure 11. The benefits have
© BCO 2012 19
 ON-SITE RENEWABLES

Construction Value of
cost renewable
obligation
– certificates
Tax benefit on
construction +
cost
Benefit = Value of
Deflated to other
2005 values subsidies
Discount
+ + ÷ rate and
Displaced period
gas use
Net area loss
× ×
Price of gas
Lost rent
(basement)
+
+ Displaced
Net area loss electricity use
Cost = × ×
Lost rent Price of
(above ground) OVER LIFETIME
Discount electricity
OF BUILDING
+ ÷ rate and
Maintenance period
materials
Figure 10 specification for defining benefits.
Courtesy of Sturgis Carbon Profiling LLP
+
Maintenance
labour Important Finding: The average costs and benefits of
+ the sample are £570 and £190, respectively. Figure 12
illustrates how these are broken down into their
Replacement
fuels OVER LIFETIME components from the specification described earlier.
OF BUILDING
Figure 13 illustrates a basic marginal abatement cost
Figure 9 Specification for defining costs. curve (dividing the net cost of a renewable technology
used on a building by the total number of tonnes of
Courtesy of Sturgis Carbon Profiling LLP carbon emissions displaced by the use of renewables in
a given year) constructed in order to compare renewable
technologies on a cost per tonne basis across the
been calculated for three distinct discount rates (8%, 13% sample. Further details are given in Appendix 1.
and 33% – see Appendix 1 for discussion on discount
rates). The variation in benefits at different discount For each building in the sample, the emissions displaced
rates illustrates how different occupiers might view over the lifetime of the technology were assessed, with
the risks associated with the returns from renewable each year of emissions given equal weighting. The total
technologies. For a technology with a 20-year lifespan, emissions displaced were then ranked according to
these discount rates correspond to an implied range of ascending costs along the horizontal axis in Figure 14,
payback periods of between 3 and 10 years, which is with the width of the bars representing the amount of
consistent with other occupier behavioural studies displaced emissions for each building. Thus the area
undertaken for small-scale microgeneration (Element of each bar becomes the total net cost or benefit of a
Energy, 2009). renewable technology.

20 © BCO 2012
 ON-SITE RENEWABLES

1,000,000
Benefit to developer: 10-year payback period, 8% discount rate
Benefit to developer: 7-year payback period, 13% discount rate
800,000
Benefit to developer: 3-year payback period, 33% discount rate
600,000 Total costs (PV)

400,000

200,000

–200,000

–400,000

–600,000

–800,000

–1,000,000

Figure 11 The costs and benefits for the 77 developments assessed in this study.
Courtesy of Sturgis Carbon Profiling LLP

Average cost Average benefits

£190 Total cost

£570 over lifetime
of building

–
Cost of each Total benefit
tonne of CO2 = over lifetime
saved of building

Value of initial
÷
Capital cost subsidies
Total emissions
Indirect cost of Value of displaced fuel displaced
lettable area lost and heat
(over lifetime
Maintenance and Value of post-installation of building)
materials subsidies

Figure 12 Average costs and benefits to developers. Figure 13 Marginal abatement cost curve.
Courtesy of Sturgis Carbon Profiling LLP Courtesy of Sturgis Carbon Profiling LLP

© BCO 2012 21
 ON-SITE RENEWABLES

Savings 1.7 tCO2e saved at a cost of £1596.91/tCO2e to developer

1500 Costs
Subsidised abatement cost (£/tCO2e)

1000

500

37.1 tCO2e saved resulting in a net benefit of £145.77/tCO2e to developer

0 500 1000 1500 2000 2500 3000 3500

Carbon savings achieved (tCO2e)

Figure 14 Subsidised marginal abatement costs associated with on-site renewables.

Courtesy of Sturgis Carbon Profiling LLP

Savings
1.7 tCO2e saved at a cost of £1620.94/tCO2e to developer
Costs
Subsidised abatement cost (£/tCO2e)

1500

1000

89.7 tCO2e saved at a cost of £0.47/tCO2e to developer

500

0 500 1000 1500 2000 2500 3000 3500

Carbon savings achieved (tCO2e)

Figure 15 Unsubsidised marginal abatement costs associated with on-site renewables.

Courtesy of Sturgis Carbon Profiling LLP

22 © BCO 2012
 ON-SITE RENEWABLES

Figure 14 incorporates the value of any subsidies that
were applicable to specific buildings in the sample. Figure
15 shows the same data with these values removed,
to illustrate the impact on costs of withdrawing subsidies.
Discussion
Two observations can be made on comparing the costs
and benefits of installing renewable technologies in
different building types:
most instances the direct financial costs significantly
outweigh the direct financial benefits (associated
environmental benefits will be considered later in
the report).
I The level of benefits varies significantly, even
between buildings that incurred similar costs.
As illustrated in Figures 14 and 15, the net costs per
tonne of displaced carbon emissions across the
sample range from:

I Regardless of the discount rate chosen (based on a I £0.47/tonne CO2 to £3089/tonne CO2 when subsidies
comparison of three rates: 8%, 13% and 33%), in are not in place, to

Gas plant CCS retrofit

Reduced slash and burn agriculture Iron and steel CCS new build
conversion
80 Reduced pastureland conversion Coal CCS new build
Lighting – switch incandescent
to LED (residential) Grassland management Coal CCS retrofit
60
Appliances electronics Organic soils restoration
40 Motor systems efficiency
First-generation biofuels
Abatement cost (€/tCO2e)

20
Cars full hybrid
0
5 10 15 20 25 30 35 38
–20
Geothermal Abatement potential (GtCO2e per year)
–40 Rice management
Small hydro Solar CSP
–60 Waste recycling Reduced intensive
Efficiency improvements other industry agriculture conversion
–80
Landfill gas electricity generation High penetration wind
–100 Clinker substitution by fly ash Solar PV
Low penetration wind
–120 Building efficiency new build Degraded forest reforestation
Insulation retrofit (residential) Pastureland afforestation
–140 Tillage and residue management Degraded land restoration
Cropland nutrient management Nuclear
–160 Cars plug-in hybrid
Retrofit residential HVAC
–180
Second-generation biofuels
–200 Appliances residential

NOTE: The curve presents an estimate of the maximum potential of all technical GHG abatement measures below
€80 per tCO2e if each lever was pusued aggressively. It is not a forecast of what role different abatement measures
and technologies will play.

Savings Strategies sorted by cost-efficiency

Costs

This graph attempts to show ‘all in one’ the various measures for greenhouse gas reduction, with both reduction (in carbon
dioxide equivalents (CO2e)) and cost (in Euros (€)) quantified.
Read from left to right, it gives the whole range of strategic options, ranging from ‘low hanging fruit’ (in green), such as
building insulation (coming with economic savings), to the increasingly ‘higher hanging ruit’ (in red), such as afforestation
and wind energy.
Figure 16 Global cost curve for greenhouse gas abatement measures beyond ‘business as usual’ (greenhouse
gases measured in GtCO2e1).
Courtesy of McKinsey & Company

© BCO 2012 23
 ON-SITE RENEWABLES

I –£145/tonne CO2 to £2806/tonne CO2 when subsidies

are in place.

A negative cost indicates that, in these cases, profits

are realised when subsidies are in place. It is, however,
important to emphasise that only a small minority of
the sample achieve a profit. The requirement to use
on-site renewable technologies to generate electricity
acts, in effect, as a levy or tax on new development.

As Figures 14 and 15 illustrate, the majority of the

cost per tonne values from the sample are in excess
of £280/tonne CO2. In comparison to the potential for
reducing carbon emissions from other sectors of the
economy and other sources within the construction Figure 17 Carbon capture and storage.
industry, on-site renewable technologies represent an Courtesy of Statoil
extremely inefficient investment. McKinsey & Company’s
(2010) research (illustrated in Figure 16) can be used to
help understand what marginal cost per tonne is required
to deliver different levels of greenhouse gas reductions. Even the high-cost emerging technology of carbon capture
Our view of these figures is that for governments to and storage (Figure 17) represents a more cost-effective
stabilise global greenhouse gases at around 450 parts means of reducing emissions than most of the on-site
per million, which is seen as the threshold value at renewable technologies examined in the sample.
which to avoid dangerous climate change, will require
a cost of carbon of around €20-30 per tonne so long This finding gives rise to serious concerns about
as governments can efficiently target each sector of the efficiency of policies requiring the use of on-site
the economy best placed to deliver these reductions.7 renewable energy technologies.

QUESTION 2:
WHAT ARE THE DOMINANT FACTORS AFFECTING THE FINANCIAL COST
OF USING ON-SITE RENEWABLES TO REDUCE BUILDING EMISSIONS?
Motivation
Given the range of costs and the variation in size of
benefits of different buildings in the sample, the next
stage of the investigation sought to discover which
characteristics were driving these costs. Understanding
these costs may then help developers or owner-occupiers
to identify opportunities to reduce the cost of compliance
at an early stage and to understand the economic
fundamentals driving the costs of using renewable
technologies in commercial buildings (Figure 18).

This stage seeks to address issues such as:

I whether returns to scale occur, making larger
installations more cost-effective, or whether an
optimum size can be identified for renewable
Figure 18 Thermal storage needs space, and may be
problematic if demand for heat falls.
Courtesy of SolarVision

7 ‘Efficiency’ here refers to the ability of governments to introduce legislation on the most cost-effective measures first. It is, however,
recognised that this can often cause other political complications due to matters such as distribution of wealth effects that make the most
efficient outcomes impossible.

24 © BCO 2012

installations given the limits of energy demand
(e.g. for heating) in a building
I whether other planning policies impact on the costs
of meeting requirements for on-site renewable
technologies, for example by restricting the choice
of measures that could be used
I whether it is easier and more cost-effective to install
renewables in tall buildings or in low-rise structures.
Data
The sample used is the same as the one identified in
Question 1 (a total of 77 buildings in central London
in which renewable technologies were installed). To
identify the impact of various building characteristics
on costs, a range of other explanatory variables are
identified for each building.
Methodology
The ordinary least squares (OLS) method of regression
analysis was used to identify the association between
the net average cost of emissions reductions due to
500
50
0
–500
Abatement cost (£/tCO2e)
–1000
–1500
–2000 High cost installations
–2500
–3000
Figure 19 The relationship between abatement costs and total carbon savings from renewables on each building.
Courtesy of Sturgis Carbon Profiling LLP
ON-SITE RENEWABLES
the use of on-site renewables and the other variables
deemed likely to affect emissions. The variables used
are: the maturity of the technology used; the quantity
of CO2 saved; the existence of supply incentives; the
existence of tax incentives; whether the building is
listed or located in a conservation area; the size of the
building; and whether the building is new or refurbished.
The development of the regression model and the data
used are described in more detail in Appendix 2.
Findings
Figure 19 gives an intuitive feel for the data and the
trends within it, illustrating the relationship between net
average cost on a specific building (the dependent
variable) and a single variable (the total quantity of
CO2 saved on the building) (explanatory variable X3).
Examining this relationship suggests a number of
basic trends, even without carrying out a complex
regression analysis:
I Costs appear to be high at low values of total
emissions reduction, which could imply either that
Profitable installations
100 150 200 250 300 350
Carbon savings achieved (tCO2e)
Low cost installations
© BCO 2012 25
 ON-SITE RENEWABLES

small installations are inefficient, or that there is
selection bias, in that only high-cost measures are
capable of delivering low levels of carbon reductions
(e.g. PV).
I The initial high costs per tonne of carbon abated
may be explained by high fixed costs such as those
incurred by maintenance, where it can cost similar
amounts for a yearly service for a small or large
renewable installation, or marginal costs increasing
at a lower rate than the marginal benefits.
I Costs decrease as the amount of emissions
reductions required increases, up to a point around
40–100 tonnes.
I Around this point, some buildings can realise a
profit from operating on-site renewables (green
points in Figure 19).
I After this point, costs increase, but less rapidly than
they had decreased before, suggesting that there
may be competing influences on costs that are not
captured in this scatter plot. For example, technology
becomes more economically efficient at higher levels
of energy generation, but limits in demand for heat
may serve to restrict these potential gains.
I To capture this relationship of rapidly decreasing
costs followed by slowly increasing costs suggests
a cubic function relating to quantity, hence the
explanatory variables X4 and X3 in the final
regression specification.
Table 2 shows the results from the final OLS model
described above.
The minimum cost of compliance can be proven
(within this sample) to occur around the level of
90 tonnes of CO2 saved on each individual project.
Discussion
Of the explanatory variables investigated using the
regression model, the following are worthy of note:
I The total quantity of emissions reduced on a building
was found to have a highly significant impact on
cost in all the model terms (Quantity – linear,
Quantity – squared, Quantity –cubic, specifications).
In statistical terms we are thus 99.9% confident that
a 1 tonne increase in total emissions saved on a

Table 2 Results of regression analysis

COEFFICIENT t-VALUE P
Quantity 20.460 5.22 0.000
Quantity 2 –0.147 –5.35 0.000
Quantity 3 0.0003 5.04 0.000
New technology –232.111 –1.89 0.063
Supply incentive –368.714 –3.02 0.004
Tax incentive –113.969 –1.37 0.174
Conservation area –208.321 –2.02 0.048
New building 12.253 0.12 0.904
Number of floors –1.526 –0.77 0.443
Size –0.003 –0.76 0.452
Constant –432.456 –2.42 0.018
Observations 77
R2 0.524
Robust standard errors used: * significance at the 10% level; ** significance at the 5% level; *** significance at
the 1% level.
Source: Sturgis Carbon Profiling LLP

26 © BCO 2012

project will halve the cubic relationship to cost
described in the specification.
I To illustrate this effect through a point estimate, the
effect of saving an additional tonne of carbon at a
level where 50 tonnes are currently saved will
reduce net average costs by £5.80 per tonne.
I The regression analysis indicates (at a 95% confidence
level) that, if a given building is subject to conservation
area legislation, the average cost of saving 1 tonne
of carbon will increase by £208 on that building.
I This conservation area effect could operate in one
of two ways:
– the cost of applying the same technologies could
increase as a result of higher indirect associated
costs (e.g. installing the technology without
affecting the appearance of the building could
increase the area of lettable space lost)
or
– the choice of measures that could be employed
on a building in a conservation area could be
limited to those that are more expensive.
I It can also be shown that a statistically significant
and negative effect is associated with the use of
QUESTION 3:
HOW DO THESE COSTS COMPARE WITH OTHER POLICY ALTERNATIVES?
Motivation
At present, policies on the use of renewable energy
target reductions in emissions at the level of individual
developments. In the discussion of Question 1 (see
page 19) evidence was presented of the substantial
variation in costs incurred, with net average costs per
tonne ranging from –£2806 to +£145 (enabling building
owners to make a modest profit from the installation
of renewable technologies).
Equally important to these findings are the sensitivity of
these costs to scale, with strong statistical evidence to
suggest that up to 37% of the variance in these costs
can be explained by a single variable, the quantity of
emissions, alone.8
These findings could support arguments for an alternative
policy instrument that encourages developers to target
more cost-effective levels of emissions reductions
and seek profits from the installation of renewable
technologies, subject to their respective constraints,
8 In the simplified OLS regression model, NACb = α + β2X2,b + β3X3,b + β4X4,b + εb, using robust standard errors R2 =37.65%.
ON-SITE RENEWABLES
supply incentives for renewable measures on a
given building. This result is counter-intuitive, as
supply incentives would be expected to reduce
rather than increase costs. However, the reader
is reminded that association does not constitute
causality; the most likely explanation in this case is
that the regression model has identified a correlation
between subsidies being in place for expensive
technologies, rather than a tendency for subsidies
to make technologies more expensive.
I Finally, there is weak statistical significance (at the
10% significance level) for the following variables:
– whether the development is a new or refurbished
building – new development is associated with
reducing net average costs by £12 per tonne,
compared with refurbishments
– the maturity of the technology – using a new
technology is associated with increasing net
average costs by £232 per tonne.
I The remaining three variables, size of building,
number of floors and the existence of tax incentives,
were found to have no significant impact on costs in
the sample examined.
by choosing the optimum size of installation in the
presence of a uniform carbon-reduction subsidy.
In practice, however, while reducing the burden on
developers, such a policy might not deliver the quantity of
emissions reductions deemed necessary by legislators.
This approach would also depend on some quite strong
rational economic behavioural assumptions, which
may not be realistic in practice, given the range of
discount rates observed and the problems of incentive
misalignment previously discussed.
An alternative approach would be for local authorities to
be responsible for commissioning new renewable energy
installations, identifying the most cost-effective and
carbon-efficient generating solutions for each district, and
funding these projects through planning charges. Such
an approach would provide greater certainty for legislators
on the delivery of carbon reductions. While it might
be less efficient than the ‘first best’ solution identified
above, it could deliver carbon emissions reductions
at a significant cost saving over the status quo.
© BCO 2012 27
 ON-SITE RENEWABLES
To examine these issues, a simple comparison is
made between the compliance costs associated with
the current policy and those associated with a district
CHP scheme.9 It is worth stressing here that it is not
the intention of this report to advocate greater use of
CHP, but merely to question whether other policy
alternatives exist that are more efficient.
This approach has also been advocated by the Zero
Carbon Hub through their work on allowable solutions,
which envisages local energy funds or the use of
embodied carbon to deliver savings more cost-effectively.
The basis for using CHP (Figure 20) as an alternative
is three-fold: it can be considered as an alternative to
renewables by the GLA today; it can deliver emission
reductions in a non-location-specific way (i.e. it can be
generalised with relevant land-value conversion factors),
and technology and price effects are likely to be correlated
with renewables (as renewables become cheaper, it
is likely that CHP units will become cheaper also, as
they share similar markets and both will be subject to
technological advancement over the coming years).
It is recommended that more research should be carried
out in this area, and that the comparison outlined below
should simply be regarded as framing the problem to
be investigated.
Data
Data for the comparison exercise were taken from an
Energy Saving Trust study of a large-scale community
Figure 20 A CHP plant in Aberdeen.
Courtesy of Aberdeen Heat and Power Company Ltd
9 For those wishing to find out more, London First’s report Cutting the Capital’s Carbon Footprint (2008) provides a detailed critique of the
challenges and opportunities associated with decentralised energy.
28 © BCO 2012
scheme in Aberdeen (Energy Saving Trust, 2004)
and adjusted to account for various factors specific to
London (e.g. the higher cost of land and labour). The
costs per tonne associated with the existing policy on
on-site renewable energy were taken from the average
of the sample used in the preceding sections.
Methodology
As described above, this section serves only to consider
a simple comparison of the cost of achieving a 1 tonne
reduction in emissions through on-site renewable
technologies (the status quo) and of a large-scale
efficient off-site CHP installation, adjusted to take
account of London-specific opportunity costs. Full details
of these adjustments and the analysis underlying this
comparison are given in Appendix 3.
Findings
Figure 21 provides a simple comparison on a cost per
tonne basis of the current policy for on-site renewable
On-site renewables District CHP
£130
£175
£380
Cost to private sector (developer)
Cost to public sector (subsidies)
Figure 21 Comparison of the abatement cost
associated with on-site renewables and an alternative
policy.
Courtesy of Sturgis Carbon Profiling LLP
 ON-SITE RENEWABLES

energy and the policy alternative of large-scale

installations. The total net costs per tonne associated
with the existing policy were identified in the discusiion
on Question 1 (see page 19) as being £380, whereas
for the large-scale alternative the total costs are £175
per tonne.

Discussion
This illustrative comparison suggests that, while
commissioning a large-scale district energy installation
could be both costly and practically complex, it could
also offer significant savings both to taxpayers (who
would incur less cost in subsidies) and developers. The
comparison made here suggests that savings could be
in the region of £205 per tonne of CO2 abated to the
private sector and around £130 per tonne to taxpayers.
If indicative of relative costs across the UK as a whole,
the savings to both the private sector and taxpayers
could be in the region of £153 million every year.10
Further research on the potential of large-scale
renewable energy installations is recommended to
explore these issues more fully, with reference to other
UK locations and large-scale renewable technology
alternatives. The type of approach adopted would
also need further consideration, and three options
are briefly outlined below:
I A direct approach: Local authorities provide a default
means to achieve carbon emissions reductions,
through large-scale retrofitting projects or district-level
schemes, which could capitalise on economies of
scale. These projects could be supported financially
through planning contributions, with an effective
price per tonne of £125–175.11 At these price levels,
efficient renewables will be encouraged that are
capable of being delivered for less than this, while
the more expensive and inefficient renewable
applications will not be pursued.
Issues: Weak evidence of successful local authority
roll-out to date; lack of capacity and skills of local
authorities; no market incentive for good performance.
Figure 22 Wildlife Mitigation Bank, California.
Courtesy of Burns & McDonnell
I A private-sector approach: Developers could provide
carbon savings on-site and, where they are able to
save in excess of their reduction requirements, then
sell excess reductions to other developers who are
unable to achieve reductions as cost-effectively.
Issues: Robust measurement and verification
procedures are required, which, due to transaction
costs, may wipe out the gains that a market-based
approach may provide.
I A flexible approach: This is similar to the wetland
banking system used in the USA (Figure 22), in which
all developers are required to reduce emissions by an
amount decided centrally by government, and where
compliance can be achieved through either buying
allowances from other parties (e.g. local authorities,
energy service companies or other developers who
exceed their targets) or through providing low-cost
renewables on site. Such a scheme may help change
attitudes towards carbon reduction, by fostering a
partnership-based approach, allowing the sharing
of risk more effectively and through the bargaining
power benefits that local authorities may bring to
the table.
Issues: Again robust measurement and verification
procedures are required.

10 Based on an average annual number of tonnes reduced per square metre of 0.0027 tonne and a 10-year average new-build construction
for commercial properties of 8,301,000 m2. Although a crude estimate, it is believed that this should provide a conservative lower bound
for the potential savings, given that commercial property uplift figures do not take into account replacement (as occurs through demolition
and rebuilding) and do not include refurbishment projects. In addition, if retrofitting of existing stock and embodied carbon were also
considered, significant additional savings could be realised.
11 Such a price level should be based on the capacity of renewables to become cheaper over time due to the market maturing and
improvements in technology. Comparisons with similar technology sectors would suggest that 50–70% price reductions may be feasible,
supporting an initial price of carbon of £50/tonne.

© BCO 2012 29
 ON-SITE RENEWABLES
QUESTION 4:
HOW DO THESE COSTS COMPARE WITH THE FORGONE
ENVIRONMENTAL DAMAGE?
Motivation
Earlier sections of this report have focused only on the
financial costs and benefits to developers and the costs
to taxpayers in the form of subsidies. These, however,
represent only half of the equation, as the purpose of
on-site microgeneration policies is to avoid harm to the
environment caused by the build-up of greenhouse
gases such as CO2, which result in global warming.
Although a discussion of the science associated with
these wider issues is outside the scope of this report,
we believe that examining the value placed by
government on avoiding this damage is an important
stage in appraising the on-site renewable energy
policy. Our reasons for doing so are three-fold:
I The values placed by government on avoiding
environmental damage (shadow prices of carbon)
take into account the possible costs of delivering
emissions reductions in other sectors of the economy,
given the government’s policy targets (as illustrated
in the MAC curve shown in Figure 25). Therefore, if
the costs per tonne considerably exceed the shadow
price, it should be possible to achieve significant
carbon reductions in other sectors of the economy
far more cost-effectively.
I Retaining a policy that delivers a benefit that is far
outweighed by the cost could, however, be justified,
if the relatively high cost is a short-term problem
and costs are expected to fall over time. Comparing
shadow prices with the observed costs of the policy
enables an assessment of how much these costs
would need to fall in order for a matching long-term
equilibrium situation to be achieved.
I
Comparing these costs and benefits with those of
similar technological sectors could provide a measure
of whether this justification is realistic for this
particular policy.
I Comparing the costs of the policy with its
environmental benefit allows consideration of
whether it is preferable to apply this particular policy
today or at a later date. This is not to question the
urgent need to reduce greenhouse gas emissions
now, but emphasises that, given that the value of
12 For further discussion, see Dietz (2007).
13 See, for example, Clarkson and Deyes (2002) and Price et al. (2007), which relied solely on demand side estimations of value.
30 © BCO 2012
forgone environmental damage is time dependent,
the introduction of this particular policy might be
more easily justified at a point in time when its cost
better reflects the environmental benefit.
Data
This section uses the average measure of the costs and
benefits of the sample, as a tonne of carbon saved on
one project is of equivalent value to society as any other
tonne of carbon saved on any other project. The value
of forgone environmental damage is calculated using
the shadow price of carbon. Although this is by no
means a perfect measure, it is widely used, its limits are
well known12 and it provides considerable improvements
on the accuracy of measures employed previously.13
Methodology
The value of forgone environmental damage associated
with each building in the sample is calculated using
the formula for the present value illustrated in Figure 23.
A more detailed explanation is given in Appendix 4.
Emissions
saved
×
Value of Value in given
forgone = time period
damage
÷
Social discount
OVER LIFETIME rate @ 35%
OF BUILDING
Figure 23 Present value of forgone environmental
damage.
Courtesy of Sturgis Carbon Profiling LLP

Findings
Figure 24 provides a simple analysis of costs and
benefits on a per tonne basis, from the perspective of
a private owner/occupier’s cash flow and from the
perspective of society. The cost of saving each tonne
of carbon using on-site renewables and through the
alternative policy analysed in the discussion on
Question 3 (see page 27) is equated to the shadow
price of a tonne of carbon in each case.
The aggregate analysis indicates that, even once the
value of forgone environmental damage is included,
the burden generated by this policy is in excess of
£470 per tonne.
Discussion
These findings suggest that the costs to building owners,
occupiers and UK taxpayers far exceed the value of the
forgone environmental damage generated by the policy.
The figures suggest, in accordance with the cost curve
developed by McKinsey & Company (see Figure 16),
that many sectors of the UK economy are capable of
delivering these savings in a far more cost-effective way.
Figure 25 shows an approximate ranking in terms of
cost of the means by which carbon savings are being
Cost to taxpayers
On-site renewables
£130
1 tonne
£380
Social value
CO2 saved
Cost to developers
vs
District CHP
£175 1 tonne
Social value
Cost to developers CO2 saved
ON-SITE RENEWABLES
made in the UK. Included in the figure are both
reductions associated with legislative requirements
(including successive target emission rates required
under Part L of the Building Regulations) and those
means by which further reductions could be made
at lower compliance costs than those of the on-site
renewables in this sample.
The costs of complying with a requirement for on-site
renewables would need to fall by a factor of ten to
justify the installation of such resources in the long-term.
While the price of the technology is expected to change,
a change of the required magnitude seems most
unlikely at present.
As discussed above, given that the social value of
carbon changes over time, a more pragmatic approach
would be to reintroduce this policy at a later period,
when the costs would be easier to justify given the
higher values placed on avoiding CO2 emissions at
that time.
Some evidence exists to support this course of action,
in that the value of avoiding carbon emissions will
increase to over £200 per tonne by 2050. However, it
is clear that, without significant reductions in the costs
of the technology, most on-site renewable energy
installations would continue to represent a financial
burden on developers, taxpayers and the environment.
£40
£40
Figure 24 Costs and benefits per tonne.
Courtesy of Sturgis Carbon Profiling LLP
© BCO 2012 31
 ON-SITE RENEWABLES

Improved lighting efficiency

Low-cost renewables
Cavity-wall insulation
Net benefit

Cost-effective requirements under Part L

Energy-efficient appliances
Occupiers reducing energy consumption

Use of materials with low embodied carbon

Solid-wall insulation
Non-cost-effective requirements under Part L
District low-carbon energy networks
Net cost

Average cost of renewables: CHP, heatpumps, borehole cooling, etc.

High-cost renewables: CHP, fuel cells

Figure 25 Approximate ranking of abatement technologies by cost per tonne.

Courtesy of Sturgis Carbon Profiling LLP

32 © BCO 2012

KEY FINDINGS
The findings from this research indicate that on-site
renewable energy installations can generate modest
financial returns to investors and occupiers in the
presence of subsidies, although they rarely do.
Taking account of all the costs and benefits, the
average net position is a cost of £382 per tonne, even
with the help of subsidies.
The research has also shown that costs are sensitive
to external factors, such as conservation area status
(which increases costs by restricting the range of
technologies that can be used).
Our calculation of the forgone value of environmental
damage in the UK, based on the government’s appraisal
method, suggests grounds for serious concern. The
negative NPV to developers (£173 million) exceeds
the environmental benefits (£18 million) by a factor
of ten each year.
These high costs are a consequence of the physical
constraints of dense urban environments, which limit
KEY RECOMMENDATIONS
I A wider review of the costs and benefits of achieving
emissions reductions across the built environment is
required, using MAC curves for a range of building
types and carbon reduction processes.
I The efficiency of subsidising on-site renewables, as
a means of reducing emissions, should be reviewed.
I Local authorities should explore the role of district
and large-scale renewable installations as
alternatives to on-site microgeneration, especially in
the context of hard-to-treat stock such as that in
historic city centres.
I All parties should play to their strengths: developers
should be encouraged to seek profits by installing
ON-SITE RENEWABLES
CONCLUSIONS
the range of technologies available and the scale at
which they can be deployed, and reduces the level of
emissions reductions that can be achieved through
this means.
In response to this concern, a simple policy alternative
has been examined, which suggests that similar
environmental benefits could be delivered at lower
costs. This report, however, does not advocate a
specific technological solution: a wide range of
measures could reduce emissions far more cost-
effectively than on-site renewables.
The implications of these findings suggest that, as
further carbon savings will be required from
commercial buildings in the UK in the near future,
other strategies to supplement on-site renewable
energy must urgently be explored. Only by doing so
can the burden on occupiers and developers be
minimised and emissions reductions delivered in the
most cost-effective way.
on-site renewable technologies where it is possible
to do so profitably, while local authorities should use
their collective bargaining power to remove barriers
in the delivery of large-scale solutions.
I More flexible policy mechanisms should be
investigated, allowing combinations of on-site
solutions and purchase of carbon allowances at a
realistic price in order to drive behavioural change
(e.g. £125–175 per tonne), encouraging local
authorities to take an active role in creating and
delivering large-scale low-carbon power projects
and to make best use of their bargaining positions
to reduce transaction costs.
© BCO 2012 33
 ON-SITE RENEWABLES

I A more detailed enquiry should be undertaken into for a larger investigation of the economic and
how these findings relate to other land markets and environmental benefits of low carbon legislation on
commercial building types across the UK. As such, commercial property in the UK.
this report should be perceived as a scoping study

34 © BCO 2012
 ON-SITE RENEWABLES

REFERENCES

British Council for Offices (2007) Renewables and the London Plan. London: British Council for Offices. Available at:
http://www.bco.org.uk/uploaded/Renewables_report.pdf (accessed 3 June 2012).
Building Cost Information Service (2001) Life Expectancy of Building Components. London: Royal Institution of Chartered
Surveyors.
CABE (Commission for Architecture and the Built Environment) (2007) Sustainable Design, Climate Change and the Built
Environment. London: CABE. Available at: http://www.designcouncil.org.uk/Documents/Documents/Publications/CABE/
sustainable-design-and-climate-change.pdf (accessed 3 June 2012).
Carbon Trust (2010) Introducing Combined Heat and Power. Available at: http://www.carbontrust.com/media/19529/
ctv044_introducing_combined_heat_and_power.pdf (accessed 11 July 2012).
C B Richard Ellis (2010) Prime Rent and Yields Monitor Q2 2010. London: CB Richard Ellis. Available at:
http://www.cbre.co.uk/uk_en/news_events/news_detail?p_id=5167 (accessed 11 July 2012).
Clarkson R and Deyes K (2002) Estimating the Social Cost of Carbon Emissions. Government Economic Service Working
Paper 140. London: HM Treasury. Available at: http://www.hm-treasury.gov.uk/d/SCC.pdf (accessed 3 June 2012).
Day T, Ogumka P and Jones P (2007) Review of the impact of the energy policies in the London Plan on applications referred
to the Mayor (Phase 2). London: London South Bank University. Available at:
http://london.gov.uk/archive/mayor/planning/docs/lsbu-research.pdf (accessed 3 June 2012).
Day, T, Ogumka, P & Jones, P (2009). Monitoring the London Plan: Energy Policies – Phase 3. Part 1 Report. Final. London:
London South Bank University. Available at: http://static.london.gov.uk/mayor/priorities/docs/lon-plan-energy-policies-
monitoring-1.pdf (accessed 3 June 2012).
Department of Energy and Climate Change (2009) The UK Low Carbon Transition Plan. London: Department of Energy
and Climate Change. Available at: http://www.decc.gov.uk/assets/decc/White%20Papers/UK%20Low%20Carbon%
20Transition%20Plan%20WP09/1_20090724153238_e_@@_lowcarbontransitionplan.pdf (accessed 3 June 2012).
Department for Business Innovation and Skills (BIS) (2008) The Growth Potential for Microgeneration in England Wales and
Scotland. London: BIS. Available at: http://webarchive.nationalarchives.gov.uk/+/http://www.berr.gov.uk/files/file46003.pdf
(accessed 11 July 2012).
Dietz S (2007) Review of DEFRA paper: ‘The Social Cost of Carbon and the Shadow Price of Carbon: What They
Are, and how to Use Them in Economic Appraisal in the UK’. London: London School of Economics. Available at:
http://eprints.lse.ac.uk/21613 (accessed 3 June 2012).
Element Energy (2009) Uptake of Energy Efficiency in Buildings. Available at: http://downloads.theccc.org.uk/docs/
Element%20Energy_final_efficiency_buildings.pdf (accessed 3 June 2012)
Energy Saving Trust (2004) Aberdeen City Council: A Case Study of Community Heating. London: Energy Saving Trust.
Available at: http://www.energysavingtrust.org.uk/england/Publications2/Housing-professionals/Heating-systems/
Community-heating-Aberdeen-City-Council-case-study-2004-edition (accessed 3 June 2012).
HM Treasury (2011) The Green Book. Appraisal and Evaluation in Central Government. Treasury Guidance (updated
version of 2003 edition). London: TSO. Available at: http://www.hm-treasury.gov.uk/d/green_book_complete.pdf
(accessed 3 June 2012).
Mayor of London (2004) The London Plan: Spatial Development Strategy for Greater London. London: Greater London
Authority. Available at: http://legacy.london.gov.uk/mayor/strategies/sds/london_plan/lon_plan_all.pdf (accessed 3 June 2012).
Mayor of London (2008). The London Plan: Spatial Development Strategy for Greater London. Consolidated with Alterations
since 2004. London: Greater London Authority. Available at: http://www.london.gov.uk/thelondonplan/docs/londonplan08.pdf
(accessed 6 June 2012).
Mayor of London (2011a) The London Plan: Spatial Development Strategy for Greater London. London: Greater London Authority.
Available at: http://www.london.gov.uk/sites/default/files/The%20London%20Plan%202011.pdf (accessed 3 June 2012).

© BCO 2012 35
 ON-SITE RENEWABLES

Mayor of London (2011b). Delivering London’s Energy Future. The Mayor of London’s Climate Change Mitigation and Energy
Strategy. London: Greater London Authority. Available at: http://www.london.gov.uk/sites/default/files/Energy-future-oct11.pdf
(accessed 3 June 2012).
McKinsey & Company (2010) Impact of the Financial Crisis on Carbon Economics: Version 2.1 of the Global Greenhouse Gas
Abatement Cost Curve. Available at: http://www.mckinsey.com/client_service/sustainability/latest_thinking/greenhouse_
gas_abatement_cost_curves (accessed 17 August 2012).
Price R, Thornton S and Nelson S (2007) The Social Cost of Carbon and the Shadow Price of Carbon: What They Are, and
how to use them in Economic Appraisal in the UK. London: Department of Environment, Food and Rural Affairs. Available
at: http://archive.defra.gov.uk/evidence/series/documents/shadowpriceofcarbondec-0712.pdf (accessed 3 June 2012).
Royal Institute of Chartered Surveyors (RICS) (2007) Code of Measuring Practice: A Guide for Property Professionals, 6th
edn. London :RICS.
United Nations Statistics Division (2012) Millennium Development Goals Indicators: Carbon Dioxide Emissions (CO2),
thousand metric tonnes of CO2 (CDIAD). Available at: http://mdgs.un.org/unsd/mdg/SeriesDetail.aspx?srid=749&crid=
(accessed 11 July 2012).

36 © BCO 2012

COMMENT ON DISCOUNT RATES
Discount rates enable cash flows from future time
periods to be placed alongside present-day cash
flows. They take into account a range of general time
uncertainties, as well as how risky receiving the future
cash flows might be. Within this report, various
discount rates are used to reflect the degrees of risk
associated with the different cash flows being
analysed. The more risky the future cash flow might
be, the higher (larger percentage) the rate used.
An example of this is how the government carries out
the valuation of forgone environmental damage, where a
DEFINING COSTS
The following specification was used to define the
present value of financial costs:
Costb = {[CCb – (Taxe – CCb) × Defy]} +
t = lifespan
∑ (NIAb1 × R1) + (NIAb2 × R2) + Mb + Lb + Fb
t=1
(1 + r)t
where the total cost of the renewable technology on
building b is Costb.
The various cost variables are:
CCb construction cost of the renewable technology
on building b
Taxe any tax benefit from the use of technology b
Defy cost deflator to 2005 prices from year y
NIAb1 net area loss on building b in area 1
(basement)
NIAb2 net area loss on building b in area 2 (above
ground)
R1 rent in area 1 (basement)
ON-SITE RENEWABLES
APPENDIX 1:
DEFINING COSTS
rate of 3.5% is used (see page 30) (as prescribed in the
HM Treasury Green Book, 2011) this low rate reflects the
long-view that the government takes on the damage or
benefits that may accrue at a long time in the future and
that they believeit is important not to discount too heavily
(in fact, some would argue that this is still too high).
However, the opportunity costs of forgone lettable area
in this report are discounted at the higher rate of 6.13%
(see page 20), which reflects the mean 15-year yield
rate for offices, sourced from CB Richard Ellis (2010).
This higher rate reflects the rental income and asset
risk that private investors perceive in the office market.
R2 rent in area 2 (above ground)
Mb maintenance materials on building b
Lb maintenance labour on building b
Fb replacement fuel(s) on building b
r discount rate
t discount time period.
Data
Values for these data were sourced as follows:
CCb, the capital costs paid by developers to purchase
the items of technology intended to achieve the required
CO2 reductions, were sourced from the Corporation of
London’s Planning Archive, where available, or provided
directly by the developer, or based on general cost
estimates provided by Davis Langdon.
Data for Taxe, the value of the enhanced capital
allowance (ECA) and other tax subsidies to the
developer were derived, in the absence of developers’
tax records, on the basis of a number of assumptions:
if it were possible to claim the ECA in that year with
© BCO 2012 37
 ON-SITE RENEWABLES
the item of technology identified, a developer would do
so (developers act rationally and are well informed); all
developers pay tax at a uniform rate of 28%; and, finally,
when a developer chose a technological measure
benefiting from ECA, they were expecting to make an
accounting profit from which the ECA could be deducted
(projects would not be given the go ahead on a no-profit
basis). With these conditions holding true, the value of
the ECA variable would be 28% of the capital cost if
the measures used appeared on that year’s ECA list.
A deflating factor, Defy, corrects for time-related cost
differences between observations by adjusting to 2005
prices. The deflator was chosen on the basis of
information from the Department for Business Innovation
and Skills. Although the use of one deflator for different
costs is far from ideal, given the short time period of
this study and the fact that all major cost variables
positively correlate with construction costs, it was
decided that using a single value would not overly
compromise the specification.
NIAb1 and NIAb2, the net internal areas (in the basement
and above ground, respectively) forgone by using a
particular technological solution, were measured (in
accordance with the Royal Institution of Chartered
Surveyors’ (RICS) Code of Measuring Practice (2007))
from the plans submitted with planning applications
held by the Planning Archive.
DEFINING BENEFITS
The following specification was used to define the
present value of financial benefits:
Benefitb =
t = lifespan
∑
t=1
ROCb + SUBb + (Eg × Pg) + (Ee × Pe)
(1 + r1,2,3)t
where the total benefit of the renewable technology on
building b is Benefitb.
The various other benefit variables are:
ROCb value of renewable obligation certificates
generated by the renewables on building b
SUBb value of other subsides now introduced on
building b
38 © BCO 2012
R1 and R2, the value of forgone lettable areas
(in the basement and above ground, respectively),
were sourced from IRIS Engineering and Technology,
a building consultancy firm specialising in asset
management and environmental appraisals of
buildings in central London.
Data for Mb and Lb, the cost of materials and labour
required each year to maintain specific renewable
technologies, and Fb, the cost of fuel, were provided
by the Energy Saving Trust.
A value of 6.13% was chosen for r, the discount rate
used by developers to capitalise future payments and
income into a present value, based on the 15-year
mean yield rate for offices sourced from CB Richard
Ellis. It is acknowledged that yields are typically lower in
central London, but evidence suggests that developers
may discount future cash flows relating to renewable
measures more heavily (Department for Business
Innovation and Skills, 2008). Given this uncertainty
over a correct rate, various alternatives were
examined in the calculations of benefits.
Data for t, the lifespan of the renewable technologies
employed, were sourced from the Building Cost
Information Service (2001).
Eg energy generated that displaces gas use
Ee energy generated that displaces electricity use
Pe price of electricity
Pg price of gas
r1,2,3 range of different discount rates used
t time period of discount rates.
Data
Data for ROCb, the value of Renewable Obligation
Certificates awarded, were sourced from IRIS
Engineering and Technology.
Eg and Ee, the quantity of energy generated that
displaces the use of gas and electricity, respectively, were
obtained from the Energy Statement for each building
held in the Corporation of London Planning Archive.

Pe and Pg, the prices of gas and electricity, are the prices
offered on a commercial tariff in 2005 by Powergen, a
large utilities provider in the UK.
Values for t are as defined for costs above.
Three values (8%, 13% and 33%) are used for r, the
discount rate applied by occupiers.
MARGINAL ABATEMENT COST CURVE
The marginal cost abatement (MAC) curve is
calculated as follows:
Costb – Benefitb,r = 13%
Net average costb =
t = lifespan
∑ Emissionsb
t=1
ON-SITE RENEWABLES
All prices and costs are baselined to 2005 to enable
comparisons to be made between projects within the
sample carried out in different periods. Checks of
robustness were done by taking different alternative
baseline time periods, none of which resulted in a
substantial change the findings of this report.
where Costb and Benefitb are defined as previously,
and Emissionsb is the total number of tonnes of CO2
displaced by the use of renewables in a given year
in building b.
© BCO 2012 39
 ON-SITE RENEWABLES
APPENDIX 2:
REGRESSION MODEL
MODEL
Ordinary least squares (OLS) regression analysis14
was used to test the explanatory power of the different
control variables on the variance of the net average
costs per tonne. The basic estimation model is:
Regulatory compliance cost (RCC)i = α + β1Quantity
+ γ1′ X + αi
where the dependent variable is the regulatory cost
of CO2 abatement of building i. The main coefficient of
interest is β1, which measures the effect of one unit
of emission reduction required. The other control
variables are part of X, and εi is the error term.
Robust standard errors were used in all regressions.
Four models of estimating the RCC were examined:
I Model I – a linear specification of all variables.
I Model II – introduces a quadratic expression of
the Quantity variable (Quantity 2).
I Model III – introduces a cubic specification into the
Quantity variable (Quantity 3), in response to
DATA
The variables used are explained in more detail below.
Maturity of the renewable technology used. A control
dummy is introduced into the specification, as it is
anticipated that new methods of emission reduction
may be more expensive. A dummy variable of 1 is
given if the technology is new, and the expected
coefficient is negative.
Quantity of CO2 saved. It is anticipated that various
effects may occur through this variable. First, economies
14 OLS regression analysis is a means of identifying the association between a single continuous variable (in this case, the net average cost
of emissions reductions using on-site renewables) and one or more other variables deemed likely to affect it. The method of estimation
involves identifying values for the parameters β1 to β9 in this model that are capable of predicting a value for the net average cost that is
as close as possible to the actual value. Tests of statistical inference are then carried out on these parameter values to decide if their
least squares estimates have significance and are robust.
40 © BCO 2012
expectations described above and after viewing the
scatterplot, which supports the cubic functional form.
I Model IV – the most parsimonious regression model,
introduces the new technology control and is given by:
Net average costb= α + β1X1,b + β2X2,b + … β9X9,b + εb
The dependent variable is the net average cost on
building b, given by the explanatory variables:
X1 the maturity of the renewable technology used
X2 the quantity of CO2 saved by the technology
X3 (quantity of CO2)2
X4 (quantity of CO2)3
X5 existence of supply incentives
X6 existence of a tax incentive
X7 building located in a conservation area or listed
X8 size of the building
X9 new or refurbished
εb error term.
of scale may help reduce regulatory compliance costs,
as the ‘output’ of emission reductions increase (by
reducing the impact of fixed costs, such as yearly
maintenance costs, or reducing heat losses through
higher efficiency components via the installation of
larger plants). The second effect, which contrasts with
this, may be that output constraints start to bind and
limit a developer’s ability to choose the most efficient
factors of emission reduction. For example, use of
the surrounding ground as a thermal store may be
constrained by fears of raising bedrock and water table

temperatures. It is thus expected that, after a given level
of emission reduction, costs may again begin to rise,
although benefits from economies of scale may persist.
For these reasons, it is anticipated that the regulatory
compliance cost function, rather than being a quadratic
average cost curve function, may follow a cubic
relationship restricted within certain bounds. Thus
three terms for the quantity of CO2 saved are included.
Dummy variables are applied to control for projects on
which supply incentives have been awarded through
ROCs or on which ECA tax incentives apply. The
expected coefficients are positive.
Conservation area and listed building status. Buildings
in these categories are subject to stricter planning
controls than others. This is expected to increase
developers’ costs and indirectly restrict their choices.
A dummy variable of 1 is given if a building is inside
a conservation area or the property is a listed building.
The expected coefficient is negative.
RESULTS
The size of installation that minimises compliance
costs was identified by taking the derivative of the
fitted model with respect to quantity, setting the first
derivative equal to zero and solving with respect to
quantity, as shown below:
Net average cost (NAC) = α + β1X1 + β2X2 + … β9X9
where β1 = 20.46040 (to 5 decimal places (dp)),
β2 = –0.14660 (5 dp), β3 = 0.00025 (5 dp), and X1 = Q
(quantity saved on building b), X2 = Q1 and X3 = Q1.
Taking the first derivative
ΔNAC/ΔQ = 20.46040 – 0.29320Q + 0.00075Q2 = 0
and solving using the quadratic formula
ON-SITE RENEWABLES
Size of building. It is expected that, as a building
becomes larger, it will become easier to accommodate
a renewable measure (because of the additional
flexibility). The expected coefficient is positive.
Number of floors. It is expected that the ratio of roof
area to energy demand will decrease as the building
height increases. The expected coefficient is negative,
as low-cost measures requiring large amounts of roof
space (e.g. solar water heating) will become
increasingly difficult to apply.
New or unrefurbished space. This is typically less
efficient and less capable of accommodating new
mechanical and electrical plant because of constraints
of the existing structure. A dummy variable of 1 is
given if the space is new, and zero if it is refurbished;
the expected coefficient is negative.
–(–0.2932) ± (0.2932)2 – 4 × 20.46040 × 0.00075
Q=
2 × 0.00075
Q = 90.9 (1 dp), 299.9 (1 dp)
to derive which point is a maximum and which is a
minimum. Taking the second derivative
Δ2NAC/ΔQ2 = –0.29320Q + 0.00150Q
where
Q = 90.9 Δ2NAC/ΔQ2 < 0, therefore a maximum
Q = 299.9 Δ2NAC/ΔQ2 > 0, therefore a minimum
© BCO 2012 41
 ON-SITE RENEWABLES

APPENDIX 3:
MODELLING THE COSTS PER TONNE OF
A POLICY ALTERNATIVE

In this illustration, the methodology was revised slightly
to reflect the variables for which data were available
(values are given in Table A3.1).
Data for the capital cost (CC) and whole-life cost (WLC)
of the CHP plant (the latter including annual fuel (f)
and maintenance (m) costs over 25 years (t)), and for
the total CO2 emissions (e) produced were sourced
from the original case study report (Energy Saving
Trust, 2004), where:
t = 25
The prices per kilowatt-hour of gas and electricity (pg
and pe, respectively) are those offered by Powergen
on a commercial tariff in 2005 (as in Appendix 1), and
the annual net benefit (B) is calculated as the cost of
the displaced gas and electricity, minus the annual fuel
and maintenance cost and opportunity cost:
B = [(g × pg) + (e × pe) – [(f + m) + OC
The net average cost per tonne (NAC) is defined as the
difference between the capital cost and the net present

WLC = CC + ∑ (f + m) value of B (NPVB, based on a discount rate of 13%

t=1 over 20 years), divided by the total CO2 emissions over
20 years, where:
A similar scheme in central London would also involve
the opportunity cost (OC) of lost lettable area. The NAC = CC – NPVB
value of this opportunity cost is based on assumptions
∑t = 1 E
t = 20

made for the space required for a typical CHP plant

and the notional rent rate (assuming the plant is
located in a basement in central London).
Data
The literature on CHP technology (e.g. Carbon Trust, Table A3.1 Values used in the model
2010) commonly assumes an efficiency rate (R1, the
proportion of CO2 that is converted to usable energy)
OVERVIEW
of 75% and a rate of transfer from heat to power (R2, Capital cost (CC) £1,530,000
the proportion of the usable energy that is available as Annual fuel and running cost £14,678.24
electricity, the remainder providing heating that displaces
(f + m)
an equivalent amount of gas) of 20%. The Carbon Trust
issues conversion factors (cg and ce, respectively) that Whole life cost (WLC) £1,896,956
can be used to calculate the kilowatt-hours of displaced CO2 emissions (E) 936,000 kgCO2
gas and electricity that would be generated annually
from the equivalent of the total kilograms of CO2 Heat energy (g) 2,726,214 kW-h
produced (g and e, respectively), where: Electrical energy (e) 681,553 kW-h

E OPPORTUNITY COST
g=
[( ) ]
cg
× R 1 × (1 – R 2 )
Building (site)
Notional rent rate
2,500 ft2
£22.50
and extra over
Rent (OC) (£) 56250
e=
()E
ce
× R 1× R 2
Continued

42 © BCO 2012
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Table A3.1 Values used in the model (continued)

SUMMARY NET COST

Capital costs £1,530,000.00 Average saving per tonne £277.90
Yearly costs £70,928.24 (NPV)
936,000 kgCO2 Mean cost £453.20
Yearly savings £204,466.02 Net average cost per tonne £175.30
1,104,798 kgCO2 (NAC)
Net saving (B) £133,537.78
168,798 kgCO2
Payback (years) 11.46

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APPENDIX 4:
CALCULATING THE VALUE OF FORGONE DAMAGE

Value of forgone damage = notional cost per tonne of CO2 emissions that can
be incorporated in policy and investment appraisals.
t = lifespan

∑ Emissionsb,t × Valuet The SPC set at that time was £25.50 per tonne: the
Department of Energy and Climate Change (2009) has
t=1
(1 + rsdr)t since proposed a short-term schedule of prices in the
non-tradable sector, increasing from £50 per tonne in
2008 to £60 per tonne in 2020.
where:
The social discount rate (rsdr), which is set out in
Emissionsb,t emissions saved in a particular time the government’s official guidance on appraisal and
period t in building b evaluation of projects (The Green Book, HM Treasury,
2011), adjusts for the timing of the occurrence of costs
Valuet value of forgone atmospheric damage
and benefits by discounting them to present values.
in a given time period
The recommended rate of 3.5% in real terms was
rsdr social discount rate of 3.5%, as introduced in the 2011 version of The Green Book,
recommended by HM Treasury replacing the previous recommended rate of 6%.
t the lifespan (in years) of a given
renewable technology.
Note
To ensure consistency in the comparison of the average
Data costs per tonne of CO2 emissions saved in the buildings
Emissionsb is the total number of tonnes displaced by in the sample, the value of forgone damage was divided
the use of renewables in a given time period in building by the total quantity of emissions saved over the lifespan
b, as defined in Appendix 1. of the technology. It is recognised that this makes an
‘absolute’ interpretation of the findings complex: if the
The amount of forgone atmospheric damage in a given reader seeks such an interpretation, reference should
time period (Valuet) is based on the shadow price be made to the original total NPV costs identified in
of carbon (SPC) as defined by Price et al. (2007), a Question 1.

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