Building a Decarbonization Modelling Tool

Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.

The pursuit of building decarbonization is not new to ESG professionals in the global commercial real estate market; however, it has only been in the last five years that there has been increased demand from the investor, owner, financing, and tenant side. This increase in demand is crucial for moving markets forward and taking action to decarbonize buildings in order to meet national carbon targets and the commitments set out in the Paris Climate Agreement.

A full building decarbonization strategy is not simple or straightforward to develop or execute. It requires deep knowledge of the building’s operations, mechanical systems, energy consumption profiles, and electrical grid emissions just to get started. Fuel switching, electrification, deep energy retrofits, and envelope enhancements are at the forefront of a decarbonization strategy, but they are by no means the only focus. As a result, KingSett Capital created its Building Decarbonization Modelling (BDM) tool to analyze the different financial scenarios to decarbonize buildings and how they compare to business-as-usual scenarios. This tool has since been released to the market, at no cost to users.

A fundamental shift in energy saving sentiment is required to achieve net-zero carbon objectives. Low-hanging fruit and payback periods can no longer be the targets for energy-saving programs, but rather planning how we get buildings from their current state to the desired state in the prescribed timelines. We no longer seek to reduce carbon emissions by 3% per year across the portfolio. Instead, by way of example, the target is to achieve 70% reduction across 3% of the portfolio per year.

Background of the BDM tool

Over the last three years, KingSett developed a tool to model the different approaches used to decarbonize existing buildings, including capital investments, energy use, carbon reduction, and operating cost impact. This tool has been instrumental for getting asset manager, c-suite, investor, and board buy-in, thus helping to provide the necessary capital to decarbonize and create value in our core assets. By utilizing this tool, KingSett has created an actionable target for a 35% reduction in carbon emissions by 2027, decarbonizing 5.4 million square feet of commercial real estate in our core portfolio, in addition to decarbonizing the historic 1.3 million-square-feet Fairmont Royal York Hotel in downtown Toronto, Canada.

Over the course of several years, KingSett’s experienced ESG team continually ran into difficultly receiving buy-in and capital investment for decarbonization projects over high efficiency replacements. This, coupled with pressure to set stringent carbon reduction targets, led them to design and construct a tool which captures the key financial inputs to make a business case for deep carbon retrofits in existing buildings. By demonstrating the impact on operational costs, energy performance, carbon reductions, and mitigation of future transition risks (climate regulation and carbon tax), we have been able to push the market to new definitions on building decarbonization, fiscal responsibility, and building and community improvement.

The underlying hypothesis was that completing deep carbon retrofits was not only beneficial for carbon emission reductions, but also has a significant positive impact on energy consumption, operational costs and climate risk mitigation. We first needed to define our decarbonization strategy and identify the properties within our portfolio that have immediate opportunity to decarbonize based on our definition; major equipment near or at end-of-life, located in a region whose grid favors, or is on a trajectory to favor, electrification and ensuring the asset can withstand the potential capital cost premium to decarbonize. In tandem, we needed to identify the core equipment components impacted when our decarbonization strategy is executed.

How it works

Once we had all this information it was time to test the modelling and conduct sensitivity analyses within the tool, layering in the different metrics which provide a financial impact such as carbon tax, utility rate escalations due to inflation or commodity volatility, capital amortization, efficiency gained through operational excellence, and the coefficient of performance (COP) of new systems. By including all these metrics and modelling scenarios out to 2040, we created a clear picture comparing different scenarios over significant timelines and the value they offer. The model shows users the all-in costs to decarbonize versus an alternative scenario, highlighting the potential point in time where one scenario becomes more financially viable, and ultimately the true value of conducting deep carbon retrofits.

Adjustable metrics

This tool required significant amounts of data collected from multiple sources and studies, high levels of proficiency in Excel, time, and creativity. KingSett’s ESG professionals were able to collaborate using their varying skillsets to create a finished product. The bulk of time was spent constructing the file structure so all initial data points had the same units, and conversions between utility types could be easily completed. We also had to ensure the model could utilize different baseline and decarbonization years for each asset and could account for assets located in different geographic regions leading to varying energy sources and emission factors without causing errors in the model. As with many projects, one of the greatest challenges to overcome were the changes in scope that would lead to near rebuilds of an ever-changing Excel model. Year-over-year changes in inflation, consumption, carbon tax, capital expenditure, and emission factors also made automation across our entire portfolio a challenge. Each property uses a minimum of 3,800 data points to produce a single dashboard which models scenarios that can be easily understood.

The final version allows users to customize data points and conduct sensitivity analysis at both a property and portfolio level to help others in the industry work toward their decarbonization goals. The tool is unlocked and allows users to trace calculations presented in the final scenarios and understand how the various metrics impact your overall carbon emissions, energy consumption, and operating cost outcomes.

Value creation

The impacts of utilizing this model cannot be understated for KingSett. By showing the cost savings, carbon tax mitigation and carbon emission, and energy reductions in a way that asset managers and owners understand allowed us to get significant buy-in and access to capital to fund our decarbonization pipeline.

The impact this tool can have on helping other companies, whether they are just starting their decarbonization journey or have well developed roadmaps, get the buy-in and financial support they need to execute is immense. It can help owners, investors, managers, and consultants determine not just the environmental benefits of decarbonizing buildings and portfolios, but also the financial benefits. We hope this will both inspire and encourage partners, peers, competitors, and the broader market to not just use our tool but improve it with their own creative solutions. We think this tool has the potential to put Canada on a global stage, showcasing how collaborative our market is when faced with a national and international crisis that we all need to address.

This article was written by Kit Milnes, Vice President, Sustainability & Resilience at KingSett Capital.

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