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Real Estate

How real estate will play a leading role in getting to net zero

By Darren Teoh
B Eng (Hons), MBA Head of Sustainability for Real Estate Sydney, Australia

Australia’s net zero debate could leave the impression that climate change is all about heavy manufacturing, regional towns and coal-fired power stations.

But in fact, Australia’s buildings make up a vast part of the nation’s climate emissions — and the real estate industry is quietly leading the way to a low carbon future.

The day-to-day operations of buildings produced around 23 per cent of all Australia’s carbon emissions in 20131. AMP Capital estimates that figure might have been as high as 40 per cent of all emissions if the greenhouse gases produced by the timber, steel, concrete and the construction process itself were included2.

So, there’s little doubt that getting to net zero will include tackling greenhouse gas emissions from buildings.

For most companies, unless they are in energy production, agriculture or emissions-heavy manufacturing, their building is likely to be the largest part of their own net zero roadmaps.

Happily, buildings are also among the most cost-effective way to get carbon emission reductions.

Both McKinsey’s and ClimateWorks’ Australian Abatement Cost Curves show that the bulk of emission reductions in buildings come from things that also save energy costs like better insulation or installing LED lights3.

Many landlords and managers like AMP Capital already have zero carbon goals in place which will see base buildings transition to zero carbon over the coming years. But the penny has also dropped for many big tenants, who realise that managing energy usage in their buildings can not only save the planet, but it can also save them money.

Until recently, the logical next step of switching buildings’ electricity supply agreements to carbon-neutral renewables has been frustratingly out of reach.

Partly, this is because the economics of renewable electricity contracting have not been favourable. Buying renewable electricity through the grid has traditionally come at a cost premium to traditional fossil-fuel power and required complex long-term contracts with exposure to market spot price fluctuations.

Now, this too is changing.

At the vanguard of change are two pioneering agreements negotiated by AMP Capital that make renewable electricity available at the same cost — and on the same terms — as fossil fuel power.

The first was a seven-year Renewable Electricity Agreement for the AMP Capital Wholesale Office Fund, which allowed it to achieve zero net carbon for its internally managed assets from 1 January 2021 – nine years ahead of target4.

The second, signed in October, is a three-year agreement with renewable electricity retailer SmartestEnergy that will see the AMP Capital-managed component of a large institutional superannuation fund achieving net zero carbon from 1 January 2022, eight years ahead of target5.

These agreements pave the way for the real estate industry to adopt renewables on a broad scale.

The second agreement links a 10-hectare, community solar farm in Numurkah, Victoria to AMP Capital managed assets including NSW’s Dapto Mall, Marrickville Metro and 7 Macquarie Place and Victoria’s Malvern Shopping Centre.

It is difficult to overstate the importance of these contracts, which have been years in development.

For the first time, large companies can buy renewable electricity in deals that are as cheap and simple as buying fossil fuel power.

It has been a long road to get here as a complicated combination of conditions have had to align to make these power agreements possible.

First, the actual price of renewable electricity has come down.

Households have seen this in the price of solar. A typical 3kW household solar system that would have cost around $5,000 five years ago now retails for around $3,0006— and is more efficient and reliable to boot7.

But grid scale solar has seen even better efficiencies, with the price falling as much as 82 per cent between 2010 to 20208.

Secondly, in our experience, retailers are becoming more innovative in how they sell electricity. As recently as 18 months ago, buyers were being forced to wear contractual complexity and market risk in renewable agreements and contracts locked in supply for unacceptably long 10 or 15 years of fixed prices9.

Now, renewable electricity agreements look contractually similar to traditional power contracts.

This is a direct result of sophisticated corporate energy buyers with good advice pushing for better contractual terms.

This change has implications beyond the real estate sector.

Renewables were only around 24 per cent of electricity generation in Australia in 202010 yet the national electricity grid was strained by the rapid entry of variable renewable energy projects between 2016 to 202111.

The grid was originally designed to deliver a constant flow of power from a few large electricity producers, but it is being forced to adapt to power being generated by many small-scale producers. The variability of solar and wind also causes issues for a grid designed for stable supply.

Renewable supply agreements like those signed by AMP Capital are creating a market signal that is helping shape the future of the National Energy Market.

As more and more building owners seek similar supply deals, the energy regulators will need to adapt the grid to make it more accessible for renewables.

This is a market signal that needs to happen so that energy market participants can freely trade renewable electricity across the grid at the time it is needed.

At AMP Capital, we are proud to be able to show that a major commercial real estate portfolio can achieve zero net carbon in a cost neutral way — and at a price that is less than what used to be paid for traditional electricity. Supporting renewables and combatting climate change is not only the right thing to do for the environment but also cost effective for investors.

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Darren Teoh, Head of Sustainability, Real Estate
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

 

This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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