Consultation for Whitewash

Posted on September 6, 2013 by Doug King

The government is currently consulting us, the great unwashed public, on Allowable Solutions for ‘Zero Carbon’ homes. The scope and extent of these consultations makes it clear that the term ‘Zero Carbon’ is about to become pretty meaningless. I do hope that we are not being asked to consult on a whitewash.

The working definition of ‘Zero Carbon’ has been prepared by the Zero Carbon Hub. This definition includes three components: fabric energy efficiency, onsite Carbon Compliance (Renewables & LZCTs) and finally allowable solutions. The first two components are presently regulated under Part L of the Building Regulations. Allowable Solutions is essentially an offsetting scheme, which allows house builders, where necessary, to make up the final gap to ‘Zero Carbon’ by funding offsite Carbon mitigation measures.

This structure is entirely logical and should have been workable had it been developed as a complete system. Unfortunately, as in so many other aspects of energy policy, the policymakers do not understand the importance of systems. The ‘Zero Carbon’ working definition was broken down into its three components and each was subject to separate consultation and agreement.

Fabric Energy Efficiency was the first to be considered. However, rather than adopting a challenging new standard for British construction, such as the Passivhaus fabric energy standard, this working party backed off, presumably under pressure from the builders. But that was felt to be OK as the Carbon Compliance layer would surely ensure that the overall Carbon reduction targets were achieved.

The debate around Carbon Compliance unfortunately also fell short of what should have been possible in an enlightened construction industry. The final proposal was that Fabric Energy Efficiency & Carbon Compliance together should achieve a 60% reduction below 2006 Part L. This was felt to be a target that could be achieved by 90% of house builders by 2020, four years after ‘Zero Carbon’ becomes a requirement. Hardly a challenge sufficient to promote step change in working practices.

But this did not matter, as the consultees were certain that the Allowable Solutions would be drawn sufficiently tightly to encourage on-site Energy Efficiency and Carbon Compliance to at least this level.

Since then of course we have had the long delayed announcement of the 2013 Part L revisions (now only coming into force in 2014). This sets the Target Carbon Emissions Rate for housing just 6% below the 2010 Part L (cumulatively 29.5% below 2006 Part L). So in 2016 ‘Zero Carbon’ will comprise 29.5% cumulative reduction in Part L emissions to date, a huge step of 30.5% reduction in the 2016 Part L, with the expectation that 10% of the industry will still be unable to comply four years after that, and 40% Allowable Solutions.

Now we are beginning to see the true picture of Allowable Solutions as well. The Government feels that house builders who are unable to build low carbon housing should not be penalised by the expense of Allowable Solutions. Thus the cost of abating a tonne of Carbon will be capped. This means that the builder may not have to pay the actual cost of abatement or may not achieve the full abatement required, depending on the abatement methods available.

One of the suggestions to overcome the price barrier is that Allowable Solutions ‘Providers’ will spring up to take money from house builders to deliver aggregated abatement projects. That sounds like a great opportunity for bankers who are already making a great deal out of the Green Deal and the renewables incentives. Further, in order to ensure that Allowable Solutions are available at the lowest cost it is proposed that they could include abating Carbon emissions from existing buildings.

What?! I hear you ask.

Yes. Under these proposals it could be possible for a very ordinary new house, without substantial improvement in energy performance to be classified as ‘Zero Carbon’ if some money is spent on improving an existing, worse performing building.

But surely, in order to meet our 2050 Carbon budget we need ‘Zero Carbon’ new homes in addition to ALL existing buildings becoming Nearly Zero Carbon too. Does this suggestion not simply lead to double counting of Carbon abatement whilst actually achieving very little?

Well, actually, yes it does.

I thought that the point of gradually tightening the performance standards of buildings through the Building Regulations towards ‘Zero Carbon’ was to encourage the construction of better performing buildings and stimulate innovation and improvement in our industry. Now I see it for what it is:

House builders will be able to continue with business as usual. They will take a bit more money from house buyers on the sale price to funnel into offsetting schemes. The offsetting schemes will be arranged by financiers to invest in profitable, easy energy efficiency retrofits in existing buildings. The bankers will harvest the profit that should have been financing these measures independently in the first place. House builders, Government and the Banks all win. The only buildings that will be left out of the abatement gravy train are those that are classified as hard to deal with. These will only get refurbished under the Green Deal ECO mechanism and subsidised by – you’ve guessed it – energy bill payers.

Past Delusional

Posted on August 27, 2013 by Doug King

I am currently preparing my talk for the annual Lignacite Lecture which I will be giving next month entitled ‘Building on Evolution’. I have taken as my theme the tacit knowledge of historic builders and what we could learn from them. However this has also got me thinking about our tendency to allow nostalgia to blind us to reality.

How often do we hear that it was ‘better in the old days’, that Georgian or some other architectural period was the ‘pinnacle of achievement’, that pop music these days is not as good as the 70s, that the modern world is poor by comparison.

By comparison with what?

All aspects of our culture suffer from the same delusion. People of my generation often lament the decline of popular music. It was so much better in the 70s they say. Well that’s probably because they are judging the past by their own collection of music. They bought a small selection of what was available because it appealed to them, and it probably still does. However, they have long since forgotten all the rubbish that was also played on the radio. This creates a distorted impression of the past. Lets face it there was just as much rubbish recorded in the 70s as there is today, we have just forgotten about it!

Well, the buildings that we use to judge the past are also the few, finest examples of their genre. Lets face it, the majority of Georgian buildings no longer exist. They were not fit for purpose and have gone, they failed to endure. Many buildings of the Georgian period were cheaply built by speculators, just like today, and sometimes they even fell down.The Georgian buildings that remain are the ones which were well enough built to endure and functional enough to still be useful to future generations.

The same goes for Gothic cathedrals. The ones that we are familiar with are the ones that were well enough built as to not fall down already (although the reformation had a little to do with it too). But even enduring cathedrals show the signs of constant alteration and repair. The history of British cathedrals is replete with collapses and reconstructions; Hereford, Chichester and Lincoln all suffered major collapses amongst many others. However, the Gothic style developed through expression of the structural imperatives of construction and so such buildings can be easily repaired and altered.

So we could reasonably expect that buildings from any period in history varied in quality and only the best still survive. It is wrong therefore to assume that any period was a golden age based on only the surviving evidence. The buildings that survive are either the product of enduring institutions such as the church and government or they are buildings that managed to appeal to successive generations.

This appeal in surviving historic buildings must be tangible. The buildings had to survive long enough on their own merits to become historic and therefore worthy of legislative protection. So we should be able to learn an awful lot about how to make buildings for the future by trying to understand why historic buildings survived, physically, functionally and culturally. After all enduring is synonymous with sustainable.

Are Our Pensions Founded on Sand?

Posted on August 17, 2013 by Doug King

We are used to seeing environmental protection at the centre of sustainability arguments. We are not so used to thinking about the economic sustainability of what we do in construction. I believe that we may need to rethink the economic model behind commercial construction in the UK or face some dire consequences. Let me explain:

Back in 2009/2010, early in the recession, I was seeking new premises for my business. I identified a recent development in Bristol which was still unoccupied several years after completion. Normally, we would not have been able to afford city centre rents, but I thought that this building should have been ripe for negotiation, having no tenants. However, when I approached the agents I found that commercial property rent is not subject to the usual market forces of supply and demand. The agents gave me the following reason for being unable to reduce the rent. The asset value of the building is determined by the anticipated rental yield. Having purchased the building at a value based on predicted rent the landlord will not reduce the rent in order to attract tenants as this would reduce the asset value leaving them with a loss on their balance sheet. Apparently the paper value of a building is more important than it actually generating revenue. Why would this be?

Well, consider our typical commercial development model. A developer borrows money from the banks in order to construct a building which nobody actually wants. In order to maximise the potential return, the building is constructed to the lowest acceptable specification for its target market. Shortly after completion, the building will be sold to a landlord, typically a pension company. The pension company uses the asset value of the building to underwrite its future pension commitments. The pension company appoints an agent to market the building and then largely forgets about it. Rental revenue pays for the operation of the building. The developer repays the bank loans and pockets the profit.

So, now I understand. The pension companies hold these buildings on their books as assets on paper. It is these paper assets that underwrite the security of my (and your) future pension. However, it seems to me that this is based on the premise that:

the asset will generate revenue;
the asset will appreciate in value.

If the building does not have tenants and is not generating a revenue then what value does it actually have? Consider this other example:

Green Park is a business park development near Reading originally owned by Prudential. The park, which was valued at £500M – £600M in 2008, was held in the Prudential’s Life Fund. Green Park’s principle claim to fame is its highly visible wind turbine next to the M4. Green Park’s other landmark, 450 South Oak Way, the building facing the M4 motorway, together with its sister, 400 South Oak Way, have sat empty since completion in 2002.

450 South Oak Way has sat empty for 10 years, consuming capital rather than generating revenue.

These buildings were leased by Cisco shortly before the dotcom crash and never occupied. Cisco has been trying unsuccessfully to find alternative tenants since. Now, in order to prevent the building fabric from deteriorating, it must be the case that basic heating and cooling systems are kept in operation and basic maintenance is carried out. This will not be cheap considering the buildings’ fully glazed south facing elevations. So, without tenants, these buildings are consuming capital rather than generating revenue. How does that affect the asset value held on Cisco’s books? Well, Cisco gave up and surrendered their leases in July 2012.

So now the cost of maintaining these empty buildings falls once again on the landlord. Interestingly, by now, Prudential had also gotten out of Green Park, selling to Oxford Properties, the property arm of a Canadian pension fund, in 2011 for £400M (a loss of at least £100M for the Pru, such are the shenanigans of the property world). So the costs of maintaining these “assets” must now be borne by Canadian pensioners until tenants are found. I wonder if they will fare any better than Cisco or Prudential did.

In the past, commercial property has clearly been a good investment for pension funds as the assets typically always appreciated. However, this paradigm is changing. As regulations on building energy consumption are continually drawn tighter, underperforming commercial buildings will quickly become obsolete. Commercial tenants are beginning to demand energy efficiency in buildings and, further, from 2018 landlords will be unable to offer for rent any building with an EPC rating lower than E. 450 South Oak Way is Band D according to the agent’s particulars and so it is not in immediate danger of becoming obsolete. Nevertheless, the longer that buildings such as this sit empty the less likely it becomes that they will ever find a tenant, as newer buildings come along with substantially better energy ratings. Do we face the prospect that recently constructed buildings may even be demolished without ever having generated revenue? I wonder what this does to the asset value recorded in the pension fund’s books. Will we find ourselves in a few years time faced with pension funds loaded down with a whole load of toxic assets as bad as the sub-prime mortgage situation?

I’m not an economist and don’t know the answer to this question, but I do know that if my business does not produce revenue then it has no value as an asset and cannot be used to underwrite borrowing or liabilities. It worries the hell out of me that my pension might be underwritten by assets with no value other than paper. Does anyone else have any insights on this situation?

Lets Talk Business

Posted on June 24, 2013 by Doug King

In sustainable construction it has become commonplace to focus on carbon footprint. We cleave to the metric of kg CO2e / m2 for both operational or embodied carbon. This has clearly grown out of the practice of valuing buildings by floor area. Yet this measure of sustainability is largely meaningless to the leaders of businesses that will occupy our buildings.

Businesses have their own measures of performance and success. In commercial enterprises these are likely to involve profitability and productivity ratios. Schools will measure their performance in terms of learning outcomes, hospitals by recovery rates. None of these measures relates to floor area.

A business leader choosing premises needs to evaluate many criteria. It is well known that location is a primary consideration. Design, as in the overt appearance, may also play a role. However, since assessing performance against building carbon footprint quickly becomes complex, it is rare that sustainable design gets sufficient consideration.

By sustainable design, I of course mean design that addresses the social and economic performance of business, not just the carbon footprint of buildings. There is plenty of evidence that well designed workplace leads to happier and more productive staff. This should be of immediate interest to a business leader, as the cost of staff dissatisfaction and absenteeism is likely to far exceed the cost of energy in offices.

On the other hand, less tangible design features should also feature in property decisions. Workplace designs with higher carbon footprints, such as air-conditioning, may actually permit higher occupation densities, in other words more staff in the same space. These considerations should also be critical in the choice of premises if only the benefits could be made explicit.

The simple metrics of construction cost and carbon emission by floor area do not reveal any useful information about the true benefits of a building’s design. Imagine instead metrics for office buildings of construction cost and carbon emission per workstation at design occupancy. These give direct measures of the efficiency of the design in terms that are meaningful to the occupier.

These metrics allow true comparison between naturally ventilated out of town offices with low occupation and a densely occupied, air-conditioned, city-centre offices. These metrics would allow a business leader to immediately relate productivity to resource consumption via the vector of staff. This is a compelling tool for property related decision-making.

It doesn’t end with commercial offices. If we understand the end user businesses a little better we can develop metrics for cost and carbon efficiency appropriate to any business sector. We would measure the efficiency of a hotel by bed space and a distribution warehouse by the number of pallets of goods accommodated. It will require some work to establish suitable measures at the outset, but this will lead to better business outcomes for us as well as our customers.

The recent RIBA survey of chartered practices revealed that the majority do not have a business plan nor set themselves business performance targets. We would probably also find this to be true of consulting engineers and other related professionals. This lack of familiarity with business issues could be limiting our ability to communicate with our customers in language familiar to them.

If we want to see substantial change in sustainable construction we may need to start by changing ourselves a little. A bit more business savvy would not go amiss. Not only would we be more successful in the business of making buildings, but we could learn the language of business to better communicate our skills and ideas to our customers. Measuring the cost and impacts of buildings in terms that are evident and compelling to business leaders has to be a good start in the transition to a new paradigm.

Race to the Bottom

Posted on June 19, 2013 by Doug King

The built environment is of vital importance to the creation of a sustainable society and construction needs to be considered as being for the public benefit. Decarbonising the UK building stock will not be easy or cheap and it requires concerted effort and co-operation across the supply chain. The capitalist free market is no longer an appropriate mechanism for the construction industry if we are to deliver the new paradigm.

Despite numerous spectacular failings in the delivery of IT and defence projects, our political leaders persist in their faith in the free market. Thus least first cost tendering is now applied across all aspects of public procurement for construction, from initial design right through to the regulatory functions. Where the Government leads the private sector will surely follow.

Open competition certainly does drive down prices but it is equally clear that it does not deliver real value or quality.

Any student of economics can tell you that people respond to incentives and that competition creates perverse incentives. Consider the case of the exam board official caught out last year feeding prior knowledge of exam questions to teachers at a training event. When schools are judged by exam results and exam boards compete to attract schools to use their examinations, they will do whatever is necessary to capture business. The market has created an incentive for perverse behaviours by exam boards including dumbing down the questions and advising teachers which areas to focus on during revision.

Nowadays even Local Authority Building Control has been forced into competition with approved inspectors. There is no longer any protection for the regulatory function. Developers will select their inspection services based not only on fees, but also on who is likely to give them the easiest route to compliance. So, just as with the competing exam boards, there is an incentive for building inspectors to be lenient in order to encourage future business. Any inspector who rigorously applies the regulations is likely to be quickly out of work. How can we therefore expect the statutory regulation function to be rigorously and impartially executed?

So, if our system of statutory oversight is compromised, can we rely on the supply chain to deliver the quality and performance improvements we need? I don’t think we can, as I said in a previous article ‘The Root of the Performance Gap’.

When I started as a young engineer, the practice I worked for had a policy of disregarding the lowest tender when we were evaluating mechanical and electrical subcontracts. You could almost guarantee that the lowest bidder had cut his cloth too thin and that performance on site would suffer, leading to poor quality and a continuous battle over proper completion of the works.

These days however, I find that clients not only appoint the lowest tenderer for every service, but that they also try to negotiate the price even lower. Yet it is clear that lowest cost tendering incentivises suppliers to deliver the lowest level of service that they can get away with. I contend that this actually leads to increased overall cost due to the additional management and supervision required to ensure that the bare minimum requirement of the specification is fulfilled.

However, given the urgent need to decarbonise the UK building stock, simply achieving the bare minimum of the specification is not enough. Every party in the construction process needs to deliver over and above. We need an industry in which every individual actively contributes to achieving a long-term vision rather than being focussed on short term financial goals. We need an industry in which selection is on the basis of performance and lifecycle value.

I suspect however that the public sector is still wedded to competitive tendering and we won’t see the necessary leadership for some time to come. In the interim, a step change in construction performance and value could be achieved by simply changing tender rules. There are lots of clever ways to structure competitions to achieve best value rather than lowest cost. However, a simple first step would be for the public sector to commit to taking the second lowest bid in any tender. At a stroke this would remove the incentive to bid at unrealistically low levels. The construction industry would then be able to concentrate on delivering value rather than recouping its losses.