The real estate industry has not been immune to the impact of the pandemic and, with the new financial year looming, costs are mounting. Despite huge utility savings from reduced occupancy usage, the industry is now facing fines and penalties from pre-purchased energy plans.
On the surface, reduced usage of a property and the associated energy savings would seem to be a cost saving. However, the opposite is proving true for many businesses that are still operating under previously-purchased commercial energy contracts, where it is now emerging that they are being penalised for turning off and reducing their environmental footprint.
Typically, in commercial properties, longer-term contracts with energy suppliers are taken out in order to gain the best rates. Suppliers can offer these lower rates because it they are able to plan their energy output more efficiently. Despite the unprecedented impact of the pandemic on the real estate industry, these contracts remain in place. Therefore, where agreed energy allowances are not used, suppliers have the right to impose fines or penalties when consumption falls outside specified limits.
“Although we could blame the energy suppliers, the cost is passed down from further in the chain. From demand, energy suppliers will have committed to a certain amount of energy from generators over a fixed time. The cost has to land somewhere, and – unfortunately - this is likely to be the end-user”, says Peter Catlow, Director at Businesswise Solutions.
With energy usage in the real estate sector significantly reduced due to low occupancy or from doors completely shutting, it is clear that the industry is going to have to make some significant payments.
“Unfortunately, we may yet see worse to come as we head towards the new financial year - 12 months after the first lockdown. Annual energy bills are yet to be cleared by their energy providers. Although during the pandemic, energy consumption has dropped significantly with reduced use and building closures, we expect many energy volume tolerance issues to surface’, says Ufi Ibrahim, Chief Executive of the Energy & Environment Alliance.
Property managers may find that, in order to maintain commercial energy contracts, properties will have to pay an energy premium, are charged for an upfront deposit, or provide more frequent and early payments.
This situation is only going to be exacerbated as insurers look into the industry’s risk and credit ratings and decide there isn’t the capital to continue covering those who default on their energy payments.
Although it is unclear how contracts will look now and in the future, businesses should be prepared to flag this issue, have a financial recovery plan in place and shop around in order to minimise their financial risk.
Acting swiftly is key; “We are finding that the earlier we work with our client’s supplier credit and risk teams to propose a business case to the insurers to minimise risk, the better the prospects. It is also important to tender across a broad range of suppliers with different approaches to credit management where there is the best possible chance of at least one supplier approving credit”, says Catlow.
It seems backwards that those who are reducing their energy, heating and lighting in unused buildings during the pandemic are seemingly being punished. One glimmer of hope is that industries where energy usage has increased may be able to offset the pressure, and experienced energy brokers may be able to negotiate on behalf of an asset if they cover a range of sectors.
With no official due date in sight for business as normal to resume, the full cost of the pandemic on the real estate sector is yet to be seen.