financing options for energy efficiency in community housing · solar pv, batteries and energy...

i

Financing options for energy efficiency in community housing

August 2019

Executive Summary Despite organisational support for investing in energy solutions in community housing stock, social landlords still struggle to overcome the split-incentive between landlords and tenants, where landlords pay for the upgrade but tenants receive the benefit. In a constrained financial environment community housing organisations often have to choose between more traditional asset management priorities, like kitchen upgrades, and improving the energy efficiency of their tenants’ homes.

This project was designed to overcome the split incentives by exploring ways for community housing organisations (CHOs) to generate a return on their investment in clean energy solutions (including solar PV, batteries and energy efficiency initiatives). Combining input from the Victorian community housing sector with a review of the legal and accounting frameworks, our project examined financial and business models that could be adopted, as well as ways to implement energy upgrades at a much larger scale than is currently possible.

Three options were identified for including a tenant co-contribution:

• Service charge by CHO • Increased rent charged by CHO • Fee/charge by energy supplier

Using these charging mechanisms three funding options were considered:

• Debt financing with banks, aggregators or other lenders • On-bill financing, where an energy supplier finances the upgrades and tenants repay that

investment over time through charges on their monthly bills • Third party financing, where another party funds the upgrade and the CHO repays them and

then recoups the cost from tenants (see p. 3-4 for more details on these funding models)

A legal review of the community housing and tenancy regulations and legislation for five jurisdictions (VIC, NSW, TAS, SA and QLD) highlighted significant difficulties in having tenants contribute to the capital cost of installing solar or other energy efficiency upgrades, despite such an arrangement providing a net benefit to both the tenant and the landlord.

In Victoria landlords are liable for installation costs for the initial connection of any electricity service to rented premises under section 53(1)(a) of the Residential Tenancies Act (1997). The Act prohibits requiring a tenant contribute toward any installation costs, which are likely to include energy efficiency upgrades such as solar. A charge for consumption may be imposed for dwellings that are not separately metered, but landlords are still required to cover the capital cost of installing the solar system. Charges could only be applied for the tenant’s ongoing consumption of electricity.

For this project we also examined the regulation and legislation of New South Wales, Queensland, South Australia and Tasmania. All of the jurisdictions examined had rent caps for community housing. All jurisdictions restricted what landlords could charge tenants for. Most states allow

ii

landlords to charge for the consumption costs of utilities but not the installation costs. Only NSW had a provision that allowed regulation to prescribe additional payments that could be required by landlords.

Five business models were identified as being viable in the current regulatory environment.

Cash purchase – for CHOs who do not wish to charge tenants for installing energy efficiency upgrades. Requires sufficient cash and/or grant funding available to cover the capital costs.

Where a CHO is responsible for the utility costs – if sufficient savings are anticipated from the upgrades energy efficiency upgrades can be financed through corporate borrowing, on-bill finance, third party or project financing, and third party leases.

Embedded networks operated by a third party - may be able to incorporate a charge for the installation cost as well as consumption. Needs to be a clear separation between the CHO and the embedded network operator.

Rent increases may be used by CHOs who are not already charging their tenants the maximum level of rent they are entitled to.

Creation of a new entity by the Victorian community housing sector to own and manage energy efficiency upgrades on its behalf.

The legal review clearly identifies significant barriers to implementing a tenant co-contribution. This is due to the dual restrictions of rent caps of between 25-30% of tenant income set by DHHS (and the relevant government bodies in other states) and the limitations on what landlords are able to charge tenants under each state’s Residential Tenancies Act (RTA).

It is apparent that residential tenancy regulation needs to change to accommodate the ability of social housing landlords to create a “win-win” scenario and unlock the sector’s ability to install energy efficiency measures at scale.

Three possible solutions were identified:

• Adopting the NSW example and amending tenancy legislation to allow the Minister to make regulations permitting social housing landlords to recover certain additional charges from tenants, separate to rent.

• Amending tenancy legislation to allow for landlords and tenants to agree to pass additional costs on to tenants so long as the agreement results in the tenant being better-off overall.

• In Victoria, ensure the Solar Homes mechanism for tenant co-contributions is broad enough to encompass any arrangement between landlords and tenants where the tenant receives a net benefit from the installation of energy efficient utilities or fixtures.

If any of these proposed amendments to the RTA were enacted they would allow community housing landlords and tenants to negotiate a co-contribution based on anticipated bill savings. This would make it possible for CHOs to finance energy efficiency upgrades at scale, with the tenant co-contribution supporting the cost of finance.

In pursuing this work we were conscious that no matter how CHOs choose to finance energy efficiency upgrades, tenants are a key stakeholder in this process. It is clear that tenant engagement is critical to successful installation of energy efficiency upgrades. Furthermore, for those CHOs that wish to discuss tenant co-contributions there are a variety of additional issues to consider, including how benefits are measured, what constitutes a fair tenant contribution, and transition arrangements for new tenancies. This matter warrants considerable further work.

1

Contents Financing options for energy efficiency in community housing ......................................................................... i

Executive Summary .................................................................................................................................. i

Financing options for energy efficiency in community housing ........................................................................ 2

Background ............................................................................................................................................. 2

Funding and Charging options examined ............................................................................................... 2

Charging models ................................................................................................................................. 3

Service charges ............................................................................................................................... 3

Embedded network charges ........................................................................................................... 3

Rent charge ..................................................................................................................................... 3

Funding models ................................................................................................................................... 4

Cash purchase ................................................................................................................................. 4

Corporate borrowing ...................................................................................................................... 4

On-bill finance ................................................................................................................................. 4

Third party or project financing ...................................................................................................... 4

Regulatory barriers to tenant co-contributions ...................................................................................... 5

Victoria ................................................................................................................................................ 5

New South Wales ................................................................................................................................ 5

Queensland ......................................................................................................................................... 6

South Australia .................................................................................................................................... 6

Tasmania ............................................................................................................................................. 6

Potential business models under current regulation ............................................................................. 6

Proposed regulatory reforms .................................................................................................................. 8

Exemption by Regulation .................................................................................................................... 9

The NSW example: .......................................................................................................................... 9

“Better-off” test for tenants ............................................................................................................. 10

Solar for renters – an expanded version ........................................................................................... 10

Potential business models requiring regulatory change ...................................................................... 11

Tenant Considerations .......................................................................................................................... 11

Conclusion ............................................................................................................................................. 12

Appendix A: Full page business decision making tree .......................................................................... 13

Appendix B: Regulatory barriers to tenant charges .............................................................................. 14

Appendix C: Financing options in other jurisdictions ........................................................................... 25

2

CHIA Vic would like to acknowledge the support of the Lord Mayor’s Charitable Fund who funded this project through the Eldon & Anne Foote Trust. Without their support this work would not have been possible.

Financing options for energy efficiency in community housing Background Despite organisational support for investing in energy solutions in community housing stock, social landlords still struggle to overcome the split-incentive between landlords and tenants, where landlords pay for the upgrade but tenants receive the benefit. In a constrained financial environment community housing organisations often have to choose between more traditional asset management priorities, like kitchen upgrades, and improving the energy efficiency of their tenants’ homes.

However, solving this problem could allow social landlords to do both, unlocking the capacity of the community housing sector to retrofit ageing stock, improve the comfort of their tenants, and reduce energy costs for some of the most vulnerable people in Australia.

This project was designed to overcome the split incentives by exploring ways for community housing organisations to generate a return on their investment in clean energy solutions (including solar PV, batteries and energy efficiency initiatives). Combining input from the Victorian community housing sector with a review of the legal and accounting frameworks, our project examined financial and business models that could be adopted, as well as ways to implement energy upgrades at a much larger scale than is currently possible.

Community housing organisations currently pay to install energy solution upgrades (such as solar panels, insulation, efficient hot water systems, split system or air conditioning, draft proofing or energy efficient lighting) and are often only feasible if grants cover part or all of the up-front costs of installation. These upgrades are installed based on a business case that demonstrates the expected cost savings to tenants in their energy bills.

Funding and Charging options examined Following a workshop with the community housing sector, several potential charging and funding models were identified.

The business models considered for this project assume that:

a) Upgrades will only be installed if there is a business case (or similar) demonstrating how the upgrade will provide savings to tenants and/or significantly improve the thermal comfort of their home.

b) Any charges to be paid by the tenant will be smaller than the total savings generated by the upgrade, ensuring that tenants are still receiving a reduction in their energy bills

OR

c) Tenants will not pay more than they did before the upgrade and will experience a measurable improvement in thermal comfort in their home.

3

The models considered were:

Table 1: Charging and Funding models

Charging models Funding models

No charge to tenants Cash purchase by CHO

Service charge Corporate borrowing by CHO

Embedded network or retailer charge On-bill finance

Solar charge – fee or levy included in or on top of rent

Third party or project financing

Charging models CHOs have the option of covering all of the costs themselves rather than charging tenants, and some will continue to do so for philosophical reasons. There are also grants available that can pay for elements of an installation, but these are limited in amount and often will not cover the full suite of solutions (e.g. solar rather than energy efficiency).

However, for CHOs who do choose to charge tenants a portion of the savings accrued from increased energy performance in their homes, they have three ways to do so:

Service charges Service charges are usually assessed for unmetered utilities consumed by residents. This could be for common facilities, or for individual units if the property does not have individual meters for each unit (as is often the case in rooming houses).

In Victoria there are restrictions under the Residential Tenancies Act 1997 regarding who can apply services charges to unmetered properties (RTA 1997 s.53-57, s109A), however the amendments to the Act have clarified that services charges will be available to registered housing agencies as well as the Director of Housing.

Embedded network charges An embedded network operator on-sells energy to individual tenants, which it purchases wholesale from the market. They provide metering and billing services for a specific area, most commonly a grouping of homes in an estate, such as independent living units in a retirement village, or an apartment block. The embedded network operator charges residents directly for their energy usage, which could also include a charge for capital outlays in energy solutions.

This model could include a CHO making the initial investment and recouping it from tenants via the Embedded Network Operator.

Rent charge Some CHOs have added a Solar Contribution Service Fee to tenants rent. In these examples tenants had to agree to the fee as a condition of having solar installed and were given the choice to opt in for solar panels. The fee is calculated as a percentage of rent, usually around 2%. This has largely been done in co-ops, where the fee allows the co-op to share the energy savings and lower co-op costs, freeing up resources for other priorities.

4

Funding models The funding models relate to different ways that CHOs can source the capital needed to invest in energy solution upgrades. The four being considered as part of this project are outlined below.

Cash purchase The model most often used to date. This requires CHOs to have sufficient cash available at the time of the upgrade to pay for it out of their reserves or in combination with grant or philanthropic funding.

Corporate borrowing CHOs can also borrow some of the funds needed from their commercial bank or potentially from the federal bond aggregator, the National Housing Finance and Investment Corporation.

On-bill finance This can be used where an electricity retailer (or potentially the CHO) covers the cost of installing the upgrades and then charges tenants the cost of the investment over time. In some cases, the retailer might own the solar panels and sell the energy back to the tenant.

Third party or project financing This involves obtaining specific project financing outside of traditional borrowing sources such as a bank loan or using the NHIFC aggregator (which are noted above). Examples could include the provision of finance, either at commercial or concessional rates, specifically for rolling out energy solutions. The Darebin Solar Savers model is an example of this for solar.

For the Solar Savers program Darebin Council provided a 10-year interest free loan for the total cost of solar panels and installation. Repayments are made quarterly alongside council rates and are 10% of the total loan per year.

The lending could be straight to the CHO or they could do it in a separate entity just for the energy investment. This latter option is more complicated and would be better suited for the larger CHOs who want to create a significant energy solutions programme.

The figure below outlines how businesses might make decisions about which charging and funding options to pursue (see Appendix A for a full-page version)

Figure 1: Charging and funding models

5

Regulatory barriers to tenant co-contributions For this project we examined the regulation and legislation of four other jurisdictions: New South Wales, Queensland, South Australia and Tasmania. This covers almost 90% of community housing tenancies across Australia, and the five largest states in terms of the number of community housing dwellings (ROGS 2017, table 18A.3). Note that Western Australia was excluded from the analysis due to the amendments to the WA Residential Tenancies Act that were in process at the time.

All jurisdictions examined had rent caps for community housing, ranging from 25% in South Australia and Tasmania to 30% in Victoria, NSW and Queensland.

All had restrictions on what landlords could charge tenants for. Most states allow landlords to charge for the consumption costs of utilities but not the installation costs, although it varied whether this required separate metering or not.

Only NSW had a provision that allowed regulation to prescribe additional payments that could be required by landlords. This provision has been used to allow social housing tenants to pass on rebates for solar hot water panels to their landlord, provided the landlord paid for their installation. Queensland, South Australia, Victoria and Tasmania all had a blanket prohibition on any other forms of charge other than what is specified in the RTA.

Victoria A legal review of the Victorian regulation and legislation highlighted significant difficulties in having tenants contribute to the capital cost of installing solar or other energy efficiency upgrades, despite such an arrangement providing a net benefit to both the tenant and the landlord.

Section 53(1)(a) of the Act provides that a landlord is liable for installation costs and charges in respect of the initial connection of any electricity service to rented premises. Therefore, unless the landlord recovers installation costs from the tenant through an increase in rent (which is not usually an option for community housing providers due to caps on rents), it may be unable to require tenants to contribute toward any energy efficiency installation costs.

A charge for consumption may be imposed for dwellings that are not separately metered. It would still require the landlord to cover the capital cost of installing the solar system and would only allow them to charge tenants for their ongoing consumption of electricity. It cannot be used to recoup installation costs.

Embedded networks can be used provided the landlord is not the owner of the embedded network. When owned by the landlord they are prohibited from charging tenants for anything other than the consumption costs (RTA 1997 s.52-53, 56).

Where CHOs are not charging tenants up to the rent cap imposed by DHHS (25% of tenants’ income for General Lease properties or 30% of tenants’ income for properties owned by the CHO) they may be able to increase rent up to the cap and recover some of the capital costs in this manner. However, only a very small proportion of CHOs will have this capacity, making this option unworkable for most.

New South Wales Section 32 of the Residential Tenancies Act (2010) prohibits landlords from requiring or receiving any payment from a tenant other than rent bond or amounts/fees prescribed by the regulation.

6

Regulation 8 of the RTA 2010 prescribes renewable energy rebates paid to social housing tenants as a result of installation by the landlord of solar hot water panels. This regulation could be amended to include additional cost recovery mechanisms where tenants are no worse off.

Tenants are responsible for gas, electricity and oil consumption charges but only where they are separately metered. If utilities are not separately metered, then the landlord is responsible for these costs. Landlords are also required to pay for installation and initial connection costs for electricity, water, gas, bottled gas or oil supply.

The NSW Affordable Housing Ministerial Guidelines 2017-2018 and the NSW Community Housing Rent Policy (2018) place a cap of between 25-30% of household income on rents for low and very low-income households, while higher income households may be paying rent at a discount to market (e.g. NRAS).

Queensland Rents for affordable housing are capped at 30% of household income by the Queensland Community Housing Rent Policy.

Landlords are required to pay all outgoings at the property which cannot be passed on as a service charge. Consumption of utilities can be recovered through a service charge, but this is unlikely to be available for energy-saving measures and will not allow landlords to recover the cost of installing solar.

Landlords are prohibited under the RTRA (2008) from requiring the tenant to buy goods or services from the landlord or another nominated party, with the exception of a service charge.

South Australia Rents are capped by the Community Housing Rent Policy & Procedures at no more than 25% of household income, and in some cases no more than 21% of household income.

Landlords are only able to charge for rent, bond or water charges. They can charge tenants for the provision of electricity, gas or telephone services only where the accounts are in the name of the landlord, however this will only relate to consumption charges.

Community housing providers may charge an additional service levy for the maintenance of some items, including solar panels, air conditioners, room heaters (Residential Tenancies Regulations 2010, s11).

Tasmania The majority of community housing in Tasmania is operated under the Better Housing Futures program, which require providers to charge rents in accordance with public housing policies. This places a cap of 25% of household income on rents.

Landlords are prohibited from charging for anything other than rent, water consumption charges, or reasonable compensation for damages.

More detail on regulatory barriers in the various jurisdictions can be found in Appendix B.

Potential business models under current regulation Cash purchase remains a viable option for CHOs who do not wish to charge tenants for installing energy efficiency upgrades. This model requires that they have sufficient cash and/or grant funding

7

available to cover the capital costs, and in the absence of generous government grants for energy efficiency measures is extremely limited in its ability to be scaled up.

Where a CHO is responsible for the utility costs (e.g. common facilities) and the potential savings meet or exceed repayment costs then it may be viable to finance the energy efficiency upgrades in a variety of ways. These include corporate borrowing, on-bill finance, third party or project financing, and third party leases.

In cases where the CHO charges tenants for utility costs via a service charge or similar they will only be able to charge for consumption costs and will have to cover the repayment of the capital cost out of organisational revenues.

Where an embedded network is in place and is operated by a third party it may be possible for this operator to incorporate a charge for the installation cost as well as consumption. However, most landlords are not permitted charge tenants for energy consumption other than through a service charge so there would need to be a clear separation between the CHO and the embedded network operator.

Rent increases may be used by CHOs who are not already charging their tenants the maximum level of rent they are entitled to. CHOs could finance energy efficiency measures in the ways described above in instances where the additional rental revenue would support the repayment costs.

The primary barrier to financing energy efficiency upgrades is the combination of rental caps based on household income and the prohibition on landlords charging tenants for the capital costs of installing these improvements. However, the tenancy legislations reviewed do not contain any prohibition where the entity providing the upgrade and charging tenants is not the landlord.

This means that another possibility under the current regulations might be the creation of a new entity by the Victorian community housing sector to finance and manage energy efficiency upgrades on its behalf.

This entity could own the energy assets and enter into a contract with tenants where they make a co-contribution to the capital cost of the installation based on the expected savings created by the upgrades. CHOs could subsidise the cost to tenants through an initial capital contribution to the entity.

The entity could be jointly owned by the CHOs involved or could be privately owned with CHOs contributing a portion of the capital needed up front to de-risk investment by the private sector.

This approach would require additional work to scope out the possible structure of such an entity, as well as ensuring ways to create tenant choice, and ensure subsequent tenants were not being locked into arrangements they had not agreed to.

The options, and those where regulation prevents CHOs from negotiating a tenant co-contribution are summarised for Victoria in the table on the following page.

Similar tables outlining the opportunities and barriers in the other four jurisdictions can be found in Appendix B.

8

Table 2: Opportunities and restrictions on tenant co-contributions under current Victorian regulation

Charging / rent

options No charge Service charge

Embedded network charge

Rent charge

Funding options

No tenant contribution Tenant co-contribution

Cash purchase

CHO owns the

assets

Where cash or grant funding is available

Service charges can only be for consumption

costs. No capacity to

charge for the capital cost of

installation.

If CHOs are not charging rent at the maximum level then rent increases could

be used to support

repayment or leasing costs.

Corporate borrowing

Where CHO is responsible for utility costs and savings meet or

exceed repayment or leasing costs

On-bill finance

May be possible

where there is a clear

separation between the

network operator and

the CHO. Third party or project

finance

Third party lease

Third party

owns the assets

May be possible

where there is a clear

separation between the

network operator and

the CHO.

Proposed regulatory reforms The legal review outlined above clearly identified significant barriers to implementing a tenant co-contribution. This is due to the dual restrictions of rent caps of between 25-30% of tenant income set by DHHS (and the relevant government bodies in other states) and the limitations on what landlords are able to charge tenants under each state’s tenancy legislation.

It is apparent that residential tenancy regulation needs to change to accommodate the ability of social housing landlords to create a “win-win” scenario and unlock the sector’s ability to install energy efficiency measures at scale.

As outlined at the beginning of this paper, a “win-win” scenario is one where a tenant obtains more comfortable housing and/or enjoys a net saving on energy costs, and landlords are able to fund the installation costs via a tenant charge of some description.

Two of the proposed reforms detailed below draw on the NSW example, while the third identifies a current opportunity in the Victorian system under the Solar Homes scheme.

9

Exemption by Regulation One possible solution would be to amend residential tenancy legislation (in Victoria sections 52 and 53 of the Residential Tenancies Act (1997)) to allow the relevant Minister to make regulations permitting social housing landlords to recover certain additional charges from tenants, separate to rent.

Any charge in this setting should be separate to rent in order to avoid the existing constraints in raising community housing rents. It makes sense to keep the charge separate to rent, as it would typically represent a charge in exchange for reducing a household expense and may need to be justified against actual energy or cost savings.

Currently, in most jurisdictions tenants cannot be required to contribute to the installation costs of any energy-saving or energy-producing measure, regardless of the contribution or the size of any benefit to the tenant.

Regulations could allow for a social housing landlord and its tenants to agree to share installation costs for a new energy efficient measure. Tenant contributions could be payable over a limited period or could be ongoing. The Minister could then exempt arrangements (including Solar for Renters), which would not otherwise comply with the Act.

The Victorian Act does not currently grant this kind of regulatory power to the Minister. However, ministerial powers to make exemptions by regulation are found in the tenancy legislation of New South Wales and South Australia. A change of the type proposed would simply provide the Victorian Minister with a similar power to that already available to their counterparts.

The NSW example: Although Section 32 of the NSW Residential Tenancies Act 2010 prohibits the recovery of any payment from a tenant other than rent, bond or a payment prescribed by the regulations, the Regulations of this act have made allowance for landlords to require tenants to pay to the landlord any rebate received by the tenant on account of solar hot water installations.

Regulation 8 provides:

If a landlord and a tenant under a social housing tenancy agreement enter into an agreement requiring the tenant to pay to the landlord the whole or part of any renewable energy rebate for the supply of electricity that is payable to the tenant as a result of the installation by or on behalf of the landlord of solar hot water panels, any such payment is prescribed for the purposes of section 32 of the Act.

There are three important things to note about this regulation:

a) the exemption it provides to the NSW Act is limited to social housing tenancies, and therefore cannot be used by private landlords (who can simply adjust rent where dwellings are improved);

b) the payment prescribed under the Act is specific to a particular government rebate program/energy saving measure; and

c) the exemption provides a solution to the ‘split incentive’ problem (where a landlord is not inclined to invest because savings go solely to the tenant) without significantly broadening the kinds of charges which are able to be recovered from tenants.

Regulation 8 could be used as a template for creating a number of narrow regulatory exemptions to the Victorian Act, and the residential tenancies legislation in other jurisdictions. In Victoria this

10

would require sections 52 and 53 to be amended to allow for the Minister to prescribe charges for which tenants could be made liable. Such an amendment creates flexibility for the Minister to allow for specific charges to be passed on to tenants.

“Better-off” test for tenants Another alternative would be to amend the Act to allow for landlords and tenants to agree to pass additional costs on to tenants so long as the agreement results in the tenant being better-off overall.

This is a test commonly seen in enterprise bargaining arrangements (EBAs) between unions, workers and employers. The Fair Work Act 2009 allows employers to include conditions in EBAs which are less favourable to employees than required by the relevant award, so long as the EBA results in workers being better-off overall. This form of contracting provides flexibility for employees to choose working conditions which better suit them, while affording protection against their employer’s significantly greater leverage in any negotiation.

It is possible that this form of contracting could be translated into the social housing space, allowing for the levying of certain new charges from tenants provided that the tenants are better-off overall as a result. The Solar for Renters program is just one example of the sense in this approach – the program is premised on the principle that a tenant should be able to agree to a less favourable term (contributing to capital installation costs) in order to obtain a net positive overall (significantly reduced power bills, the reduction in which outweighs the contribution cost).

This kind of scheme may require government administration and faces certain practical questions:

a) Who would be responsible for determining whether an agreement actually results in a tenant being better-off? The tenant, the Minister, the Director of Housing, an independent certified consultant?

b) Should a social housing landlord be able to obtain permission independently of tenants on a ‘class basis’ or should landlords need to agree with tenants on an individual basis?

c) Would the legal test require tenants to be better-off overall “on average” (i.e., across a class of tenants), or must each tenant be individually better-off?

A ‘better-off’ test may be workable in the social housing context, as there is already a regulatory infrastructure in place (in Victoria the Registrar of Housing Agencies and the performance standards, in most other states the National Regulatory System for Community Housing) which monitors the performance of landlords and the relationships between social housing providers and tenants.

A “better-off” test could empower providers (without prescribing methods) to seek ways of sharing the costs and benefits of building upgrades with their tenants, so that all parties are better off as a result.

Solar for renters – an expanded version As of 1 July 2019 the Victorian Government has expanded its existing Solar Homes rebate Scheme to include properties which are subject to a residential tenancy agreement1.

From late 2019 landlords can receive a 50 per cent rebate of their installation costs as well as an interest free loan equivalent to the rebate amount from the Government. The rebate and loan will be paid directly to the solar provider, with the landlord and tenant paying the balance directly to the

1 https://www.solar.vic.gov.au/Solar-rebates/Solar-for-rental-properties

https://www.solar.vic.gov.au/Solar-rebates/Solar-for-rental-properties

11

provider once installed. The amount of the tenant contribution is expected to be capped at 25% of the total installation cost, spread out as an annualised charge over four years.

The tenant co-contribution scheme has not yet been enacted in Victoria but aims to significantly reduce tenant power bills while allowing landlords to recover part of their installation costs. However, based on the legal advice received for this project, the proposed arrangement still appears to be incompatible with the existing provisions of the RTA, despite payments going to the solar provider rather than the landlord.

Details of how the Victorian Government intends to address the restrictions under the Act have yet to be made public – however, the ongoing review of residential tenancies legislation in Victoria presents an opportunity for reform in this area.

Importantly, this reform need not be limited to just solar panel installations. Any ‘carve out’ from section 53 of the Act for the Solar for Renters program can, and should, encompass any arrangement between landlords and tenants where the tenant receives a net benefit from the installation of energy efficient utilities or fixtures.

Such arrangements could include solar hot water, improved insulation, energy-efficient heating or lighting, etc.

Where Victoria or other States are considering such a scheme, it should be broad enough to contemplate the installation of a variety of energy-saving or energy-producing measures.

Potential business models requiring regulatory change If any of the proposed amendments to the RTA outlined above were enacted then additional business models become possible for the community housing sector.

As soon as the regulation allows community housing landlords and tenants to negotiate a co-contribution based on the anticipated bill savings it becomes possible to finance energy efficiency upgrades, with the tenant co-contribution supporting the cost of finance.

CHOs will need to work through business cases to evaluate the merits of installing energy efficiency upgrades, the potential savings to be generated, and an equitable co-contribution by the tenant on a per-property basis before embarking on any potential installation.

CHOs can then evaluate the potential financing mechanisms to determine which one is most appropriate for the circumstances of the program of work proposed. In some cases, CHOs may choose to subsidise the capital cost of installation or seek additional grant funding to support more thorough retrofits than would otherwise be possible.

Tenant co-contributions could also be directed into a hypothecated fund for future upgrade programs, for repairs and maintenance of the assets, or for future replacement of aging appliances or panels. It’s worth noting that the ability to do so may be constrained by how the RTA is amended and under what circumstance tenant co-contributions can be sought.

Tenant Considerations No matter what option is pursued to finance energy efficiency upgrades, tenants are a key stakeholder in any project to install these upgrades.

Based on work in this space to date it is clear that tenant engagement is critical to success. Simple and easy to understand resources to support conversations with tenants about the benefits of

12

energy efficiency improvements would be invaluable to the sector. So too would a better understanding of the kind of sustained engagement that is required to ensure a smooth installation as well as that tenants are able to get the most out of the upgrades.

For those CHOs that wish to discuss tenant co-contributions there are a variety of additional issues to consider. These include:

• How to measure the benefits delivered if the upgrade involves a higher energy use, or a shift from one fuel to another,

• How to calculate a fair charge for tenants, especially if no baseline exists or the benefit is improved comfort rather than a savings in energy costs,

• What happens if the original tenant leaves – what is the process for agreeing to a tenant co-contribution once the upgrades are already in place.

Conclusion Community housing organisations house some of the most vulnerable tenants in the state, and there is significant appetite within the sector to install energy efficiency improvements as a way to reduce energy poverty and improve the comfort of their tenants’ homes.

This paper identifies viable business models under the current regulatory system in Victoria as well as avenues for reform which would enable much greater take up of energy efficiency improvements.

It highlights areas where additional work is needed, including the potential for a separate entity to manage energy efficiency improvements for the community housing sector, and the challenging issues around how to ensure tenant considerations remain a fundamental part of any business decision about implementing energy efficiency upgrades.

13

Appendix A: Full page business decision making tree

14

Appendix B: Regulatory barriers to tenant charges Victoria

• DHHS affordable rent parameters cap rent (excluding CRA) at 30% of household income, up to a certain income level. Some programs are limited to 25% of household income.

• Service charges only available in non-metered properties, and only for consumption charges. • RTA confirms tenants are liable for consumption costs, and supply and hire of gas bottles. • RTA confirms that landlords are liable for installation costs for connection of services and consumption charges that are not separately metered.

Affordable Housing regulatory settings

Reference Summary Implications

Director of Housing affordable rent parameters

Requires net rent (excluding CRA) to be set at no more than 30% of household income. Income limits apply to this rule (i.e., the rule does not hold above certain household income levels).

Calculation of rental caps varies for different kinds of housing (e.g., transitional housing, DOH housing under management, etc).

Places a natural cap on rent.

Cap does not lift where energy efficiency measures provide net reduction to household costs.

GST legislation In order to be defined as a “charitable supply”, supply of accommodation must be at less than 75% of market value.


Market value of rent would typically increase on account of energy efficiency measures installed.

Housing Registrar’s rent-setting guide

Describes a “service charge” as a charge in addition to rent which may be charged in respect of services that cannot be separately metered.

Confirms the position under RTA 1997, allowing a “service charge” in relation to services.

15

Housing Registrar’s performance standards

Housing agency must have policies and procedures in place to ensure that service charge and other charges do not exceed fair market or actual charges.

Characterises a service charge as a cost-recovery mechanism by which housing agency should not profit.

Consistent with RTA 1997 position that service charge is a cost-recovery mechanism.

Residential Tenancies Act 1997

Section Summary Implications

Section 52 Confirms that a tenant is liable for:

(a) Supply and use of electricity, gas or oil in respect of tenant’s occupation (where the premises are separately metered) but tenant is not liable for installation costs and charges in respect of the initial connection of the service to the premises;

(b) Cost of water supplied based solely on volume and only if separately metered;

(c) Other charges that are calculated by reference to the volume of water supplied only if separately metered;

(d) Sewerage disposal charge only if separately metered;

(e) Use of bottled gas (but not the charge for supply or hire of bottles).

Prohibits charging installation costs regarding the initial connection of the service.

Where premises are separately metered, charging a fee in respect of energy efficiency installations (e.g., insulation, solar panels, etc) would likely be prohibited.

Section 52 (as of 1 July 2020) Tenants will be liable for supply and hire gas bottles. Previously this cost was allocated to landlords only.

Allows landlords to shift the cost of bottled gas provision (not just gas consumption) to tenants.

Will apply more often to regional settings.

16



Section 53 Confirms that a landlord is liable for:

(a) Installation costs in respect of the initial connection of electricity, gas, water, oil or bottled gas to the premises;

(b) Consumption charges that are not separately metered;

(c) Water supply charges that are not based on volume of water;

(d) Water supply charges that are not separately metered;

(e) Sewerage disposal charges that are not separately metered;

(f) Sewerage and drainage service charges;

(g) Supply or hire of gas bottles.

A landlord can agree to be liable for consumption charges for which a tenant is liable under section 52.

Enables landlord to possibly enjoy the cost-saving benefit, if landlord agrees to be liable for consumption costs for all or some expenses.

Rent would need to increase where a landlord took over tenant’s consumption costs. Query whether rent adjustment would send rent above affordable rent ceilings.

Section 57 Where it is not possible or practicable to measure tenant use of a service, the Director of Housing (or a housing agency funded by DoH) can impose a service charge.

Service charges can relate to water, central heating, laundry or utility services or facilities made available to the tenant. This includes the provision of electricity, but only where use is not separately measured.

Service charges can increase or decrease based on the actual cost of providing the services or facilities.

A service charge is separate to rent and is regarded as a substitute for payment by a tenant for utilities. It is also a way to recover costs of provision of common services (e.g., heating or laundry) where tenant use cannot be separately measured.

Only permitted where separate metering does not exist. Would not be permitted as a charge on separately metered dwellings.

17



Important – an ‘embedded network’ charge is not allowed by the RTA 1997. A landlord only has the option to increase rent or impose a service charge.

Section 57 (as of 1 July 2020) Still allows service charges only where separate use is impossible or impractical to measure. Service charges must not exceed the cost of service provision.

Where a service charge is imposed or varied, housing agency must notify tenants, including giving particulars of the changed costs relating to the provision of the service.

Tenants can apply to VCAT in the event that they wish to dispute the imposition or increase to a service charge.

Suggests that housing agency must measure the cost of providing services to each building.

Housing agency to report on changes to the cost of service provision in order to increase a service charge.

Prohibits residential landlords from ‘profiteering’ from the provision of electricity supply. Arguably may allow for total costs (consumption charges plus amortised network cost) to be charged as a single consumption cost to tenants, but would infringe section 52 (no liability for installation costs).

18

New South Wales • Ministerial guidelines cap rents at 30% of household income, and the provision of energy efficiency measures will not raise it. • Landlords prohibited by NSW Residential Tenancies Act from requiring payment for anything other than rent, bond, or any other amounts or fees

prescribed by regulations. • Regulation allows for a social housing landlord and tenant to agree that the tenant will pay the landlord part or all of a renewable energy rebate for

the installation by the landlord of solar hot water panels. This is a prescribed payment under the RTA. • Under NSW RTA tenants are only liable to pay for utility costs where they relate to supply to the premises and are separately metered. • Landlord must pay utilities costs for residential premises if not separately metered • Landlords must pay for installation costs regarding the initial connection of a utility service.



NSW Affordable Housing Ministerial Guidelines 2017-2018

Rent paid for Affordable Housing (very low and low income households) should be no more than 30% of household income. This rule may vary for moderate income households or based on other household circumstances.

Aim of Affordable Housing rent setting guidelines includes maximising CRA and ensuring GST free status.






Section 32 RTA 2010– Payments under a residential tenancy agreement

A landlord must not require or receive from a tenant any payment for or in relation to renewing, extending or continuing a residential tenancy agreement other than rent, bond, or any other amounts or fees prescribed by the regulations.

Blanket prohibition on any charge not expressly contemplated under the Act or Regulations.

19



Regulation 8 RTR 2010- Rebates may be repaid to social housing provider

If a landlord and a tenant under a social housing tenancy agreement enter into an agreement requiring the tenant to pay to the landlord the whole or part of any renewable energy rebate for the supply of electricity that is payable to the tenant as a result of the installation by or on behalf of the landlord of solar hot water panels, any such payment is prescribed for the purposes of section 32 of the Act.

Similar mechanism could share benefit of other energy efficient measures installed by landlord.

Parliament could be lobbied to amend regulations to include additional cost recovery mechanisms where tenants are no worse off.

Section 38 RTA 2010 – Utility charges payable by tenant

A tenant must pay the following charges for the residential premises:

(f) all charges for the supply of electricity, gas (except bottled gas) or oil to the tenant at the residential premises if the premises are separately metered;

(g) all charges for the supply of bottled gas to the tenant at the residential premises;

(h) all charges for pumping out a septic system used for the residential premises;

(i) any excess garbage charges relating to the tenant's use of the residential premises; and

(j) any other charges prescribed by the regulations.

Tenant is only liable to pay for utility costs where they relate to supply to the premises and are separately metered.

20



Section 40 RTA 2010- Payment of rates, taxes and certain utility charges by landlord

The landlord must pay the following charges for the residential premises:

a. rates, taxes or statutory charges; b. installation costs and charges for initial connection to the

residential premises of an electricity, water, gas, bottled gas or oil supply service;

c. all charges for the supply of electricity, gas (except bottled gas) or oil to the tenant at the residential premises that are not separately metered;

d. the costs and charges for the supply or hire of gas bottles for the supply of bottled gas;

e. all charges (other than water usage charges) in connection with a water supply service to separately metered residential premises;

f. all charges for the supply of sewerage services (other than for pump out septic services) or the supply or use of drainage services to the residential premises; and

g. any other charges prescribed by the regulations.

Prohibits charging installation costs regarding the initial connection of the service.

Landlord must pay utilities charges for the residential premises if it is not separately metered.

21

Queensland • Queensland community housing rent policy caps rents at 30% of household income • RTRA: Landlord must pay all outgoings which cannot be passed on as a service charge • Landlords may only claim a service charge from a tenant to the extent that it relates to the supply of utilities to the premises. Energy-saving

measures cannot be subject to a service charge.



Queensland Community Housing Rent Policy – 7.1.1

Rent paid for Affordable Housing must be no more than 30% of household income.




Places a natural cap on rent. Market value of rent would typically increase on installation of energy-saving measures.

Section 163 RTRA 2008 – Outgoings other than service charges

Landlords must pay all charges, levies, premiums, rates or taxes payable for the premises.

Landlord is responsible for paying all outgoings at the premises which cannot be passed on as a service charge.

Section 164 RTRA 2008 – Meaning of Service Charge

The Act defines service charges as a charge payable by the owner or occupier of premises for electricity, gas or water supplied to the premises.

Landlords may only claim a service charge from a tenant to the extent that it relates to the supply of utilities to the premises. Energy-saving measures cannot be subject to a service charge.

Section 171 RTRA 2008 – Supply of Goods and Services

The landlord must not require the tenant to buy goods or services from the landlord or another nominated party. This provision does not apply in relation to any service charge.

Although the landlord would be able to recover the costs of utilities distributed by the embedded network, it would not be able to recover its costs for installing or operating the embedded network.

22

South Australia • CH rent policy & procedures require rent (ex CRA) to be set at no more than 25% of household income. • RTA limits landlord to receiving payments of rent, bond or water charges. • Landlord may charge for utility service if the accounts are in the name of the landlord. Must only be for consumption costs. • Community housing providers able to charge maintenance levy for solar and other prescribed amenities at the property.



Community Housing Rent Policy & Procedures - 7.2.3

Requires net rent (excluding CRA) to be set at no more than 25% of household income. Income limits apply to this rule (e.g. very low-income households have a limit of 21% of net household income.)



Community Housing Rent Policy & Procedures – 9.1-9.22

Community housing providers can apply a small mandatory Additional Services Levy for maintenance of items exempted under the RTR (1995) 11

Can be for supply, installation and maintenance of anything on the exemption list.

May be subject to the rent cap of 30% of household income.




Section 53 RTA 1995- Permissible consideration

Landlord may only receive payments of rent, bond or water charges in relation to the lease.

Blanket prohibition on any charge not expressly contemplated under the Act or Regulations.

Reg 7 RTR 2010 – Landlord may receive payment for services

A landlord may receive payments for the provision of electricity, gas or telephone services at the premises if the accounts for those items are in the name of the landlord.

Where utility service provider installs at no upfront cost and recovers via consumption prices, landlord can pass on consumption costs to tenant.

23

Section 55 RTA 1995 – Variation of Rent

A landlord may increase rent where it is permitted under the terms of the lease (unless expressly stated otherwise, a fixed term lease automatically prohibits a rental increase). If the landlord is a community housing agency and the lease contains a method for calculating rent, the landlord may alter the method for calculating rent during a fixed term.

Community housing leases can include a method for calculating rent which accounts for the future installation of energy efficient measures.

Tasmania • Better Housing Futures management transfer contract caps rents at 25% of household income • RTA: Landlords may only receive rent water consumption charges or reasonable compensation for damages from tenants. Blanket prohibition on

any other forms of charge.



Better Housing Futures contractual obligations

Rents expected to be capped at 25% of household income, excluding Commonwealth Rent Assistance






24

Section 17(3) RTA 1997 – Money other than rent

Landlords may only receive rent, water consumption charges, or reasonable compensation for damages from tenants.

Blanket prohibition on any other forms of charge, preventing cost recovery through service or embedded network charges.

On-bill finance costs sit solely with the tenant, as costs are not able to be passed through (and shared with) the landlord.

Landlord could provide a rental discount to tenants to mitigate increased bill costs.

Section 20(3A) RTA 1997 –

Increases in rent under social housing lease

A social housing landlord may increase rent payable under a lease by giving 60 days written notice to a tenant if:

(a) there is a written lease for the premises which allows for an increase; or

(b) there is no written lease for the premises.

Unlike other jurisdictions, very few limitations on social housing landlords increasing rents as a means of covering installation costs.

Still must account for GST ‘charitable supply’ rental caps.

25

Appendix C: Financing options in other jurisdictions New South Wales

Charging / rent options

No charge Service charge Embedded network charge Rent charge

Funding options

No tenant payment

Tenant pays towards investment costs

Cash purchase Community

Housing Organisation

owns the assets

Feasible where excess cash or grant funding is available.

S40 RTA 2010 – the landlord must pay for the installation costs and charges for initial connection to the residential

premises of an electricity supply service.

S32 RTA 2010 – the landlord may require a payment from a tenant which is prescribed by

regulation.

R8 RTR 2010 – Under a Social Housing tenancy

agreement, the parties may agree for the tenant to pay

an amount equal to any renewable energy rebate

received by the tenant as a result of the installation of

solar hot water panels at the premises by the landlord.

Opportunity for legal reform to allow for recovery of

similar costs for providing embedded network where energy savings are passed

through to tenant.

S42(1) RTA 2010 - rent

increases not permitted during fixed term tenancy

of less than two years unless the agreement specifies the increased

rent or method of calculating the increase.

S42 RTA 2010 – rent

increases only permitted at intervals of at least 12

months for lease for a fixed term greater than

two years.

Possible only where rents are not currently at

or close to the cap for Affordable Housing or

GST purposes.

Corporation borrowing

Feasible where potential savings meet or exceed repayment costs

(e.g., landlord costs can be substantially

reduced).

On-bill finance Possible where utility service provider effectively installs free of charge and recovers

via consumption prices (apportioned to tenants via a service charge). Premises

must be separately metered.

Third party or project finance

S40 RTA 2010 – the landlord must pay for the installation costs and charges for initial connection to the residential

premises of an electricity supply service.

Third party lease Third party

owns the assets

26

Queensland


No charge

Service charge


Rent charge

Funding options

No tenant payment Tenant pays towards investment costs

Cash purchase Feasible where excess cash or grant funding is available.

Although s165 RTRA 2008 allows for passing on of a

service charge, s164 provides that a service

charge may only relate to consumption, not

installation.

S163(1) RTRA 2008

requires the lessor to pay all charges, levies,

premiums, rates or taxes payable for the

premises.


Community Housing

Organisation owns the assets

Feasible where

potential savings meet or exceed repayment costs (e.g., landlord

costs can be substantially reduced).

S171(1) RTRA 2008

prohibits a lease from requiring a tenant to buy goods or services from the landlord, with the specific exception of recovering a service

charge.

Operation costs of the embedded network are

not costs for the consumption of utilities

and are not able be recovered as a service

charge.

S91(6) RTRA 2008 - rent increases not

permitted during fixed term tenancy unless provided for in the

lease.

Possible only where rents are not currently at

or close to the cap for Affordable Housing or

GST purposes.

On-bill finance Possible where utility service provider effectively installs free of charge and recovers via consumption

prices (apportioned to tenants via a service

charge).


Although S165 RTRA 2008 allows for passing on of a service charge, s164

provides that a service charge may only relate to

consumption, not installation.


owns the assets

27

South Australia


No charge

Service charge


Rent charge

Funding options No tenant payment Tenant pays towards investment costs



owns the assets

Feasible where excess cash or grant funding is

available.

S53 RTA 1995 – A person must not require or receive from a tenant a payment other than rent or a bond for a residential tenancy.


An embedded network charge does not fall within the exemption provided by

Reg. 7 RTR 2010 because there will be no “account” in the name of

the landlord.

RTA 1995 generally limits when rent increases can take effect under a lease

(i.e. not during a fixed term unless explicitly provided in the lease).

S55(2)(iii) RTA 1995 - Lease from a Community

Housing landlord may allow for changes to the basis on which rent is calculated – potentially

allowing for rental increases during a fixed

term.

Possible only where rents are not currently at or close to the cap for

Community Housing or GST purposes.


Feasible where

potential savings meet or exceed repayment costs (e.g., landlord


On-bill finance Although generally prohibited by the Act,

Reg. 7 RTR 2010 allows a service charge where

utilities are in landlord’s name.

Possible for landlord to pass on usage charges from a service provider

which include repayment of installation costs.




owns the assets

28

Tasmania


No charge Service charge Embedded network charge

Rent charge

Funding options No tenant payment Tenant pays towards investment costs



owns the assets

Feasible where excess cash or grant funding is available.

S17(3) RTA 1997 – An owner must not require or receive from a tenant any money or consideration other than rent, a water consumption charge, or

reasonable compensation for damage to the

premises by the tenant.

S17(3) RTA 1997 – An

owner must not require or receive from a tenant any money or consideration other than rent, a water consumption charge, or



S20(1) RTA 1997 - An owner may increase the amount of rent payable

by the tenant if the tenancy agreement

allows for an increase.

S20(3A) RTA 1997 - If a residential tenancy

agreement relates to social housing, an

increase in rent may take effect from a day that is more than 60 days after

the day on which the notice is given.

Possible where rents are not currently at or close to the charitable

supply rent cap for Community Housing or

GST purposes.


Feasible where potential savings meet or exceed repayment costs (e.g. landlord


On-bill finance Possible where utility service provider

effectively installs free of charge and recovers via

consumption prices.

Landlord unable to apportion utilities cost

(other than water consumption) through

service charge.

Tenant would be solely responsible for

increased consumption prices.


S17(3) RTA 1997 – An

29


owns the assets

owner must not require or receive from a tenant any money or consideration other than rent, a water consumption charge, or



financing options for energy efficiency in community housing · solar pv, batteries and energy...

Documents