Tenant flow - the great opportunity of the real estate industry

Local, profitable, independently implemented: The decentralized solution for climate protection 

6 min. reading time

6 min. reading time

by Dr. Karsten Schmidt, author
Published on 29.04.2020

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by Dr. Karsten Schmidt, author
Published on 29.04.2020

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1.The building sector must now become active in climate protection

In 2018, 117 million tonnes of CO2 emissions were generated in the “buildings” sector. This includes the real estate of private households as well as commercial, retail and service providers. 117 million tonnes are only the direct emissions, mainly produced by combustion processes in buildings for space heating and hot water, and correspond to about 14% of the total greenhouse gas emissions in Germany. If indirect emissions are also taken into account, which occur for the electricity and grid-bound heat supply of the building sector in the energy industry, the share of the building sector in emissions is about twice as high. 

Germany therefore still has considerable savings potential when it comes to CO2 reduction in the building sector. 

This is also the view of the Minister for the environment Svenja Schulze. The current BMU report on German greenhouse gas emissions in 2019 shows a total release of 805 million tonnes of CO2. That is a decrease of about 54 million tons and thus 6.3% of the emissions compared to the previous year. The Federal Environment Minister sees the reasons for this decrease in the successful expansion of renewable energies and the shutdown of the first coal-fired power plants, among others. While she expressly praises the results in the energy industry, she still sees considerable potential in the transport and real estate sectors.  

By 2030 Germany wants to reduce its emissions by at least 55 percent according to the Climate Protection Act. This represents a huge opportunity for the real estate sector in particular: it can make a significant contribution to achieving climate protection targets and at the same time build a new profitable business model for itself. 

The solution is called tenant flow 

To explain “tenant flow” in more detail, we take a look at the real estate industry, its situation on the energy market, the challenges it faces and what solutions exist for it. 

2. The decreasing feed-in tariff

Solar power in Germany is already a success story. Today, in 2020, more than 1.7 million PV systems will supply around 9% of the electricity produced in Germany – and the share of photovoltaics in electricity generation continues to rise. However, a look at the ownership structure of photovoltaic systems in Germany shows that the real estate sector (represented here proportionately by commercial enterprises) is lagging behind its potential. 

With a consistent development of available and so far unused (roof) areas, the real estate industry would raise the topic of solar power to the next level. However, the achievable yields of fully feeding PV systems are shrinking due to the falling feed-in tariffs, which is slowing down the investments of real estate companies in solar energy.  

The feed-in tariff for PV electricity is decreasing faster than for any other renewable energy source. Over the last 15 years, the feed-in tariff has fallen by approx. 80% for small-scale systems and 90% for medium-sized systems. The reasons for this are the declining state subsidies paid in the 1990s and early 2000s to promote solar energy as quickly as possible. Now the production of PV systems no longer needs to be subsidised to such an extent, as it is much more cost-effective than 20 years ago due to increased efficiency and cost reductions in production.  Due to the experience curve effects of the manufacturers, government subsidies have been steadily decreasing since 2014 and the energy market is facing falling feed-in tariffs.  

 [4] EEG remuneration for PV electricity after the date of commissioning of the power plant, average remuneration in the tenders of the Federal Network Agency, electricity prices and average remuneration for PV electricity

The energy market is changing. From summer 2020, the yield of a full-feed PV system will be between 3% and 3.5% and will tend to fall further. Compared with this classic grid-oriented business with falling revenues from full feed-in and rising electricity prices, a consumer/neighbourhood-oriented business with cheap and locally generated renewable energies will become increasingly profitable in the medium term. 

3. Tenant flow - the sustainable solution with higher profit

Tenant power is the answer to the question of how renewable energies can be integrated into the property portfolio in an economically profitable way. The own use, i.e. the marketing, of locally produced electricity to the customers of the real estate company (e.g. tenants) is becoming increasingly lucrative.  

Tenant electricity, if efficiently implemented, can generate a return that is approximately three times higher than that of a full-feed system.  

The real estate industry has additional income, as it now offers electricity in addition to heating and rental space. The value of the property increases sustainably by equipping it with innovative technology. Tenants receive their locally produced tenant electricity, which is not only sustainable but also cheaper compared to electricity from the public grid. They get a renewable energy source they can experience – a regional, green product. 

And last but not least, the environment benefits. Because it is profitable for the real estate industry to make the existing unused space available for the expansion of renewable energies, the share of renewable energies in the energy supply increases and there is an immediate positive effect on CO2 reduction. Tenant electricity is a win-win situation for all parties involved and a profitable opportunity for the building sector to make its contribution to achieving climate targets. 

The real estate sector already has the customer access necessary for tenant electricity. Current business models, such as offering other service contracts in addition to the rental contract, for example for service charges or a telecommunications service, have already proven their worth – and can even be expanded. Concluding an additional energy supply contract is easy and does not require any major additional sales effort. 

4. The "challenges" of tenant electricity projects

Now the question arises why not all property owners are yet implementing tenant power projects, even though the expected return is demonstrably higher. In our experience, this is related to two (supposed) problems. On the one hand, real estate companies fear a loss of the trade tax privilege due to the commissioning of a tenant electricity system. According to § 9 no. 1 sentence 2 GewStG, real estate companies save trade tax if they exclusively manage and use their own property. In theory, the additional turnover from the sale of electricity would jeopardise their trade tax privilege.  

Moreover, there is simply a fear of uncertainty. Power supply is a completely new and supposedly complex business field. Most housing companies have many years of expertise in the provision of rental space and heat, as well as the billing of the same. Entering the electricity business would be uncharted territory and so there is caution and restraint when it comes to setting up and commissioning a tenant electricity system. There are questions about the metering infrastructure and meter reading. How are the new, small-scale, decentralised processes recorded, billed and reported to the responsible authorities? 

The lack of energy-industry and tenant-electricity know-how combined with the fear of losing the trade tax privilege discourages many real estate companies from implementing tenant electricity. 

5. The solutions for the simple implementation of tenant flow

But of course, there are suitable solutions for these “challenges”. 

There are various ways for real estate companies to implement tenant electricity projects without risking their trade tax exemption at the same time. 

One possibility is cooperation with an energy supply company or an energy service provider. In this cooperative approach, the entire tenant electricity offer is implemented by a commissioned utility company. 

Alternatively, the real estate company can, of course, also carry out tenant electricity on its own by implementing the issue with a specially founded energy supply company. This subsidiary can operate the energy supply for its own property, as the trade tax is only incurred in the subsidiary.  

Since a possible “threatening trade tax loss” deserves special attention, the upcoming blog post will focus on the legal and technical intricacies of the “challenges and solutions to the topic of tenant flow”. In a podcast, AMPEERS ENERGY co-founder Karsten Schmidt discusses all the questions that arise on the topic with energy law expert Peter Mussaeus of PwC Legal. 

 

Thus, the only remaining obstacle is the “uncharted territory” in the energy industry from the point of view of the real estate industry. Many companies only see the complex and small-scale tasks in tenant electricity projects (such as balancing the quantities for the proof of origin, reporting electricity tax to the main customs office or controlling the quantities relevant to the EEG).  In order to ensure the economic efficiency of this small-scale task, it is necessary to deal with the individual specifics and take them into account in the calculation. Manual accounting, such as with MS Excel, is extremely time-consuming due to the small scale of the task. One could claim that a tenant electricity project is a microcosm of its own. 

6. Making tenant electricity projects possible

And this is exactly where we at AMPEERS ENERGY come in. 

Because we have a fully automated software solution, the AE Local Supplier, which not only makes the billing of tenant electricity projects scalable, but also supports all energy management processes end-to-end. It is the energy industry expertise that makes tenant electricity projects automated and easy to implement for everyone.  

The Local Supplier focuses on tenant electricity projects. It is individually adapted for the respective companies and is then able to implement the small-scale processes in all tenant electricity projects in a largely automated manner. 

The Local Supplier enables the customer to be guided through the topic of tenant electricity without having to know every last detail about it. It is easy to work with the user-friendly software and implement entire tenant electricity projects. The software takes over the complete administrative side of tenant electricity projects, e.g. change processes, balancing, billing of generation plants and end customers and also receivables management. 

Many companies have their own functioning inventory systems, such as accounting systems or CRM customer management systems for their customers’ master data and are extremely reluctant to set up a parallel system. This is not necessary with our solution. We are open to the system and integrate ourselves as a plug-in to the existing systems, without wanting to replace them. 

This enables every real estate company to benefit from the advantages of tenant flow and to generate an attractive return on investment. 

Thanks to our network of partners and our energy expertise, we have an answer to all questions regarding infrastructure, software or financing and experts who can take care of the matter (all-round carefree service). 

From our point of view, the real estate industry is predestined to enter into the distribution of tenant power. If the huge potential is used intelligently, the real estate industry will not only have a new, lucrative business model, but it will also make a decisive contribution to advancing the energy turnaround and a greener future.

Let´s make decentralized business profitable!   

[1] https://www.ise.fraunhofer.de/content/dam/ise/de/documents/publications/studies/aktuelle-fakten-zur-photovoltaik-in-deutschland.pdf

[2] https://www.baulinks.de/webplugin/2010/1689.php4

[3] The concept states that the inflation-adjusted (real) unit costs fall constantly if the cumulative output (production quantity) increases. Typically, the costs decrease by 20 to 30% when the cumulative output quantity doubles.

[4] Source Fraunhofer ISE: https://www.ise.fraunhofer.de/content/dam/ise/de/documents/publications/studies/aktuelle-fakten-zur-photovoltaik-in-deutschland.pdf