Energy Prices and the PBSA sector. What does it mean and what can be done?

For UK purpose built student accommodation (PBSA), energy is one of the largest operational cost bases and hardest to control, accounting for approximately 23% of costs (excluding management fees).

Changing energy prices could have a significant impact on PBSA operational costs. The inclusive rent structure in PBSA exposes it more to changes in energy pricing compared to other real estate sectors. Furthermore, investors, particularly those facing public scrutiny, are increasingly applying pressure to see assets run more efficiently and be decarbonised, so how operators manage energy costs now and mitigate in the future is a big focus.

PBSA energy usage varies based on the level of occupancy, season, the operating pattern of each asset and more. Additionally, PBSA can have complex metering arrangements making it difficult to track consumption.

Operators can manage energy costs with energy management companies procuring energy on their behalf such as Amber; or use a Power Purchase Agreement (PPA), a long-term electricity supply agreement. An example of this is Unite and npower. Unite are a leading player in driving energy efficiency and since 2017 have purchased electricity under a group supply contract with npower from renewable sources covering approximately 73% of their buildings. Taking this further, with a published commitment to buy 100% certified renewable electricity by 2030, Unite agreed a PPA with npower signed in April 2021 guaranteeing 20% of Unite’s annual electricity will be sourced from renewable wind power for the next five years. These approaches mitigate against real-time cost fluctuations by fixing operating costs now, but this suggests organisations are insulated from energy price changes for a finite period only.

Managing energy costs in the future is inextricably linked to sustainability actions. PBSA under construction today can be built smart with good fabric and insulation. Watkin Jones, for example, plans to install heat pumps on all new developments by 2023. Older PBSA may not feature renewable and energy-saving technologies such as double/triple glazing, solar panels, tamperproof thermostats, centralised gas fired Combined Heat and Power (CHP) or LED/motion lighting. With at least 100,000 PBSA beds built between 1960 and 1990, we expect many PBSA schemes will be retrofitted with some or all the aforementioned technologies, else incur some big energy bills. Some retrofitting is harder than others – traditional gas boilers are difficult and expensive to change. We could see the emergence of a two-tier market with costs for older schemes impacted if significant one-off capex is not undertaken. Installing heat pumps for example, can reduce heat costs by as much as 80%, reducing opex costs and exposure to price variability. This kind of capex would generally be considered accretive with respect to the asset value.

Richard Skeels CEO of CRM Students, the PBSA operator with 23,000+ beds under management, has highlighted ESG and efficiency topics are now central to conversations with landlords and investors.

“The current uncertainty around energy costs and what this means for PBSA is a priority, but it is still early days as to what this means for the long-term management of these for the sector. We have worked with ZTP, the energy management consultancy firm, since October 2020 to procure green energy and control our energy costs as much as we can by leveraging our scale. We hope in the next 3-6 months we will all have a greater understanding on the direction of travel for energy prices. Our relationship with ZTP will help us make the right decision based on the market view”.

CRM Students also take an active role in the development of new PBSA they will be managing. This means they can recommend using energy saving technologies where possible to support the longevity of the design. Older buildings under management are regularly retrofitted with items such as LED lights via refurbishment programmes, however significant capex spend to make bigger changes can depend on budget. The pandemic has put pressure on budgets and while there is a renewed focus on saving money and driving efficiencies, larger changes may take longer to implement. CRM operate schemes for a wide range of clients with different needs, but CRM is consistent in its approach- ‘Our aim is to offer best advice to operate as efficiently as we can and ensure our solutions are fit for purpose for the future.’

The PBSA sector is exposed to energy cost fluctuation risk which impacts operating costs if not contractually mitigated or offset with energy saving technologies. The sector is changing including students making bookings based on aligned values, investors focussing on sustainable buildings and universities wanting to partner with decarbonised suppliers. On this basis and with a renewed focus on cost saving, we would expect to see a shift change in refurbishment programmes to include extensive retrofitting where possible and significant changes in how PBSA is built going forward.

Sources: Unite Students Signs Power Purchase Agreement with npower – 29 April 2021, Ignite Enery - Unite Students Case Study

Special thanks to Richard Skeels, CEO, CRM Students