Five months ago, chef Tom Davies and his partner, Libby Driver, took over the lease of The Village Inn, a pub nestled in Swindon, England. The quaint brick-laden pub had long been a local darling, but on December 4th, The Village Inn had shut its doors for good. Why? Because soaring energy bills had eaten too much of the pub’s profits for the business to have been remotely sustainable.
The Village Inn’s story is not an outlier. Thousands of pubs and restaurants in the UK are facing financial ruin as the ongoing energy crisis continues to drive up operational costs. Nearly half of the 47,000 pubs in the United Kingdom are owned by corporations, and their executives claimed at the end of August that tenants were already giving their notice because they could not afford the energy costs, which are expected to increase by more than fivefold in some cases.
Russia typically supplies around 40 percent of Europe’s natural gas, and since Europe’s entire energy system relies so heavily on this imported gas, Russia’s invasion of Ukraine has had catastrophic consequences for European businesses. Prices skyrocketed, volatility in the gas market reached its highest point since the mid-90s, inflation followed, and costs are getting out of hand. There’s no cap on business energy costs in the UK, just like the European Union, which is also reeling from the crisis. To make matters worse, Europe could be running out of fuel altogether in 2023.
A recent joint press conference held by the European Commission painted a grim picture for the European Union’s gas supply. While it stressed that Europe will have enough power to survive the winter, a supply gap of 57 billion cubic meters could emerge next year. If more efforts are taken to increase energy efficiency, promote the adoption of renewables, expand the use of heat pumps, and encourage other behavioral changes, the shortage may be reduced. However, the stress test developed by the International Energy Agency (IEA) that concluded in the 57 billion cubic meters figure assumed that China’s imports of natural gas would return to 2021 levels, but China is still partially under COVID-19 lockdowns. Now that full reopening plans have been set in motion for 2023, China’s energy demand will increase by millions of barrels per day. That jump in demand could worsen Europe’s energy crunch if China’s energy needs force them to reduce their natural gas exports. As IEA’s Executive Director Fatih Birol put it at the press conference, “we may have a bit of a problem.”
The energy crisis has rattled Europe, but its impact can be felt on a global scale, as anyone who’s tried to fill up their gas tank lately can attest. But the crisis is dealing a serious blow to Europe’s retail real estate sector. Energy costs are skyrocketing for tenants, particularly in commercial buildings like hotels and restaurants. Even U.S. retailers, who have been largely shielded from the worst of the energy crisis, are directing more of their revenue to their energy bills, which have climbed to a four-decade high. Compared to their income and housing costs, European retailers now have energy bills so substantial that they’re absorbing a bigger share of the businesses’ revenue, just like in The Village Inn’s case.
A report from Colliers suggests that some businesses are seeing their energy bills surpass their rent costs, and the energy crisis is shining a brighter spotlight on renewable infrastructure. Madeline Bujis, one of the report’s authors, said that energy conservation and sustainability initiatives, including the installation of solar panels, had been made more “attractive.”
The solar express
Solar has also been more topical as solar panels have become more efficient over the years; newer models can extract more than enough power during rainy weather or overcast skies, which are common in the UK. Components of solar panels that were once exorbitantly expensive (like silicon) have been replaced with less costly alternatives (like perovskite), resulting in cheaper panels that are more accessible for residential adoption. But evidence of serious untapped potential in the retail sector may soothe some of the economic woes brought on by the energy crisis.
A report from the nonpartisan research organization Frontier Group and nonprofit Environment America Research and Policy Center found that the rooftops of big-box retailers could supply roughly half of the store’s energy needs per year. If that potential is fully realized, it could generate 84.4 terawatt-hours of electricity yearly and prevent more than 52 million metric tons of carbon dioxide emissions. It’s the equivalent of powering 8 million houses in the United States (equivalent to 35 cities the size of El Paso, Texas) or removing 11.3 million passenger cars from the road for a year.
Some retail developers are taking that idea to the next level, and perhaps European retailer developers can take a page from one of Australia’s property firms. Panthera Group, a property development, investment and management company based in Australia, has overseen a massive portfolio of Australian retail properties. Because Australia exports most of its fossil fuels abroad, the international shortage caused Australia’s energy prices to more than double from the previous year. Australia has been hit so hard by the energy crisis that Panthera Group’s founder and CEO, Chakyl Camal, was seeing more appreciation in value for energy than any of the properties within Panthera’s own portfolio. “Nothing that I’m investing in, and that includes the shopping center that I own, is escalating and appreciating at that value,” he said.
Concerns over sustainability and the opportunity presented by the energy crisis propelled Panthera Group to expand into the solar market in 2021. Panthera Group certainly wasn’t the first property management company to set up solar panels for any of their properties, but according to Camal, they are gearing up to become one of the largest renewable energy generators in Australia’s retail property space. Camal was particularly excited about this when we recently caught up, because energy prices hadn’t decreased since we last spoke a few months ago.
It sounds like the perfect solution–retail landlords can throw on a few rows of solar panels and watch their energy bill plummet, and in turn provide an additional service to tenants that would ultimately result in higher yields. But there’s a reason the Frontier report highlights the potential of superstores and not smaller brick-and-mortar stores. The average one-bedroom house needs a minimum of six solar panels to provide adequate power, but retail spaces pull a lot more power than a domicile. In order to support the dozens of panels necessary to power the building, there needs to be adequate surface area to place the panels…which is a problem for the tighter spaces in Europe’s infrastructure.
There aren’t nearly as many big-box retailers in Europe as there are in the U.S. since the size of most properties had been set hundreds of years ago. Retail occupiers in Europe and the UK are at the mercy of a total energy infrastructure. This is especially true in the UK, where political infighting regarding the cost-of-living crisis is repeatedly resulting in high-profile resignations instead of tangible initiatives to solve it. It’ll take less time revamping the UK’s energy system than it would be for the UK parliament to finally decide whether or not to issue a cap on energy prices for businesses.
The gas price crisis is pushing forward what the UK needed anyway: more solar panels on rooftops. In 2021 the UK’s electricity grid operator set out three different pathways the UK’s energy sector could follow to reach net zero emissions by 2050. Two of them required a tenfold increase in rooftop solar panels by 2050. The third requires a fivefold increase. But installations are hobbled by ongoing labor shortages, leaving thousands of unused panels stockpiled in warehouses as thousands of European businesses slashed hours in order to afford to keep the lights on.
Despite these obstacles, the European Commission wants to revitalize Europe’s solar manufacturing sector and kick-start a large-scale spread of solar energy. The Commission is putting pressure on the EU to install solar panels in all suitable public buildings by 2025, offsetting dependence on Russian gas, obliging decarbonization goals, and, oh yeah, giving commercial owners, operators, and occupiers some financial breathing room. As of a few days ago, The EU’s solar photovoltaic industry alliance was formally established by the European Commission with the goal of reclaiming output lost to China and building a “Made in Europe” industry. By 2025, the new alliance hopes to have each major solar component producing 30 gigawatts (GW) annually, which is more than six times its current capacity of about 4.5 GW. The alliance will encourage investments in these large-scale manufacturers.
Owners and occupiers of all types are feeling the pinch of rising energy costs, but the pain Europe’s retailers are feeling is underscoring the worst of the energy crisis. Unfortunately, the story isn’t going to get better in the next few months. Europe is still way too dependent on Russian oil and it’s going to take more than a minute to install enough solar panels to make a dent in Europe’s energy bills. However, the crisis is putting real pressure on solar panel adoption across the globe, so let’s just hope European retail real estate isn’t totally upside-down by the time that happens.