View From Within: Insuring Against Outages

Cause for Concern

Most realty analysts believe that municipal power suppliers are no longer able to cope with ever-increasing consumption, which causes serious concerns on the part of real estate market players. In the wake of the May 2005 accident at the Chagino electricity transmission substation one-third of the capital, including several commercial zones, was left without power.

Months later Russia’s top electricity official warned that in the event of severe frosts in the capital, the power supply to some of the city’s non-residential properties – offices and industrial facilities – would have to be interrupted. As the temperatures plunged to nearly minus 40 this winter some offices were, indeed, left in the dark.

“The May 2005 blackout really was a moment of truth for many office landlords,” says Antonina Lairova, senior analyst at Prime City Properties. “The rumor was that companies - tenants at the business center on Kosmodamianskaya Embankment were left without electricity supply and Internet connection on that day, while tenants at Alexander House faced no such problems.”

Companies involved in real-time operations are especially wary of sudden power outages. They include “banks and companies working online 24 hours a day, such as DHL and FedEx, media companies and broadcasters (Reuters and Bloomberg) and IT firms (Nortel, Cisco Systems, and Sun Microsystems),” says Konstantin Baranov, managing partners at Colliers International. Power cuts may inflict serious losses on such companies and “quite often entail irreversible errors in the operations of the entire company.”

A single accident like the one that hit the city in May 2005 was enough to prompt developers to start looking for additional ways of minimizing risks. “Although that [outage] of course amounted to an act of God for developers, nevertheless tenants now will now be looking for outage-proof offices,” says Antonina Lairova. “Therefore, developers are forced to adjust to the changing requirements and install isolated generating facilities.”

“Availability of backup power generating facilities is the key requirement set by IT companies,” says Elina Zanina, deputy head of commercial real estate and development at Miel-Nedvizhimost realty. “Offices with such facilities in place are more popular with Western firms, too.”

Examples Exist

“The main elements of the engineering system are uninterrupted power supply units and a self-contained boiler-room,” says Elina Zanina. In Moscow there are already several office centers and business parks protected against interruptions in power supply. “Most office developers have had isolated engineering networks installed only because municipal generating facilities failed to handle the ever-increasing load,” says Olga Kisarina, head of research and analysis at Praedium.

Among the business centers secured against power outages and voltage swings are Capital Plaza and Country Park. Capital Plaza has a self-contained transformer substation, Kisarina says. Power supply to Country Park is provided by two distribution transforming plants, each having two separate power supply lines, for computers and other electrical appliances. Capital Tower runs its own, 1,350-kilowatt transmission station. Borodino business center on Rusakovskaya Street is believed to be one of the best facilities in the city, in terms of energy supply, with a reciprocal gas engine as a source of power. That list can be continued with the Aurora Business Park, Novinsky Passazh, Berliner Haus, Dom Na Naberezhnoi at Moskva City and a few other business centers. All those complexes are equipped with diesel generators.

All office centers using self-contained engineering networks fall into two groups – those that use uninterrupted supply units that switch on automatically in case of a failure and those operated manually by authorized personnel, such as the Severnoye Siyaniye (Northern Lights) business center on Pravda Street, Blackwood realty reports.

Gas & Diesel

Diesel generators and gas boilers are considered to be the most reliable power supply units, experts believe. “The most widespread power units at class A and B office centers are diesel generators,” Konstantin Baranov notes. As a rule, diesel generators supply power to the main systems throughout a building in the case of a power cut or outage.

“A diesel generator with a capacity of 15-20% of the total energy consumption at an office complex is capable of ensuring normal operation of control, security, access, and ventilation systems in the case of an emergency,” says Nikita Yemets, head of marketing at Country Park. Experts say it takes approximately 30 seconds before emergency power generators switch on following a failure. In the meantime, interrupted power supply units keep operations going. In developments where there are no diesel generators and only interrupted power supply units are installed, in the case of a power outage the systems will operate for no longer than 30 minutes, which will be enough to shut down computers and check if there is anybody stuck in the elevators.

Gas boiler rooms are alternative sources of heating supplies. But such systems are still rare in Russia, according to experts. “With Moscow rapidly ceasing to be a region with an abundant supply of energy generating facilities and commercial activity shifting to the outskirts, beyond the Garden Ring, the demand for independent power generating facilities is growing,” says Konstantin Baranov.

The most successful office projects are those where several types of independent power generators are installed, he adds. Olga Kisarina agrees: “In principle, class A offices must have at least 2 impendent power generating systems. For the time being, however, there is just a handful of such properties in Moscow, as the cost of installation is growing.”

Labor of Love

In addition to power supply, self-contained engineering networks are also responsible for uninterrupted operation of all the other systems installed in the building. For example, a backup heating supply system is installed at Country Park. Quite often developers are forced to install such facilities, because in order to obtain permission to connect the building to heating supply systems developers have to pour cash into the expansion of the existing networks of the supplier, Nikita Yemets says.

Where those expenses cannot be included in an investment contract, the investor should consider construction of an isolated or alternative engineering systems, Yemets says. They do not have to supply heat to the entire building but are quite capable of covering 25-30% of consumption. “In the case of an emergency they may help maintain operations and provide heating during freezing temperatures,” he says.

Often, developers tend to regard the installation of self-contained engineering networks as an encumbrance rather than a means of boosting the competitiveness of a project. Developers and landlords often believe installation of sewage disposal facilities to be a compulsory encumbrance, unaware that a rational approach could help them save water resources. At Country Park, Yemets says, water from disposal plants is used to water the park area, washing sidewalks and roads, and as a reserve water source in case of fire and for refilling ponds.

Landlords, Tenants

“Usually, the landlord signs a general agreement with the energy supplier while tenants are allowed to plug into power lines through switchboards installed on their floors. The landlord then collects payments from tenants,” Nikita Yemets explains. But tenants may also install additional power generating units at their own expense.

As independent systems provide only a backup in case of emergency, some landlords and developers may content themselves solely with Mosenergo’s resources and uninterrupted power supply sources. Ian Al-Nuri, commercial property analyst at Penny Lane Realty, says: “when installing engineering networks [developers] proceed primarily from the economic expediency, which is why in most cases municipal mains are used.” Most developers decide against spending on backup generating facilities as long the commitment is not assumed under an investment contract.

Each extra unit of equipment prolongs the payback period and pushes up the cost of maintenance, realty experts explain. The cost of installing the most primitive diesel generator is $100,000 or more. Furthermore, the developer will require permission to install it from local officials who may refuse due to environmental concerns.

Regional governments often impede the development of such systems, says Stanislav Kristofovich, chief engineer at Becar. “Monopoly suppliers do not want any rivals because such facilities can provide power to entire districts, including both neighboring offices and residential quarters. To install such a station it is necessary to obtain permission from lots of people,” he said.

But once backup generators are installed the cost of the building rises inevitably. “Independent engineering systems do not seriously affect rental rates. Rental payments increase by only 4-5%,” says Elina Zanina. Blackwood analysts, on the contrary, report that operating costs at office buildings equipped with such networks grow considerably: for example, at Legion business center they run up to $100 per sqm.

Plans for the Future

Self-contained power generators are still rare on the Moscow office market. “Installing your own engineering networks makes sense where vast territories undergo redevelopment,” holds Andrei Patrushev, public relations director at Knight Frank. Office buildings under construction these days are being connected to the public mains. “Banks install their own generators to prevent demagnetization of their electronic shutters, but those are used in small rooms, not for the entire building,” Patrushev says.

Antonina Lairova believes that with time backup engineering systems will become a compulsory feature for class A and upper class B offices. Most importantly, developers should not overdo it by trying to switch to isolated power generators permanently. “Full autonomy is impossible and unjustified," Nikita Yemets says. "But when developing modern business centers developers should opt for know-how that minimizes the risks arising from failures on public mains and man-made disasters," he explains.

Nikita Yemets is convinced that the future belongs to energy saving systems. Those systems should be used and managed, he says. “That approach has not yet become a trend in these days of booming construction, but it should not be ignored,” he says. Olga Kisarina believes that developers and office landlords will most likely heed the advice. “With prime office supplies increasing, tenants’ requirements growing and the office market decentralizing, developers are likely to show more interest in such systems in the future,” she says.