Solarus blog: To reach the Paris Climate Agreement, the hotel sector needs to rethink contractual models and put energy savings first

People are traveling more than ever. A growing global middle class is giving rise to those who view travel as an essential part of life, rather than a luxury. While much of this is business travel, we are also taking holidays to increasingly far-flung destinations. This comes at the expense of our environment, and at a time when environmental awareness and the pursuit of a sustainable lifestyle is growing, many are seeking to consolidate their love of long-haul travel with their environmental concerns.

The hotel sector accounts for around 1% of global emissions and though this may seem small, growth in the sector means that the sector will increase its negative environmental impacts if it does not start to measure and reduce its CO2 emissions. The International Tourism Partnership (ITP) has warned that the hotel industry must reduce its carbon emissions per room per year by 66% from 2010 levels by 2030, and 90% by 2050, in order to stay within the limits of the Paris Agreement. Leading hotel groups like Hilton, Hyatt, Marriott, Four Seasons, Radisson and the InterContinental Hotels Group have set 2030 goals aligned with the UN Sustainable Development Goals on four key issues: water scarcity, carbon emissions, human rights and youth employment.

Considering energy and carbon emissions: air conditioning, kitchen and laundry facilities and hot water for hotel guest rooms contribute the most to energy consumption, prompting hotels to focus on energy efficiency, switching to renewable energy and electrification. Globally, on average this consumption counts for more than 60% of a hotel energy bill. Hospitality operators are starting to realize the sun can do more than just attract tourists; they can also power the hotels themselves. In many cases and in many locations, solar PV and Solar Thermal solutions are a viable, affordable energy option for hotels. Why is despite the solid pledge from the hospitality sector, the adaptation of Solar solutions lacking behind in comparison to other industries?

To reach the committed CO2 targets by the various hotel groups, the ownership model play a pivotal role. The majority of hotels operated under a global brand are either owned by the operator, leased by the operator, run by the owner (or its manager) under a franchise or run by an operator on behalf of the owner under a management agreement. Many global operators have pursued asset-light strategies over the past decade, and franchise and management agreements have thus become the preferred types of contract. Franchising in the hotel space has been growing in recent years. Hotel brands, or “flags” as they are referred to by industry insiders, are lending their name and likeness to third party owners, while the building and operations are run by the franchisee (or often a third party hotel management company). Considering this, worldwide 10% of the hotels are owner-operated; 35% operated by a management company and 55% under a franchise.

The ownership structure is relevant when it comes to capital expenditure (CAPEX) and investments in energy saving measures. The main obstacle is the relationship that exists between owners and operators or between franchisors and franchisees. The hospitality industry in that respect is quite unique with multiple arrangements. It is uncommon to find ’asset light’ operations via contracts in the hotel industry. Many sustainability features especially in terms of energy efficiency, involve structural changes of a building or large capital investment which are often undertaken by the owners of the land and building. In the case of new builds, project developers often opt for the cheapest energy solution upfront. The direct benefits (energy savings) are flowing to the pockets of the hotel operator. This creates a conundrum, where decisions on sustainability may be stalled or delayed. Furthermore, different levels of involvement in franchise agreements exist, all with different levels of imposed procedures. Less demanding franchise formulas give managers more freedom to design their own strategies with regard to sustainability. Those are considerations potentially slowing down the transition towards a sustainable hospitality industry.

In both the franchise and management contract case, however, the Hotel Group and (property) owner can agree on additional service delivery. Most Hotel Groups have a range of optional services that answer specific needs, throughout the hotel’s lifecycle. These optional services are sold at an additional cost to the franchisee or managed owner. Or a hotel operator can agree on an incentive fee with the management company to operate the hotel efficiently and strive to both increase revenues and minimize expenses. Doing so will increase a hotel’s bottom line income and maximize the management company’s incentive fee earning potential. Hotel franchise and management contracts duration vary from 10 to up to 50 years.  As a general rule, the higher the market positioning of the hotel, the longer the initial term. For example, learning from other industries, this window allows for outsourcing the energy supply to an (ESCO). The ESCO guarantees the cost of energy saved; the cost savings are split for a pre-determined length of time in accordance with a pre-arranged percentage.

As travelers and tour operators are putting more emphasis on environmental sustainability when making lodging decisions, it seems that typical towels-and-linens reuse programs and recycling efforts are no longer sufficient. Going forward, hotels should integrate more sustainability features and green technologies in its hotel designs. In addition, most of the existing environmental initiatives have been focused on owned hotels, which is only 10% of the global hotel stock. Therefore, hotels chains should push its environmental sustainability initiatives more at its franchised hotels and managed hotels. To meet the Paris climate goals, it’s time to rethink contractual models, putting energy savings and renewable energy first.

 

 

Author: René Laks, Sales Director Solarus South Africa