Important Update on Minimum Energy Efficiency Standards | Deloitte UK has been saved
The Government wants all non-domestic rented buildings to meet an Energy Performance Certificate (“EPC”) level B by 2030 (currently the minimum requirement is an E). The change is estimated to affect 85% of the non-domestic rented stock, equating to around one million properties. The Government recently carried out a consultation on how to implement this and improve the compliance and enforcement process for EPCs. The consultation closed during the summer, with a response expected before the end of 2021. Regulations will then be drafted and come into force in April 2025, but the effects will be felt much, much sooner.
A second consultation has also been carried out in tandem, setting out the Government’s plans to introduce a national performance-based policy framework for assessing energy use and carbon emissions in commercial and industrial buildings above 1,000m² in England and Wales, with annual ratings and mandatory disclosure as the first step. This addresses the issue that the EPC does not measure metered energy consumption and associated carbon emissions and the need to focus on operational performance by putting in place a policy framework that can measure and assess building performance. This proposal arguably addresses a long-held belief that the role of Display Energy Certificates (“DECs”), which measure actual energy consumption of largely publicly-accessible “public sector” buildings, is equally valid in the commercial arena.
The Energy Efficiency (Private Rented Property (“PRS”)) (England and Wales) Regulations 2015 introduced Minimum Energy Efficiency Standards (MEES) to improve the worst performing buildings in both the domestic and non-domestic sectors. Under the current MEES regulations landlords are, subject to certain exemptions, prohibited from granting new leases (including renewals and extensions) of non-domestic privately rented property with an EPC rating below E, with financial penalties for landlords who do not comply. From 1 April 2023, the ban will extend to prohibit the continuation of any existing lease of non-domestic premises in England and Wales with an EPC rating below E. Commercial landlords may face financial penalties and/or public reference in respect of any non-compliance.
In 2019, the UK Government published a consultation on how best to further improve the energy performance of non-domestic private rented buildings through tighter minimum energy standards. The preferred option was to set a long-term trajectory that would require all non-domestic rented buildings to meet an EPC B by 2030. There was widespread support for this approach and the Government confirmed this trajectory in the Energy White Paper (published December 2020). Since then the further consultation earlier this year on the framework to implement this new requirement and improve the compliance and enforcement process has been completed, with the results now awaited.
Under the proposals set out in the 2019 consultation, around one million non-domestic buildings across England and Wales should be improved by 2030, accounting for 85% of the non-domestic rented stock. Inevitably, this is expected to drive significant investment in the fabric and services of buildings across a large proportion of the existing stock. But equally, the prospect of such a cost burden and need for capital expenditure is increasingly being recognised as a significant valuation issue.
The Government’s stated aim is to deliver buildings which are cheaper to run for tenants and more importantly have a lower carbon footprint, including being more readily able to accept low-carbon heating systems. It is further stated that “This will help drive clean growth and reduce emissions across the non-domestic rental building stock, ensuring vital energy and carbon savings to support the path to net zero by 2050”.
To date, there has been notable and widespread support from the Real Estate sector for this move, including bodies such as the British Property Federation. Notwithstanding, it has been flagged that significant implementation issues will need to be addressed, including:
The Government considers that taking the following approach should ease the issues identified above and provide a more effective framework for both industry and local authorities:
The ‘three quotes’ system for the seven-year payback will be replaced by a more efficient and user-friendly ‘payback calculator’.
The EPC effectively measures a building’s hypothetical – or potential – efficiency. It does not measure actual metered energy consumption and associated carbon emissions. That will depend on how well the building is being managed and maintained and how effectively regulated and unregulated energy is used in the building in reality. Therefore, a high EPC score is no guarantee that a building will use less energy and consume less carbon as a result.
The Government has set out plans to introduce a national performance-based policy framework for assessing energy use and carbon emissions in commercial and industrial buildings above 1,000m² in England and Wales, with annual ratings and mandatory disclosures publicly available online. It is outlined in their recent consultation that the rating framework itself should look to build on and modernise the Display Energy Certificate (DEC) – as referenced above. The DEC is a performance-based rating which currently applies to public sector buildings over 250m². It measures the entire energy consumption of a building and benchmarks that performance against similar buildings.
The Government intends to underpin the policy framework with a rating that, like NABERS (National Australian Built Environment Rating Scheme), the market can trust to be fair, accurate and consistent, with high levels of quality assurance. In other words, the rating must be ‘investment grade’. The Government’s preferred option is to use a star rating system, similar to that of NABERS, as it is a format that clearly rewards improvements and avoids confusion with the EPC.
After onboarding their building onto the framework, owners and single tenants will be required to submit, every year, their metered energy use data (and other relevant information) to the ratings administrator and receive a rating based on the building’s annual energy and carbon performance. The rating will then be disclosed, publicly, both in the building and online.
The Government plans to introduce the rating in three phases over the 2020s. The office sector will be addressed in the first phase, followed by the remaining sectors in phases two and three. Buildings under 1,000m² will remain solely in the Non-Domestic PRS MEES regulatory framework.
The original PRS Regulations were designed to ensure landlords of the lowest rated non-domestic buildings were investing in improving their properties. The future EPC B requirement is an ambitious target designed to drive the UK towards Net Zero, by encouraging investment in rented non-domestic buildings throughout the vast majority of the stock. Therefore, it is imperative that PRS Regulations are adjusted effectively to ensure they are better aligned with how the industry and local authorities operate in reality, as well as being effective at scale. The cost of enforcement and monitoring compliance is also expected to increase significantly, therefore it is likely that local authorities are going to require additional funding support.
Philip leads Deloitte’s UK Real Estate Valuation business within Real Assets Advisory and is a member of it’s cross-border EMEA valuation team. Philip has over 20 years of real estate experience, advising clients in respect of both traditional valuation and appraisal situations including financial reporting, loan advisory and acquisition due diligence as well as participating in multi-disciplinary teams delivering wide ranging business advisory services – notably to the Financial Services sector in connection with major restructuring, assurance and M&A activities. Having led the Valuation business in the UK for 10 years, Philip has overseen a period of considerable evolution in the delivery of valuation advice. In addition to providing opinions of value, he and his team have refined their offer to bring a wealth of specialist insight to broader business challenges, working seamlessly alongside colleagues from across Deloitte’s service offer. Such situations range from providing buy and sell-side advice on loan portfolios to succinctly identifying key real estate risks within an occupied or investment portfolio subject to a corporate transaction; and from supporting statutory Audit teams in reviewing the robustness of valuations to complementing strategic advice concerning valuation processes and controls within a Risk Advisory context. The approach is one which places the challenges of clients at the centre. Philip is a regular contributor to valuation profession debates. He has also played a significant role in raising awareness of the impact of Sustainability issues on the Valuation profession and values being reported; chairing and participating in working groups for the RICS, Investment Property Forum and the UK Government.
Cameron is a Senior Associate in the Development and Assurance team within Real Assets Advisory. Cameron’s role focuses on valuation and assurance work and is based out of the Manchester office. Since joining the firm, Cameron has assisted in providing valuation advice across a full range of asset classes for a range of purposes including sale / purchase and accounts, and has worked with a range of clients including Public Sector, Local Authorities and large corporate clients. Cameron is currently working towards RICS APC to become a Chartered Surveyor.