Energy efficiency - the winds of change?
Minimum energy efficiency standards (“MEES”) are now in force meaning that, since 1 April 2018, it is unlawful to grant a new lease of property (residential or commercial) with an energy performance certificate (EPC) rating of F or G, unless an exemption applies. In 2020 (for residential properties) and in 2023 (for commercial properties), this will not only apply on the grant of a new lease but also to those leases which are already in place.
The industry has been braced for this change for some time, and well-advised landlords continue to prepare for the further dates ahead. However, is this all that landlords should be preparing for? In terms of energy efficiency, should landlords, or indeed other building owners, anticipate that more will be required of their buildings in the years ahead? The government’s “Clean Growth Strategy” (“CGS”), which was published in October 2017, indicates that further legislative controls will follow. What can building owners expect?
Minimum Energy Efficiency Standards
- As it stands, the minimum EPC rating for letting is an E. However, the industry has always anticipated that the threshold will rise and, more often than not, “future-proofing” is a sensible strategy. The actual MEES regulations require that the government must review the operation and effect of the regulations every 5 years (the first review being due in 2020). The CGL suggests that this process is already underway, and the direction of travel is very much “one-way”, via a two-pronged approach.
- Minimum EPC rating: The government intends to consult on increasing the minimum standard for rented commercial buildings.
- Building Regulations: Separately, the government intends to consult on improving the energy efficiency of new and existing buildings (following the final report from the government’s independent review of building regulations and fire safety, which is expected imminently). The stringency of building regulation criteria will no doubt increase as a result.
For building owners, especially landlords, energy inefficient stock will present an increasing challenge. As a reminder, there is no provision in the minimum energy efficiency regulations that exempts landlords from carrying out work on the basis of affordability. If energy efficient improvement works meet the MEES “7-year payback test”, the landlord must carry out the work, even if the landlord does not have access to funding.
- The CGS is more specific. The government aims to increase:
- all privately-rented homes to EPC band C by 2030; and
- as many homes as possible to EPC band C by 2035,
in each case where “practical, cost-effective and affordable”. As it stands, there is no clarification on this phrase. In addition, as for commercial property, the government aims to strengthen energy performance for new and existing homes under building regulations.
The government has already consulted on amending the MEES regulations, with a proposal to introduce a capped landlord contribution at £2,500 which would remove the “no cost to landlord principle”. So, whilst the minimum standard is set to increase over the long term, residential landlords should also brace themselves for substantive change in the short term. Change to the MEES legislation in residential property is imminent.
The CGS was published in 2017 and, more recently in March 2018, the “Green Finance Taskforce” made recommendations to the government to accelerate the growth of green finance in the UK. The Green Finance Taskforce is an independent group established by the government (comprising senior leaders from the financial sector) and its “Accelerating Green Finance” report (“AGF”) is here. Interestingly, the AGF recommends that the minimum standard for commercial properties should be EPC B by 2035, and suggests that commercial property owners will benefit from the certainty of having a defined long-term target.
Separately, the AGF proposes further changes that commercial property owners may encounter in the future. The EPC is only a theoretical rating on energy performance, rather than an actual measure. A property may have a high rating but, if on an operational basis it is used inefficiently, the EPC will not provide an accurate representation of actual energy usage. The AGF proposes:
- In commercial property, mandatory operational energy ratings;
- In commercial and residential property, data-driven digital building passports, to supplement EPCs, setting out actions already undertaken and required to improve the decarbonisation status of a building. The AGF also considers whether this passport should also incorporate other data (e.g. flood resilience, health and wellbeing). There is no doubt that technology, and particularly data management, has great potential as a tool to accelerate decarbonisation steps in the built environment.
The CGS sets out the government’s intent to work with mortgage lenders to develop green mortgage products. The £1bn Green Lending Initiative by Lloyds Banking Group is an example already in play. The AGF considers how the government may choose to support the growth of green consumer loans/ mortgages, citing the possible provision of partial government guarantees and/ or a fund to support the development of these products. Lenders are already taking closer note of energy efficiency as a consequence of the MEES regulations. If the government steps in behind the report’s recommendations, building owners may well face increasing encouragement from lenders to improve the energy efficiency of their assets.
The very latest….
On 17 April 2018, clean growth minister, Claire Perry, hinted that the UK could tighten the existing commitment to cut greenhouse gas emissions to “net zero” by 2050 - a step purportedly necessary to meet the UK’s commitments in the 2015 Paris Agreement. The existing target, in the 2008 Climate Change Act, is a reduction in UK carbon emissions by 80% compared to 1990 levels. If the government follows through with more stringent targets, it is perhaps inevitable that the built environment will face closer scrutiny. Legislative change, above and beyond that described above, may well follow.
Edward is an associate in our Commercial Real Estate team.