EPC consultation- 5 talking points for comment
In a previous blog entry, we discussed the likelihood of further regulatory change around energy efficiency. In turn, we can now report that the government has launched a consultation on Energy Performance Certificates (EPC). In the consultation, it is refreshing to see the government not only acknowledging criticisms of the current EPC regime, but also embracing the opportunities that EPCs offer. In this blog we draw out some talking points for those operating in commercial real estate.
- EPCs and MEES: As the consultation acknowledges, whilst originally introduced as an information tool for consumers, EPCs and their ratings now have more “legal and financial weight”. For example, EPCs underpin the minimum energy efficiency standards (MEES) which, as of 1 April 2018, now bite. For any given property, the applicability of MEES relies on the existence of an EPC. It is now unlawful to grant a new lease of property with an EPC rating of F or G, unless an exemption applies or the letting falls outside the scope of the MEES regulations The consultation notes that there is a “misalignment” in enforcement between EPC and MEES requirements, with higher financial penalties in respect of the latter and different enforcement authorities. Surely it is time now to align the two? Arguably, as things stand, the risk of not getting an EPC for an energy inefficient building when one is required is less than the risk of getting an EPC and then bringing it within the scope of MEES.
- EPC Updating: An EPC is valid for 10 years. With the EPC regulations in place since 2008, many EPCs have recently expired or are approaching expiry. The consultation touches on the likelihood that EPCs are out of date, or do not accurately reflect the state of a building, given the subsequent passage of time (e.g. alterations have been made). The consultation explores the possibility of EPCs being kept up-to-date on a more regular basis, whether by reducing their validity period or introducing new trigger points for the provision of an EPC (e.g. renovations or new boiler installation). Currently, the majority of alterations will not necessitate a new EPC. Inevitably, building owners will be alarmed by the likelihood of increased bureaucracy and cost. However, with the arrival of MEES, there is greater concern from buyers and funders that an EPC presents an accurate picture of an investment property. It is worth also considering that, from a seller’s perspective, an accurate up-to-date EPC “picture” can ensure a swift transaction (something we have experienced first-hand). Perhaps a more regular EPC updating process is in everybody’s interest?
- EPC Reliability: The consultation further addresses the notorious unreliability of EPCs. The consultation refers to one “Green Deal Mystery Shopper Exercise” in 2014 where the EPC on two thirds of dwellings under review (29 dwellings, 5 assessments) had a variation spanning at least two bands. Landlords in the commercial property sphere have reported similar experiences, especially now that many have carried out extensive EPC audits as part of their preparations for MEES. Whilst the consultation accepts that in the main, discrepancies result unintentionally, it does acknowledge that deliberate manipulation (“gaming”) may occur. The government expresses particular interest in how sellers or existing landlords may place greater value in an accurate EPC. The consultation suggests that currently the benefits of accuracy accrue to the new “owner” even though the seller or letting estate agent may have commissioned the EPC. This presumably reflects a government concern that sellers/ landlords treat EPC commissioning as just a “tick box” exercise, often done at the last minute, simply to allow a sale or letting to progress. On a sale, with MEES now in play, increasingly a buyer may want to commission its own EPC (with its chosen assessor). However typically, under time pressure, it is forced to accept that EPC put in front of it. So the consultation makes a fair point but, realistically, one suspects that a solution, acceptable to all, will be difficult to come by.
- Technology: The potential for tech (particularly data) to improve the EPC regime is a consistent theme throughout the consultation. Access to data can potentially improve the assessment process on different levels, whether by making historic data available to assessors (the consultation identifies the potential for “building logbooks”, to be passed on to new owners) or feeding “real world” data (e.g. smart meter data) into the EPC modelling process, and so reducing the reliance on standard assumptions. There is no doubt that tech presents a great opportunity. Perhaps the greatest challenge here is moving towards an EPC regime that can adapt in light of ever-improving technological innovation?
- Actual vs Theoretical Ratings: The EPC is only a theoretical rating on energy performance, rather than an actual measure (as above, the EPC modelling process uses “standard occupancy” assumptions to estimate energy use). It does not capture the effect of occupant behaviour. This is an underpinning feature of the EPC regime so that buildings are compared on a “like-for-like” basis. As such, a property may have a high rating but, if it is used inefficiently in practice then, the EPC presents a misleading picture as to the efficiency of the premises (described in the consultation as the “performance gap”). The consultation does not go so far as to discuss an overhaul of the EPC regime, to introduce “real-time” EPCs, based on operational use. However it does acknowledge recommendations by the Green Finance Taskforce (as referred to in our previous blog), and confirms that it is considering a response to recommended “mandatory operational ratings” and “building passports” (as well a the introduction of a minimum standard of B for all commercial properties by 2035).
EPCs seem to attract considerable criticism in the industry- bureaucratic, unreliable, and unrepresentative of the actual energy “picture”. It seems that with MEES now in play, criticism has only increased. For those in the industry, this consultation is your opportunity to guide the direction of travel. The consultation closes on 19 October 2018.
Edward in as associate in our Commercial Real Estate team.