New EPC Regulations – a force for good or unnecessary burden?
In 2030 all rented non-domestic buildings will need to be B rated, barring lawful exceptions.
Sarah Manley, Partner who specialises in commercial property matters, explores the impact of the proposed new Energy Performance Certificates (“EPC”) regulations on commercial properties.
Currently the minimum EPC requirement for a rented non-domestic building is an E rating, with financial penalties for those landlords that do not comply. This is set to change in 2030 when all rented non-domestic buildings will need to be B rated, barring lawful exceptions.
The rationale for this plan is twofold. Firstly, the government has ambitious climate reduction targets and this requirement will be part of the jigsaw. Secondly, having buildings which are more efficient for tenants will help competitiveness. To support this planned change there will be a raft of other initiatives including accelerating the production and affordability of low carbon heating systems.
The initial announcement was included in the Energy White Paper published in December 2020. Many in the sector at the time welcomed and supported the planned changes which included the opportunity of consultation before legislation would come into force in 2025. Some elements of the consultation included a phased approach achieving C rating by 2027 and a compliance window; we already have a database which would include lawful exemptions with reasons.
There are various estimates of how many properties this regulatory change will impact, and the consensus is that there are around 1 million properties which will be affected, with only 15% of commercial buildings currently rated B or above.
In 2021 out of 83,804 EPCs recorded, only 12,821 achieve the minimum B rating target likely to be set by government, which is circa 15% of buildings registered. Looking back at figures in 2017 and 2011 only 11% and 8% respectively of the buildings would meet the minimum 2030 requirement which demonstrates progress, but clearly highlights the challenge ahead.
One consideration for many that has gone under the radar is an EPC rating only calculates a buildings’ hypothetical or possible efficiency. There are concerns that new heat pumps which replace a fossil fuel heating system could actually make an EPC rating worse. The rating also does not consider actual consumption with associated carbon emissions, how the building is being used and its management.
It is clear that the vast majority of the existing stock of commercial properties will around for many decades and it is not a case of demolish and start again. Therefore, there will be a substantial requirement to retrofit and improve the services and fabric of many buildings. The capital cost of this should not be underestimated particularly at a time of rising interest rates and high levels of inflation.
Whilst making buildings more energy efficient should reduce energy bills, how much of the capital investment required for these changes will be passed on to the tenant thus negating one of the stated aims of the government, certainly in the short to medium term? On the flip side, tenants are increasingly looking at their own carbon footprint and operating costs and will search for energy efficient properties. Landlords who do not get ahead of the curve will be disadvantaged by having stranded assets.
For the 850,000 buildings that will need to be improved (or a valid exemption identified and registered), the work will collectively require many thousands of skilled construction and engineering workers. Also needed is a robust and efficient supply chain to supply new heating systems, solar panels, insulation and other elements to improve the building, both of which are in short supply. This does not take into consideration the likely increased administrative burden to reassess buildings, monitoring and potential enforcement by local authorities, and potential legal challenges by landlords.
The fundamental aim to reduce carbon emissions is a force for good, and I think few would disagree. My concern is that aggressive new EPC requirements for rented properties, with limited exceptions and exemptions, are too much of a blunt instrument particularly with emerging technologies potentially throwing anomalies in to the equation.
With such a popular focus on climate change and the rise of ESG on the corporate agenda with flow down implications, there is an argument for a more market lead approach with more incentives for those landlords and tenants who embrace the need to change the commercial building stock faster. It will be interesting to see how flexible government will be in terms of timings and alternative solutions at a time of significant economic challenge.
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