With the current spotlight on climate change and the Government’s commitment in its 2017 Clean Growth Strategy to help businesses reduce energy use by at least 20% by 2030, it is hardly surprising that attention is once again focusing on the energy efficiency of buildings.
As part of this continuing process, the Government has identified that one of the most effective ways to meet its target is to tighten the Minimum Energy Efficiency Standards (MEES) of rental buildings. It has announced that it intends to look at both commercial and domestic buildings.
Last week, the Government launched a consultation on raising the MEES requirements in the existing MEES Regulations for commercial buildings.
Commercial Buildings - What is proposed?
The consultation seeks views on raising the level of EPC certificate required for a commercial building to be lawfully let, from an E to either level B or C by 1 April 2030. The current system of exemptions would still apply and the cost effectiveness of improvements would still be measured using the current seven year payback test (i.e. that the value of savings on energy bills over the seven year period is equal to or greater than the cost of the energy efficiency improvement measures).
- Option one – raising the EPC requirement to B by 2030: This is the Government’s preferred option. It would bring an estimated 85% of buildings into the scope of the MEES Regulations i.e. buildings that will require improvements to be carried out or an exemption to be registered.
- Option two – raising the EPC requirement to C by 2030: It is estimated this option would bring 42% of properties within the MEES Regulations, but it is not the preferred option as the Government does not believe it is ambitious enough as modelling suggests it will not deliver the level of carbon reduction and energy savings required in the sector.
Feedback is sought on whether the change should be incremental, with phased increases being brought in during the 2020s or achieved in a single increase date set in 2030.
Views are also sought on how the enforcement of MEES can be improved.
What are the likely impacts?
The investment cost required to implement the first option is estimated to be £5 billion between 2019 and 2030 compared with £1.5 billion if only an EPC of C has to be reached by 2030. However, the consultation maintains that whilst it is acknowledged the costs of improvement are usually born by the landlord, with the energy improvement savings benefiting the tenant, they see rental levels ultimately reflecting this and anticipate that either option would “instigate a closer correlation between rental value of a building and its energy efficiency, as well as increase the overall value of the landlord’s asset”.
When the current MEES Regulations were introduced approximately 18% of commercial buildings were estimated to fall below MEES requirements. Clearly both of the proposed options will hugely increase the number of properties falling within the scope of the Regulations if the consultation document is correct in anticipating that they will impact 85% (option one) or 42% (option two) of non-domestic properties. However the Government’s modelling suggests that 64% of buildings will be able to reach an EPC B, with 20% failing to reach EPC B but able to reach an EPC C, and a remaining 17% unable to reach an EPC C.
The consultation on commercial properties closes on 7 January 2020 and we would urge landlords and tenants to respond to the consultation – click here for a link to the consultation.
For further information on MEES, see our Information Sheet – click here.
Watch this Space
This is only the start of changes to be implemented due to the Government’s continued focus on climate change and ambitions for improvement for the environment.
The Government has launched a consultation on the introduction of a “Future Homes Standard” for England, to be operable from 2025 with proposals for interim measures applicable from 2020. The aim is to ensure that new build homes in England will be energy efficient with low carbon heating with further consultation on the technical detail, guidance and impact to be published in 2024.
The Government has also proposed that certain firms be required to state whether or not they have followed the recommendations of the global Task Force on Climate-related Financial Disclosures (TCFD) when issuing securities for trading on a regulated market. It also intends to produce new guidance for regulated firms, clarifying their existing obligations to report on the impact of climate change on their business where this is material to the company's business.
We expect to see numerous changes in the property market which will affect investors, funds and developers alike in relation to both commercial and residential property.