A guidance note for clients
Carbon emissions from the built environment contribute significantly to the production of greenhouse gasses. The Government is committed to reducing the country’s carbon footprint and has introduced a number of measures to encourage owners to improve the energy efficiency of their buildings.
This guidance note summarises the key initiatives that the Government has introduced and the important features of each scheme. It does not give detailed guidance on how each scheme applies.
Energy performance certificates (EPC)
On the sale or letting of a property (residential or commercial), the seller has to provide an EPC for the property to the buyer or the tenant. An EPC is produced by an independent certified energy assessor. It contains an asset rating showing the performance of the property on a scale of A (good) to F (very poor). It also contains a list of recommendations on steps that could be taken to improve the energy performance and the likely asset rating if those recommendations are implemented. There is no obligation to implement the recommendations in the EPC.
An EPC is valid for ten years from the date of its issue unless intervening works mean that a new certificate is required. However, if, for example, there is an EPC for the whole of a building and an EPC is then obtained for part of it, the EPC for the whole remains valid save in respect of the part, where the new EPC is the valid one.
You can search a central register to determine if a property has an EPC. The link is here.
Key exceptions from the requirement to produce an EPC are listed or officially protected buildings. temporary buildings only going to be used for 2 years or less, buildings used as a place of worship or for other religious activities, industrial sites, workshop or non-residential agricultural buildings that don’t use much energy, detached buildings with a total floor space under 50 square metres and buildings due to be demolished by the seller or landlord or buyer (if sold with vacant possession) and they have all the relevant planning and conservation consents.
Government guidance states that an EPC is not required where the transaction is not the sale or new letting of a property. This excludes transactions such as lease renewals or extensions, compulsory purchase orders, sales of shares in a company and the surrender of leases.
If a commercial building is frequently visited by the public and has a floor area of more than 500m2, the EPC must be displayed in a prominent place.
The Trading Standards Authority are responsible for enforcing the EPC requirements. For commercial buildings a fixed penalty can be issued for breach up to 12.5 per cent of the rateable value of the property subject to a minimum fine of £500 and a maximum fine of £5,000.
Display Energy Certificates (DEC)
A DEC is required for buildings with a total useful floor area over 250m2 that are occupied in whole or part by public authorities and frequently visited by the public.
The DEC shows an operational rating for the energy use of the building based on the actual energy consumption over a 12 month period. It should be accompanied by an advisory report showing how energy savings could be made. A DEC must be produced by an authorised energy assessor. The form of a DEC and the methodology for producing it are similar to an EPC. The key difference is that an EPC rates the potential energy consumption of a property and a DEC measures the actual energy consumption of the property. There is no obligation to implement the recommendations in the advisory report.
Where the building has a total useful floor area of more than 1,000m², the DEC is valid for 12 months and the advisory report is valid for seven years. Where the building has a total useful floor area of between 250m² and 1000m², the DEC and advisory report are valid for 10 years.
The DEC should be displayed in a prominent place that is clearly visible to members of the public. To enable members of the public to view the document easily, it should be no smaller than A3 in size.
The Trading Standards Authority are responsible for enforcing the DEC requirements. For failure to display a DEC, the penalty is £500 and for a failure to be in possession of an advisory report, the penalty is £1,000.
Air-conditioning inspections and R22 refrigerants
Air conditioning systems with an effective rated output of more than 12kW (including systems consisting of individual units that are less than 12kW but whose combined effective rated output is more than 12kW) must be regularly inspected by an energy assessor. The inspections must be no more than five years apart. The energy assessor will highlight improvements to the operation of existing systems or opportunities to replace older, less energy efficient systems or oversized systems with new energy efficient systems.
The person who controls the operation of the system, such as the building owner or manager, is responsible for organising the inspection. It is in addition to the normal activities associated with the ownership and operation of air conditioning systems, not a replacement for them.
A person holding an inspection report has to hand it on to any person taking over responsibilities with respect to the control of the air conditioning system. If the control of an air conditioning system is passed to another person and that person has not been given an inspection report by the previous operator of the system, the system must be inspected within three months of the new operator of the system taking over such control.
The Trading Standards Authority are responsible for enforcing the air-conditioning report requirements. The penalty for not having an air-conditioning report is £300.
R22 is a refrigerant that was used in air-conditioning systems. It has not been legal for use in new AC equipment since 2004. Since 2010, existing AC equipment could only use recycled or reclaimed R22 obtained from decommissioned AC equipment. From 2015, the use of recycled or reclaimed R22 is also prohibited.
Where a system uses R22 and the refrigerant needs to be replenished, there are now two options – entire replacement of the air-conditioning system or using an alternative modern refrigerant. This will normally involve having to replace parts of the current AC system. Where the air-conditioning systems needs to be replaced, issues may arise in respect of the recoverability of costs under the service charge provisions in leases of a building depending on whether the works are classified as an improvement or part of the repair and maintenance costs for the building.
Carbon Reduction Scheme (CRC)
CRC is a scheme administered by the Environment Agency that requires participants to measure energy consumption for property within their organisation and then to buy and surrender carbon allowances equal to the CO2 emissions generated by their property.
CRC operates in phases. The current phase runs from 1 April 2014 to 31 March 2019. The second phase will be from 1 April 2019 to 31 March 2024.
For each phase, there is a qualification year. Organisations that meet certain criteria during the qualification year need to register for the next phase of CRC. The qualification year the current phase was between 1 April 2012 and 31 March 2013. The next qualification year (for phase 2) will be 1 April 2017 to 31 March 2018. Organisations affected by CRC have to register with the Environment Agency at the start of a phase and then buy and surrender carbon allowances for each year in the phase.
CRC is assessed at the group level, not at the individual company or organisation level. Participants need to identify their entire UK organisational structure. If, within the overall structure, the organisation has at least one settled half hourly electricity meter and uses 6,000 megawatt hours or more of qualifying electricity supplied through settled half hourly meters, the organisation is required to register for CRC. The participant that registers is then responsible for the purchase and surrender of carbon allowances for the whole of the organisation.
Carbon allowances are purchased and surrendered annually from government sales or from the open market. There are two sales of allowances for each compliance year. The first sale at the start of a compliance year is based on predicted emissions at a lower price. The second is a "buy to comply" sale after the end of the compliance year at an expected higher price. The price of the allowances for the 2014-15 compliance year was set at £15.60 per tonne of CO2 for the forecast sale and £16.40 per tonne of CO2 at the “buy to comply” sale.
The energy use and emissions of all participants are published for each compliance year.
There are criminal offences for making false or misleading statements on material matters, failing to comply with an enforcement notice, pretending to be an authorised person or refusing the CRC administrator access to premises. In addition, there are a wide range of civil penalties for failure to comply with the CRC scheme up to £500,000 in extreme cases. Those in breach will also have their names published on the CRC register.
Energy savings opportunity scheme (ESOS)
ESOS affects “large organisations” – those with more than 250 employees or whose annual turnover is in excess of 50 million euros (£38,937,777) and whose annual balance sheet total is in excess of 43 million euros (£33,486,489).
Like CRC, ESOS operates on an organisational basis so if any part of a corporate group qualifies as a large organisation, the whole of the group is within ESOS. Unlike CRC, participation is not based on minimum energy use requirements. ESOS can also apply to trusts, trusts, partnerships, private equity companies or limited liability partnerships, unincorporated associations, not-for-profit bodies and universities that get more than half their funding from private sources. It does not apply to public bodies.
ESOS requires a participating organisation to appoint a Lead Assessor (who must be on the Environment Agency’s list of approved assessors) to produce an energy audit that covers at least 90% of the organisation’s energy usage and make recommendations for energy improvements. The audit must be approved at board level. The audit must cover not only energy use from buildings but also energy used in transport costs where the organisation pays directly for the fuel used in the transportation. There is no obligation to implement any of the recommendations contained in the audit.
ESOS operates over four-yearly compliance periods. The first compliance period was based on the status of and the property owned by the organisation on 31 December 2014. It requires the ESOS audit to be produced and registered with the Environment Agency by 5 December 2015. Property that has been acquired after 31 December 2014 or which will have been sold before 5 December 2015 does not need to be included in the energy audit for the current phase.
There are civil penalties for failing to register and failing to comply with ESOS. Fixed penalties range from £5,000 to £50,000 with an additional £500 per day (up to 80 days) where a breach continues.
Heat Network (Metering and Billing) Regulations 2014
These regulations apply to both district heating schemes and to individual buildings where heat, hot water or chilled water is supplied by the building owner to a number of final customers who use those supplies for heating or cooling their premises. It does not apply in respect of air-conditioning supplies. The regulations are administered by the National Measurement and Regulation Office (NMRO).
Under the regulations, building owners must register with NMRO by 31 December 2015 and have completed a notification and data collection exercise for the heat networks that they operate. Building owners must also undertake a viability study to determine whether or not the installation of individual heat meters is required. This information must be updated every four years.
Where there is more than one final consumer of the heat, hot water or chilled water, building owners must ensure that meters are installed to measure the consumption of heat, hot water or chilled water by 31 December 2016, unless it would not be technically feasible or cost effective to do so. This assessment has to be repeated every four years. The regulations set out how to determine whether the installation would not be technically feasible.
Where it is not technically feasible or cost effective to install the meters then the building owner must instead install heat cost allocators and thermostatic radiator valves, unless it would not be technically feasible or cost effective to do so. Again, this has to be reassessed every four years.
Any bills and billing information provided to the final customer must be accurate and based on actual consumption where meters or heat cost allocators have been installed. This may not correspond to a typical service charge arrangement where payment is based on floor area or other apportionment methods for service charges.
If a building owner fails to provide accurate consumption data at a final customer level, then they will be in breach, subject to criminal proceedings and will face a fine if convicted of up to £5,000.
Minimum Energy Efficiency Standards (MEES)
MEES comes into force on 1 April 2018 pursuant to the requirements of the Energy Act 2011. From this date, a landlord will be unable to let a property that has an EPC with a rating below an E unless one of the exemptions in the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 applies. From 1 April 2023, a landlord will be in breach of the regulations if it continues to let a property that has an energy rating below an E. If a property does not have an EPC, then the regulations will not apply to it.
The regulations do not apply to short leases (defined as less than 6 months) or long leases (greater than 99 years).
The key exemptions where property with a low energy rating can be let are:
- all cost effective improvements works that have a simple payback period of seven years have been undertaken or all works that could be carried out under the Green Deal have been carried out.
- A landlord is unable to obtain third party consent, for example from the planning authority, lender, superior landlords or consent from the tenant under a lease to enter to carry out improvement works.
- An independent surveyor determines that the energy efficiency improvements would devalue the property by more than 5% (such as providing thermal insulation to the internal face of external walls) or would damage the property.
Exemptions last for 5 years and to qualify for an exemption a landlord must register the exemption that it is relying upon.
Where a landlord is required to grant a lease pursuant to a statutory or contractual obligation to do so, such as on a lease renewal, the landlord is not in immediate breach of the regulations. It has six months to comply or to determine that one of the principal exemptions apply.
The penalties for non-compliance range from £2000 to £150,000 and will be based on the rateable value of property. Penalties also apply where a landlord has registered false or misleading information on the exemptions register.
This note is intended as general guidance and is not a substitute for detailed advice on specific circumstances. It reflects the position as we understand it as at September 2015.