The Government on 17 March 2021 issued two important consultations on energy efficiency. The first consultation seeks views on the Government’s proposals to introduce a national performance-based policy framework for rating the energy and carbon performance of large commercial and industrial buildings in England and Wales. The second consultation seeks views on the Government's proposed framework to improve the implementation and enforcement of the EPC B target by 2030 for privately rented non-domestic buildings in England and Wales. Both consultations close on 9 June 2021.
Consultation on a performance-based policy framework in large commercial and industrial buildings
Who and what is impacted?
This applies to commercial and industrial buildings above 1,000m² in England and Wales. The proposals are relevant to building owners, tenants, landlords, real estate investors, asset management/consultancies, from both large and small organisations and the wider energy efficiency supply chain, and are particularly relevant to the office sector.
The context for the consultation is the Government’s pledge to achieve net-zero greenhouse gas emissions by 2050 and the UK is hosting the crucial COP26 summit later this year. The Government regards commercial and industrial buildings as one of the most difficult challenges on the UK’s decarbonisation pathway, accounting for a third of UK emissions from buildings. In England and Wales, 7% of commercial and industrial buildings are larger than 1,000m². and they use over 53% of all the energy used by commercial and industrial buildings and the associated carbon emitted.
For large and complex buildings in particular, there is almost no correlation between a building’s energy performance certificate (EPC) rating and its actual energy and carbon performance in practice. The Government previously committed to address this issue by putting in place a policy framework that can measure and assess building performance.
National performance-based policy framework for assessing energy use and carbon emissions
The consultation sets out the Government’s plans to introduce a national performance-based policy framework for assessing energy use and carbon emissions in commercial and industrial buildings above 1,000m² in England and Wales, with annual ratings and mandatory disclosure as the first step. The rating will be performance-based and reward a building with a higher score if the building actually reduces their measured energy use and carbon emissions. The proposal is that the energy use and carbon emissions from a building will be benchmarked against similar building types, which will then produce a simple rating, for example between 1-6 stars, where 6 stars could represent the best and 1 the worst. The consultation describes the process, in 1-6 stages, to go from a set of meter readings to the rating. It is proposed there will be two possible rating types - “Base building rating” for Building owners with tenant space and “Whole building rating” for Owner occupier/single tenant sites.
It is the intention that these ratings will improve over time and the Government intends to introduce clear incentives and possibly regulation in the future (examples of possible interventions are included in the consultation). The rating framework should modernise and go beyond the existing Display Energy Certificate.
Requirement to obtain rating
The Government proposes that owners and single tenants of buildings above 1,000m² will be required to obtain a rating for their building on an annual basis and have that rating disclosed publicly online. This will ensure that large businesses and building owners will be aware of, and accountable for, how effectively they use energy. The proposal is that prospective tenants and buyers must be made aware of the rating before the building is let or sold and the consultation considers how this will interact with the commissioning of EPCs. The consultation also proposes that instead of needing to obtain EPCs alongside performance-based ratings to prove compliance, landlords will be able to agree the set of cost-effective measures that they need to install under the Minimum Energy Efficiency Standards (MEES) with the scheme administrator when they are first required to obtain annual performance-based ratings.
Translating the rating into value
The Government wants building owners, businesses, investors, shareholders, insurers, lenders, energy consultants to translate the rating into value – whether in the form of lower energy bills, increased asset or rental value for high performing buildings, lower insurance premiums, or performance-driven financing packages. The consultation includes estimates for what the rating framework could cost building owners and tenants on a four-year cycle period.
The consultation’s proposals complement the future target for the Non-Domestic Private Rented Sector MEES of EPC B by 2030 and the consultation on improving the implementation and enforcement of the Non-Domestic PRS MEES regulations is referred to below.
The Government plans to introduce the rating in three phases over the 2020s.
It is proposed that phase one will apply to an estimated 10,000 offices in England and Wales. There is a separate consultation document on this office sector implementation. The proposal is for a phase one soft launch in April 2022, which will require all appropriate sites to register with the ratings administrator and produce a rating within the first 12 months. Disclosure of the rating in the first year will be voluntary but highly encouraged. The Government propose to legislate to enable mandatory disclosure from the second year of being on the rating framework.
Phases two and three of the rating’s introduction will address the remaining commercial and industrial sectors.
Click here for further details including how to respond to the consultations.
Consultation on a proposed framework to improve the implementation and enforcement of the EPC B target by 2030 for privately rented non-domestic buildings
Who and what is impacted?
The proposals are relevant to the non-domestic private rented sector (which includes leases of commercial property) in England and Wales affecting in particular landlords, tenants, local authorities and the supply chain (energy efficiency installers, non-domestic energy assessors etc.)
The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the PRS Regulations) set a minimum energy efficiency standard (MEES) of EPC E for private rented properties. The PRS Regulations apply to both non-domestic (commercial) and domestic (residential) property. The requirement that a property must be EPC E has applied since 1 April 2018 to properties let on new tenancies, and from 1 April 2023 will apply to all privately rented properties (even where there has been no change in tenancy).
In October 2019, the Government consulted on proposals that would tighten the non-domestic MEES to set a long-term regulatory target of EPC B by 2030, or the highest EPC band a cost-effective package of measures could reach. The Government confirmed in the Energy White Paper that the future trajectory for the non-domestic MEES will be EPC B by 2030. This consultation sets out proposals to improve the implementation and enforcement of the EPC B requirement. The consultation’s illustrative timeline shows that the amendments to the PRS Regulations would come into force on 1 April 2025. The proposals in this consultation apply only to non-domestic (commercial) property, not to domestic (residential) property.
PRS Regulations – Listed buildings
The Government propose to require listed buildings, and those in a conservation area, which are to be rented out, to have an EPC (there has been some confusion over whether listed buildings need an EPC). Protected buildings that are privately rented may still be able to register for relevant exemptions under the PRS Regulations if they are unable to comply with MEES.
Framework for implementation and enforcement
The proposal for the overall framework is for:
a phased implementation of the EPC B by 2030 requirement, with EPC C by 2027 set as an interim milestone. The interim milestone should not be taken to mean that landlords must improve their properties to an EPC C before then improving the property to achieve an EPC B - the Government is clear that landlords should invest in the improvement of their building in a way that is most cost-effective and minimises disruption to themselves and their tenants.
the introduction of two-year ‘compliance windows’. The ‘compliance window’ will begin with the requirement for landlords to present a valid EPC. For EPC C, the Government proposes the compliance window should be 2025-2027, and for EPC B 2028-2030.
a move away from enforcement at the point of let.
This will be supported by:
the introduction of a PRS Exemptions and Compliance database to provide the data that local authorities will require for enforcement and compliance monitoring.
updates to the penalty framework to enforce the new requirements.
non-domestic EPCs will follow the proposed domestic changes, such as the requirement for non-domestic rental properties to continually have an EPC and the need to commission a post-improvement EPC to demonstrate compliance.
the ‘three quotes’ system for the seven-year payback will be replaced by a more efficient and user-friendly ‘payback calculator’.
Further details on aspects of this follow.
New compliance windows
The current position is that from 1 April 2023 all non-domestic rental properties in scope of the PRS Regulations will need to be compliant with EPC E, or have a valid exemption.
Beyond April 2023, the Government proposes that there will be new compliance windows – there should only be four junctures where landlords are expected to comply, and where enforcement activity is required:
First Compliance Window: EPC C (2025-2027)
1 April 2025: Landlords of all non-domestic rented buildings in scope of MEES must present a valid EPC.
1 April 2027: All non-domestic rented buildings must have improved the building to an EPC ≥ C, or register a valid exemption.
Second Compliance Window: EPC B (2028 – 2030)
1 April 2028: Landlords of all non-domestic rented buildings in scope of MEES must present a valid EPC.
1 April 2030: All non-domestic rented buildings must have improved the building to an EPC ≥ B, or register a valid exemption.
At each enforcement date in 2027 and 2030, landlords will need to demonstrate the building has reached the highest EPC band that a cost-effective package of measures can deliver. These new compliance windows highlight a notable change that landlords will be required to present a valid EPC two years before the enforcement date for each EPC target. This will involve submitting the current EPC to an online PRS compliance and exemptions database, which will ‘start the clock’, creating a clear time period within which landlords will be expected to undertake improvements if they have not done so already. All properties will have to review their existing exemptions at the start of each compliance window and landlords would effectively have to ensure that any valid exemptions registered are still relevant in 2027 and in 2030.
Move away from enforcement at point of let
Enforcing at the point of let has not worked well in practice, because non-domestic buildings are often rented in a shell and core state. To be compliant at the point of let, landlords either have to install measures that will be immediately replaced, or tenants will have to pay for installations before they legally become the tenant. The proposed framework addresses the issue by moving enforcement and compliance away from the point of let. Landlords will still be required to hold a valid EPC when looking to rent out their property, but for the purposes of meeting MEES, all non-domestic rented buildings will need to achieve an EPC C by 2027 and EPC B by 2030, regardless of when they are let.
The Government also proposes for a shell and core property where the compliance deadline is missed that a tenant must have occupied a property for a minimum of six months before a local authority can take action against the landlord for failing to meet MEES. This should give landlords and tenants enough time to work together to ensure the building will be compliant with the latest EPC standard, or to have a valid exemption registered.
The following is proposed:
- requiring that landlords provide a valid EPC to letting agents prior to a property being put on the market - the proposal is to remove the seven to twenty-one-day exemption.
requiring letting agents and online property platforms to only advertise and let properties compliant with the PRS Regulations.
the continual requirement to have an EPC if letting - this will ensure that lease renewals are captured within the scope of the PRS Regulations, by ensuring that properties always have an up-to-date EPC during the whole time that they are being rented out.
post-improvement EPCs to demonstrate compliance with MEES.
permitting local authorities to use EPC Open Data for PRS enforcement.
extension of the period when a penalty charge notice can bite under certain of the EPC regulations.
In view of landlords’ concerns that the current PRS Regulations mean they have limited power to affect tenant fit-outs and yet landlords remain liable for penalties, the Government is considering amending the PRS Regulations to give tenants of non-domestic properties some duties regarding compliance with MEES, and to add duties of cooperation for both landlord and tenant.
Click here for further details including how to respond to the consultation.