Following on from the 2017 Clean Growth Strategy (CGS), in which the government committed to support businesses in reducing their energy use by at least 20% by 2030, the government has now issued a consultation, The Non-Domestic Private Rented Sector Minimum Energy Efficiency Standards: Trajectory to 2030 (Consultation), in which it recommends significantly tightening minimum energy efficiency standards. If the government's preferred recommendation is implemented it would mean that all non-domestic private rented properties would either need to achieve an Energy Performance Certificate (EPC) rating of B or above by 2030 or be subject to a registered exemption.
Under the current minimum energy efficiency standards landlords are, subject to certain exemptions, prohibited from granting new leases (including renewals and extensions) of non-domestic privately rented property with an EPC rating below E. There are stringent financial penalties for landlords that do not comply. From 1 April 2023, the ban will extend to prohibit the continuation of any existing non-domestic lease of premises that fall below the E standard.
The Consultation considers a couple of trajectories for tightening the minimum energy efficiency standards the key points for which are summarised below.
How will it work?
There are two suggested trajectories:
- the "Preferred Trajectory" – all privately rented non-domestic premises must achieve a minimum EPC rating of B by 2030, provided the measures to reach that rating are cost effective; and
- the "Alternative Trajectory" – as per the Preferred Trajectory, except a C rating must be achieved.
The Preferred Trajectory, whilst clearly requiring a higher standard of energy efficiency, would also importantly have the effect of bringing 85% of buildings into scope, as compared to only 42% of buildings under the Alternative Trajectory.
Within both trajectories, the consultation suggests the following options for implementation:
- Single Implementation Date – legislation to the effect that non-domestic buildings with an EPC below B (Preferred Trajectory) or C (Alternative Trajectory) cannot be leased after 31 March 2030 (subject to exemptions);
- Incremental Milestones – legislating to impose EPC milestones to get to a trajectory of EPC B (Preferred Trajectory) or C (Alternative Trajectory) by 2030. For example, if the Preferred Trajectory was put in place, the government might implement a minimum D rating by 2025, minimum C rating by 2028 and a minimum B rating by April 2030 for all non-domestic leases (subject to exemptions).
The use of a Single Implementation Date would allow landlords to work during the period leading up to 2030 towards reaching a B rating, but there would be no push on energy efficiency measures being taken before then and therefore a risk that landlords will leave those measures until the last minute. The Incremental Milestones technique would undoubtedly drive energy efficiency faster, but would likely be less cost-effective for landlords than making all necessary upgrades to buildings at one time. In addition, local authorities would have greater enforcement action requirements if the minimum standard continually increased.
The government recognises that the minimum standards set out above will be unattainable for some buildings, with the prediction that 64% of buildings will be able to achieve a B rating, 20% will achieve a C and 17% will fail to reach a C1. Exemptions would still be available for buildings that cannot reach the minimum standard where it can be proved that the building has reached the highest EPC rating that a cost-effective package of measures could deliver. Importantly, the "seven year payback test" will continue to apply, namely that measures will only be deemed cost effective where the value of savings on energy bills over a seven-year period (starting with the date the installation of the measures is completed) is equal to or greater than the cost of paying for those measures. Other exemptions will continue to apply, including where there is an inability to obtain third party consent or the measures will significantly devalue the building.
Costs v. savings?
The Consultation estimates the investment cost of the Preferred Trajectory would be approximately £5 billion between 2019 and 2030. The bill savings to businesses is projected at £1 billion in 2030 alone, with an overall net present value to the UK economy of £6.1 billion. Whilst other indirect costs and savings related to reputation, lending appetite and valuation cannot be easily quantified, they will also be influential.
The consultation states the government anticipates that "setting a clear trajectory to 2030 now should provide landlords and businesses with a long-enough lead time to act and provide certainty to the energy efficiency market and enable growth and innovation". The takeaway? All commercial landlords need to start planning ahead. Whether the minimum energy efficiency standard for non-domestic leases is gradually raised one rating at a time or simply jumps from an E to a C or B rating (dependent on the trajectory applied) by 2030, it is clear that standards will be tightened. Those letting non-domestic property that is likely to fall below the required standard will have to invest time and money either improving the energy efficiency of those premises or paving the way to establish one of the exemptions. However, it should not be forgotten that improving the energy efficiency of a building will not only result in energy cost savings, but will also have an impact on valuation and perhaps more importantly on the environmental credentials (and consequently reputation) of the party concerned – something that most landlords in the current climate will take very seriously indeed.