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Energy efficient standards: cold comfort?

The 2011 Energy Act will make it illegal to let homes that fall below minimum energy efficiency standards. Graeme Murray explains.

Graeme Murray

energy-rules-man-reading-house-plansIt is well known that the 2011 Energy Act will have implications for property owners, managers and investors. Although the details of these new energy efficient standards remain to be finalised, the change is so significant that the industry needs to act now.

Affecting both residential and commercial property, the main change is that from 1st April 2018, it will no longer be legal to let a property that falls below a specified minimum EPC rating, likely to be a level E. Any properties rated F or G, therefore, are potentially obsolete due to the dramatic reduction in their value.

It is estimated that 18 per cent of commercial property (approximately 600,000 assets) currently falls into this category, with a similar if not higher percentage applying to the residential sector. The Government has made it known that at the time of creating the legislation, the private rented sector (despite having improved over several years) still had the largest proportion of properties with inadequate energy performance ratings.

The private rented sector will also be doubly affected by the legislation, which, from April 2016, requires private residential landlords to respond to a tenant’s “reasonable request” for consent to energy efficiency improvements where a finance package, such as the Green Deal is available.

PLANNING FOR CHANGE

How should a property owner, manager or investor respond to these changes? What do you need to know and do to ensure that your landlords’ property portfolios are free from the risk of obsolescence?

Essentially, you can accommodate the changes by thinking ahead, planning, monitoring, responding and keeping up to date with the future changes. Those with larger property holdings are advised to start doing so immediately, to ensure that necessary work is coordinated with the management of the portfolio and the work carried out before excessive demand creates a scarcity of services.

An EPC will enable a property owner to identify the areas in which the property has capacity to improve. Additionally, for owners of residential properties, initial planning can be performed by a Green Deal Assessor or a Domestic Energy
Assessor. Identifying the areas in which each property is weak determines the work that needs to be carried out. Bearing in mind the deadline of April 2018, planned work should then assess each measure individually, bearing in mind the cost; the funding and tax relief available and the requirements to quality; the timing of structural changes, the level of disruption, and how it might be accommodated.

In terms of timing, be careful not to isolate energy efficiency improvements from a schedule of works, as it may be sensible to implement improvements when carrying out other non-energy efficiency related works. For example, it may be appropriate to internally insulate walls and floors at the same time as refurbishing a bathroom or kitchen, or to install PV panels and double glazing when scaffolding is erected for other improvements.

Finally, plan to inform tenants and any other stakeholders of the work being carried out and the reasons for doing so. Although the work may be costly, the asset may be saved from obsolescence as a result.

VALUE AND VIABILITY

It goes without saying that prior to any material changes to affect the energy efficiency levels, there is potential for the values of energy inefficient properties to fall, or see the rate of any increase in value slow, and that in this scenario the annual return from such an asset would reduce if substantial sums were invested to bring it up to the required standard.

Viability is therefore an important consideration at an early stage. Owners will need to consider the cost benefits of undertaking retrofits or refurbishments: whether the expense of the upgrades is in danger of exceeding the annual rental income of the building; whether the necessity of carrying out the work will result in rental voids; and ultimately whether the asset should be disposed of imminently prior to a further decline in its value. There are likely to be very few buildings which will fall into this final category but it is an important exercise to carry out nonetheless.

CONFIRMATION AND CLARITY

That said, we are yet to have any firm guarantee that the legislation, although scheduled for 2018, will not become altered through political U-turns, especially in light of a possible change of government before it becomes active. There is however, general consensus among the political parties that legislation on energy efficiency is required and therefore the direction of travel appears to be set.

Our recommendation is that all property professionals should prepare for the change, but that nobody should relax in the knowledge that it will go ahead as stated. There is the possibility that the requirement to upgrade becomes voluntary, or is introduced over a longer period of time – but equally the legislation might be strengthened and the proposal that an energy level E is acceptable revised upwards.

EFFICIENCY MEASURES

If this article has had a foreboding and gloomy tone so far, this, in exhaustive list of potential energy saving measures should provide reassurance that a solution is always available:

  • Upgrading a boiler to a more efficient model
  • 
Changing light fittings – LED or CFL technology now becoming a more cost effective solution without having to compromise on aesthetics
  • Introducing more sophisticated controls on heating, lighting, air conditioning
  • Upgrading insulation to roof and cavity walls.

Retrofitting external insulation/ cladding to solid wall construction
  • Replacing single glazed windows or apply secondary glazing
  • Introducing solar panels (both photo- voltaic and solar thermal)
  • Installing an air sourced heat pump

Recent properties have seen refurbishment works lifting EPC ratings from F to B with only a limited increase in cost compared to a standard refurbishment. These works can be carried out individually but it is often more cost effective for them to be carried out as a combined package of works or as part of a larger project.

FUNDING OPTIONS

Feed in Tariffs (FIT) 
Property owners installing electricity- generating technology from a renewable or low-carbon source such as solar PV or wind turbine are eligible for the Government’s Feed in Tariffs scheme – a form of reimbursement from the energy supplier. Both energy used by the building and surplus electricity exported to the National Grid qualifies and electricity bills are substantially reduced as a result. Currently, FIT ranges from 6.61p to 14.9p/ kWh plus an export tariff of 4.64p/kWh.

RENEWABLE HEAT INCENTIVE (RHI)

Currently for commercial property, it is anticipated that the scheme for residential properties will start in Spring 2014. The RHI is a payment for generating heat from renewable sources, a Government initiative to encourage property owners to save money by eliminating or reducing the need for gas or oil. The scheme incentivises participation by paying between 7.3p and 19.2p/ kWh for hot water and heat generated and used within the building. It supports biomass, geothermal and ground source heat, biogas and solar thermal below 200kW. All tariffs will now run for 20 years, index-linked to RPI.

THE GREEN DEAL

The Green Deal was introduced January 2013 to enable the cost of energy efficiency improvements (e.g. loft and wall insulation) to be paid through a loan attached to the property’s energy bills over a period of up to 25 years. An accredited Green Deal advisor visits the property and draws up a plan showing the possible energy efficient improvements, the cost and potential energy savings. Improvements are carried out by accredited providers. Green Deal funding is only available if the anticipated energy savings throughout the lifetime of the improvement (up to 25 years) exceed the initial cost of making the improvement. The scheme works best in the case of owner-occupied property but tenants are also able to make use of the scheme.

Since the scheme was launched a year ago, uptake has been poor primarily due to the high interest rates which compared unfavourably to market rates. In many cases, property owners are currently finding it more cost effective to seek more traditional financing but this may change as the Bank of England inevitably raises interest rates in coming years.

Graeme Murray

Graeme Murray

Graeme Murray is Head of Sustainable Engineering, CBRE.

May 18, 2014

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