NDEA / MEES Consultation Response

The Government has made a commitment to support businesses in reducing their energy usage, The target is a reduction of at least 20% by 2030. A consultation was released to gather views on the use of minimum energy standards to support the improvement of energy performance in commercial properties.

Stroma Certification has responded to this consultation on behalf of our members and you can read our response in full below:

Stroma Certification Response

Question 1: Do you have any evidence which can improve the Government’s understanding of energy use in the non-domestic building stock?

The EPC is an effective indication of the energy performance potential of a building at a given point in time, but it is not an indication of actual energy use. Combining EPC data and actual energy usage would provide a fuller understanding of the energy use in non-domestic building stock. ESOS has brought about data that combines performance and actual energy usage via the use of DECs, but this is limited to companies that are required to take part in this scheme. Under EPBD only public sector buildings have been required to have DECs lodged on the government register.

Stroma Certification understands the NCM used for calculating energy use when producing EPCs. In our experience, energy is used in non-domestic buildings the following key areas:

• Heating, cooling and ventilation (HVAC)
• Lighting
• Hot water

In addition, the following aspects of energy assessment can affect the EPC rating in a meaningful way:

• Zone activity – this can change markedly over the life cycle of the building and with occupancy
• Zone assignation and adjacency
• Conventions in place at the time of survey

Question 2: It has now been over a year since the minimum energy efficiency standards for the non-domestic private rented sector were introduced. What have been the positives and areas for improvement of their introduction?

Positives

• A stronger focus on the EPC – raising the profile in the minds of building owners
• A better understanding of the concepts of energy efficiency
• A better understanding of life cycle costs and benefits
• Landlords beginning to improve their buildings
• Passive enforcement via lenders (mortgage providers) not willing to lend on substandard buildings

Areas of improvement

• No meaningful funding available for commercial buildings (no ECO equivalent)
• Poor understanding of MEES and unaware of guidance documentation
• Loop holes seem to exist for the 7-year payback rule – possibly a reason to examine this exemption
• Potential unintended consequences via the methodology. An example would be heating existing in unheated zones (warehouse area) which when removed improves the rating
• Building improvements seen between recent EPC and older EPC may be as a result of better levels of evidence of insulation or systems installed. It is therefore possible that buildings haven’t necessarily improved
• Guidance can conflict with existing Landlords contracts. For example, when a building is rented out with all systems stripped out as the tenant will fit out once they are occupying
• Guidance between BEIS and MHCLG guidance for listed buildings seems to contradict each other

Question 3: Do you agree that 2030 is the appropriate date to set the future trajectory? Does this allow a long enough lead in time for landlords and businesses to plan effectively, as well as providing the energy efficiency market with medium to long-term certainty of demand?

Stroma Certification agrees with the desired trajectory date. This sets a challenging timescale which would focus action needed by landlords. This should be achieved using interim target dates to encourage continuous improvement of buildings, or to inspire action to achieve improvement to the standard in advance of this date where desired and logical. This may also allow a market for energy efficiency solutions and potential new technologies to emerge and provides a sustainable market place.

However, the 10-year validity of the EPC does cause potential problems, whereby decisions being made by building owners could be based on an EPC up to 10 years old (i.e. from 2010) which now bares little resemblance to the current configuration. With such a long lead time there is a need for early compliance incentives. Landlords could be incentivised, maybe with stamp duty reductions, Council Tax reductions or a modification to the HMRC rules on capital allowances, to go early. Also, the Section 63 scheme in Scotland has some useful principles that could be employed. Landlords could be incentivised to have DEC assessments performed and made available for their tenants, to help them understand/appreciate their energy use and energy using equipment. If this were mandated until a building achieves the minimum standard of C/B then this may also motivate Landlords earlier upgrading.

Question 4: To what extent do you think an EPC B trajectory provides sufficient certainty of demand to encourage suppliers in the energy efficiency market to grow, scale and innovate?

The only comment Stroma Certification can make on this is that the market has shown its readiness to deliver for the current implementation of MEES and a future trajectory would create certainly to continue that. In order for business within the industry to invest and support the regulations, then a long enough trajectory is needed and 10 years to achieve B ratings with milestone targets would give businesses confidence that this isn’t a ‘boom and bust’ scenario, or activity wont be held back until the final few years of the regulation coming into force.

Question 5: What do you think are the opportunities and challenges of the Government’s preferred 2030 EPC B trajectory?

Opportunities

• Increased energy efficiency
• Building Improvements in a limited time period
• Encourage action by Landlords
• Improved Tenant awareness of energy efficiency

Challenges

• Ensuring that buildings requiring an EPC have one, (EPBR compliance)
• Dealing with the UK rental practice of tenant fit-out
• Getting the right improvement option to take into a payback assessment
• Issues with the Gaming of the payback exemption. It is relatively easy to get a “fail” for the payback calculation. It may be prudent to recognise this issue and look at a solution to it – one answer is using a certified energy assessor to do the calculation in line with a methodology and ensure this is audited by a scheme
• A fuller understanding of the methodology and conventions to ensure that these don’t create unintended consequences or an easy way of achieving compliance

Question 6: We estimate an EPC C trajectory will only bring 42% of the non-domestic PRS building stock into scope of the regulation. Are there any alternative approaches that could complement an EPC C trajectory that would guarantee the necessary action across the remaining stock to drive clean growth and deliver sufficient energy and carbon reductions?

Whilst a good EPC rating is desirable, it is not the whole truth of how a building is used. Energy management principles need to be applied to deliver the potential carbon savings. Whether the minimum energy efficiency standard is achieved, basic energy management practice should be a focus, and this can be done using an annual DECs a 7 yearly Advisory Reports. The EPC validity period of 10 years is also not helpful in the pursuit of tracking and seeing improvements in building stock. Ratings will change with methodology and building regulations improvements. Fuel costs, installation costs and savings will change markedly within the 10 year validity.

Question 7: Can you identify any issues regarding the current administration of the seven-year payback test which could be improved to support the goals that a tightened regulatory trajectory to 2030 aims to deliver?

Firstly, the notion of requiring three quotes is over-simplified and doesn’t work in reality, In non-domestic applications (as opposed to the domestic scenario), particularly in more sizable/complex buildings, a quote is never the first stage I the process of improvement – design is always considered first. The software tools used to produce EPCs, iSBEM or other solutions are compliance tools not design tools. It is therefore very difficult to get a correct calculated output for the 7-year rule. It is possible to oversize systems to ensure that the 7 year payback rule will fail. Also consider the changes in technology installation costs over time – technology gets cheaper. It is very much worth considering using the same 15-year payback test applied by Approved Document ADL2B as this is widely used for improvement mandated by the building regulations. Encourage a ‘cap’ (suggestion of a % versus rentable value) which Landlords had to spend to improve their property regardless. Maybe 10% per year? Will make Landlords take action to improve their property.

Question 8: Would a single backstop date in 2030 or phased milestones to 2030 be the more effective method for implementing the trajectory options? Does it depend on the trajectory option? If a single backstop were favoured by the Government, what type of financial and non-financial incentives could encourage landlords to install measures earlier than the 2030 deadline?

Although a single backstop date would most likely be the most economic – i.e. do all improvement work at the same time, there is a risk that a single 2030 deadline will lead procrastination until 2030 which will likely lead to deliver issues. The best solution is a set of phased milestones, but one that allows a Landlord to chose to exceed these for early compliance. Landlords should be advised that technology can get cheaper and working out the best plan to achieve compliance is key to delivering the desired result at the best possible cost outcome. The use of DECs could again be used to motivate reaching milestones early (see answer to Q6). Domestic MEES seems to point to success for having a date for new leases and a backstop date for existing leases with a years gap in between. This could be extrapolated as suggested by the consultation document; D by 2024, C by 2026 and B by 2028 for new leases alongside parallel dates for sweeping up passing leases, such as D in 2025, C in 2027 and B in 2030. As noted previously, Landlords could be incentivised with stamp duty reductions, Council Tax reductions or a modification to the HMRC rules on capital allowances, to go early. Anecdotally, and with reference to domestic MEES, the lender market also seems to be driving compliance, for not only Buy to Let mortgages but also for most property sales, due to risk averse lenders wanting to ensure that properties meet the minimum standards. It is possible that a similar effect will be seen in this market.

Question 9: Are there any reasons why any of the current exemptions will be less effective under a tightened trajectory?

Stroma Certification cannot identify any reasons. However, the 7-year payback does seem to be a bit outdated now that there is no Green Deal in place in the market. Stroma Certification would encourage BEIS to review this exemption and link it to a 15 year payback.

Question 10: Are there any ways in which the market can overcome situations where the tenant has fit-out requirements and is willing to fund the improvement of the building at the start of the tenancy?

The Agreement for Lease is currently being used effectively in this situation.

Question 11: Are there any unique challenges that the tightened trajectory will pose to SMEs or any individual sector? How could the sector look to overcome that challenge?

None that can be seen.

Question 12: At this stage we welcome views on how the Government could most effectively improve enforcement of minimum energy efficiency standards under an EPC B or C by 2030 trajectory.

Firstly, enforcement needs to happen, and we cannot simply allow passive enforcement via the lenders and agents. The current enforcement is by Trading Standards Departments who have many competing priorities and areas to cover. Stroma Certification would suggest the Environment Agency as an alternative as this agency has seen effective enforcement of ESOS over the last 3-4 years. Alternatively, the government could consider the setting up of a specific enforcement agency to cover the various energy efficiency regulations in place. Enforcement brings compliance and so if not in place already, then a trial will be useful to inform on how best and most effectively to enforce the standards.

Question 13: As illustrative examples, do the costs, bill savings and private payback periods that our modelling assumes for these building types approximate your experience?

Bill savings, payback etc all based on predicted energy use generated by the SBEM calculation and not actual occupancy and bills (how the property is actually used). Understanding how a building is used, the occupancy and the fuel usage is key to understanding the bill savings and payback. This supports the use of a regular DEC.

Case study 1 – refers to gas heat pumps – Stroma Certification is not convinced this is this is a technology that is likely to be used for property improvement measures. Additionally, Stroma Certification isn’t convinced that the case studies support the theory that taking buildings from E-B compared to E-C is three times the private investment cost (referenced on page 21, paragraph 3).

Question 14: The table lists the costs and benefits we have identified as a result of the proposals. Are there any impacts relevant to your sector or organisation/business (e.g. SME, Civil society organisations) that are missing? If so, can you provide us with any supporting evidence?

Stroma Certification cannot comment on this.

Question 15: We understand that there are natural void periods when leasing a property, due to finding a tenant and refurbishing a building. Is there any evidence to suggests the proposals are likely to increase void periods and by how long? Please provide as much detail as you can.

This is not likely to be a large problem as refurbishment work will be done in simply complying with Building Regulation minimum requirements and will therefore involve energy performance improvements. The optimum time is when other work is being done. However, some concern centres around buildings that require large levels of work to achieve compliance (i.e. all exemptions considered) may be left void and be difficult to sell on. Stroma Certification is not able to add any detail in this matter as it is not our area of expertise.

Question 16: Under both trajectory options, landlords of buildings below EPC B or C will be required to invest money upfront to improve the energy efficiency of their building. If you are a landlord, what are the key factors that would determine the pass-on cost to the tenant, and the length of time under which you would seek a return on your investment? We anticipate key factors could include: investment cost, bill savings delivered by the measure, payback period of the measure, lifetime of the measure, maintenance costs and market forces. If you are not a landlord, we also welcome any evidence you could provide.

Stroma Certification cannot answer this question effectively.

Question 17: Is there a possibility that under certain types of lease arrangements (for example green leases) the costs of improvements might be shared between landlords and tenants?

Yes, we think Landlords will possibly look to share the costs with tenants.

"Stroma’s response to this consultation is aimed at re-enforcing the value that an accurate EPC can bring to a building owner, whilst identifying areas that can lead to inaccurate information that prospective building improvements are based on. Stroma would like to see the Government close the known loopholes to encourage Landlords to make the necessary building improvements to improve the energy efficiency of their buildings, whilst recognising that the current Enforcement protocols are not effective in maintaining compliance with the legislation. Stroma have also re-enforced the view that the 10 year validity period of the EPC is too long to allow Landlords to make meaningful and precise decisions in relation to their property."

Sam Cantle, Technical Manager