Article
Could changes to EPC calculations save landlords money?
November 20, 2023 6 Minute Read
Where do we stand on Minimum Energy Efficiency Standards for commercial assets?
The property market likes certainty. Unfortunately, commercial Minimum Energy Efficiency Standard (MEES) regulations are an area where this certainty is missing.
While continuing to let out an F or G-rated building was made unlawful earlier this year, the UK Government has still not responded to its 2021 consultation on raising MEES for commercial property to ‘Energy Performance Certificate (EPC) B by 2030’. In fact, they recently stated the proposed timeline for MEES will “require updating”, thereby implying that the 2030 proposed deadline is likely to be postponed. This has left the industry in ‘upgrade’ limbo. The UK Government’s recent announcement on the relaxation of interim net zero drivers, albeit continued commitment to net zero by 2050, has added to this uncertainty.
Nevertheless, the market tends to see MEES style regulations as inevitable, since a 78% reduction in UK greenhouse gas emissions by 2035 is enshrined in law and must still be worked towards. Meanwhile, regulations comparable to MEES is likely to be introduced in the EU. Non-regulatory drivers such as disclosures and occupier demand also reward assets with better EPC ratings.
So, despite a lack of clarity on Government policy in the short-term, landlords are still incentivised to achieve better EPC ratings.
A change to the underlying method for calculating commercial EPCs in England and Wales came into force in June 2022. The change affected the calculation for carbon intensity, improving EPC ratings for electrified systems in buildings. This update reflects the decarbonisation of grid-supplied electricity. In an EPC, this means that all electrical systems (e.g., lighting, comfort cooling units, VRF, ventilation fans etc.) have become more efficient in the asset rating calculation when compared with their performance in the EPC assessment pre-June 2022.
Therefore, a building with an EPC rating issued pre-June 2022 could make no changes but achieve a different EPC rating if assessed today.
The effect of the changing methodology will differ depending on the building; some buildings’ EPC ratings could worsen, but buildings with electrified heat stand to benefit in their EPC scores.
Having tracked data for a year, arbnco Ltd, a service provider to CBRE’s ESG Consultancy team, have supplied CBRE with data for 8,464 EPCs on Retail, Industrial and Office units. Using Level 3 and Level 4* EPCs (smaller in floor area or less complex systems than for corporate offices), they found that an EPC carried out after June 2022 could result in an improved EPC in 56% of cases because of the new calculation method. Crucially, 34% of the sample with an EPC of C or lower improved to a B or above, including 3% (39 units) which had originally been an F or G. 10% were downgraded; these were typically office buildings with gas-fired heating systems.
For reasonably efficient buildings where electricity is the primary fuel, the revised methodology will be advantageous for them. As a result, less capital expenditure (CapEx) needs to be budgeted for upgrades, or CapEx allocations can be targeted towards decarbonisation or fabric improvements. However, we cannot assume that the same pattern illustrated by arbnco’s data would be observed for corporate offices which tend to be heated by gas. While some buildings scored worse and others improved; arbnco’s data indicates that the score of a revised EPC depends on the building services and the overall fuel and energy profile of the asset, rather than on the use type.
Consider commissioning a new EPC prior to performing upgrade work
For clients with Level 3 and 4 EPCs, it may be beneficial to have a revised EPC undertaken before committing to upgrade works. Also, if building or services upgrades have been undertaken prior to June 2022, a new EPC could reflect improved energy efficiency, which feeds into the overall asset quality and value.
However, while the new assessment methodology may reduce the budgeted CapEx for compliance with any future MEES uplift, the costs to achieve a truly net zero performing asset may not be any cheaper, considering the decarbonisation of services required, i.e., the removal of any natural gas.
While a ‘fabric first’ approach is often promoted as an essential step to energy efficiency, the fabric of new buildings tends to already be efficient. With existing buildings, a ‘services first’ (lighting, HVAC etc.) approach can achieve sufficient results to improve the efficiency and hence EPC rating. Fabric improvements are generally more disruptive for occupiers and may be deferred until the building becomes vacant.
CBRE Valuations can provide further insight and advice on the best course of action for reassessing EPC ratings or improving ratings to a B or above. In addition, CBRE ESG Consultancy have an extensive track record of producing optimised EPCs and providing strategies for improving the energy performance and EPC rating for assets of all types.
*arbnco reviewed Level 3 and 4 EPCs. Level 4 is where the heating systems are greater than 100KW with mechanical ventilation – usually retail, industrial and smaller office buildings. Complex buildings such as corporate offices tend to be Level 5, and smaller units are Level 3.
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