Consultation Deep Dive: real estate & mandatory energy reporting

The government has launched a consultation which sets out its 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'.  Annual ratings and mandatory disclosure will be the first step.

What is proposed?

Buildings will be benchmarked against similar building types and a ratings system will be introduced.  A higher rating will indicate a building is more efficient that its peers.  Buildings will also be assessed in relation to a net zero trajectory.  Ratings will be required to improve over time and the government notes clear incentives and, potentially, regulation may be required in the future.

The consultation proposes that owners and single tenants of buildings above 1,000m² will be required to:

• onboard their building onto the framework;
• submit, every year, their metered energy use data (and other relevant information) to the ratings administrator;
• receive a rating based on the building's annual energy and carbon performance.

The rating will be disclosed publicly both in the building and online. Online disclosure will be mandatory from the second year of the scheme. The consultation notes that in Australia through the National Australian Built Environment Rating Scheme (NABERS), the reputational benefits of improving performance (or the reputational risk of poor performance) have driven improvements.

Creating an 'investment grade' rating system is identified as vital to success.   The government is proposing that the framework should look to build on and modernise the Display Energy Certificate (DEC). The DEC is a performance-based rating which currently applies to public sector buildings over 250m². It measures the entire energy of a building and benchmarks that performance against similar buildings. The consultation sets out proposals to 'level up' the DEC and suggests that to ensure a high level of quality assurance and enforcement, buildings in the framework will require site assessments by a chartered professional every four years to make sure the rating is being produced accurately and consistently.   Ambitious targets, accuracy, consistency, quality assurance, sector specific ratings, flexibility and industry collaboration are all highlighted as part of this levelling up.   However, unlike the DEC which uses letters and colours, a star rating system is preferred for the rating presentation.

The intention is a ratings administrator will run and administer the framework. A 1-6 stage delivery model is proposed. This will start at stage 1 with the submission of the annual metered energy data for the building as well as information about the building. There will then be a benchmarking process and disclosure of the annual performance based rating. At stage 6 it is envisaged building owners/occupiers will use the wider energy management market or in-house capabilities to understand what their rating means, and how their rating can be improved.

The consultation also looks at enforcement.  The government notes that there the two main methods of enforcement available: publication of non-compliance and financial penalties. Exemptions are likely to be very limited.

A voluntary scheme may be introduced for buildings below 1,000m² and the 1,000m² threshold may vary on a sector by sector basis.  In the future, the framework may cover wider sustainability factors such as water, waste and indoor air quality.

What does this mean in practice?

There is a focus on the technical considerations for implementing the scheme and the challenges associated with this.  Three types of rating are proposed depending on whether you are a building owner (a base build rating), owner occupier or single tenant (whole building rating), or a tenant in a building with multiple tenants (voluntary tenant rating). The government considers landlords and businesses should only be required to improve the performance of the features of the building that are within their control.

The government wants to ensure ratings improve over time and is consulting on how best to do this.  However, regulation is not proposed from the outset:

• As set out above ,the consultation notes that evidence from the Australian NABERS scheme is that reputational drivers work. It also highlights the leadership shown by the public sector in Australia which sets high public procurement standards and prevents government tenants occupying buildings with a lower NABERS rating.  Interestingly, the consultation states that '[t]he Government is currently exploring how the central government estate can be encouraged to show leadership to drive similarly positive outcomes in England and Wales.'

• Fiscal interventions are also raised with the suggestion this could 'take the form of a financial incentive/penalty structure linked to an existing tax' which would be based on the rating achieved by the building.  Freestanding financial incentives are also mentioned and the government notes it is keen for lenders to use this framework to open avenues for more innovative methods of lending.  

• Possible regulatory interventions include a clean heat rating cap - meaning a building could not score above a certain star rating unless its primary heating system is low carbon and/or minimum performance standards enforced by penalties.

But we already have EPCs....

An EPC evaluates the standard of the buildings fabric and services and gives an indication of how it should perform. However, it does not measure metered energy consumption and associated carbon emissions. That will depend on how the building is used and maintained in practice.  The consultation notes that in large and complex buildings the evidence is showing that there is almost no correlation between a building's EPC score and its actual energy and carbon performance in practice. The government therefore wishes to put in place a performance based ratings system that can measure and assess building performance.

Part of the consultation looks at how the annual performance based rating would interact with EPCs and the consultation asks whether the government should allow owners of buildings above 1,000m² to use their annual performance based rating to satisfy their existing regulatory obligation to present a valid EPC before a building is sold or let.

Why buildings above 1,000m²?

The consultation states that 'in England and Wales, only 7% of commercial and industrial buildings are larger than 1,000m². Yet these buildings use over 53% of all the energy used by commercial and industrial buildings'. The government notes that the energy improvements seen in these buildings over the last decade are not on a trajectory which will deliver its commitment to net-zero.

The Government estimates that, as an average across each sector, private non-domestic buildings over 1,000m² will need to be using approximately 30% less energy in 2030 than they were in 2015.

What is the background to the scheme?

The consultation states that the proposals have been developed with industry experts and are based on international best practice, building on NABERS. 

NABERS UK launched in November 2020 and the government notes that NABERS UK is 'implementing - at a voluntary level - exactly the kind of performance-based approach that the Government is looking to mandate at a national level.'

Next steps

The Government plans to introduce the rating in three phases over the 2020s. Phase one will be the office sector and a paper has already been issued in relation to this. The government estimates there are approximately 10,000 commercial offices above 1,000m² in England and Wales. The target years for onboarding office buildings to the scheme are 2022/23.  The government estimates the cost for those covered by the office scheme would be in the region of £4,100-£7,500 for the first four years.

Phases two and three will address the remaining sectors which have been identified as follows: health, education, hospitality, industrial, retail, storage and arts, leisure, and community.

These proposals aim to complement the MEES target of EPC B by 2030.  A hybrid solution is the governments preferred option for landlords of offices who are also dealing with performance based ratings.

The government also aims to publish a short guide on the steps that building owners and businesses can take to prepare.

Sarah Ratcliffe, CEO of the Better Buildings Partnership commented:

This really could be a game-changer for the UK commercial property sector....  The BBP applauds these aspirational plans to implement a scheme that will provide much needed transparency for commercial property investors, owners and occupiers. This is vital in order to accelerate efforts to improve energy efficiency and drive the UK commercial property sector to decarbonise and deliver on its net zero targets.

The Consultation is open until 9 June 2021.  Industry responses are welcomed and submissions can be made here.