Minimum Standard Rating of an EPC from the current E Rating to a B by 2030

Current Regulation

The Energy Efficiency (Private Rented Property (“PRS”)) (England and Wales) Regulations 2015 introduced Minimum Energy Efficiency Standards (MEES) to improve the worst performing buildings in both the domestic and non-domestic sectors. Under the current MEES regulations, 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, with financial penalties for landlords who do not comply. From 1 April 2023, the ban will extend to prohibit the continuation of any existing lease of non-domestic premises in England and Wales with an EPC rating below E. Commercial landlords may face financial penalties and/or public reference in respect of any non-compliance.

Aims and Ambition

In 2019, the UK Government published a consultation on how best to further improve the energy performance of non-domestic private rented buildings through tighter minimum energy standards. The preferred option was to set a long-term trajectory that would require all non-domestic rented buildings to meet an EPC B by 2030. There was widespread support for this approach and the Government confirmed this trajectory in the Energy White Paper (published December 2020).  Since then the further consultation earlier this year on the framework to implement this new requirement and improve the compliance and enforcement process has been completed, with the results now awaited.

Under the proposals set out in the 2019 consultation, around one million non-domestic buildings across England and Wales should be improved by 2030, accounting for 85% of the non-domestic rented stock. Inevitably, this is expected to drive significant investment in the fabric and services of buildings across a large proportion of the existing stock. But equally, the prospect of such a cost burden and need for capital expenditure is increasingly being recognised as a significant valuation issue.

The Government’s stated aim is to deliver buildings that are cheaper to run for tenants and more importantly have a lower carbon footprint, including being more readily able to accept low-carbon heating systems. It is further stated that “This will help drive clean growth and reduce emissions across the non-domestic rental building stock, ensuring vital energy and carbon savings to support the path to net zero by 2050”.

Implementation Challenges

To date, there has been notable and widespread support from the Real Estate sector for this move, including bodies such as the British Property Federation. Notwithstanding, it has been flagged that significant implementation issues will need to be addressed, including:

• Improving the implementation of the “Payback Test” and general enforcement of the PRS Regulations;

• Improving how the PRS Regulations currently apply to older buildings and to premises rented in a shell and core state;

• Better aligning the EPC requirements with the PRS Regulations; and

• A need to also focus on operational performance (akin to the Display Energy Certificates required for public buildings).

Proposed New MEES Framework

The Government considers that taking the following approach should ease the issues identified above and provide a more effective framework for both industry and local authorities:

• Phased implementation of the EPC B by 2030 requirement, with EPC C by 2027 set as an interim milestone (although it should be noted this approach is subject to significant challenge);

• The introduction of two-year ‘compliance windows’. The compliance window will begin with the requirement for landlords to present a valid EPC. For EPC C, Government proposes the compliance window should be 2025-2027, and for EPC B 2028-2030;

• A move away from enforcement at the point of letting. Non-domestic EPCs will follow the proposed domestic changes, such as the requirement for non-domestic rental properties to continually have an EPC and the need to commission a post-improvement EPC to demonstrate compliance;

• The introduction of a PRS Exemptions and Compliance database to provide the data that local authorities will require for enforcement and compliance monitoring;

• Updates to the penalty framework to enforce the new requirements; and

The ‘three quotes’ system for the seven-year payback will be replaced by a more efficient and user-friendly ‘payback calculator’.

Proposed New Performance-based Policy Framework

The EPC effectively measures a building’s hypothetical – or potential – efficiency.  It does not measure actual metered energy consumption and associated carbon emissions. That will depend on how well the building is being managed and maintained and how effectively regulated and unregulated energy is used in the building in reality. Therefore, a high EPC score is no guarantee that a building will use less energy and consume less carbon as a result.

The Government has set out 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, with annual ratings and mandatory disclosures publicly available online. It is outlined in their recent consultation that the rating framework itself should look to build on and modernise the Display Energy Certificate (DEC) – as referenced above. The DEC is a performance-based rating that currently applies to public sector buildings over 250m². It measures the entire energy consumption of a building and benchmarks that performance against similar buildings. 

The Government intends to underpin the policy framework with a rating that, like NABERS (National Australian Built Environment Rating Scheme), the market can trust to be fair, accurate and consistent, with high levels of quality assurance. In other words, the rating must be ‘investment grade. The Government’s preferred option is to use a star rating system, similar to that of NABERS, as it is a format that clearly rewards improvements and avoids confusion with the EPC.

After onboarding their building onto the framework, owners and single tenants will be required to submit, every year, their metered energy use data (and other relevant information) to the ratings administrator and receive a rating based on the building’s annual energy and carbon performance. The rating will then be disclosed, publicly, both in the building and online.

The Government plans to introduce the rating in three phases over the 2020s. The office sector will be addressed in the first phase, followed by the remaining sectors in phases two and three. Buildings under 1,000m²  will remain solely in the Non-Domestic PRS MEES regulatory framework.

Final Note

The original PRS Regulations were designed to ensure landlords of the lowest rated non-domestic buildings were investing in improving their properties. The future EPC B requirement is an ambitious target designed to drive the UK towards Net Zero, by encouraging investment in rented non-domestic buildings throughout the vast majority of the stock. Therefore, it is imperative that PRS Regulations are adjusted effectively to ensure they are better aligned with how the industry and local authorities operate in reality, as well as being effective at scale. The cost of enforcement and monitoring compliance is also expected to increase significantly, therefore it is likely that local authorities are going to require additional funding support.

Most of this news article has been taken from these 2 sources;

1. https://www2.deloitte.com/uk/en/blog/real-estate/2021/important-update-on-minimum-energy-efficiency-standards.html
2. https://www.todaysconveyancer.co.uk/new-epc-regulations-expected-2025