Clean Growth Strategy - tougher minimum energy efficiency standards and other key points for the real estate sector

Posted: 24/10/2017

Earlier this month the Government published its Clean Growth Strategy, a 164 page document setting out 50 low-carbon policies/plans aimed at accelerating the pace of 'clean growth', ie delivering increased economic growth alongside decreased emissions.

A 'significant acceleration in the pace of decarbonisation' will be required for the UK to meet its legally binding carbon budgets over the next 15 years. These are set by the Climate Change Act 2008 which requires the UK, by 2050, to reduce its greenhouse gas emissions by at least 80% (when compared to the 1990 baseline). The strategy sets out what it describes as ’stretching domestic policies’ to keep the UK on track to meet these carbon budgets.

Key policies for the real estate sector

Unsurprisingly, with almost a third of UK emissions coming from heating homes and businesses, the strategy illustrates the Government's renewed focus on the energy efficiency of both commercial and domestic properties.

The headline policies and proposals for those involved in UK real estate (including investors, tenants, developers and lenders) are set out below.

Raised minimum energy efficiency standards for commercial property
The Government will consult in 2018 on raising minimum energy efficiency standards (MEES) for rented commercial buildings. 

Currently, from 1 April 2018, properties with an EPC rating of F or G cannot be re-let until relevant energy efficiency improvements are made to bring their ratings up to at least an E (unless an exemption applies and has been validly registered). Clearly, raising the MEES threshold (to perhaps a D or even C rating) will bring many more properties within MEES and will have a significant impact on real estate transactions.

With this in mind, landlords and purchasers should pay close attention not only to F and G rated premises but also to those 'at risk' premises with an EPC rating of D or E. The likelihood of higher MEES thresholds (and more stringent methodologies for calculating EPC ratings) should be factored into letting and acquisition strategies. 

More effective MEES for residential property
Making MEES effective and raising the MEES threshold for residential property is firmly on the Government's radar. The strategy confirms that the Government will:

• consult on improving MEES for residential properties;
• look at ’a long term trajectory’ for residential MEES to achieve their aspiration of upgrading as many homes as possible to a C rating by 2035;
• consult on introducing similar energy performance standards across the social housing sector;
• publish a call for evidence on further trigger points for EPCs and how EPCs can be improved in the light of new data and capabilities.

The Green Deal overhaul
There has been recent commentary on landlords ’wriggling out’ of their responsibilities to improve the energy efficiency of their properties. Remember that residential landlords are only required to make improvements that can be wholly financed, at no cost to the landlord, by means of funding provided through government schemes, such the Green Deal. As such funding was withdrawn in July 2015 (when the Government announced that there would be no more public investment in the scheme), many residential landlords considered themselves outside of MEES. They would simply register an exemption when the time came based on the lack of Green Deal finance.

Residential landlords can no longer take this simplistic approach. Green Deal finance is again being offered by the new owners of the Green Deal Finance Company (see their 19 June 2017 press release). In addition, the strategy and accompanying Call for Evidence on the reform of the Green Deal Framework indicates that the Government is looking seriously at making the Green Deal and residential MEES work.

Green mortgages and green finance
The Government has also announced its intention to work with mortgage lenders to:

• incorporate energy efficiency into their lending decisions; and
• develop ‘green mortgages’’, being preferential mortgage products (eg offering lower interest rates) to encourage borrowers to purchase more efficient properties or improve their efficiency.

Also suggested in the Government's Call for Evidence on Building a Market for Energy Efficiency are:

• conditional mortgages based on the owner carrying out certain energy efficiency improvements;
• requiring lenders to publish data on the average EPC rating of the properties they lend on; and
• setting voluntary targets for lenders to improve the EPC rating of the properties on which they lend.

If such measures are adopted, it could become harder to obtain funding for less efficient properties unless borrowers agree to carry out energy efficiency improvements. Combining energy efficiency legislation and market forces in this way may prove more effective at driving change than legislation alone.

Improvements in energy efficiency consultation
The Government will consult in 2018 on:

• improving the energy efficiency of new and existing commercial buildings; and
• strengthening energy performance standards for new and existing homes under Building Regulations.

These consultations will be subject to the conclusions of the independent review of Building Regulations and fire safety which was launched following the Grenfell Tower fire.

Voluntary building standards 
The Government will explore how voluntary building standards can support improvements in the energy efficiency performance of commercial buildings.

Streamlined energy and carbon reporting 
The Government aims to simplify the requirements on businesses for measuring and reporting on energy use. A consultation: streamlined energy and carbon reporting, launched on 12 October 2017, seeks views on a new reporting framework for introduction by 2019. 

It is proposed that reporting will be within companies' annual reports which are filed at Companies House. The consultation, which closes on 4 January 2018, seeks views on:

• who the reporting requirements should apply to (including whether the requirements should apply to LLPs);
• what the reporting thresholds should be; and
• what should be reported.

Closure of CRC scheme
The strategy confirms that, in line with its 2016 Budget announcement, the Government will continue with its plans to:

• close the CRC Energy Efficiency Scheme following the 2018-19 compliance year; and
• implement the previously announced increase to the main rates of the Climate Change Levy from 2019.

Next steps

The strategy gives us a clear message and direction of travel. Despite Brexit, which some thought might derail green initiatives, the Government's commitment to tackling climate change ’remains undimmed’.

The strategy is, however, short on detail. We will have to wait for the publication of further consultations over the coming months. Penningtons Manches will be monitoring the Government’s drive towards a low carbon future. If you would like to receive future updates on developments as they happen, please contact Caroline Barry to be added to our mailing list.

Further Information

If you would like more information on the impact of MEES, please see our recent fact sheet or contact the writers or another member of the Penningtons Manches real estate division.

A full summary of the Government's key policies and proposals can be found at page 12 of the strategy. Annex A of the strategy also contains decision pathways which map out the Government's policies and proposals over time. Annex B of the strategy set out the actions and milestones that the Government has committed to.

Finally, in case you missed it in the excitement, the Government has also published detailed guidance on the application of MEES to domestic premises, which will be of particular interest to private landlords, housing associations and local authorities.

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