Energy: THE LEGAL LANDSCAPE
What impact will the past year’s momentous events have on the energy challenges UK organisations face over the next 10 years – and in particular, the regulatory demands for energy efficiency placed upon the property industry? Andrew Cooper, director at EVORA EDGE, looks at the compliance challenges.
9 January 2017 | Andrew Cooper
It will probably come as no surprise, but the biggest source of uncertainty in terms of energy supply comes from the vote last June to leave the European Union.
Among the raft of laws and systems which must now be unravelled are a number of directives on energy efficiency and engineering.
In addition, the USA has voted in as its 45th president Donald Trump, a man who has claimed publicly that climate change is a Chinese hoax to make US industry less competitive. Reuters has reported that Trump is already looking at quick ways of withdrawing from the Paris climate agreement, despite increasing international backing for the plan.
The obvious assumption is that these two events might mean the momentum of the past few decades – towards clean-tech low carbon engineering and energy efficiency – will be halted or even reversed. Indeed, asset managers are already asking whether certain regulations are now likely to be scrapped.
The reality, however, is that for the next five to ten years there could very well be little change to the regulatory landscape. And where there is change, it could in fact be compelled by market forces which seek similar objectives to ensure a low carbon, energy efficient, economically viable and productive estate.
For example, in 2012 the UK government calculated that better energy efficiency could replace 22 power stations, while the International Energy Agency (IEA) in its latest report, Energy Efficiency Market Report 2016, found that last year consumers, businesses and governments spent US $221 billion on energy efficiency improvements. In fact, the IEA now regards energy efficiency as a fuel source in its own right.
The challenges facing the UK
According to the House of Commons Library, between 1993 and 2014 Parliament passed 945 Acts of which 231 implemented EU obligations of some sort. It also passed 33,160 Statutory Instruments (or secondary legislation) of which 4,283 implemented EU obligations.
The UK has yet to trigger Article 50 to begin the mandated two-year process to decouple itself from the EU and it remains to be seen if it will be triggered in the first quarter of 2017. It is reasonable therefore to conclude that the soonest the UK could replace EU law with domestic law is 2.5 to 3 years from now.
There is then the process of deciding which laws to keep and which to discard, transposing them to UK domestic legislation before expiry of the notice period. Given the number of Acts and Statutory Instruments (SI) affected, this is a gargantuan task. It is, in all probability, simply not possible within a two year notice period – a requirement of Article 50.
With this in mind David Davis, Secretary of State for Exiting the European Union, has made the following statement: “To ensure continuity, we will take a simple approach. EU law will be transposed into domestic law, wherever practical, on exit day”.
We can therefore conclude that change will not happen quickly unless the Act or SI in question is politically sensitive. Even if it is, our laws must still ensure the UK does not breach international agreements that go beyond the requirements of the EU.
So it’s likely that, in the near future at least, the general direction of travel will still be towards a low or net zero carbon trajectory and energy efficiency will continue to play an important part of this.
What is likely to happen over the next 10 years is less clear. But it is possible to make three educated predictions on the regulatory drivers likely to affect the day-to-day work of FMs over this period.
In England and Wales EPCs could soon matter more than operational costs
The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015
As of 1 April 2018 a non-domestic property with an energy performance certificate (EPC) cannot be let unless it complies with The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 – also known as Minimum Energy Efficiency Standards, or MEES.
Although the measurement of energy efficiency in the regulations is EU-inspired (an EPC), the regulations themselves are domestic. In the bonfire of environmental regulations passed by the conservative government in 2015, these remained unaffected and are now UK law affecting England and Wales.
These regulations place a requirement on landlords to ensure their properties have an E rated EPC before a letting, lease extension or lease renewal. Landlords with F or G rated assets can only rent if a time-limited exemption applies. An example of such an exemption is that there are no relevant energy efficiency improvements that can be installed that have a simple payback period of less than 7 years.
There is already market evidence of the regulations affecting transactional values with significant cost implications, and there is research to show that the effects of MEES on valuation generally, post-2018, could be profound. Large landlords such as funds and REITs are implementing MEES management strategies and FMs should expect to operate in an environment where landlords are as concerned about an EPC rating as operational (energy) costs, if not more so.
But in Scotland: DECs will trump EPCs
The main legislative driver for change in Scotland will be through the implementation of Section 63 of the Climate Change Scotland Act (2009). The regulations affect buildings over 1,000m2, and where they apply building owners are required to produce an action plan prior to marketing the property. This must be prepared by an accredited Section 63 Advisor.
The building owner then has the option of either improving the energy and emissions performance of the building within 3.5 years of the issued action plan, or deferring that improvement by reporting annual energy use by way of an annual Display Energy Certificate (DEC).
The Section 63 Action Plan can only be prepared using the basic version of iSBEM. It is unlikely that a landlord’s assessor would voluntarily use iSBEM for larger buildings which may have complex HVAC. Instead they would use one of the more advanced energy modelling software systems that have been adapted to prepare EPCs and calculations for building regulations.
For large landlords such as funds and REITS this creates a disconnect between extant corporate wide policy on EPC procurement, and the requirements of Section 63. It will increase costs since preparing an EPC using basic software is both time consuming and prone to error, and outside of Section 63 the iSBEM model is of no value whatsoever. Because of this landlords may simply choose to comply through the use of DECs which are arguably a better benchmark of energy efficiency than an EPC anyway.
Funds and REITS which own corporate buildings with HFCs will have to replace these systems well ahead of any regulatory dates
The 2014 EU fluorinated greenhouse gas (F gas) regulations and the Montreal Protocol (as amended)
Back in October of 2016, almost 200 nations reached an agreement in Kigali, Rwanda, to amend the Montreal Protocol on Substances that Deplete the Ozone Layer and introduce a global phase-out of hydrofluorocarbon (HFC) and hydrochlorofluorocarbons (HCFC) refrigerants. HFCs and HCFCs were introduced to limit damage to the ozone layer and replace chlorofluorocarbons (CFC) refrigerants that have now been phased out. However, they have much greater levels of global warming potential (GWP).
This international agreement is legally binding and strengthens the existing UK commitment to a 79% phasing down of HFC use by 2030, through F-gas Regulations. The high-profile nature of the global phase-out agreement - as opposed to the lower profile EU phase-down through F-gas regulations, is likely to heavily influence corporate social responsibility (CSR) policies, particularly among companies operating internationally.
As more companies adopt a CSR policy that restricts the occupation of buildings that use HFCs there will be a greater impact on letting or lease renewal negotiations. This will effectively speed up the phase-out of such systems.
This means that landlords with buildings that use HFCs will need to think beyond the requirements of regulations. These landlords will have to think about medium to long term value linked to building resilience - particularly if the targeted tenant is a corporate occupier.
As a result, FMs should expect to see the increased use of HFC alternatives such as hydrocarbons (HCs) and hydrofluoroolefins (HFOs) well ahead of any regulatory compliance dates. These systems will still need to demonstrate high-levels of energy efficiency for EPC benchmarking purposes as well ensuring operational energy savings.
Demand for ISO50001 Energy management in large organisations increases significantly
Article 8 of the EU Energy Efficiency Directive (The Energy Savings Opportunity Scheme) and UK government proposals to introduce a new, simplified reporting framework by April 2019
In 2015, the government announced it would review the business energy efficiency tax landscape and launched its consultation document that September. The review considered the interactions between business energy policies and regulations such as the Climate Change Levy (CCL) The Carbon Reduction Commitment Energy Efficiency Scheme (CRC), Climate Change Agreements (CCA), mandatory greenhouse gas (GHG) reporting, ESOS and Enhanced Capital Allowances (ECAs).
In March 2016 government released its response to the consultation. As part of this response it has proposed applying the new reporting framework to all large UK undertakings and their corporate groups who satisfy the criteria for the ESOS scheme (or similar criteria) as well as large public and third party sectors which meet these criteria.
ESOS applies to large organisations in the UK and operates in four-yearly compliance phases. Qualifying organisations must submit a formal notification to the scheme administrator, the Environment Agency, before the compliance date. The first compliance date was 5 December 2015, the next compliance date is 5 December 2019 and then 5 December 2023.
Under ESOS, organisations must ensure that at least 90% of total energy consumption is subject to audit, DEC or a certified ISO 50001 Energy Management System. An ISO 50001 Energy Management System is likely to be more cost effective and easier to administer than having to mass procure audits and/or DECs every four years and it is likely many organisations will move to adopt it.
The past year has resulted in possibly the most uncertain political environment since World War II. How quickly we will see genuine legislative change in how energy is procured and reported remains to be seen.