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Why MEES is Changing Behaviour Two Years Ahead of the Compliance Date

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The Minimum Energy Efficiency Standards (MEES) regulations will make it unlawful from April 2018 to let buildings in England and Wales which do not achieve a minimum Energy Performance Certificate (EPC) rating of E. This will initially apply to new lettings and renewals only, but from 2023 will apply to all existing leases as well.

John Alker, Director of Policy and Communications at the UKGBC stated that MEES is “The single most significant piece of legislation to affect our existing building stock in a generation”. I would certainly agree with this on a number of levels.

But doesn’t MEES have its flaws?

YES!

Firstly, the minimum standard is based on an EPC rating but as we know, EPCs are renowned for their lack of correlation to actual energy performance and that, as a commoditised service, quality diminished significantly putting into question the accuracy and usefulness of many EPCs.  Note that the Government is aware of this issue and has entered into a consultation process designed to improve quality assurance of EPC assessments.

Secondly, EPC calculations are linked to building regulations, so as regulations get tougher, so does the ability to achieve a decent rating making MEES a moving target. Many have suggested that EPCs produced pre 2011, if re-modelled now, could be up to two ratings lower. If correct, this could potentially see in excess of 30% of building stock, at risk to 2018 regulations.

However, this is not what we are experiencing, primarily due to the poor quality of many existing EPCs. As an example, EVORA recently re-evaluated shopping centre units with an EPC ratings E – G, where the rental value of these units exceeded 75% of the total ERV of the scheme. The original EPCs were of poor quality, as shown through the use of defaults. By completing accurate EPCs, EVORA was able to secure at least a D rating and therefore mitigating MEES risks for the next 10 years.

It is also not yet clear what the future trajectory will be for the minimum standard, although it is possible that this will be raised come 2023. This makes refurbishment planning challenging for landlords, who generally work on ten year cycles.

Finally, there are a number of exemptions, not least the requirement to have the consent all of tenants, which is surely a get out of jail free card for any landlord.

MEES and Behavioural Change

Despite these flaws and challenges we are seeing a significant change in behaviour well in advance of the 2018 compliance date. This shouldn’t be a surprise. MEES has the real potential to adversely impact many key value drivers including occupancy, rental growth, liquidity, cost of finance and yield on sale.

Greater Rigour Required

As such, it is focusing minds to ensure EPCs are carried out professionally and with rigour, whilst taking steps to understand portfolio risk supported by an appropriate strategy to mitigate.

As an example, more sophisticated energy modelling is being undertaken using Dynamic Simulation software packages to ensure the accuracy of EPCs and to better understand the opportunities to improve both energy performance and the EPC rating. We are currently supporting Hines on a major refurbishment in Canary Wharf, providing energy simulation modelling to ensure the design intent improves both the energy efficiency of the building as well as the EPC rating.

Understanding your MEES Risk

In addition, we are regularly using sophisticated sustainability management software such as SIERA on behalf of our clients, to analyse EPC ratings, lease events and ERVs together to understand and profile MEES risk.

Collaboration is going to be Essential

Ironically, rather than being a get out of jail free card, lack of consent by the occupiers, possibly due to business interruption issues, could impact on asset management plans to improve the overall EPC rating to ensure future marketability and to prevent possible price chipping on sale. This is also an issue for FRI assets where there is no legal right to gain access, but improvements may be necessary to achieve a minimum rating, prior to lease expiry to enable the property to be marketed to minimise the risk of void periods. These issues will drive the need for greater collaboration between landlord and tenant.

Improvement vs repairing obligations and what about dilapidations…?

Collaboration will also be key if the landlord intends to replace M&E equipment with more energy efficient kit, ahead of the end of its useful life, and is seeking the tenants to share in the costs or to recover fully through the service charge. The cost benefits to the tenants will need to be clearly articulated to get their engagement.

Staying on the theme of replacing kit, this is likely to have an impact on dilapidations where the landlord may require more energy efficient equipment to meet MEES regulations but the issue of improvement vs repairing obligations will arise. Again, collaboration and forward discussions will be key.

New lease terms?

New lease terms (notice my omission of ‘green’ which generally makes tenants and letting agents run a mile) could become the norm, specifically to bar alterations that adversely affect an EPC rating. But policing such terms will be a challenge.  Does this, for example, mean that every planned tenant fit-out or even minor alteration, has to be fully modelled to assess the impact on the EPC rating – possibly.

There are many other issues and challenges associated with the impending MEES legislation and whilst it is far from perfect it offers an opportunity to improve the energy efficiency and resilience of your assets and engage in long term communication and collaboration with your tenants. Surely that can’t be a bad thing!

How can EVORA support you?

EVORA can support you in understanding the upcoming MEES regulations, help you profile your MEES risk using our sustainability management software, SIERA and provide professional support in delivering and improving the EPC ratings for your assets.

EVORA is participating in a select group to provide industry guidance to DECC on the future of MEES regulations.

For further information or guidance on MEES please contact Ed Gabbitas: egabbitas@evoraglobal.com or 07557 529 106

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Legal Update: Scotland’s Energy Efficiency Programme

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Changes to Scottish Energy Performance in Building Regulations

Publicity surrounding the introduction of Minimum Energy Efficiency Standards (MEES), which set a minimum EPC rating of E for leasing of properties from April 2018, has increased significantly in recent months, and rightly so. However, the Scottish Government has chosen to implement a different approach to drive energy performance improvement in buildings.

The Scottish Government has released guidance on the practical implementation of Section 63 of the Climate Change (Scotland) Act 2009 relating to the energy performance of existing non-domestic buildings.

The regulations, which come into force on 1 September 2016, require the production of a building specific energy Action Plan on the majority of buildings offered for sale or lease, which exceed 1000m².

The Action Plan, which is based on the output of Energy Performance Certificate (EPC) assessments, must be prepared by an approved Section 63 Advisor. Existing EPC assessors will need to complete further training and development to become approved advisors.

The Action Plan will identify appropriate measures to reduce energy consumption. Official guidance also indicates that the area threshold (currently 1000m2) is likely to drop over time. Following completion of the Action Plan, building owners will be responsible for either the reporting of annual energy use (in the form of a Display Energy Certificates (DEC) in England and Wales) or the implementation of physical improvement measures within a 3.5 year period.

Our EPC assessment team is already working to ensure it can provide Section 63 Advisor support.

Click the image to download this article as a handy one-page flyer.

For further information on regulations and requirements please contact Paul Sutcliffe: psutcliffe@evoraglobal.com or 07557 529 104.

Further information is available on – http://www.gov.scot/section63

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Pre-Budget: Rethinking the Energy Efficiency Taxation Landscape

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With the energy efficiency taxation review just around the corner, it is expected that the CRC Energy Efficiency Scheme will be scrapped or at least changed significantly.  Below, we make three key predictions:

What are the key predictions for the upcoming budget review?

  1. A simpler energy efficiency taxation landscape: A single new tax based on the climate change levy and a single reporting framework
  2. Scrapping of the CRC Scheme
  3. Further developments based on ESOS supported by an incentivisation scheme to drive the implementation of improvement measures.

Moving away from the older policy environment, the translation of theory to practice will present new opportunities to utilise ESOS to spur the uptake of energy efficiency measures. Following on from our reflections on ESOS, it makes sense for businesses to develop strategies to address energy regulations in a coordinated fashion and to reap the benefits of a combined approach. A good example of this is having a combined approach to ESOS and MEES, where meeting minimum energy efficiency requirement aligns with the broader achievement of reducing energy costs in the building.

Please stay in tune for the budget announcement on the 16th of March 2016 and our post-budget review.

Links:

Reforming the business energy efficiency tax landscape

http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2015/11/Consultation_reforming_the_business_energy_efficiency_tax_landscape1.pdf

http://uk.practicallaw.com/3-623-4911?source=rss#

 

 

Reflecting on ESOS: The Next Steps

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Going forward, what are the prospects for ESOS? EVORA highlights the next steps for the scheme.

A Coordinated compliance and improvement approach?

EVORA recommend that clients should consider the establishment of a collective approach to address all regulatory risks and opportunities. It makes sense for example, for real estate businesses to develop a strategy addressing both ESOS and the Minimum Energy Efficiency Standards (MEES).

ESOS: a burden or an opportunity for businesses?

On the whole, we believe that businesses have found the compliance process more challenging than regulators anticipated. ESOS is new and businesses will certainly feel that they had a short period of time in which to prepare. Nevertheless, EVORA is already seeing evidence that assessment results are being incorporated into energy action plans. Overtime, ESOS has the ability to deliver the energy savings the UK industry needs. However, ESOS needs to form part of a structured and stable energy policy framework.

ESOS and ISO 50001

In the latest round of ESOS, only 0.9% of businesses chose ISO 50001 as a route to compliance. EVORA believes that, over time, an energy management system approach will help deliver the best results. However, the ISO 50001 approach is also the most time and resource intensive. Nevertheless we believe that, ISO 50001 will grow in popularity over time. The low level of initial uptake will have been restricted by the long time it takes to gain certification and the lack of available certification assessors.

For more information, Paul Sutcliffe will be speaking at the UK Green Building Council (UK-GBC) ESOS Showcase Event in London on the 15th of March. The link to the event can be found on the website: http://www.ukgbc.org/event/esos-showcase

Stay in tune for further updates on the energy efficiency taxation review budget to be announced soon!

Reflecting on ESOS: The EVORA Experience

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Over the last six months, EVORA has supported a broad range of clients to meet ESOS requirements. Through our support programmes we have engaged with 27 companies from Real Estate to a Big Six energy provider.

Energy spend assessed equated to £55m and saving opportunities of £2.8m (5.2%)  where identified (this equated to 27,000 MWh per annum).

ESOS routes to compliance

It was also interesting to explore the ESOS routes to compliance. From an analysis of all ESOS participants and responses to the notification questions (excluding personal data) across the UK and a selection of industry sectors, 65% of the notifications were made during or after December 2015.

The breakdown by compliance routes was as follows:

  • ISO 50001 – 0.9%
  • DECs – 5.3%
  • Green Deal – 0.2%
  • Audits -90%
  • De Minimus – 3.6%

Audits formed the main route to compliance; although ISO 50001 could become a popular option in the future.

EVORA predicts an increase in the take-up of ISO 50001, although significant time investment is required. This reflects the opportunities that energy management system frameworks present for target-setting and monitoring for continual improvement in the long-term.

How about transport?

This is often neglected since traditionally businesses have focused on health & safety when considering travel. Many opportunities exist including training, installation of tracking-systems, promotion of alternatives to travel including video conferencing and introduction of site-specific green travel plans. Focusing on transport could present new ways to achieve significant energy and cost reductions.

Please check out our Reflecting on ESOS: The Next Steps article for more on our reflections on ESOS and the next steps going forward.

For more information, Paul Sutcliffe will be speaking at the UK Green Building Council (UK-GBC) ESOS Showcase Event in London on the 15th of March. The link to the event can be found on the website: http://www.ukgbc.org/event/esos-showcase

Stay tuned for further updates on the energy efficiency taxation review budget on the 16th of March.

Health impacts of climate change on indoor environments

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A report recently published in the journal Environment International highlights health risks associated with climate-induced change to indoor environments. The report explored four key consequences on indoor environments: overheating, reduced ventilation, indoor air quality (which may lead to the growth of pathogens) and biological contamination such as pest infestations or airborne infectious diseases. Climate change is expected to amplify existing health risks already associated with these categories. This is not very surprising and will only stretch the public health purse further if climate change is not tackled.

More information via Science Direct and the European Commission.

Global green building sector to double by 2018

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A major new survey reveals the proportion of building companies planning to secure green certification for over 60% of their projects will increase from 18% to 37% by 2018.

Over 1000 professionals and 69 countries were surveyed for the report, carried out by Dodge Data & Analytics and United Technologies Corporation.

“The survey shows that global green building activity continues to double every three years,” said John Mandyck, chief sustainability officer at United Technologies Corporation, in a statement. “More people recognise the economic and productivity value that it bring to property owners and tenants, along with the energy and water benefits to the environment, which is driving the green building industry’s growth. It’s a win-win for people, planet and the economy.”

Full article via Business Green.

70% of organisations on the road to ESOS compliance

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Latest figures from the Environment Agency show 6000 organisations have ESOS compliance.

In the two days before 29 January deadline, the agency received a further 1,015 notifications of compliance. This last-minute action reflected earlier fears of a slow start to compliance by organisations covered by the scheme.

More information via The Environmentalist

DECC launches Energy Innovation Consultation

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A new consultation published by the Department of Energy and Climate Change invites the energy sector to contribute thoughts and ideas to encourage innovation across the sector.

The consultation is open until 11th February and asks the following three questions:

  • How can legislation and enforcement frameworks help support new technologies and business models to encourage growth?
  • How is new technology likely to shape the energy sector?
  • How can regulators better utilise new technologies to generate energy savings and reduce burdens on business?

The final Innovation Plan will be published in spring 2016.

More information via Business Green.

Integrating Climate Risks in Real Estate

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Real Estate Investor members of UNEP FI, CERES – INCR, IGCC, IIGCC, PRI and the RICS believe it is economically and practicably feasible for the real estate sector to play a significant role in limiting global temperature increase to 2°C.

The Integrating Climate Risks in Real Estate paper summarises key roles, risks and opportunities for real estate investors.

Important facts to note:

  • The building sector consumes approximately 40% of the world’s energy and contributes to 30% of global annual greenhouse gas emissions.
  • The global universe of investable real estate is worth about $50 trillion.
  • New buildings can easily be built to use 30-50% less energy than required by most energy codes dating back to 2005.
  • There is growing evidence across geographies that a climate friendly and sustainable real estate sector can both preserve and increase asset value.
  • Technology and operating processes are currently being used to improve energy efficiency of existing building portfolios by a further 2-4% each year.
  • The scale of the investment opportunity in energy efficiency building retrofits globally will rise to US$300 billion annually by 2020 and is supported by a robust business case.
  • Yet, the current rate of investments is a fifth of that required to stay within the desired less than 2°C pathway.

 

Further reading relating to the real estate sector and the recent events at COP21:

FM World: Business Pledges Huge Building Carbon Cuts 

GreenBiz: Why Tackling Climate Change is Good for Business 

GreenBiz: 4 City Initiatives out of COP21

GEF: A report on Sustainable Cities and the approach to attempt to promote urban sustainability.