UK: Built To Last

Energy Use And Emissions For The Real Estate Sector
Last Updated: 3 July 2008
Article by Linda Fletcher

With the announcement by the EU on 23 January 2008 of a three limbed package of measures to tackle climate change1, you may be wondering how this affects you as a property owner, developer, investor, lender, manager or occupier.

The package set for the UK is ambitious and includes a reduction of 16% in UK GHG emissions by 2020 from 2005 levels from sectors not covered by the current EU ETS, for 15% (current requirement is 1.3%) of the energy consumed in the UK to come from renewable sources by 2020 and for 10% of road transport fuels to come from renewable sources.

The UK government has already introduced a number of obligations on businesses which directly affect the real estate sector to help meet the current targets and we expect these to tighten and broaden in scope. Some of these are EU-driven but we will see more UK national measures being taken.

How might the real estate that you either own, fund, manage or occupy be affected?

Are you about to carry out a major renovation or refurbishment programme for your portfolio? Does your lender, who is going to part-finance the programme, have its own environmental checklist and does your programme meet these?

Are you managing the older buildings in your portfolio so as to optimise their environmental performance?

Are you about to embark on a sale/lease-back programme or an intra-group re-organisation?

Will you be able to charge higher rents if your building has a good energy rating or is it more likely that tenants will expect lower rents at commencement and on review for buildings with a poor energy rating? Perhaps it is more realistic to expect that a higher rated building will have better rental stability. Will you see tenants' demand 'greener' buildings to fit in with their CSR policies?

The first of this three part series focuses on the issues surrounding energy use and emissions for the real estate sector.

Real estate (there are 25 million buildings in the UK2) alone accounts for more than 40% of final energy consumption in the EU and so its impact on long-term energy consumption needs to be addressed. In the UK the energy used in buildings represents about 45% of total CO2 consumed in the UK3.

The Energy Performance of Buildings Directive was enacted by the EU in 2003 and was required to be implemented by Member States by 4 January 2006. The Directive introduced higher standards of energy conservation for new and refurbished buildings, regular inspections (every 5 years) for larger air conditioning systems and/or advice on more efficient boiler operation for commercial buildings. The UK government has now passed two sets of regulations to implement this Directive, albeit late. If you have European portfolios then you will need to understand how other Member States have implemented this Directive and take action accordingly; for example, in Spain new residential and commercial buildings have to be 30% more energy efficient than under previous legislation.

Building Regulations 2006 Amendments4

Amendments have been made to the building control system by introducing a new part L to the Building Regulations 2006. This came into force on 6 April 2006. The changes apply to both commercial and residential buildings and establish minimum energy performance requirements for all new buildings and for major renovations of existing buildings exceeding 1,000 m2 of useful floor space5. The CO2 emissions standards have been raised by between 20% and 28%, depending on the type and size of building, compared to 2002 standards6. The cumulative impact of the 2002 and 2006 changes are substantial, at around 40% improvement in the energy efficiency of buildings.

New buildings are now required to meet maximum CO2 emission levels so conservation of fuel and power will require improved insulation and more efficient heating systems. Examples of such systems are using low carbon fuels and heating appliances, limiting heat gains and losses by using thermal fabrics, draught proofing windows and doors, using natural ventilation, mechanical ventilation or air conditioning or a combination of each. Architects and engineers will need to address controlling solar gains, airtightness compliance and the requirement to provide energy performance certificates for a building.

For major renovation projects the extension, provision of or increase to the installed capacity of fixed building services, i.e. for heating, hot water, mechanical ventilation or air conditioning, need to comply with these requirements if it is technically, functionally and economically feasible7.

How do you know if your refurbishment programme is caught by this? A major renovation is defined as being either where the total cost of the renovation relating to the building shell and/or energy installations (e.g. heating, hot water supply, ventilation, lighting etc.) is higher than 25% of the value of the building (excluding the value of the land upon which it is situated) or where more than 25% of the building shell is undergoing renovation.

A refurbishment is, of course, an opportunity to change to low energy fittings, to install motion-activated lighting for certain areas, to put in place a system of bins for segregating waste streams from the building and to consider renewable energy being generated on site.

How do you then measure the carbon emissions? The 2006 Regulations required the Secretary of State to approve a methodology for the calculation of the energy performance of buildings and in the UK we now have the National Calculation Methodology. Under the EU Directive the energy performance requirements must be reviewed and updated at least every 5 years.

A number of models have been developed for different types of buildings. One of these the Simplified Building Energy Model ("SBEM") has been developed by BRE (Building Research Establishment) which has been adopted by the government as an approved model.

EPC Certificates - the 2007 Regulations

You are probably familiar with all the attention the residential market received about the requirement on owners when selling a house to produce a Home Information Pack which includes the provision of an Energy Performance Certificate ("EPC"). This was first introduced on 1 August 2007 for houses with more than 4 bedrooms and from 10 September 2007 it applied to houses with more than 3 bedrooms. From 1 January 2008 it was required for all houses being sold and for all new houses being constructed.

A natural progression is for this system to be extended to all other buildings and from 6 April 2008 this will apply to the commercial real estate sector in stages. The need to obtain and provide EPCs will depend on the type and size of the building and whether it is being constructed, sold or let - see table for details.

The EPC will be valid for 10 years unless changes or improvements mean that a new certificate is required. If a valid EPC still exists when changing tenants no new certificate is required. There is no need to provide an EPC for existing tenants.

For a multi-let building the requirement to provide an EPC will be triggered by a new letting of just one unit as building is defined as being either a whole or "a part of a building which has been designed or altered to be used separately". How this will work in practice remains to be seen but guidance produced by the Communities and Local Government states that if a building has a common heating system then the landlord can either prepare an EPC for the whole building or prepare an EPC for the unit being let, with the assessment being based on the energy use per square metre for the whole building8. An underletting or assignment of a unit or floor will also trigger the requirement but here the current tenant will be the 'landlord'/'seller' so it will be responsible for providing the EPC.

On construction of a new building it is worth noting that a building control inspector will not issue a completion certificate until an EPC has been provided by the contractor.

A recommendation report will also have to be provided by the assessor giving the certificate setting out any measures that could be taken to improve the energy rating of the building. Assessors need to be accredited and will, of course, need to be trained to attain this qualification. There is an obvious concern about whether sufficient assessors will be available in time and you would be wise to start the process now so EPCs for your portfolio are in your files ready for your sales/letting programmes.

Table

Date9

Buildings covered

Requirements

6 April 2008

Construction of new commercial buildings or the sale or letting of commercial buildings with a total useful floor area > 10,000 m2

EPCs and recommendation report.

Duty to provide on contractor/seller/ landlord

1 July 2008

Construction of new commercial buildings or the sale or letting of commercial buildings with a total useful floor area >2,500m2

EPCs and recommendation report

1 October 2008

The construction, sale or letting of all remaining commercial buildings and any dwellings not already covered

EPCs and recommendation report

1 October 2008

Buildings with a total useful floor area >1,000m2 occupied by public authorities or by institutions providing public services to a large number of persons where the public frequently visit the building

Annual Display Energy Certificates will need to be displayed in the building. This will include both an asset rating and an operational rating showing how much energy was consumed over a period of 12 months. Recommendation reports required as well - valid for 7 years.
Duty on occupier

4 January 2009

All buildings

Deadline for completion of first inspection of all existing (i.e. installed before 1 January 2008) air conditioning systems with output >250kW10

4 January 2011

All buildings

Deadline for completion of first inspection of all existing (i.e. installed before 1 January 2008) air conditioning systems with output >12 kW

Industrial sites and workshops with low energy demand (but not storage and distribution warehouses) are currently excluded from the ambit of the 2007 Regulations.

Flowchart

An EPC will include an asset rating, i.e. the energy efficiency of the building, based upon the CO2 emissions per m2 of floor area but on a modelled use not actual metered use, using the same scale as you now see on domestic appliances as a result of the EU Energy Label requirements and, of course, for your homes. This will range from A (very efficient) to G (very inefficient). These ratings will become commonplace with the idea being that buyers and tenants can then compare the energy performance of buildings.

Failure to comply with the duty to provide an EPC can result in a penalty charge notice being issued by the enforcing authority, which will be your local weights and measures authority via the Trading Standards Officer. The maximum level of fine however is currently fixed at Ł5,000.

Air conditioning and boilers

Do you know how old the air conditioning system is in your building and is it regularly maintained? If not it may not be running efficiently. In a typical office, air conditioning can account for over 30% of annual electricity consumption11. It is estimated that 40% of commercial floor space will be air conditioned by 2020 compared to 10% in 1994, 11 so you need to explore whether alternative 'free cooling' options are available which will use less energy. Similarly the efficiency of the boilers will have a significant impact on the overall energy efficiency and the UK regulations provide for advice and information to be given on the replacement and modification of heating systems as opposed to mandatory inspections but you can expect that to be introduced in the future.

National Register

All EPCs must be recorded in a central national register and are required to be lodged by the energy assessors after they produce them. A unique reference number will then be provided. Access to the register is restricted so that it can only be accessed by those who have been given the reference number.

What next?

So if you are involved in the real estate sector there are a number of questions you should be asking yourself now and by doing so you will be ahead the game whether you are negotiating contracts for construction, disposing or acquiring real estate or granting leases.

In the next issue we will look more closely at how these legislative changes and proposals will come through in the drafting of contracts and leases and the development of the "green" lease. In our final part we will focus on other carbon influences, such as the minimisation of waste and the proposed Carbon Reduction Commitment which will affect those of you who have portfolios with high electricity usage.

Footnotes

1. See earlier article in this Alert

2. Communities and Local Government

3. UK Climate Change Programme 2006

4. The Swiss Re building ("the Gherkin") built in 2004 was the first environmentally sustainable office building in London

5. This is equivalent to the RICS gross floor area measurement

6. Planning Portal - UK Government

7. Economic Feasibility is stated to be a simple payback not exceeding 15 years.

8. See flowchart.

9. The timetable for Scotland and Northern Ireland is different.

10. Note - any air conditioning systems installed after 1 January 2008 are required to have a first inspection within 5 years of the installation date.

11. Carbon Trust

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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