The Minimum Energy Efficiency Standards for commercial buildings should be high on landlords’ priority lists in early 2023.
Currently, under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, commercial landlords are prohibited from granting a new tenancy or extending or renewing an existing tenancy of certain types of property which have a “substandard” EPC rating of F or G (unless all relevant energy efficiency improvements for the property have been made, or an exemption applies). From 1 April 2023, commercial landlords will also be prohibited from continuing to let properties with a substandard EPC rating.
However, the government’s stated intention is that the threshold for MEES compliance will increase over time. The current proposal is a minimum EPC rating of B by 2030. It is anticipated that there will be interim steps along the way, with a minimum EPC rating of C from 1 April 2027. While these remain proposals for the time being, this is the direction of travel.
Most commercial landlords will be reviewing their portfolios to identify properties which will fall foul of the MEES Regulations when the prohibition on continuing to let substandard property comes into effect in April. Looking ahead, they should also be identifying which properties will struggle to reach an EPC rating of B in 2030, what relevant energy efficiency improvement works need to be done to these properties, and what exemptions might apply.
With these changes on the horizon, landlords may be surprised to learn that recent changes to carbon factors could have a significant effect on new EPCs commissioned for their properties.
What has happened?
In 2013, the national electricity grid was mostly fuelled by fossil fuels. This was reflected in the carbon factor used in the Simplified Building Energy Model to calculate the emissions produced by a building based on its calculated energy consumption.
As part of the wider aim to hit net zero by 2050, the government is committed to decarbonise the national electricity grid by 2035.
Today, a greater percentage of electricity (between 30% and 40%) is produced by low carbon or renewable sources.
A new version of SBEM took effect on 15 June 2022. This updated the carbon factor for electricity, amounting to a sizeable improvement of around 75% on the previous 2013 values. Conversely, the carbon factor for natural gas has worsened.
How does this impact EPCs?
EPC ratings for non-domestic buildings focus on CO2 emissions. If the carbon factor changes, then this will affect the predicted carbon emissions of the building, and therefore the final EPC rating. All EPCs produced after the new SBEM took effect on 15 June 2022 will use the new carbon factors and therefore, in simple terms:
- If a building is heated by gas, any new EPC rating may be worse than the current rating; and
- If a building is heated by electricity, any new EPC rating may be better than the current rating.
In some limited cases, it has been reported that properties previously rated E have achieved a B rating under the new methodology.
With the imminent prohibition on continuing to let substandard commercial property taking effect on 1 April 2023, and further changes to MEES on the horizon, this is a major development of which all commercial landlords need to be aware. Landlords, via their energy assessors, should consider undertaking EPC modelling across their portfolios using the new version of SBEM to ascertain whether any EPCs can be improved based on new carbon factors without having to undertake any works.
Modelling will also allow landlords to identify which properties may see a reduced EPC due to gas heating.
If a property’s EPC rating can be improved simply by commissioning a new EPC, this could lead to significantly less capital expenditure on improvement works and/or the administrative burden of relying on exemptions under the MEES Regulations as we approach 2030.
Adam Balfour is a senior associate at Hogan Lovells
