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How the Energy White Paper will impact Commercial Real Estate

By Sam Carson
15th December 2020

HM Government published their Energy White Paper on the 14th December, and it had one clear message: the future is Net Zero.

The paper is focused on macro strategy issues, mostly residential building stock, consumers and heavy industry. Below, we will provide a summary of how this specifically impacts commercial buildings. 

 

EPCs will get better and have to be better

In September 2020, the government launched the Energy Performance Certificates Action Plan, which set out a pathway to improve the EPC system. The Action Plan will help to increase the energy efficiency of the building stock by exploring ways to increase the quality of EPCs, build consumer trust and increase engagement.
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EPCs are often considered to be an inaccurate view of a building’s real-world energy performance, which is a significant barrier to improving the energy efficiency of commercial buildings. The variability of EPCs is a fundamental problem and improving the quality of EPCs will result in a better pricing signal as real estate is traded, and acquired by portfolios with Net Zero pathways. This is an important next step in setting a trusted foundation for progress in decarbonisation.

Around a half of all energy consumed in commercial and industrial buildings in England and Wales is in the rented sector, placing the onus on landlords to make energy efficiency and heating improvements. We will therefore tighten minimum standards for this sector to reach

EPC band B by 2030 where cost-effective.
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This is important because it builds on the impact of the Minimum Energy Efficiency Standards (MEES), which has helped reduce the number of poorly performing buildings. However, 2030 is nine years away, not even a complete refurbishment cycle for most buildings. Real estate owners need to develop a plan now to improve their stock to align with this future compliance requirement which will also reduce the carbon emissions associated with the building, mitigating additional upcoming carbon legislation.

 

A national energy data catalogue 

In 2018, the government and Ofgem launched the independent Energy Data Taskforce. The Taskforce’s final report in 2019 highlighted how the move towards a modern, digital energy system is being hindered by poor quality or missing data, while data which is valuable can be hard to find or subject to restricted access… The Taskforce showed that a lack of access to energy data creates a barrier to innovation in the new technologies and services required to achieve net zero emissions. We are therefore creating a national energy data catalogue to make data more visible and reduce the costs of accessing this information. A prototype of the service will be launched by summer 2021.
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Carbon Intelligence has been focused on gathering quality data for buildings for a decade now with dozens of data programmes delivered, integrated into how our clients manage their estates. Managing data like this isn’t easy. Without this data, decarbonisation programmes are hamstrung, and there’s no basis of truth for achieving Net Zero or Science Based Targets. It is important that these data challenges are recognised in this White Paper, and while the devil is in the detail, no more so with data, this has the potential to be quite transformational.

For Commercial Real Estate, data is particularly challenging because the majority of the asset owners’ impacts are in the occupier areas and often within their bills. The implementation of a national energy data catalogue could make it easier for occupiers to share data with the building owner, a process which is currently cumbersome and requires a lot of coordination on both sides. We need to see how this would work in practice, and there are several pitfalls between data privacy and technical implementation. That this dialogue has started is a hugely positive step and, building on the model of the Data Communications Company (DCC) for SMETS 1 and 2 meter data, there is the potential for a secure data infrastructure that will transform our visibility of commercial consumption data.

 

The missing element: decarbonising heating in commercial buildings

While the white paper speaks to zero-carbon heat for residential, there’s no indication on any nationally coordinated programme to decarbonise the heating systems in commercial buildings. There is a section on Clean Heat Technologies (p 109), but that is focused on homes. The paper speaks to a successor to the Renewable Heat Incentive (the Clean Heat Grant, p 111), but exclusively in the residential context. 

This will be an important mechanism for the private rented sector and commercial residential, but the wording is targeting homeowners rather than commercial landlords. 

Likewise, programmes for Biomethane, Green Hydrogen, heat pumps and heat networks are aimed at residential buildings and not commercial ones. The government may be wanting to target commercial buildings through more green finance measures and energy performance contracts rather than the energy strategy, which in some ways makes sense, but requires a building by building approach which will be costly and time-consuming. However, we were hoping for a lot more coordination or at least more confidence in the direction of travel when it comes to Green Hydrogen or heat networks. That’s clearly missing here and feels like a wasted opportunity, leaving a significant gap in incentives and structure to drive the decarbonisation of heat in the commercial sector. 

There is still a lot of uncertainty remaining, but with the requirement to improve EPCs there is a demonstrable step towards requiring buildings to become more energy-efficient. It still means commercial real estate owners will need to take a proactive approach to improve assets, and that EPCs will become easier to consider when valuing buildings or targeting improvements. That’s a step forward, as is having an energy strategy which is intended to support decarbonisation. So, on the whole, an important increase in focus on addressing the climate crisis. 

It shows that asset owners will need to start planning for the future, and it shifts energy efficiency and decarbonisation from an ambitious objective to future compliance and revenue risk. That’s important, and asset owners will need to develop plans to upgrade assets and reposition their portfolios to maintain asset values and lettability.

 

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Developing a roadmap is the key role that we play for our clients, creating long term strategies to evolve their investment approaches, delivering and safeguarding value in a transitional world. Please get in touch if we can support you, email info@carbon.ci