Energy performance certificates reform must drive emissions reduction

Years of inertia by policymakers have slowed the UK real estate net zero journey and left property owners and occupiers operating in an uncertain environment. The government’s long awaited consultation on reforms to energy performance certificates (EPCs) in England and Wales is a welcome step in the right direction and, together with an expected further announcement on new minimum energy efficiency standards (MEES), should provide industry with the clarity it has craved.

Below, we look in more detail at what has been proposed.

Brief context

The consultation, which closes on 26 February 2025, comes years after the previous UK government published its EPC action plan, in 2020, and its one progress report against the plan, in 2021. Its publication follows the government announcing a proposed uplift to a minimum of an EPC C rating by 2030 for domestic MEES requirements in September – a move that would roll back the previous government’s abandonment of its domestic MEES policy – as well as an extension of these requirements to the social housing sector.

A consultation on domestic MEES is expected imminently. The Department for Energy Security and Net Zero has further indicated it proposes to issue the government’s response to the commercial property MEES consultations of 2020 and 2021 in the first quarter of 2025.

With movement expected in the near future to require higher EPC ratings for leased property under the MEES Regulations from around 2030 and where EPCs may also be the bedrock of other policy interventions, such as a requirement on mortgage providers to disclose the average energy efficiency of their mortgage portfolios and potentially to be required to increase that average, it is essential that they are fit for purpose and driving the right outcomes. This consultation is a long overdue opportunity to address this.

The consultation is directly relevant for EPCs in England and Wales. The government expects that Northern Ireland will apply the outcomes from the consultation, subject to ministerial approvals.

The Scottish government consulted on EPC reform most recently in 2023 and is proposing new factors to be incorporated to provide more holistic information about the efficiency of the building, such as fabric rating, cost rating and heating system type. The proposal is methodology-focused and, if implemented, would change the metrics intended to improve the workings of EPCs and achieve a better output in terms of data and awareness of energy issues. The Scottish government is also proposing to reduce the validity of an EPC from 10 years to five years. The regulations were expected in 2024 to allow the new metrics to be in place in advance of the proposed Heat in Buildings Regulations, anticipated in 2025, which may introduce minimum energy efficiency standards in Scotland. Further details on both the EPC reform and the Heat in Buildings Regulations are still awaited.

Domestic EPCs

Currently, the headline metric for domestic EPCs is the Energy Efficiency Rating which does not in fact measure energy efficiency but instead measures modelled energy costs based on standardised heating, temperature and fuel price assumptions. The other supplemental metric used is an Environmental Impact Rating based on modelled carbon emissions per square metre.

The headline metric is expressed as an A to G rating. Both metrics are dependent on matters beyond the building owner’s control, namely energy costs and the carbon intensity of the grid. Whilst gas remains significantly cheaper, basing EPCs on an energy cost metric disincentivises decarbonisation. However, using other metrics without rebalancing electricity and gas prices may mean higher energy costs for rented homes that are not eligible for the various financial support schemes now available for fuel-poor homes.

The Climate Change Committee wrote to relevant ministers in February 2023 urging reform of domestic EPCs, citing its belief that they are currently “poorly suited” to driving a reduction in emissions. It set out recommendations for improvement. The government’s new consultation takes account of these and proposes changes to headline domestic EPC metrics. It is aiming for these to come into force in the second half of 2026. They are proposing four different headline metrics in place of the single Energy Efficiency Rating. These are: fabric performance; heating system type; smart readiness; and energy cost.

Fabric performance

Fabric performance is a term that “refers to the thermal properties of the building and its ability to maintain a different temperature from its surroundings”, the government said. Contributors to fabric performance include the level of insulation, window quality, and the quality of construction or retrofit, it added.

Among other benefits cited, the government said adding a fabric performance metric “could serve as a proxy for thermal comfort”, with improvements in performance resulting in homes feeling warmer in winter and more comfortable for residents. The government is seeking views on several existing methodologies for this metric.

Heating system type

Under this metric, heating systems would be rated by type with efficient low carbon systems being rated highest, less efficient low carbon systems getting medium ratings, and fossil fuel systems getting the lowest ratings.

Smart readiness

It is envisaged that the smart readiness metric would provide an indication of the building’s demand side flexibility through things like on site generation and battery storage, smart meters and electric vehicle charging, which would minimise peak period energy demand.

Energy cost

The consultation acknowledges the difficulty of accurate cost-based metrics given fluctuating energy costs. In designing a new cost-based metric, the government wants to balance consistency from a stable price over time with accuracy.

A revamped carbon metric?

In addition to the proposed headline metrics, the government seeks views on whether a carbon metric should be retained on domestic EPCs. Such a metric would not be based, as it is now, on modelled carbon emissions, it said. However, the government said it believes that due to the expected and frequent changes in the emissions intensity of the grid, the other proposed metrics, and particularly the heating system metric, could be more effective for driving action on reducing emissions.

Non-domestic EPCs

The consultation proposes that the existing headline metric for non-domestic EPCs is retained as the single headline carbon metric to maintain consistency in the short term and seeks view on this. It states further metrics may be proposed over time. However, it seeks views on whether any of the metrics being proposed for domestic EPCs should also be used for non-domestic EPCs – whether as a headline metric or as a secondary metric.

Whilst the current non-domestic metric is less flawed than the domestic metrics and does incentivise decarbonisation of heat, there are concerns that higher ratings are achievable by decarbonising heat in the property without any fabric energy efficiency improvements. This runs counter to government policy on reducing energy consumption and could lead to pressure on the grid. In that context, there may be good arguments for a fabric performance metric.

When the government responds to the non-domestic MEES consultations of 2020 and 2021, which it indicates will be in the first quarter of 2025, it is likely it will propose a delay in any uplift in the MEES trajectory to an EPC B, possibly with an interim uplift to C, of around a year, moving the possible date for an EPC B requirement on lettings to 2031 and of an interim EPC C minimum requirement to 2028.

The likely limited void periods when landlords can carry out necessary works, absent rights on leases to carry out such works or there being no need for any works within demised areas, between now and any required uplift in the next few years mean that sensible transition arrangements – some have been proposed and are considered below – will be required. Alternatively, it would be helpful if the government made clear as soon as possible whether any further headline metrics will be introduced for non-domestic EPCs, to give building owners and others the clarity which has been absent since 2020 on what targets they might need to achieve under MEES by, it seems likely, 2031.

An energy use metric

In the case of both domestic and non-domestic EPCs, the consultation suggests it will remain useful to show an energy use metric. The government proposes a new metric for this based on energy demand, heating efficiency and electricity generation information, and it would again be modelled energy use rather than actual energy use.

Many in the industry have long called for actual energy use data to be available, whether via EPCs or other statutory intervention, and the consultation notes that EPC metrics may change again in future dependent on policy priorities and might include, in addition to actual energy use, climate resilience and health and wellbeing metrics.

Transition process

EPCs have come to be used by the real estate sector in far more extensive ways than originally anticipated when they were introduced in 2007. They underpin the MEES Regulations, have been proposed as the basis of other proposed policy and regulation, and are used to target financial support to fuel poor homes. They are also used by investors and lenders as one of the key sustainability metrics in their asset level decision making. The government is conscious of this and of the need for continuity in current policy, to avoid a hiatus in efforts to decarbonise buildings.

The consultation makes it clear that any change in EPC metrics will be introduced in the second half of 2026. The change is likely to be delivered via the Home Energy Model, which already exists for new residential buildings and is being developed for existing domestic buildings – a consultation is expected in 2025 – and via updates to the National Calculation Model for non-domestic buildings.

The government has suggested measures to avoid penalising owners who have already or go on now to take action in anticipation of future targets, when those metrics change. For example, it has said existing EPCs will not be invalidated and will still be able to be used to show compliance with “existing” regulatory requirements, such as current MEES requirements. In addition, it said there may be areas of equivalence provided for between new and existing EPCs.

However, the consultation envisages that future regulatory requirements will need to reflect the new metrics. In this regard, the government said there will be transition periods to enable building owners to carry out any work required to comply with any new targets.

If this is a reference to the proposed increases in MEES requirements, it may cause building owners planning to upgrade their buildings to meet the anticipated increase in required EPC ratings based on current EPC metrics to pause until the new metrics are available in the second half of 2026 – a lost two years of progress.

Even if the new metrics will not come into effect until the second half of 2026, introducing them as soon as possible would provide the transparency and certainty which would give owners confidence they could proceed with works that would not quickly become obsolete. If this doesn’t happen then there is some indication in the consultation that, in the context of owners already having undertaken work to comply with expected future targets, “the government is keen to encourage early action and individual policies will explore options for ‘deemed to satisfy’ arrangements and ‘carry over’ rights”.

The trigger points for EPCs

EPCs are currently required on the building, sale or letting of property and are valid for 10 years. Reducing that validity period would “allow building upgrades to be captured more frequently” and provide prospective buyers and tenants with more up to date information and more relevant recommendations which take account of net zero policy and evolving technology, the government said.

The government’s preferred approach to any reduction in the validity periods of EPCs is to allow existing EPCs to remain valid for their 10-year validity period and apply any reduction in validity periods to EPCs which post-date any reduction. The alternative suggested is to provide a two-year transition period from the date of any change to EPC validity periods, at the end of which pre-existing EPCs would be subject to the reduced validity period. As to what the reduced validity period would be, the consultation seeks views on options ranging from two years to leaving it at 10 years.

Renewal or extension of lease to an existing tenant

There has been confusion to-date on whether a lease renewal or extension to an existing tenant triggers the need for an EPC. The consultation proceeds on the basis they do not.

Further, where EPCs expire during lease terms, a further uncertainty has been whether MEES “continuing to let” obligations require a MEES compliant EPC. The consultation proceeds on the basis they don’t. The government proposes to change this and make it clear that for private rented properties, the expiry of an existing EPC will be a new trigger point for a new EPC.

Where landlords have not this far been required to comply with the “continuing to let” MEES requirements, if adopted, these proposals would make them subject to these requirements and require upgrading to the minimum EPC rating – E, currently – or the registration of an exemption from compliance. It would also mean that, as a valid EPC was required at all times when the property was let, the issue of whether an EPC is required on a renewal or extension becomes irrelevant as there will always need to be an existing EPC.

Heritage buildings

Heritage buildings are not currently required to have an EPC if meeting minimum energy efficiency standards would unacceptably alter their appearance or character. As minimum standards only apply to let property via the MEES Regulations, this has only been an issue on letting and not on sale of such properties.

The consultation proposes that “heritage buildings” are required to have an EPC – it is not clear, but presumably this is only when an EPC trigger applies. It is proposed that EPC recommendations, and possibly EPC methodologies, will be tailored for such buildings. Separately, the government has committed to changes in planning policy to enable energy efficiency measures in such buildings.

Changes to EPC requirements on sales

The government plans to remove the existing 28-day window between commissioning an EPC prior to marketing for sale or rent and instead require that an EPC is prepared before any such marketing activity commences.

Houses in multiple occupation (HMOs)

It is proposed that HMOs will require an EPC whenever at least one room is rented out. This represents a change from the current requirement where an EPC is required only when the whole house is rented out. This will ensure HMOs need to comply with MEES – a 24-month transition period is proposed for HMO landlords.

Holiday lets

To-date, holiday lets have not been required to have an EPC where the property is let for less than four months in any year. Under the government’s proposals, an EPC would be required where there is any letting of the property.

Display energy certificates (DECs)

DECs are required for public buildings and are based on actual energy consumption. The government has proposed to reduce the validity period of DECS for smaller public buildings as well as the recommendation report validity periods for all public buildings

EPC enforcement

Recognising the lack of enforcement there has been under the EPC regime to-date, the government has proposed to increase fines from £200 to £400 for domestic EPC non-compliance. For non-domestic EPCs, fines will continue to be based on 12.5% of rateable value but the minimum and maximum levels of penalty will be doubled, to £1,000 and £10,000 respectively.