‘Lack of clarity’ persists over UK real estate net zero journey

In June, the CCC warned that UK policy is not being delivered at a fast enough rate for the UK to meet its climate change targets. Despite this, earlier this autumn, prime minister Rishi Sunak announced a shift in the government’s approach to delivering a ‘net zero’ UK economy by 2050, citing the need for pragmatism and proportionality amidst the rising costs associated with implementing the policies needed to achieve net zero.

In a real estate context specifically, Sunak confirmed a softening of plans to prevent new fossil fuel heating in off gas grid properties from 2026, moving that date to 2035, and he scrapped plans to impose new energy efficiency obligations on domestic landlords from 2025. However, the impact of his policy shift on other real estate-related net zero policy – much of which was trailed in the government’s heat and building strategy in 2021 – has been unclear.

The industry, with questions over both the substance of future policy and the timeframes for its delivery, was not provided with all the answers it will have been looking for in the government’s response to the CCC’s report (218-page / 1.51MB PDF).

Some things might become clearer with three new consultations promised by the end of 2023: on the Future Homes Standard technical specification and possibly also on the Future Buildings Standard equivalent, as well as on owner-occupier residential property and on whole life carbon. The long-outstanding government response to its 2021 consultation in improving energy efficiency through mortgage lenders is also expected. However, there would still be no clarity about where we are headed and when in relation to existing commercial property and, in particular, on minimum efficiency standards for let commercial property. For all property types, the uncertainty about the nature of proposed EPC reforms, given EPCs are the basis for so much policy, is very unhelpful too.

Commercial property

Minimum energy efficiency standards for let property

In 2021, the government proposed requirements for a minimum of an energy performance certificate (EPC) C rating for all non-domestic lettings by Aril 2027 and of an EPC B rating for all such lettings by April 2030.

In its response paper, the government said it is working hard to ensure the policy design “remains fair and appropriate for landlords and tenants” and plans to publish its response to the 2021 consultation – though it has given no timeline for doing so and its statement offers little clue as to its thinking.

That said, it seems clear that the timeframe for any increase in the minimum EPC rating required for lettings will be pushed back beyond the dates proposed in the consultation. The response states that “the proposed timelines within the original consultation will require updating to allow sufficient lead in time for landlords and the supply chain”. The market, though, has largely already been responding to the original indicative timelines.

All related government announcements since the consultation closed in 2021 have referred only to the 2030 proposed requirement for a minimum EPC B. In its response to the CCC, the government did not make it clear whether it will adopt the two-stage uplift the consultation proposed or focus solely on the 2030 target. The uncertainty is not helpful for businesses faced with investment decisions. Labour has, to-date, not set out any energy efficiency policy for commercial properties.

Elsewhere in the response, there were clear statements about the government’s intention to reform EPCs. It may be that clarification on the tightening of minimum energy efficiency standards for let property won’t come until there is more clarity on EPC reform, which is covered separately below.

Performance-based ratings

The consultation on the introduction of a performance-based rating system for commercial and industrial offices more than 1,000 square metres in size closed in June 2021. The government’s response to that consultation is still awaited, though it did note in its revised net zero strategy carbon budget delivery plan in March this year that the plans for the new system, which would be based on actual energy use, were on hold.

In its CCC response, the government said that, at present, the government has “paused the rollout of the operational energy rating pilot scheme” but that it “remains interested in exploring how to incorporate operational energy use in government policy”. Before it commits to a pilot, it said it is “reviewing how this scheme would function within the policy landscape for commercial and industrial buildings”.

Future Buildings Standard

In late 2021, the government regulated for revised energy efficiency standards, new ventilation and overheating standards and electric vehicle (EV) charging point requirements for new homes and buildings in England, aimed at significantly reducing their carbon emissions, an interim step on the way to a proposed Future Buildings Standard and the Future Homes Standard to be introduced from 2025.

Further uplifts in those standards, in respect of energy efficiency and possible decarbonisation of heat sources, via amendments to building regulations were intended.

The government’s response to the CCC suggests that industry will soon get clarity in relation to the delivery of both standards via a joint consultation.

The government said: “We will consult on the full technical specification for the Future Homes Standard later this year, as part of the Future Homes and Buildings Standards consultation. We will then implement the standard in 2024 and bring it into force in 2025.” It is to be hoped this means the timetable for its response and for implementation of the Future Building Standard will be the same, which is already a very short time for developers to amend plans laid long in advance of commencement on site.

Owner-occupied commercial property

There had been suggestions in the heat and building strategy that a minimum energy efficiency standard might be introduced for smaller owner-occupied buildings which would not be covered by the performance-based ratings system, with targeted support for SMEs. The government’s response to the CCC is not clear on this point, however. It merely stated that the government is “developing policy options to drive energy efficiency” in owner-occupied commercial properties “with the aim of consulting in due course”.

Fossil fuel heating

For commercial property, the response does not address whether there has been any policy change from that proposed in 2021.

In response to the CCC’s recommendation to finalise and ensure timely implantation of the plans to prohibit fossil fuel boiler replacement in off gas grid property, which was from 2024 for buildings over 1,000 square metres and from 2026 for smaller commercial buildings, the government only dealt with the row back to 2035 for phasing out new and replacement fossil fuel boilers, for on and off gas grid, for residential property.

There is also no mention of the proposed prohibition on new connections to the gas grid from 2025. The current policy position therefore appears to remain that, for commercial property on gas grid, there should be no new connections to the grid from 2025, and for off gas grid, there should be no fossil fuel boiler replacement from 2024 or 2026, dependent on the size of the building. However, there is no absolute confirmation of this in the latest response and no timeline on required regulation. The comments in the response on hydrogen heating and on heat pumps point to heat pumps, and to a lesser extent low carbon heat networks, as the likely primary heat technologies of the future.

Residential property

Minimum energy efficiency standards for let property

The government’s response to the CCC confirms that the proposed tightening of the required level of EPC rating for letting residential property has been scrapped. It means the minimum required EPC rating for let property will remain at an E rating.

Minimum energy efficiency standards for social housing

The government’s response to the CCC’s recommendation for regulation to require social housing to achieve EPC C by 2028 was that it will consult on this by February 2024. Perhaps the various financial support schemes for decarbonisation of social and fuel poor households mean that minimum energy efficiency standards will be introduced for this sector of the housing market.

Future Homes Standard

The response reiterates the government’s previous commitment to consult in 2023 on the technical specification for this standard for new build homes and confirms the standard will come into force in 2025. It will mean using low carbon heat. The government said that, on average, homes built to the standard will produce 75% less carbon emissions than homes built under 2013 standards and this reduction will increase as the grid decarbonises.

So far as we can tell there has been no reversal for residential property of the proposed policy consulted on in 2021 of prohibiting new connections to the gas grid by 2025. This means electric heating will be the main form of heating in new build homes under this standard and the government expects heat pumps to be the primary technology but also with a role for low carbon heat networks.

There is no indication of whether roof top solar, where appropriate for the property, might become a requirement under this standard, but this is live issue following the government’s apparent acceptance of the Skidmore review’s recommendation for a roof-top solar revolution.

The government also stated that it is considering whether building regulations should be changed to deal with “energy efficiency and overheating” issues in homes “created by a material change of use”. We could see all or some of the Future Homes Standard being applied to repurposing for residential use.

Owner-occupied residential property

In response to the CCC’s recommendation to develop policies to ensure owner-occupied homes achieve a minimum EPC C rating by 2035, the government has responded that it has “ruled out regulatory measures that would impose significant costs on hard-pressed families”. It added that it plans to consult on the issue by the end of 2023. It also plans to publish its response to its earlier consultation on incentivising mortgage lenders to help homeowners improve energy performance by the end of this year too.

Given the standing policy to phase out fossil fuel heating in residential properties from 2035, subject to the confirmed 20% exemption, we can expect requirements to increase the energy performance of this sector of the market by 2035.

Fossil fuel heating

The response confirmed the prime minister’s announcement that proposed dates for the phase out of fossil fuel heating in residential property will be delayed until 2035 and that an exemption for properties which are not suitable for low carbon heating will apply, which is estimated will cover 20% of properties.

At the same time, the government has confirmed the increase to £7,500 of grants available under the Boiler Upgrade Scheme, although the overall pot of funds for this scheme has not increased meaning fewer properties will benefit from it.

The CCC has said that while a 2035 phase-out date for fossil boilers is potentially compatible with net zero, the exemption of 20% of households from the phase-out will have an impact on emissions all the way out to 2050 – making net zero considerably harder to achieve.

Hydrogen heating

In its response, the government stated that it will consult in 2024 on low carbon options for off gas grid properties. It confirmed it expects heat pumps to play a prominent role “in all scenarios” and goes further than previously in making it clear that heat pump deployment should not be delayed on the basis that hydrogen may become an option – which it acknowledged is unlikely for off gas grid property. However, despite both the CCC and the National Infrastructure Commission urging an earlier decision on hydrogen heating, the government’s response reiterated its intention to stick to the proposed 2026 date for this decision.

Energy performance certificates

So much of current and proposed policy hangs on EPCs. Whilst they have been the main driver of fabric efficiency and have provided the base for clear regulation to which the market has responded, there have been growing concerns about their suitability as a driver to reduce emissions and energy use.

In February, the CCC wrote to the government setting out its concerns and making recommendations for the reform of residential EPCs.

The letter pointed out that, under the existing metrics used for domestic EPC ratings, it is possible to achieve a better rating by using fossil fuel heating as opposed to low carbon heating options, and that there are insufficient incentives built in to encourage investment in other energy efficiency measures over time.

It is vital that these issues with domestic EPCs are resolved and a standard which truly drives the right outcomes is put in place, to avoid increased costs for consumers and grid capacity issues arising in future. This must be done quickly and without prejudicing the outputs from the underlying policy mechanisms which are based on EPCs. 

In its response to the CCC, the government said that it intends to make the standard assessment procedure (SAP) methodology used for domestic EPCs for new build or change of use domestic property more “accurate, robust and fit for purpose”. It added that it “will launch a consultation on the new methodology, which will be implemented alongside the Future Homes Standard in 2025 and through planned reforms to Energy Performance Certificates”.

The government further stated that it will, in spring 2024, update the form of SAP methodology used for EPCs on existing domestic property largely to reflect the changes made last June on the SAP methodology for new builds. It stated, both in relation to the proposed SAP updates and on wider proposals around improving the reliability, accuracy and accessibility of EPCs, that it “intends to consult in the months ahead”.

The CCC’s recommendations and the government’s responses relate only to domestic EPCs. However, this leaves unanswered issues around the fitness for purpose in driving net zero of commercial EPCs.

Given an increase in the minimum energy efficiency standards remains on the agenda for non-domestic property, although possibly later than anticipated, it is critical that commercial EPCs drive the right behaviour and the government is clear about any changes it might require to those.

Domestic property is responsible for around two thirds of UK building operational emissions, but the remaining third which comes from non-domestic property is still a substantial contributor to UK emissions. After years of uncertainty and delay, there is a need for clear and effective policy and regulation in respect of this important part of the market, not just to reduce emissions but to enable the sector to operate with the certainty, efficiency and confidence needed in any business, and to comply with increasingly mandatory reporting requirements.

Embodied carbon, timber use in construction, and the circular economy

In its response, the government reiterated its previous statement that it would be consulting this year on whole life carbon measurement and the reduction of embodied carbon in new development. It also stated that it plans to publish its ‘timber in construction roadmap’ this autumn.

On the CCC recommendation that it invest in a system – such as the National Materials Datahub – to track materials and products to share information on their quantity and quality for reuse and repurposing to retain materials at their highest value for as long as possible, the government referred to a previous policy announcement in which it committed to a government led review of the material data landscape and data requirements. However, the government has given no indication of timeframes in respect of its review.

National Planning Policy Framework

The existing NPPF, at paragraph 152, states that the planning system should support the transition to a low carbon future in a changing climate, help to shape places in ways that contribute to radical reductions in greenhouse gas emissions, minimise vulnerability and improve resilience, and should encourage the reuse of existing resources, including the conversion of existing buildings. The government response to its consultation on the NPPF is awaited. In its response to the CCC, it said that it intends to review national planning policy to make sure it “further contributes to climate change mitigation and adaptation”. This does not take matters any further forward.

Cross-cutting policies

Skills and workforce

The government states it intends to publish a ‘green jobs plan’ by summer 2024. The plan is to be informed by sector-based assessments.

Rebalance electricity and gas pricing

As the current issue with the suitability of EPCs for driving the right behaviour shows, the relative costs of electricity and gas – which is cheaper – are an obstacle to decarbonising property. The response re-commits to re-balancing the respective prices and to a timeline of providing further information in the next year and making significant progress by the end of 2024.

UK ETS

At present, energy use in buildings is not subject to the UK emissions trading scheme. The response makes it clear the government is exploring extending the scheme to other sectors. If it followed the lead of the EU, this would involve extending it to GHG emissions from combusting fuels in buildings, which, in the EU, will apply from 2027 at the earliest. Entities caught by the extended EU scheme will be those supplying fossil fuel for use in buildings rather than end users. This will, however, no doubt involve higher costs for end users. If the UK ETS was extended in the same way, those in the property sector whose development and asset level decisions are already informed by the shadow carbon pricing they use would be well prepared for this.