Who will foot the retrofitting bill?

With the UK’s energy crisis further exacerbated by energy price cap changes coming into full force last month, as well as the ongoing impacts of sanctions on Russian gas and energy resources, it is an understatement to say households and businesses alike are feeling the pinch. 

While a handful of measures have been put in place to help ease the toll – including reduced taxes on fuel, home insulation and solar panel installations – the need to become less reliant on fossil fuels is only becoming more prominent, and underlines the fact that the key to the future is to become more energy efficient to help achieve net zero carbon emissions.

While the geopolitical environment calls for short-term solutions to tackle energy efficiency on a broad scale, there continue to be longer-term barriers to ensuring our buildings can operate to net zero targets in accordance with our pledges.

In the case of commercial properties, the two sides of the coin continue to be the sustainable development of new builds and the ever-challenging retrofitting of our existing property stock. With around 80% of buildings that will exist in 2050 already standing in our communities today, retrofitting is pivotal in the road to net zero targets.

So, what is preventing us from refurbishing our buildings to net zero carbon standards? The answer is simple and sadly not surprising: where is the funding coming from? This is the crux of the debate happening behind the scenes between owners and occupiers.

With strict environmental targets underpinned by broader corporate ESG strategies that have already been committed to, occupiers now face the challenge of ensuring their estates live up to these promises.

It could be a case of who blinks first – the occupier willing to pay higher rents or the owner investing to attract a more valuable tenant. However, despite the consensus being that the responsibility and decision-making power historically lie with owners, when it comes to who is responsible for energy-efficient retrofitting works, both owners and occupiers seem to be at a loss.

However, one sure way to end this stalemate is to force the hand with new legislation. With lots of talk surrounding changes to the MEES regulations on EPC ratings, there is hope, although nothing has yet been set in stone for non-domestic buildings.

According to timelines mapped out in the secretary of state for business, energy and industrial strategy’s Energy White Paper, change could be afoot from as soon as next year. Cited in the paper, all rented non-domestic buildings will need to be EPC band ‘B’ by 2030, and this would include offices, retail space, hospitality and industrial buildings.

Onus on owners

Once in place, this legislation is predicted to put the onus on owners to make energy-efficiency and heating improvements not only to lease but to ‘continue to lease’ existing property.

From 1 April 2023, an owner will no longer be able to continue to lease a building with an ‘F’ or ‘G’ EPC rating. But the scheme awaits parliamentary approval before moving into the next phases, and the devil will be in the detail of its implementation and enforcement.

It will also in general not force owners to go ‘all the way’ to net zero , which requires expensive fabric upgrades to reduce energy consumption in use to net zero targets. So how will owners decide whether their strategy is to ‘just comply ‘ or ‘go all out’? Or will the occupier market be able to force owners to act ?

In the interim, time is not a luxury we have, and the longer we delay action the more untenable the solution becomes.

According to ISG’s own research, it will cost around £330bn a year to retrofit and refurbish our current property stock to 2050 net zero targets. Furthermore, the closer to the deadline we approach, the higher the risk is that we meet a bottleneck in resources. There is already a strain on the supplies and labour force necessary for carrying out the work to re-adapt these buildings to meet sustainable requirements.

The longer we wait to act, the more pressure this process will be under, not to mention the more costly it will be, and this will result in a more damaging outcome for all involved – ultimately leading to potentially catastrophic outcomes.

With legislation expected to come into play in the near future, the smartest course of action is not to wait but to act now to avoid the inevitable rush at the 11th hour, which will no doubt be more costly and less efficient.

This article appeared in Property Week, see here.