Following recent changes to how EPCs are calculated, we asked Associate Tom Beeley, from our Sustainable Energy team, why he felt the important update means some are outdated.
Anyone involved in property will be familiar with EPCs, and the escalating regulation associated with them. A recent subtle and largely unheralded change in how they are calculated has and will continue to have very serious implications, given the fact that EPC ratings are critical to non-domestic properties as landlords will be prohibited from continuing to let their properties where they do not achieve a minimum standard.
Simplified Building Energy Modelling (SBEM), a methodology used to calculate the energy efficiencies of non-domestic properties, was updated in June. The new version, 6.1, now incorporates several changes to the assessment methodology, most significantly, a long-awaited update of the "carbon emissions factors" associated with a building’s energy use.
The carbon emissions factor of electricity has reduced by almost 75% since 2013 when the software was last updated because 30%-40% of the UK’s electricity is now being sourced from renewable or low carbon sources. The result is that any building heated using electricity will automatically benefit from the improvement in electricity’s carbon emission when assessed under the new software, which translates into a better EPC rating.
Conversely, EPC ratings for buildings which are heated by gas have been known to move in the opposite direction, i.e., their EPC ratings have deteriorated. In some properties, the new assessment has resulted in a reduction from a band E to G, sufficient to make the building illegal to let after 1 April 2023.
In a recent micro-survey of commercial buildings, 64% improved and 36% worsened. Of the improved buildings, 22% were improved by two bands. When it came to the buildings that were poorly affected, 60% were worsened by a single band. The new SBEM 6.1 software, therefore, has the potential to impact a commercial building’s rental income and consequently its capital value - which is largely determined by its rental income potential.
Beyond the change in the EPC rating of buildings, the change to the software has two other profound implications:
- The recommendations for improving EPC ratings, set out in old EPC reports (which remain valid) may no longer be relevant and worse may, in some circumstances, actually degrade a building’s EPC when calculated using the new software
- When considering acquisitions, purchasers should be aware that a valid EPC completed using the old software, before June 2022, will not reflect the rating which will be achieved under the new software. This has implications for the future value of assets and portfolios, as the risk of non-compliance and the extent of work required to achieve compliance, calculated using the new software, could be significant.
Adopting electric heating strategies, such as heat pumps, sounds like a fine plan given the evidence above, but the operational difficulties associated with making changes to heating systems in already occupied buildings are significant. While electric heating is advantageous from a carbon and EPC perspective, the reality is electricity remains more expensive on a unit basis than natural gas, even with the government’s recently announced price cap.
According to the Government’s website for all non-domestic energy users in Great Britain, this government-supported price has been set at £211 per megawatt-hour (MWh) for electricity and £75 per MWh for gas. For comparison, wholesale costs in England, Scotland and Wales for this winter are currently expected to be around £600 per MWh for electricity and £180 per MWh for gas.
The practicalities and operating costs associated with electric heating are therefore likely to be of increasing concern for existing or potential occupiers and need to be considered when making any decisions to switch away from gas. EPCs and minimum performance standards are increasingly coming into focus alongside net zero objectives and energy price volatility. Understanding the changes resulting from the new software and how to implement improvements to deliver value to both landlord and tenant will be essential to achieving compliance, securing rental income, and maintaining long-term asset value.
If EPC ratings are the foot soldiers in the government’s march towards Net Zero, this private has just been given state-of-the-art artillery to help win that war. From 1 April 2023 the minimum EPC standards are a rating of band E unless certain exemptions apply, and from 1 April 2030, there will be a minimum EPC rating of band B.
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