What Europe’s Energy Crisis Means for Home Efficiency

Economic uncertainty and the looming energy crisis have created an urgent need for improved home efficiency and an increase in energy demand, making now a critical time to invest in sustainable solutions. In Europe, with energy prices on the rise and a looming climate crisis ahead of us, making existing homes more efficient is proving to be an increasingly important factor for tenants, landlords, and investors.

Startlingly though; Eurostat reports that only 5-15% of European households have been awarded A or B ratings in terms of their Energy Performance Certificate – highlighting just how outmoded much housing across our continent currently is.

Regulation and energy crisis need for investment in housing energy efficiency measurement

The urgency to reach the European Union’s net zero targets by 2050 is increasing, as living costs spike and energy resources become scarce. The transition to net zero carbon is complex and countries, cities, and businesses around the world face a wide range of challenges. To hit those goals, new buildings must be built with carbon emissions in mind – aiming for total zero-emission status before 2028 – while existing dwellings need to be retrofitted for improved efficiency.

Fortunately, businesses are responding quickly to this challenge; already investing heavily in innovative solutions that can help unlock sustainability across the entire property sector. With time running out fast, it has never been more vital that we address these issues now or face serious ramifications later on!

The finance required to net zero targets the commercial property sector and, will largely come from the private sector. However, financial policies could support investors, landlords, or individuals in balancing the return on investment with the return for the environment by financial incentives in saving energy measures or penalizing saving poor building performance.

The data challenge feeds into the financial challenges as robust evidence of the return on investment and operational savings is vital to justify the additional capital expenditure to decision-makers. This is especially important as net zero interventions, such as major energy efficiency upgrades and on-site renewable energy, demand a large upfront investment.

These challenges are likely to be exacerbated by the current economic climate of uncertainty and the potential global recession ahead. Financial incentives were identified as one of the most influential actions, alongside standards and regulations, that national and local Governments can take to ease the transition to net zero targets. Creating an environment in which property owners have the confidence to invest in net zero carbon is a key step to achieving and speeding up the transition.

Energy Efficiency Improvements Could Alleviate Burden of Rising Energy Costs on Private Household

In Germany, Oxford Economics estimates that following the moderate to high price growth scenario, an average household will have to pay between 34% and 53% more for energy. The increase in household energy bills is expected to lead to an additional total burden on private households of around €22-32 billion. This could be a huge financial strain on already stretched budgets.

Oxford Economics estimates that by 2022, household energy bills increased by up to 55% YoY across Europe. In 2023, households are expected to allocate more of their income for powering their homes, breaking the 2022 record. Implementing energy-saving measures, such as enhancing energy efficiency, could alleviate this financial strain and ultimately lower energy bills. The chart below illustrates this trend.

Energy Savings Measures Required in Mandatory Disclosures by 2023

As global costs of living continue to rise and the energy crisis comes under increasing pressure, the European Union has set a target of reducing emissions by 2050. By 2028, all new properties must be constructed with complete emission-free designs. Subsequently, cities such as London have gone a step further and set a more ambitious target of 2030. 90% of global GDP is now linked to a net zero carbon target of some kind.

The UK has introduced Minimum Energy Efficiency Standards (MEES) for commercial and residential buildings. It is now illegal to create a new lease for a building that has an Energy Performance Certificate (EPC) of F or G, the lowest two bands; this is due to be expanded to all leases in 2023. The government is consulting on a proposal to increase the minimum requirement to B in 2030, with a potential interim stage of C in 2027.

In the current market, there is a shortage of energy-efficient in existing buildings. In the UK, Spain and Finland’s build-to-rent has become incredibly popular in recent years. Build-to-rent stock is mostly brand new or recently refurbished making it highly energy efficient compared to two-thirds of existing buildings within the privately rented market which have an EPC D standard rating or worse.

Heimstaden has taken a proactive approach to combat the challenges of today’s housing stock, innovating locally adapted many clean energy technologies such as smart heating systems for Nordic homes, rooftop solar PV, heat pumps, and thermal insulation in parts of Europe. Meanwhile, Seddon and Waypoint have joined forces on an ambitious joint venture to transition properties towards renewable energy sources; Vonovia took this one step further by investing in Austrian prop-tech start-up Gropyus. Together these efforts are paving the way forward for energy-efficient residential real estate solutions and clean energy projects that will ensure long-term comfort with minimal environmental impact.

Regulations introduced by the UK government to improve the energy efficiency of rented properties

With MEES, those leasing a property that does not comply will face fines, unless a valid exemption exists. Rules for all rented commercial properties (including existing tenancies):

  •   April 2023 – minimum EPC: E
  •   April 2028 – minimum EPC: B

Impacts on Landlords with energy efficiency measures

Landlords who don’t plan could be in for a nasty surprise; tenant void rates may increase, unanticipated capital expenditure might be necessary to ensure compliance, and legal sanctions or penalties due to non-compliance are all very real possibilities.

To avoid this, immediate action should include improving properties with an EPC rating of F or G up to the minimum requirement of E before entering into any fresh tenancy agreements…or risk registering an exemption!

Some landlords may consider longer-term retrofit options, including: A) EPC improvements to comply with 2025 or 2028 minimum ratings (C or B). B)NZC refurbishment options. There is usually a significant overlap between the scope of work required for EPC energy consumption improvements and net zero carbon goals. Looking ahead to plan out retrofit works in line with NZC goals, and/or future MEES minimum EPC requirements, can help landlords avoid rework in their building (get it right the first time!)

How to get the best EPC Rating in order to reduce emissions

1. Avoid standard defaults on EPC modeling software

Where there is no design data available the assessor has to use the poorest energy consumption data from the date of construction age or the age of the building services installed.

2. Make information available to the assessor

  • Data sheets for chillers, boilers, AHUs, lighting
  • Data sheets for building construction (e.g. U values, construction details)
  • Scaled floor plans

3. Opting for the least expensive EPC may not be the most advantageous choice

With less time to survey and model the EPC, this often leads to lower rating with greater negative impacts.

  • non-compliance with regulations
  • unnecessary investment to replace systems
  • Increased disruption to occupiers

EPC grade improvement depends on how close the current rating is to the grade boundary as well as the current efficiency of the building. Staged interventions need to be targeted to the specific building, aligned to the life cycle of the building as well as NZC and/or ESG strategy.

Implications for the Agency

Starting in April 2023, all current leases will be required to meet a minimum energy efficiency rating of ‘E’ or higher. Any forthcoming renewals and re-gearing must also adhere to this rule for clean energy purposes. As an agency should encourage landlords to improve energy efficiency in their properties

1. ALL new leases / re-gears:

  • Need to understand the route to a B
  • Be clear on access rights for the landlord
  • Address how costs are allocated for any upgrades
  • Ensure EPC ratings are protected during fit-outs/alterations
  • Have a clear process for instructing new EPCs

2. Rent reviews/renewals:

  • renewals – can landlords force changes to lease terms under the 1954 Act.

Implications for the Investors’

From 1st April 2023, all existing leases must be at least an ‘E’. For investors generally, this is a key piece of diligence already, but this change means your advice is critical for shaping your clients’ strategy, please consider the following items during the sales process:

  • Check the EPC status and the date it was undertaken early on in the process.
  • Understand the route to achieving a ‘B’ rating in line with Net Zero Carbon targets.
  • Address how costs will be allocated for any necessary upgrades.
  • Understand the occupational risks and opportunities for potential buyers.
  • Understand the exemptions and communicate them to potential buyers

Advising on acquisitions:

  • Check EPC status EARLY and the DATE it was undertaken
  • If the EPC is old and rated ‘E’ this may drop if re-assessed posing a risk to your client
  • Recommend re-assessment and route to ‘B’ along with NZC pathway
  • Consider occupational risks and opportunities for your client
  • Understand exemptions

Conclusion

In conclusion,for businesses within high-emitting sectors, like real estate, transition plans detailing the path to net zero by 2050 will be required in the mandatory disclosures from 2023. The UK also has Minimum Energy Efficiency Standards (MEES) for commercial and residential buildings, which are increasingly being tightened to drive improvements in the stock through the use of Energy Performance Certificates (EPCs). There are many reasons why investors should, in theory, pay more, in addition to the buildings simply attracting higher rents from occupiers.