Green Deal – The Way Ahead

Patrick Brown, Assistant Director (Sustainability), British Property Federation

ESTA Conference, Manchester

3rd November 2011

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What is the BPF?

> ‘Representative organisation for those who own and invest in property in the UK. We aim to create the conditions in which the commercial property industry can grow and thrive, for the benefit of our members and of the economy as a whole.’

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Commercial Property and the Economy

Commercial Property

(5.9% of UK GDP) Financial

Intermediation (5.3% of UK GDP) Public

Administration and Defence

(5.2% of UK GDP) Transport (4.8% of UK GDP)

Communication (3.4% of UK

GDP)

Hotels & Restaurants (3.4% of UK

GDP)

Agriculture (1% of UK GDP)

Partial Sectoral Breakdown of GDP (2002) Source: ONS Blue Book

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And yet….

> Climate Change Impact – 47% of UK carbon dioxide emissions come from buildings, with nearly 20% coming from non-domestic buildings.

> Resource scarcity and fluctuating fossil fuel prices.

> If we want sustainable growth, commercial property must reduce its climate change impact.

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Existing Stock is Key

> Only 1-2% of non-domestic stock replaced in each year so majority of non-domestic buildings standing today will be with us in 50 years time.

> BPF supports a focus on existing buildings, as an 80% overall reduction in emissions by 2050 will be extremely challenging otherwise.

The voice of property Improving the Energy Efficiency of our Homes and Buildings The voice of property

But most commercial buildings are rented…

Source: Paul Mitchell Real Estate Consultancy update of IPF report The Size and Structure of the UK Property Market, and Department of Communities and Local Government.

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Barriers to Energy Efficient Retrofit Arise

> Operational issues (such as the disruption caused to occupiers while buildings are refitted, refurbished or renovated).

> Information related issues (unavailability or poor transfer between landlords and tenants of data relating to energy use).

> Commercial issues (varied and uneven distribution as between landlord and tenant of the costs and benefits of, and control over, energy use and changes in buildings or behaviours designed to reduce it); and

> Legal issues (constraints within leases on how costs and benefits associated with emissions and related expenditure or behaviour can be allocated as between landlords and tenants).

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Presentation Outline

> How is the Green Deal expected to encourage investment in energy efficiency?

> What works are covered by Green Deal Finance?

> What is the ‘Golden Rule’?

> Who is most likely to benefit from the Green Deal?

> Consents, minimum standards and other complications.

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The Energy Act

> Received Royal Assent on 18th October 2011.

> Includes provision for the ‘Green Deal’ which is intended to revolutionise the energy efficiency of properties in England and Wales (Scotland is likely to follow suit).

> Government will enable private companies to offer consumers energy efficiency improvements to their homes and businesses at no upfront cost.

> Payments recouped via a charge on the energy bill.

> Consultation expected imminently with further detail!!

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Green Deal process: what We Know So Far

> The measures must be approved.

> The measures installed must have been recommended for that property by an accredited, objective advisor following an assessment.

> The measures must be installed by an accredited installer.

> For householders, the Green Deal provider must take account of the individual circumstances of the applicant and the terms of the Consumer Credit Act.

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Green Deal process: what we know so far

> The Green Deal provider must have consent from the relevant parties, including the express consent from the current bill payer.

> The presence of a Green Deal must be properly disclosed to subsequent bill payers (e.g. new owners or tenants) alongside energy performance information (e.g. the EPC).

> Energy suppliers must collect the Green Deal charge and pass it on within the existing regulatory safeguards for collecting energy bill payments.

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The ‘Golden Rule’

>‘The expected financial savings must be equal to or greater than the costs attached to the energy bill.’

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Green Deal: payments

> If a Green Deal subscriber moves out and ceases to be the bill-payer at that property, the financial obligation does not move with them but stays with the meter and moves to the next bill-payer.

> This is because, to ‘break even’ on the improvement costs, savings usually need to be enjoyed for several years longer than most tenants’ period of occupation (average commercial lease length approx 5 years).

> When a property becomes vacant, the landlord will assume responsibility but it is unlikely to receive any direct benefits or pass on the cost to a new tenant.

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Green Deal: finance provisions

> A range of financial institutions and leading retailers are expected to offer Green Deal finance.

> Packages and offerings are likely to vary, and consumers will be able to choose the offering that best fits their requirements.

> Green Deal providers will be regulated by the Office of Fair Trading and will need a Consumer Credit Licence.

> The Golden Rule must apply to the whole of the work (including financing costs).

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Green Deal: three main eligibility criteria

> There are three main steps to determining whether a given measure or package of measures can be installed using Green Deal Finance:

> Is the measure eligible?

> Is the measure suitable for the property?

> Does the measure meet the Golden Rule in the property?

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Step 1: eligibility

> Is the measure eligible?

> Eligibility still in the process of being finalised.

> Broad principles in secondary legislation.

> Measures must be ‘fixed’ to the property – in other words they are non-portable.

> Most commercial leases oblige tenants to remove fixtures and fittings at the end of their leases – does this make them portable and ineligible?

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Step 2: suitability

> Is the measure suitable for the property?

> This will be based upon a modified version of SBEM (non-domestic) and SAP (domestic).

> Average and standardised costs and savings will be ascribed to measures installed in that type of property, and using average energy consumption levels for properties of that type, age and location.

> Any risk that the actual savings will be achieved lie with the recipient of the finance.

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Green Deal: suitability implications

> As the recipient takes the risk of savings not being achieved, it is vital that imperfections in the SBEM and SAP methodologies are ironed out.

> The assessment is likely to solely focus on Green Deal interventions (i.e. not to include other improvements which could be made such as management efficiencies – a missed opportunity).

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Green Deal: qualifying works

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Step 3: meeting the Golden Rule

> Does the measure meet the Golden Rule?

> The expected financial savings resulting from installing measures must be equal to or greater than the cost of repayment over the term of the Green Deal Plan.

> The repayment period must be the lifetime of the measure or a specified ‘pay-back’ period.

> It may exceed the recipient’s expected period of occupation and is not confined by the length of the lease.

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Green Deal: Golden Rule Implications

> Although the modified software will permit use assumptions to be made, savings predicted will be based upon kit performance assumptions which are often optimistic – BPF believes that Green Deal should be accompanied by a roll-out of DECs to ensure that asset and operational performance are closely aligned.

> Landlords are likely to request collateral warranties from their advisory team that kit will perform to its promised specification.

> Some landlords may prefer to finance tenant improvements rather than depend upon arcane calculations of expected energy savings.

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Green Deal: consent

> Three types of consent will be required for the Green Deal

> Statutory consents – such as building regulations and planning consents where there will be a presumption in favour.

> Consent to alter – most leases impose restrictions on fabric improvements and the landlord must not unreasonably withhold consent in respect of improvements to the tenant’s demise.

> Consent to finance – landlords run the risk of inheriting the responsibility to pay the Green Deal charge when a property falls vacant and have a right to be consulted.

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Green Deal: consent implications

> In terms of consent to alterations, if the improvements are non-portable, there are likely to be restrictions in the lease and landlords and tenants may need to agree a licence.

> Landlords may consider the minimum lease length and solvency of their tenants before agreeing to a Green Deal to reduce the risk of having to adopt Green Deal payments during vacancies.

> Multi-tenanted properties are likely to form a difficult consent process.

> Where there are more than three tiers of ownership, a chain of custody may be the most pragmatic approach.

> Landlords are likely to consider more carefully a tenant exercising their right to assign or sub-let.

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Final Thought: Minimum Standards

> By April 2018 (date tbc), it will be unlawful to rent business premises which do not reach a minimum energy performance standard.

> Government’s intention is to start with a minimum EPC rating of ‘E’.

> F&G EPC rated property around 18% of existing stock.

> Likely that this will have a massive impact on the market – although no green premium for better performing buildings, a non-statutory compliant building is untransactable which erodes value immediately.

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Timeline

> October 2011 – Royal Assent on Energy Act.

> Any day now – Consultation on the detail of the Green Deal (this presentation based on best understanding of likely Green Deal process and mechanics).

> Early 2012 – secondary legislation laid before Parliament.

> Spring 2012 – detailed Green Deal Guidance.

> Autumn 2012 – first Green Deals appear.