With the role of the facilities manager constantly broadening and an increasing need to incorporate sustainability to a greater extent, the implications of the 2011 Energy Act are something that will affect their role considerably. Graeme Murray, head of sustainable engineering CBRE explains further
From (it is anticipated) April 2018, it will be illegal for property owners – in commercial and residential sectors – to rent out a property where a minimum energy efficiency standard has not been achieved. It is thought likely that this will be an Energy Performance Certificate (EPC) rating of E. Therefore any F and G rated assets are potentially at risk, and with building standards tightening, those currently rated E could also face obsolescence. Eighteen per cent of commercial property currently falls into this category – approximately 600,000 assets across the UK. Carrying out the substantial improvements necessary will pose quite a challenge to the property industry.
It is believed that the sectors most likely to be impacted by the change are warehouses, leased retail outlets, pubs and hotels in rural areas as these assets generally have lower EPCs. Geographically, those areas most affected are where values are lower and capital expenditure costs on energy efficiency features are likely to exceed revenue. While institutional investors have tended to be the first to react, the managers of single or small portfolios of buildings are, in many cases, yet to address the challenge.
The starting point for facilities managers who have not yet done so, is to ensure that all properties have an up-to-date and reliable EPC rating of E or above. Once this is in place there are many other factors to consider:
In some cases, leases already in place may continue beyond 2018 in which case tenants will need to be involved in the planning and timing of any necessary works. It is worth considering that in some cases the lease may contain a statutory compliance covenant, which could oblige the tenant to carry out improvements so that the premises comply with the regulations, but also bear in mind that some alternations, for example air conditioning – may be removed by tenants at the end of the lease.
Remember that valuations of energy inefficient properties will be affected if they no longer meet the minimum standard, and therefore dilapidations assessments would also be affected. If you chose to sell or let a property, be aware that companies are likely to negotiate a price or rent adjustment to cover the costs of energy efficiency improvements.
An early assessment needs to be made of the costs and viability of undertaking retrofits or refurbishments. Prior to any material changes to affect the energy efficiency, there is potential for the values of energy inefficient properties to fall (or for the rate of any increase in value to slow). In this scenario the annual return from such an asset would reduce if substantial sums were invested to bring it up to the required standard.
Dilapidation settlements are also likely to be affected by the change as landlords look to pass EPC risk onto tenants. Green leases are one way in which this can be instigated, with clauses requiring improvements to be carried out and EPC ratings maintained. Similarly, managers may wish to put in place tenant fit-out guides with a strong emphasis on sustainability. Some landlords will need to achieve a better EPC rating to allow for the possibility that some factors under the control of their tenant – such as the choice of lighting – will bring down the rating.
Landlords,tenants and managers should also bear in mind gaps and cessation in existing leases and/or on-going maintenance and plant renewal programmes. Plans need to take into account the cost of improvements; funding and tax relief available for each measure; requirements in order to qualify for funding or tax relief; timing of structural changes; level of disruption and means of accommodating this and timing of works.
A new regulation which forms part of the Energy Act will provide some tenants with a right to request energy efficiency improvements from April 2016, and landlords, where they are reasonably able to do so, must be prepared to meet these demands.
It is not all bad news though, as there are mechanisms in place to help both landlord and tenants.
Enhanced Capital Allowances (ECAs) apply to some energy-efficient plant and machinery. With a 100 per cent allowance in the first year, this goes some way to compensating for the expense.
Feed in Tariffs (FITs) are available to those who install electricity-generating technology from a renewable or low-carbon source such as solar PV or wind turbine. The government’s FITs scheme then enables you to claim back money from your energy supplier. You are paid for the electricity you generate, even if you use it yourself, and for any surplus electricity you export to the grid. You will also save money on your electricity bill, because you will be using your own electricity. At the time of writing, the FIT ranges from 6.61p to 14.9p/ kwh plus an export tariff of 4.64p/kwh although these rates have varied since the scheme was launched.
The Renewable Heat Incentive (RHI) is a payment for generating heat from renewable sources. Like the FITs, it is set by the government. Money is saved by eliminating or reducing your need for gas or oil, both of which are becoming increasingly expensive year-on-year. In additional you will be paid between 7.3p and 19.2p/kWhr for the hot water and heat you generate and use yourself. This will depend upon the technology selected. The scheme will support biomass, geothermal and ground source heat and biogas and solar thermal below 200kW. All tariffs will now run for 20 years. As with the FITs, tariff levels will be index-linked to the RPI and degression will be applied for future installations.
So there may be many challenges for facilities managers – managing the expense and reimbursement, ensuring the ongoing functioning of the building during any upgrade work, timing the work to fit around existing leases – but there are benefits too. Ultimately we will all benefit from more energy efficient buildings and save money on heat, light and other energy uses. Those managers who are quick to respond to the growing enthusiasm for efficiency as it becomes ever more prominent in our everyday lives, will benefit in terms of their reputation and their company’s corporate social responsibility. And there is the added advantage of remaining at the forefront of change – because the requirement for greater sustainability will not stand still, and next time the government increases requirements for commercial property it will be reassuring to have many of the appropriate features already in place.