Opinion: Michael Grimwood on ‘Navigating the Changing Regulatory Landscape: Energy Efficiency in Real Estate’

As an insurance professional, I have witnessed firsthand the evolving landscape of real estate and the increasing emphasis on energy efficiency. In recent years, the global focus on sustainability and environmental responsibility has prompted governments to introduce new regulations and incentives to encourage property owners to adopt energy-efficient practices.

The Significance of Energy Efficiency

Energy efficiency is no longer just a buzzword; it has become a crucial aspect of property ownership. Beyond the environmental benefits, energy-efficient properties offer numerous advantages to both owners and occupants. Reduced energy consumption not only lowers utility bills but also enhances the overall value and marketability of a property. Moreover, energy-efficient buildings contribute to a healthier and more comfortable living environment, improving the well-being of occupants.

The Changing Regulatory Landscape

Governments worldwide are recognising the urgent need to address climate change and reduce carbon emissions. Consequently, they are implementing stricter regulations and standards to promote energy efficiency within properties. These regulations encompass various aspects, including building codes, energy performance certifications, and incentives for retrofitting existing structures.

Since 1 April 2018, a landlord has been unable to let or re-let commercial property that has an EPC rating lower than “E”. Properties with an EPC rating of “F” or “G” are treated as “sub-standard”.

From 1 April 2023, a landlord will be unable to continue to let commercial property that has an EPC rating lower than “E” without a legitimate reason, such as:

• Seven-year payback – where a recommended improvement need not be carried out because the cost would be more than the savings on energy bills over a period of 7 years;
• Wall installations – where recommended wall installation would have a potential negative impact on the fabric or structure of the property;
• Consent - not being able to obtain consent from the tenant or a third party to carry out the works (i.e. the Local Authority);
• New landlord – a six-month exemption is available to new landlords in certain circumstances; and
• Devaluation - the relevant works will devalue the property by 5% or more or that the works would damage the property (this is subject to evidence by way of a valuation report).

Financial penalty: depending on the length of the breach, the landlord could be liable to pay the greater of a fixed amount (defined by a set matrix) or a percentage of the rateable value of the property up to a max of £150,000; and/or

Publication penalty: the details of the breach being entered on the public section of the PRS Exemption Register.

Insurance Implications

For the insurance industry, the changing regulatory landscape presents both challenges and opportunities. On one hand, complying with new energy efficiency requirements may increase the cost of property ownership. Retrofitting older buildings to meet updated standards can be a significant financial burden for property owners. We must be prepared to guide our clients through these changes, helping them understand the potential risks and benefits associated with energy efficiency upgrades.

On the other hand, embracing energy efficiency can lead to reduced risk and lower insurance premiums. Energy-efficient properties are less prone to certain hazards, such as electrical fires or water damage caused by outdated systems. Insurance companies are increasingly recognising the value of energy-efficient buildings and may offer incentives or discounts to property owners who invest in sustainable practices.

We have a unique opportunity to collaborate with property owners, regulators, and other stakeholders to mitigate risks associated with energy efficiency. By providing guidance on risk management strategies, such as implementing energy-efficient technologies, conducting regular maintenance, and adopting sustainable building practices, we can help property owners reduce their exposure to potential losses.

Furthermore, we can play a vital role in promoting energy efficiency by offering specialised coverage options tailored to the unique needs of energy-efficient properties.

Costs

The cost of installing energy efficiency upgrades in a commercial property within the United Kingdom can vary depending on several factors, including the size of the property, the specific upgrades required, and the complexity of the installation process. It is recommended to consult with a professional energy efficiency contractor or service provider to obtain an accurate estimate tailored to your specific needs. However, to provide a general idea, energy efficiency upgrades for commercial properties in the UK can range from a few thousand pounds to tens of thousands of pounds. This can include measures such as insulation, LED lighting, HVAC system upgrades, smart controls, and renewable energy installations.

Keep in mind that while there may be upfront costs associated with these upgrades, they can lead to significant long-term savings on energy bills and contribute to a more sustainable and environmentally friendly operation.

Key considerations:

• Will you achieve the costs savings expected?
• Will your maintenance costs increase?
• How will you fund the costs to install the upgrades as we know that rental interest rates are to replace rental yields, and you might not have the opportunity for a rent review in the short term?

Did you enjoy this opinion piece by Michael Grimwood? Read about his thoughts on Energy Efficiency Upgrade insurance, and how it helps to unlock benefits for tenants, owners, and funders.