“Understanding net zero means you understand climate risk. There are no returns on a dead planet.(1)
The net zero mission is deceptively simple. It can even be encapsulated in the ubiquitous three-word slogan: net zero 2050. But, as with any vision (and three-word slogan), it is meaningless if it is not underpinned by a decent strategy and real action. It certainly makes for some harrowing reading when delving into the topic of climate change and the possibility of achieving net zero. The overarching theme is that if we are to achieve net zero by 2050, or even get close, we must do more and be quicker about it.
The UN's straightforward iteration of the challenge is that getting to a net zero world “calls for nothing less than a complete transformation of how we produce, consume, and move about”.
We turn here from the pan-world perspective to one piece of the net zero jigsaw: what are we doing about operational energy consumption and getting the data needed to de-carbonise the real estate sector?
It is reported by the World Green Building Council that buildings are responsible for 39 per cent of global energy related carbon emissions: 28 per cent from operational emissions and 11 per cent from materials and construction. In the UK, the second biggest emitting sector after surface transport is the buildings sector. Moreover, as noted in the "Mission Retrofit" report by the Mission Zero Coalition, most buildings that exist today will still be standing in 2050. Accordingly, reducing energy demand and emissions from existing buildings presents the bulk of the net zero challenge for this sector.
Energy measurement may sound dull compared to proposed geotechnical solutions such as carbon dioxide removal and solar radiation management, but it is a key lever in getting the built environment onto a viable net zero pathway. Indeed, the British Property Federation (BPF) in its "Towards Net Zero" report identified “quality data for informed decision making” as a key challenge and an area on which policy should be focused. Being able to access and share quality buildings data at an asset level, particularly energy consumption data, is key for both property owners and occupiers who wish to set and achieve net zero goals.
Measuring energy consumption: EPCs don’t do it
Statutory regimes such as the Energy Savings Opportunity Scheme (ESOS) and Streamlined Energy and Carbon Reporting (SECR) require the collation of building energy use data, but they are targeted at an organisational level and at larger businesses. Currently, the key statutory framework regulating the generation and provision of building energy information at an asset level is the regime for energy performance certificates, well known as “EPCs”. An EPC assesses the energy efficiency of a building based on its design and rates the building on a scale from an A (most efficient) to a G (least efficient). The EPC interfaces directly into the landlord and tenant relationship in that it is unlawful to grant a lease of, or to continue to let, non-domestic premises with a rating below grade E on the property’s EPC (subject to some exemptions and exclusions). However, beyond that there is no requirement in the EPC regime for owners and occupiers to share energy data.
Critically though, the EPC is an inadequate tool for collecting energy consumption data. In its June 2023 report to Parliament, the Climate Change Committee warned that EPC ratings are poorly aligned with achieving net zero and are in urgent need of reform. Fundamentally, EPCs do not provide information on the actual, real-life energy usage and performance of a building as they are based on theory grounded from a building’s design as they tend to overestimate energy use for older buildings and underestimate it for newer buildings. Moreover, although EPCs are measured in accordance with a Standard Assessment Procedure, producing them can be relatively subjective so there can be a real lack of consistency between assessors. Additionally, EPCs are valid for 10 years so may give a false impression of a building’s actual energy consumption at the relevant time.
Unsurprisingly, there are calls for EPCs either to be redesigned to take measurements of actual energy performance or instead to mandate data collection schemes that actually measure the usage of lighting, heating, ventilation, air conditioning, security and energy consumption, such as NABERS, Australia’s national mandatory scheme. There is now NABERS UK for rating the energy efficiency of office buildings, albeit it is not mandatory in the UK and is currently in the process of looking for a new scheme administrator. The Mission Zero report states that digital measurement and energy performance monitoring under the Australian scheme has led to energy efficiency investments, which have driven a 38 per cent reduction in the energy intensity of office buildings rated under the scheme over 13 years and a 24 per cent reduction for shopping centres in eight years.
In its response to the Skidmore Net Zero review, the Government said it was intending to consult on proposals for improving EPC metrics and on options to change the EPC 10-year validity period. However, following the Government’s U-turn on ramping up the minimum EPC standard for domestic property, it was unclear whether the work on EPCs for non-domestic property would be progressed and whether the minimum standard for this sector would be raised in the near future. The Government has now said in its response to the Climate Change Committee’s Progress Report that it is working on proposals for improving EPC metrics and intends to consult on reforms to the regime in the coming months. Further, in relation to minimum energy efficiency standards for non-domestic rented property, it is reviewing policy design to “ensure it remains fair and appropriate for landlords and tenants”. However, the original proposed timelines within the consultation for increasing the minimum energy efficiency standards, which were EPC C by 2027 and EPC B by 2030, will need updating to give an adequate lead in time. The Government has also said that it has paused the work covered by its 2021 consultation on introducing a performance-based framework for rating the energy and carbon performance of commercial and industrial buildings above 1,000m² in England and Wales. It states that it remains interested in considering how operational energy use can be incorporated into policy, but the Government is reviewing how this scheme would function within the policy landscape for commercial and industrial buildings.
Access to and Sharing Energy Data
Generating quality energy data is only the first hurdle. The right people being able to access and act on the information presents the second. As the BPF report noted, access to good data is vital in order to set carbon baselines and plot realistic, evidence-based net zero pathways and targets, and it can be difficult for landlords and occupiers to get the data they need from the other party. Moreover, robust data is essential to inform financial decisions on retrofitting buildings. The access to data is also important for those corporate occupiers who have their own net zero commitments. However, there is currently no legal requirement to enforce the sharing of energy consumption data between owners and occupiers.
Understandably, there have been steps in the private sector to fill the policy gap and this has partly been addressed by seeking to use green leases (which include energy data sharing provisions) for commercial property and the take up of voluntary schemes such as NABERS UK. However, as the BPF report comments, there are still many properties where there are no green leases, or they are not working. So, what can be done? The BPF report recommended the following policy solutions in relation to the data challenge(2):
- Mandate the sharing and disclosure of energy consumption data between property owners and occupiers of all large commercial buildings.
- Mandate “green leases” for all commercial property. The forthcoming review of the Landlord and Tenant Act 1954 is an opportunity to include “green” provisions for renewal leases.
- Address data gaps at a national level, perhaps by setting up centralised anonymous data pools of building data from suppliers. This transparency is necessary for improved data collection quality and an understanding of where the fragmented and diverse property sector is most carbon intensive.
Likewise, the UNEP F1 and CRREM report (March 2022) "Managing Transition Risk in Real Estate: Aligning to the Paris Climate Accord" highlighted that industry good practice requires taking a “whole building” approach. Again, this report identified that for financial institutions collecting tenant data was a challenge and that this data was required to address transition risk and corporate level sustainability reporting.
Advanced technology could help to revolutionise corporate spaces and provide in-depth analytical reporting of data to promote energy efficiency. Instead of energy data being supplied by the tenant, which could be inaccurate or lacking in detail, together with the shortcomings of EPCs, so-called “smart buildings” have the advantage of collecting “live” data through their own systems. This occurs automatically, without having to go back to the building’s tenants, assuming of course that consent to collect that data is built into the tenants’ leases. Tenants will also want access to the building data collected by the landlord and transparency as to how that data is being used(3).
Collecting the data in this way makes it easier to understand and then optimise actual energy use (by automatically adjusting heating, cooling, lighting and other systems) and reduce usage where it is not needed. For both owners and occupiers, the data collection will also enable them to comply with their own corporate sustainability obligations.
Of course, technology is just the means for collecting data. Data sharing is dependent on the parties working together, whether this is driven by the desire to achieve their own net zero goals or policy levers which require or encourage it. That said, making data collection “easy” may act as a nudge to promote data sharing.
In the 2022 Autumn Statement, the Government announced a new ambition to reduce the UK’s final energy consumption from buildings and industry by 15 per cent against 2021 levels by 2030 and established the Energy Efficiency Taskforce to support this. However, that Taskforce has now been disbanded. At this stage, considering that the scheme relating to operational energy use in large buildings has been paused and the prospect of delayed timelines for tightening minimum energy efficiency standards, it remains to be seen how vigorously the Government will progress policy to decarbonise non-domestic buildings and whether it will do so in a way which gives the sector the regulatory certainty it needs to make business decisions.
This means that without any current mandate here to collect and share energy consumption data at an asset level, the key to uncovering the benefits relies on a close collaboration between property owners and occupiers. This will also require them to work out ways to overcome the “split incentive” dilemma as to who funds and who benefits from energy efficiency retrofits(4).
It is therefore interesting to read from a survey by Deloitte Canada that, in return for better insights on their resource efficiency, carbon footprint and space usage, over 90 per cent of tenants indicated a willingness to share their ESG data with landlords. Also, 58 per cent of tenants said they would consider looking for alternative leases while 48 per cent might look to end leases early in situations where landlords failed to meet their own net zero goals. Moreover, over half said they would be interested in paying their landlord to monitor renewable energy or water usage and half were also interested in paying for occupancy analytics to optimise space usage.
Throughout this discussion, there is also the as yet unspoken issue of the cost of not taking action. At a business level, we can talk about “stranded assets” but what is the point (of anything really) if we cannot sustain our own planet?
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2023