Heat & Buildings Strategy - Commercial Properties

After much delay, the Government this week has published its long-awaited Heat & Buildings Strategy, a guide to take the UK towards net zero by 2050. The bulk of the reporting following its release has focused on grants for domestic heat pumps and observation of considerable funding for public sector building projects. But what about the commercial sector? Today we take a deeper dive into the documentation and highlight what this means for those operating commercial buildings.

The Government’s commercial Heat & Buildings element of the report clearly states the scale of impact commercial and industrial building stock has on the environment, with around 1.5 million commercial and industrial buildings accounting for “around one-third of UK emissions from the total building stock.” The report states that reducing carbon emissions from these buildings will therefore be key to:

Meeting the 2017 Clean Growth Strategy ambition to enable businesses to reduce energy use by at least 20% by 2030, which would save businesses £6 billion per year on energy bills
Achieving our Nationally Determined Contribution of a 68% reduction in greenhouse gas emissions (compared to 1990 levels) by 2030
Meeting the Government’s carbon budgets
Delivering Net Zero by 2050

The demands are clear then, but how is this to be achieved?

Regulating For Intensive Energy Use

The impetus for commercial organisations, as set out by the strategy, is the substantial savings on energy bills, and the creation of safer and healthier working environments. The provision of safer and healthier workplaces should already be enshrined in corporate policy, and reducing operational costs is clearly logical, but it is safe to say that current generation low carbon technology and direct electric, certainly when it comes to domestic hot water (DHW) provision is more expensive than gas-based systems. So, the onus is really going to be one of corporate social responsibility in the near term.

The strategy report does recognise the complexity of the sector, pointing out the huge variety across the commercial and industrial building stock in terms of business size, building size (by floor area), use, and tenure

The policy package laid out therefore aims to avoid a “one-size-fits-all approach.” These policies, unlike previous grant packages, will instead be based upon regulatory frameworks “tailored to the size of the building and the businesses operating in that building, function and energy use of commercial and industrial buildings.”

Large Commercial buildings

The report identifies commercial and industrial buildings (above 1,000m²) as the most intensive users of energy commercially, accounting for 64% of the energy consumed by non-domestic buildings in England and Wales, despite only accounting for around 7% of the stock. The government is proposing to introduce a mandatory regulatory requirement for these buildings to obtain a performance-based energy rating based on measured energy data. This will ensure building users are aware of their energy use and where they are on their trajectory to becoming a Net Zero compatible building.

The process to decarbonise heat sources needs to happen through the 2020s. As such, this performance-based framework will work alongside proposals to prohibit new fossil fuel installations in large commercial and industrial buildings which are not connected to the gas grid.

If your business operates in a building over 1,000m2, the Government’s proposed performance-based energy rating will recognise measured reductions in actual energy use and carbon emissions. Accurate metering of usage and data assessment is going to become a necessity if all the factors influencing building performance are to be understood. The strategy believes this approach will help “optimise existing services and systems, drive behavioural changes, and see installations of improved equipment or investment in the building’s fabric efficiency or low-carbon heat.” The proposal would require building owners and tenants to obtain and publicly disclose a rating on an annual basis.

The strategy paper proposes a phased roll-out, starting with commercial offices in England and Wales. The government’s proposal is to use the performance-based approach to set sector-by-sector energy reduction targets which will be in line with the reductions required to meet Government carbon budgets.

These mandated regulations are said to “recognise and reward” actual improvements in energy and carbon performance for the first time. How businesses will be rewarded, beyond suggested energy savings remains to be seen. Mandated annual publication of investment in energy reduction will almost certainly be used by third-party organisations with climate change manifestos to hold businesses to account in a very public forum.

Evolving The Energy Savings Opportunity Scheme

The strategy document also highlighted the UK-wide Energy Savings Opportunity Scheme (ESOS), which currently requires large businesses to measure their total energy consumption every four years. This process requires an audit covering energy use from buildings, transport and industrial processes. ESOS recommends practicable and cost-effective energy efficiency measures for saving energy in an organisation’s buildings.

A consultation on ESOS has just closed, with the intent of increasing the number of participants that take action to reduce energy use. Considerations for lowering the threshold for ESOS audit to smaller businesses are being considered, but that is likely to be a post-2023 decision for the 2027 iteration of ESOS. That would address loopholes in the system, with larger organisations arranging building stock under separate small businesses, such as care homes, enabling them to currently avoid ESOS audit.

Those auditing and being audited for ESOS (public sector organisations be exempt) have pointed out the current lack of Net Zero commitment in the current version of ESOS, with 5-10% using the ISO50001 instead. So greater consistency is required moving forward. The concern is that large businesses are not doing all they can at the moment, and are not taking the recommended changes ESOS provides forward, even though they clearly show savings for the business.

ESOS splits peoples’ views, it either being an obligation or an opportunity. The government’s heating and buildings strategy is to use ESOS to increase the carbon and cost savings by extending the number and scope of recommendations taken up by participants. These new, stronger standards, which many hope will deliver greater consistency of audit and streamline carbon reporting would be introduced by 2022 for reporting in 2023. To be successful ESOS needs to demonstrate that the energy efficiency recommendations to businesses do translate to the cost savings the Government is suggesting in the Heat & Buildings strategy. Otherwise, the system threatens to become a burden to commercial organisations.

Smaller Commercial Businesses & Buildings

With smaller commercial and industrial organisations using far less energy per building (17% of all the energy used by commercial and industrial buildings in England and Wales), the onus falls to building owners and businesses to understand and optimise their energy performance, but currently without same need for government regulation. While SMEs can significantly benefit from improving the energy performance of their buildings by decarbonisation, the strategy on heat and buildings recognises that they may struggle to invest due to high capital costs.

BEIS is considering policy approaches to this segment of the non-domestic building stock, including whether to adopt minimum energy efficiency standards similar to the private-rented sector approach. Consultation on owner-occupied buildings is set to conclude by the end of this year. Long-dated regulatory targets based on the EPC, which requires building owners to invest in the quality of their building’s fabric and services, will be introduced for the 2020s.

Landlords of privately-rented commercial and industrial buildings need to improve their buildings to EPC band B by 2030. The caveat to this policy is that it applies “where cost-effective” and this has significant implementation issues that need to be addressed if the policy is going to be a success. The Government still needs to confirm the enforcement processes but believes this approach will potentially save businesses around £1 billion per year in energy costs by 2030. An equivalent long-dated regulatory target is being considered for owner-occupied commercial and industrial buildings. Consultation on both aspects is to take place in early 2022.

The Government Heat & Buildings strategy document states that “If you are a small or medium-sized business, we plan to provide support to help your buildings become more energy-efficient and adopt low-carbon heat.” The nature of this support remains unclear, previously the government has made funds available through grants and development schemes. At this time there has been no announcement of any such replacement programmes in the near term for commercial operations.

For advice, application design and supply of low carbon options for commercial hot water please speak to Adveco.