All owners of commercial buildings in Scotland need to be aware of the proposals, under section 63 of the Climate Change (Scotland) Act 2009, that will require owners to carry out an assessment of both the energy performance of their buildings, and the emission of greenhouse gases produced by those buildings or by activities carried on within them, and then to take steps to improve the energy performance of the building and reduce emissions.

We first flagged up this issue in September 2008, when, before the 2009 Act was enacted, the Scottish Government consulted on the proposals for such assessments that were to be contained in the 2009 Act. In 'Improving energy performance of existing commercial buildings to combat climate change' we looked at the proposals, which at that stage were for a mandatory assessment of carbon and energy emissions from building reports, followed by an equally mandatory requirement to carry out the recommendations contained in the assessment.

Consultation on Section 63 regulations and guidance

Section 63 itself merely imposes the requirement on Scottish Ministers to make regulations regarding such assessment, but the likely content of such regulations is only now emerging, with the recent publication by the Scottish Government of a further consultation: Consultation on Climate Change (Scotland) Act 2009: Section 63 Regulations and Guidance for Non-domestic Buildings. This document sets out the Scottish Government's proposals for the content of the regulations which will impose requirements on eligible existing non-domestic buildings to obtain Assessments of Carbon and Energy Performance (ACEPs), and steps to be taken once an ACEP is obtained.

Addressing property industry concerns

Thanks largely, it seems, to the involvement in a Working Party set up to develop the regulations, of organisations representing industry interests, such as the Scottish Property Federation, the Chartered Institution of Building Services Engineers, the Law Society of Scotland and others, the Government's current proposals appear to have taken on board some of the property industry's concerns about the potentially adverse impact of the imposition of these assessments on property owners and businesses.

Remember that these proposals were originally being mooted around the start of the recession, and worries about the effect of additional regulatory and financial burdens on businesses were to the fore. In the intervening period, we have seen all too painfully the effect of the recession on property interests, amongst others, and there now seems to be some recognition that the property industry is ill-equipped to bear the financial consequences. The devil will still be in the detail however, and owners of commercial property interests should examine the proposals, consider their implications for their business, and make representations in response to the consultation (before 20 January 2012). This will ensure that their views may be taken into account, and that the Government fully appreciates the potential effects on business of these proposals.

The ACEP

Emerging from recent deliberations and discussions is the proposal that an eligible existing non-domestic building should be subject to an ACEP, which will consist of three elements:

  • An Energy Performance Certificate (EPC);
  • A Recommendations Report; and
  • An Action Plan.

Principal among the changes in Government approach is the proposal that an ACEP will not now need to be obtained unless the building in question is being sold or let, or an existing lease is being renewed. So at least now there will be a trigger event, similar to those that apply to the requirement to produce an EPC at the moment. Lease renewal does not currently trigger the requirement for an EPC under the Scottish EPC regulations, so the circumstances in which this will apply need to be considered carefully. On one hand, it would present a useful opportunity for a landlord to insert provisions concerning access for works and monitoring into the lease, as well as responsibility for carrying out works of improvement. From the standpoint of the existing tenant however, it may prove a disincentive to triggering renewal, particularly in older, less efficient buildings, the danger then being that occupying older building stock becomes increasingly unattractive.

Once the ACEP has been obtained, the owners of the building will have two options: either carry out the improvement works to the building that the ACEP recommends in the Recommendations Report, or instead opt to provide annual reports on the operational ratings of the building and display a certificate of those operational ratings within the building. Whichever option is selected, how that option is to be implemented will form the Action Plan element of the ACEP.

Operational ratings – the true story

Operational ratings for a building show how it is actually performing, based on its annual energy use, as recorded by gas, electricity and other meters. Annual reports of such energy consumption are expected to encourage energy savings and thereby reduce emissions, although many remain unconvinced by this proposition. For buildings that are occupied by a tenant, the consultation suggests that the owner may choose to delegate the task of improvements, or conducting the operational rating regime to the tenant, although at the end of the day, the responsibility for compliance will remain with the owner.

While it is encouraging to see that the Scottish Government at least recognises that landlord/tenant relationship issues are present, it seems that actual allocation of responsibility will remain a matter for individual negotiation. The property industry has already been scratching its head on this issue, in relation to Carbon Reduction Commitment liabilities, and it seems that no solution to the conundrum is being offered under these proposals. Provisions will need to be negotiated and inserted into new occupational leases to take account of the possible requirements of an ACEP in the future on the occasion of a sale, and of course new leases that are subject to this regime, when it is finally implemented, will need to cater for access, information sharing and monitoring arrangements if that route is chosen.

Qualifying buildings

Not every non-domestic building will be subject to the regulations, at least not at first. It is proposed that all public and private buildings that have a floor area (that is conditioned i.e. heated and/or cooled) greater than 1,000 square metres would be subject to the Regulations initially. While that size limit could take the buildings of many SMEs out of the equation, arguably many would still be affected. The consultation appears to propose an incremental reduction in floor area over a period, to reflect similar size reductions proposed in the recast of the Energy Performance of Buildings Directive, which will affect displays of EPCs in public buildings, meaning that more buildings would be brought within the ambit of the regime over time. The consultation seeks views on whether qualifying floor areas of both public and private buildings should reduce incrementally for the purposes of ACEPs.

The bigger picture

As well as listening to and incorporating some of the Working Party's recommendations, the proposals recognise the need to take into account the effects of, and interaction with other energy efficiency schemes and proposals. Account needs to be taken of other schemes in which the building, or its owners, already participate, but initial indications, from an accompanying Scottish Government Report on existing energy efficiency legislation and schemes to reduce Green House Gases and their impact on proposed Section 63 regulations are that all eligible buildings should participate in the ACEP arrangements, regardless of whether or not the building is part of a larger business organisation that already has energy efficiency or CO2 commitments under other schemes.

There are complex potential interactions at play here, and care needs to be taken to avoid duplication and over-regulation which could dis-incentivise investment. While the improvement measures that ACEPs are intended to encourage, and which should reduce emissions and improve efficiency, would obviously qualify as emissions reductions under other schemes, should it not be the fact that similar steps, reports or assessments that have already been conducted under other schemes be factored into the arrangements for ACEPs?

ACEPs and EPCs

We had previously queried how the requirement for obtaining an EPC for a property on the occasion of a sale or letting (which makes recommendations for energy improvements but imposes no obligation to implement any of them) would interact with a separate requirement to obtain an ACEP and actually carry out its recommendations. It so happens that changes to the EPC regime are also in prospect (see last month’s article: Energy Performance Certificates - proposals for change), but in any event it is proposed that where a property already has an EPC that is current, a new one will not have to be obtained in the event of a sale or rental, but the existing EPC can form that part of the ACEP, with the addition of a Recommendations Report and Action Plan.

ACEPs and the Green Deal

The Green Deal proposals are central to the provisions of the Energy Act 2011, which received Royal Assent last month. Broadly, the proposals provide a framework within which homeowners and businesses can carry out energy improvements to their property, without any upfront cost. Expected to be introduced in Autumn 2012, under Green Deal arrangements, energy improvements can be carried out by participating energy companies, and other accredited organisations, who, instead of charging for the work at the time they are completed, recover the cost of the works over time, and in instalments, by payments made through the consumer's energy bills. For further details of the Green Deal proposals and the DECC publication "The Green Deal and Energy Company Obligation Consultation" click here.

Since the type of improvements that an ACEP would recommend, and those that would be likely to qualify for the Green Deal are expected to be similar, it is currently proposed that any building that is participating in a Green Deal arrangement would be exempt from the ACEP regulations.

Eligibility for Green Deals may not, of course, coincide with application of ACEPs in all cases, and how the Green Deal will work in practice is only now starting to emerge with the publication of the DECC consultation. Until the final detail is known, it is difficult to evaluate the merits of this proposal for the ACEP regime. Could this be of benefit to SMEs, who might be able to have energy improvements carried out to their building at no initial capital outlay and spread the costs of improvements over a period of years? Would this provide opportunities for owners of older buildings to perform much needed energy efficiency improvements in an affordable way?

Sadly, the sticking point in all this may be the so-called "Golden Rule" for eligibility for the Green Deal, which is: that the measures should pay for themselves over their own lifetime. How Green Deal assessments will be conducted; what will count as accredited measures that can be implemented; and above all, the amount of, and costs of finance available to carry out the measures, will be crucial considerations in determining whether the Green Deal can deliver the energy efficiencies it promises. Already, commentators are sceptical about whether the Green Deal, conceived with the housing market in mind, can stack up in the commercial sector, with the possibility of low applicability or take-up of the scheme.

There is however still an opportunity to inform and influence the final arrangements for ACEPs, and for the Green Deal, by responding to the Government consultations, and voicing your concerns.

The Consultation on ACEPs runs until 20 January 2012.

To view the Consultation on Climate Change (Scotland) Act 2009: Section 63 Regulations and Guidance for Non-domestic Buildings click here.

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