Energy performance of buildings: a new European Directive becomes law

A Directive on the energy performance of buildings has just been published in the Official Journal of the European Communities, making it part of Community law. The Directive will have to be implemented into the national law of by Member States by 4th January 2006 and will have wide-ranging implications for the property industry, as well as for property purchasers and tenants.

The underlying objective of the Directive is to reduce direct and indirect emissions of the principal climate change gas, carbon dioxide, released in the burning of fossil fuels to provide electricity and heat to building users. Energy use in residential, office, retail, leisure and healthcare buildings has been estimated to account for more than 40% of total energy consumption in the European Community. Therefore, increased energy efficiency in buildings is an important part of the package of measures to implement the Kyoto Protocol which sets targets for reductions in emissions of the greenhouse gases.

The key elements of the directive are:

1. Minimum energy performance standards

1.1 Energy performance standards are to be set by all Member States, taking into account as a minimum the factors set out in an Annex to the Directive. Standards set should differentiate between categories of building type, may differentiate between new and existing buildings and must be reviewed no less frequently than every five years. Virtually all new buildings will have to comply with applicable standards.

1.2 Existing buildings with a useful floor area over 1000m2 that undergo a major renovation will have to be upgraded to comply with applicable standards in so far as this is ‘technically, functionally and economically feasible’. As guidance, the preamble suggests that a major renovation might be one where the cost of the renovation is more than 25% of the value of the building (excluding the land on which it is built) or 25% of the building shell undergoes renovation. Where a major renovation is undertaken, the upgrading obligation may be applied by Member States to the building as a whole or, in certain circumstances, just to the renovated part or system provided this furthers the objective of improving the overall energy performance of the whole building.

1.3 In England and Wales, Part L of the Building Regulations 2000 (‘the Building Regulations’) is broadly compatible with the minimum energy performance requirements of the Directive, the key differences relate to upgrading of existing buildings:

1.3.1the ‘material alteration’ threshold is probably lower than the suggested threshold in the Directive;

1.3.2implementing the upgrading requirement under the Directive could require extending the scope of improvements required under the Building Regulations.

1.4There is, therefore, a risk that renovation work planned to commence in 3 or more years time might trigger an obligation to undertake energy performance upgrading wider than the planned renovation itself.

2. Alternative energy sources

2.1 Prior to the construction of any new building with a useful floor area over 1000m2, the ‘technical, environmental and economic feasibility’ of low or zero carbon technologies must have been considered and taken into account. This will require the feasibility of measures such as:

2.1.1renewable energy sources;

2.1.2combined heat and power;

2.1.3 district or block heating or cooling; and

2.1.4 heat pumps

to have been taken into account in the project design and opened to consultation with relevant stakeholders.

2.2 In England and Wales, there is no existing obligation that is equivalent. For some of the measures, it might suffice to incorporate an obligation into the Building Regulations. For others, it is likely that consideration would have to be given as part of the planning process, supported by Government planning policy that makes consideration of the measures a material consideration. Failure to take such considerations into account would then leave a grant of planning permission open to third party challenge by judicial review.

2.3 Even building projects already in the pipeline now but not planned for construction (or where planning or other problems delay the start of construction) until 3 or more years time could be required to demonstrate compliance with the alternative energy systems obligation. Parties with an interest in any pipeline projects would be wise to check where contractual responsibility for, and the cost burden of, complying with the obligation would fall.

3. Exemption from the minimum energy performance standards and alternative energy sources requirements

3.1 Building types which Member States are permitted to exempt from the above requirements include:

3.1.1buildings protected because of their special archaeological or historic merit if compliance would unacceptably alter their character or appearance;

3.1.2 religious buildings;

3.1.3 temporary buildings, industrial buildings and agricultural buildings with a low energy demand;

3.1.4 residential buildings intended to be used less than 4 months per year;

3.1.5 stand-alone buildings with a useful floor area under 50m2.

4. Energy certificates

4.1 Energy performance certificates will have to be shown by a developer to the owner on construction of a new building and by the owner to a prospective purchaser or tenant of any new or existing building each time it is sold or let.

4.2 The certificate must be no more than 10 years old and should include recommendations for cost-effective energy performance improvements. It should also include reference values such as current legal compliance and benchmarks in order to permit tenants, purchasers and owners to make useful comparisons.

4.3 In England and Wales, the Building Regulations already require the issue of a energy performance certificate upon completion and commissioning of a new building. However, there is no existing obligation to certify energy performance subsequently or applying to existing buildings although some institutional investors already attach value to energy performance rated under voluntary schemes.

4.4 The clear consequence of the mandatory certification of all buildings will be that good energy performance will enhance the value of a property whilst poor energy performance will be used as a negotiating tool to drive purchase prices and rents downwards across the property market. Prudent purchasers and tenants may well insist on certificates more recent than 10 years old or even insist upon an energy audit being conducted as part of their normal due diligence prior to buying or renting a property. Where recommendations are made, even though under the Directive these are not intended to give rise to a legal obligation on the owner, there may be a commercial imperative for implementing them. A prospective purchaser or tenant is likely to want to know whether recommendations have been implemented and consider whether they have or have not as a factor in price or rent negotiations.

4.5 Since a better informed market is now an inevitability, from now on anyone proposing to purchase or rent a property would be prudent to consider energy performance as a factor that will affect both the cost of operating from and, increasingly, the market value of the property.

5. Regular inspection of boilers and air conditioning systems

5.1 Member States must improve the efficiency of boilers either by obliging regular inspection of boilers or by ensuring that information is provided to owners of boilers on their maintenance, efficiency improvement and switching to alternative fuel sources. If the information route is taken, the results achieved must be broadly in line with what would have been achieved by the Member State imposing an obligation.

5.2 If the obligation route is chosen, boilers burning fossil fuels with an effective output of over 20kW will have to be inspected on a regular basis. If the output exceeds 100kW, the boiler will have to be inspected every 2 years unless burning gas when the inspection frequency can drop to every 4 years. The 20kW threshold is expected to exclude most domestic boilers.

5.3 Air conditioning systems with an effective output of over 12kW will also be subject to regular inspection although no guidance is given as to the frequency of inspection.

6. Independent experts and skills shortages

6.1 Certification of the energy performance of buildings and the inspection of boilers and air conditioning systems must be undertaken by independent, accredited or qualified experts.

6.2 There are already considered to be skills gaps, both in industry and in local authority Building Control departments, hindering design and certification to meet the requirements of Part L of the Building Regulations. If the assertion is correct, there are likely to be further gaps in the skills required to ensure inspection and certification complying with the Directive.

6.3 If the Government considers the skills gaps sufficiently serious, it can apply to the Commission to delay full implementation of the energy certification and boiler and air conditioning inspection obligations by up to 3 years from the 4 January 2006 deadline. The 2006 deadline, however, would continue to apply to all other requirements of the Directive.

For further information, please click on the link to the directive on the European Commission’s website. or contact Tom Bainbridge at [email protected] or on +44 (0)207 367 3174.