Real estate businesses look to UK’s revised net zero strategy post-Skidmore review

Recommendations aimed at improving the energy efficiency and decarbonising of UK real estate, set out by a former government minister and a committee of MPs, should be incorporated into the UK government’s revised ‘net zero’ strategy.

The recommendations are sensible and welcome, but they need to be followed by necessary regulation and implementation in order to provide the long-term policy certainty organisations require to deliver on the outcomes they are intended to achieve.

The first step towards that would be to include the recommendations in the revised net zero strategy, which the High Court has ordered the government to update before the end of March.

The Skidmore review and Environmental Audit Committee report

Chris Skidmore MP was commissioned to lead a review into the UK government’s approach to delivering its net zero target – of reducing UK greenhouse gas emissions to 1990 levels by 2050 – in September last year. He published his report (340-page / 6.6MB PDF) last month. His overarching view is that delivering on net zero will bring economic growth to the UK.

Skidmore’s report was wide-ranging, but it includes a series of recommendations relevant to the UK real estate sector – including a call for existing proposals for phasing out gas boilers in homes to be accelerated; for minimum energy efficiency rating requirements in commercial and residential property to be strengthened; for the Future Homes Standard to be mandated by 2025; and for the government to consult on whether solar panels should be installed on new homes built in future. We look in more detail at the relevant proposals for real estate in more detail below.

Skidmore is a member of the Environmental Audit Committee in the House of Commons in the UK parliament. Its report (99-page, PDF 837KB) from December last year on accelerating the transition from fossil fuels is also highly relevant for businesses in the UK real estate sector.

A distinct emphasis in the solutions recommended by the Committee is on energy saving and efficiency measures. For example, the Committee called for “a national ‘war effort’ on energy saving and efficiency” and found that “upgrading homes to energy performance certificate (EPC) C or above must be treated as a national priority to enhance the UK’s energy security, reduce bills and cut emissions from the country’s leaky and draughty building stock”.

The Committee found that announcements by UK prime minister Rishi Sunak last year regarding a five-year 0% VAT rate for installing technology, including heat pumps and solar panels in UK homes, whilst welcome, fell short of covering all the works involved in retrofitting homes for energy efficiency. Its findings also correlate with recommendations in the Skidmore report on stimulating green finance for retrofitting buildings and on the shortcomings of EPCs.

Energy efficiency of non-domestic buildings

The Skidmore report tackles what the Climate Change Committee’s 2022 progress report called a “particular policy gap on energy efficiency for owner-occupiers”. It recommends that the UK government should:

• legislate by 2025 for a required minimum energy efficiency rating for all non-domestic buildings, both rented and owned, to be EPC B by 2030 – this would bring owner-occupied buildings onto the same trajectory as is proposed for rented non-domestic buildings, though the review does not clarify whether the new standard would apply automatically at that date or only when triggered by a sale or qualifying works to the building;
• legislate for all new non-domestic buildings to have an EPC B rating from 2025 – this would coincide with the proposed changes to building regulations to introduce the Future Buildings Standard.

According to the government’s 2021 heat and building strategy, 60% of non-domestic building energy use was by owner-occupied properties. That strategy hinted at aligning EPC standards with those proposed for the rental sector. The Skidmore report’s clear recommendation on existing owner-occupied property is overdue and very welcome.

The proposed requirement for an EPC B on ‘new builds’ is also welcome, though absent further details on the technical aspects of the proposed Future Building Standard it is not clear what it will add beyond that. Joined-up thinking to ensure these measures work together will be required – 2025 is still too late for regulation addressing the energy efficiency of new builds and it will be important there is no slippage on the prompt delivery of these measures.

The report also recommends reforms to EPCs to better account for low carbon heating systems. Work to reform EPCs has already commenced with the new methodology introduced in June 2022 but some other aspects of the EPC action plan remain outstanding.

Whilst increased energy efficiency will result in operational costs savings, there will be understandable concern at the capital cost of energy efficiency improvement works. The Skidmore report includes recommendations for support for SMEs for the purpose of improving the uptake of energy efficiency technologies and incentivising decarbonisation. This includes via a comprehensive and integrated communications campaign and energy advice service, direct funding, and as part of the recommended wider review of the tax system.

In addition to the minimum energy efficiency standards it recommends, it also recommends extending the Energy Savings Opportunity Scheme (ESOS) and mandating the take up of recommendations made under that scheme.

Decarbonising non-domestic buildings

The Skidmore report recommends a “rooftop revolution”. This envisages that constraints to widespread use of rooftop solar panels are removed, including the removal of requirements for planning permission and the provision of VAT relief. Other recommendations aim to enable profit from surplus energy generation and ensuring there are low-cost finance options.

On the phase out of fossil fuels from buildings, the report is clearer on the timeline for domestic premises. For non-domestic properties the latest policy recommendations are those in the 2021 heat and building strategy and the separate 2021 consultations which propose no new gas grid connections or fossil fuel heating systems in stages between 2024 and 2026 and a complete phase out of gas boilers by 2035. Skidmore recommends bringing forward the date for the phase out of gas boilers from homes to 2033 and it is hard to see why it should not also be brought forward for non-domestic property.

The Skidmore report also recommends that the UK government seek to create sustainable material supply chains, influence market development through public procurement standards, and influence business through public sector decarbonisation projects – such as by conducting and publishing the results of its own trials. New York, Milan and Copenhagen are identified as cities where government methodologies and toolkits have already successfully influenced a change in business thinking around energy efficiency measures.

Energy efficiency of homes

Skidmore identifies domestic homes as being at the heart of the net zero mission. Of the UK’s 28 million households, government figures show that some 64% are owner occupied. However, there has largely been a policy vacuum in relation to these properties. The report recommends:

• legislating for all homes sold by 2033 to have an EPC rating of C or the new Net Zero Performance Certificate (NZPC), subject to specific exclusions such as those applicable to listed properties or on affordability grounds;  
• mandating landlords to include average bill cost alongside the property’s EPC/NZPC rating when letting, helping tenants to understand what costs to expect and putting a premium on energy efficient homes;
• that EPCs should be reviewed so that they properly reflect low carbon heating, in particular heat pumps, with the suggestion that the EPC regime could transition into a new NZPC regime.

Decarbonising homes

In line with previous government policy announcements and the consistent recommendations of the Climate Change Committee, the Skidmore report identifies the use of heat pumps as the central technology in the transition to sustainable heating, which it sees as both more efficient and cheaper than gas boilers.

Acknowledging the slow take-up of heat pumps and that the UK has experienced years of low home insulation rates due to a lack of government support and policies, the report identifies cost as the greatest barrier to people improving the energy efficiency of their homes and concludes that the UK government’s role in facilitating access to finance is vital, suggesting a range of policies as to how this might be achieved – including the provision of long-term, low-interest loans and government guarantees to the banking industries to offer green mortgages. Germany and the US are cited as examples of where such financial solutions are currently being offered by the government to the public. There are also recommendations that the current financial support for fuel poor homes should continue and be expanded.

The report also highlights the importance of the UK government delivering its heat and buildings strategy to provide the long-term predictable policy framework required for investment in required skills and products, such as insulation, heat pumps and heat networks. In particular, it recommends bringing forward all consultations and work to mandate the Future Homes Standards by 2025 to ensure that this applies to all developments, and also recommends a further consultation on the proposal to mandate that new homes should be built with solar to deliver a new Net Zero Homes Standard.

In terms of practical help for households, the report recommends the expansion of the government’s energy efficiency advice service, the setting up of retrofit hubs by 2025 to connect householder and suppliers, and measures to close the skills gap on retrofitting.

Hydrogen

Hydrogen will play a vital role in the UK’s future energy mix, according to Skidmore. Given the nascency of the sector, he believes there is an opportunity for the UK to become a global leader and reap huge growth and employment opportunities. His report makes a range of detailed policy recommendations in relation to hydrogen. 

The report’s core recommendation concerning hydrogen from a UK real estate sector perspective is that the UK government should continue hydrogen heating community trials to inform decisions on the role hydrogen can play in heating buildings, and that it should, by the end of 2023, update its analysis of the mass roll out of hydrogen for heating to ensure that the case for economic optimality and feasibility still holds. This recommendation is made in the light of the UK government’s announcements in relation to hydrogen on 13 December 2022. They include:

• the launch of a consultation on its proposals to require hydrogen-ready boilers in residential homes from 2026 – a policy which, if implemented, would effectively ban the installation of traditional gas boilers;. 
• a summary of responses following its call for evidence on its proposals to enable or require hydrogen-ready industrial boiler equipment which closed on 14 March 2022.  

In respect of hydrogen-ready boilers, the consultation proposes a requirement that all new domestic-sized gas boilers be ‘hydrogen-ready’ from 2026 onwards. It sets out the UK government’s view that there is a strong case for such a mandate, but that this is dependent on several assumptions – including that boilers can meet all relevant regulatory standards, that they can reach price parity with existing gas boilers if deployed market-wide, that a single market-wide definition can be agreed, and that hydrogen will later be rolled out to the gas grid. 

The deadline for responses to the consultation is 21 March 2023.

The House of Commons’ Science and Technology Committee reported in December 2022 that it was unconvinced the deployment of low carbon hydrogen in domestic heating would prove to be economically viable by 2026 and concluded that hydrogen use would be best applied to areas of the UK economy where no viable low-carbon alternatives currently exist, including in heavy industry.

In respect of hydrogen-ready industrial boiler equipment, the conclusions reached by the government are especially relevant to businesses that lease or occupy industrial buildings and reflect a growing focus on using hydrogen to replace high-carbon fossil fuels in industry. 

In summary, respondents to the call for evidence supported the idea of the government enabling and requiring hydrogen-ready industrial boiler equipment, noting that technical standards and certification routes would be important in enabling the supply chain to adapt and support the deployment of industrial boiler equipment. As a result, the UK government will take steps to phase out unabated fossil fuel burning in industry and will support possible replacements through sponsoring the British Standards Institution (BSI) to set the relevant technical standards for hydrogen-ready industrial boiler equipment.

Embodied carbon and the circular economy

The Skidmore report does not deal with the issue of regulation of embodied carbon, which many in the property industry would be in favour of. However, it does make recommendations which would support the development of low carbon building materials, accelerate waste reforms, and that promote work on developing a viable circular economy – including a role for government on resource matching across the private sector.

A net zero local big bang

Skidmore criticised the lack of UK government clarity over the role of local authorities in net zero and short-termism in associated funding and outlined his support for a more locally-led approach to net zero, calling for a reformed relationship between central and local government on this issue and a planning system which is aligned with net zero. 

His report recommends the introduction of a statutory duty on local authorities to take account of the UK’s net zero targets, simplified net zero funding, and establishing local net zero missions in 2023 with central government providing guidance and support to increase capacity and capability.

Importantly for the real estate sector, Skidmore considers the planning system is an obstacle to net zero and recommends reform of the local planning system and the National Planning Policy Framework, seeking alignment on net zero and the introduction of a net zero test. The ongoing government consultation goes some way to recognising the UK’s net zero target but at this stage it is impossible to speculate on how strong a factor alignment with the UKs net zero targets will become in planning decisions. 

Fiscal policy

The report also identifies a number of fiscal “levers” through which the UK government might support the development of new and emerging green markets and low carbon technologies. These include the use of tax credits, capital allowances, and business rates. 

The existing super-deduction on corporate tax, which runs from 1 April 2021 to 31 March 2023 and incentivises businesses to invest in new plant and machinery is acknowledged in the Skidmore report, as is the business rates exemption until April 2027 for eligible plant and machinery for on-site generation and storage. However, Skidmore recommends that the Treasury consider a successor to the super-deduction tax relief, with a focus on increasing investment in low carbon technologies, and continual assessment of the existing business rates incentives. To ensure there are no further disincentives for businesses to invest in net zero technologies, he has also called on the government to undertake a review by autumn 2023 of how fiscal policy incentivises decarbonisation.

The opportunity with the revised net zero strategy

The Skidmore report is welcome and has been generally acknowledged as impressive, comprehensive and ambitious. From a UK real estate sector perspective, this is particularly the case in relation to the report’s legislative recommendations to firmly address the “owner-occupier” policy gap for the first time. With such owner-occupied properties making up the majority of UK properties, it is crucial that new regulation in this area is put into place in order for the UK to meet its net zero targets.

The revised net zero strategy is due to be published before the end of March 2023. Businesses operating in the UK real estate sector will be keenly awaiting its publication in the hope it will provide the long-term policy certainty needed for investment in the net zero transition of the UK’s real estate. 

Co-written by Shannon Breeze and Paul Roberton of Pinsent Masons.