Blog: Energy efficiency & the cost cap - why new regulations must be flexible
The Heat and Buildings Strategy, published in October by the Department for Business, Energy, and Industrial Strategy (BEIS), announced a small number of grants and increased web-searches for ‘heat pumps’ dramatically. What it failed to do however, was provide the clarity we in the private rented sector need to plan for the future and make decisions about what form of retrofit might be needed, or even possible, in the next few years to meet stricter new energy efficiency standards.
It is likely that some of the information we so badly need will be published in the government’s response to the minimum energy efficiency regulations (MEES) consultation, which was conducted earlier in 2021. According to the aforementioned strategy, this will be published later this year.
We expect that this will mandate a minimum EPC rating of ‘C’ for new tenancies, with the Government consultation proposing this should be in force from 2025. This is of course more stringent than the current minimum rating of ‘E’ and presents a real challenge for landlords with older, less efficient properties which are more difficult to treat.
The NRLA sponsored report Lagging Behind addresses some of these issues in detail, identifying ways in which a local approach could benefit landlords and communities, where deep retrofit is required.
We have argued for a later start date for the policy, recognising the impact of Covid on the sector and giving landlords sufficient time to plan and prepare. But as the minimum standard is raised, it is also likely to be uneconomical for landlords to meet the high costs required to bring some ‘E’ rated properties up to a ‘C’. This means that the so called ‘cost-cap’ will be ever more important.
What is the cost cap?
The cost cap refers to the maximum amount a landlord will be expected to pay in order to improve the energy efficiency of a property.
At present all rental properties must rate at least ‘E’ on the EPC scale unless they qualify for an exemption. One of those exemptions is the ‘high cost’ exemption, which sets a ceiling on how much a landlord should have to pay and allows for a property to be let, with a lower rating, as long as it can be demonstrated that the cost of further measures would exceed the cap.
The current cap is £3,500 but we know that the government intends to increase this when the standards are amended.
How much will the new cap be?
In short, we don’t know yet, but we do know that the government’s original proposal was £10,000.
As well as being high, a cap of £10,000 seems arbitrary and fails to reflect the fact that property values vary significantly throughout the country.
For instance, a £10,000 investment in a £750,000 house in London represents about 1.3 per cent of its value. Exactly the same investment in a property in Shildon, County Durham, where average values are less than £60,000 it could be closer to 20 per cent of the home’s value.
This is why in our dealings with BEIS NRLA has been arguing two points in relation to the cost cap.
First, although we have to acknowledge that landlords will be required to contribute to greening residential stock, the government has to recognise that many typical landlord businesses have neither the liquid capital or equity to finance expensive retrofit like external wall insulation or the installation of heat pumps – not without help. As such setting the cost cap too high will simply dissuade investment and drive businesses out of markets where property values cannot support it.
Secondly, for the cap to be meaningful it cannot be arbitrarily set at a level that assumes London, or South East, values throughout the country. We have proposed that the cost cap operate on a scale, tapering the maximum amount landlords will be expected to contribute relative to the local market conditions.
Rather than base this on property valuations, which can be gamed or distorted, we have argued that the Valuations Office Agency (VOA) broad market rental areas (BRMA) should be used to divide areas up into bands based on average rent levels. For example, those in the highest quintile would be held to the full cap, whilst those in each of four lower groups would be subject to a decreasing cap based on rent data in their local BRMA.
Ultimately a system like this, with a cap dependent on the market in which the property is based, would be fairer to those in areas where investment represents a larger proportion of their capital and where finance may be harder to arrange.
Of course, if landlords are to be required to retrofit older properties across the board, we are going to need to find new, innovative ways to mitigate the costs, and ways to make sure funding is made available where it is most needed. All of which is to be the focus of a series of NRLA blogs to be published in the next few weeks.
The NRLA, in partnership with Propertymark is hosting a webinar on 18th November to discuss the transition to net zero and what this means for landlords, where Localis will also talk about the findings of their report. Join us for a lively discussion on the future of energy efficiency in the private rented sector.
