The CCC Report 2022 and the Buildings Sector

Insight

19.12.2022

“While there is little consensus on the expected near-term macroeconomic consequences of climate change policies, this chapter’s central message is that if the right measures are implemented immediately and phased in gradually over the next eight years, the costs will remain manageable and are dwarfed by the innumerable long-term costs of inaction.”

“With investment and research and development decisions based on long planning horizons, it is key that (to affect behaviors) new climate policy measures and commitments to future carbon-reducing policies (for example, increments in GHG taxes, regulations, and subsidies) be perceived as credible and irreversible”
International Monetary Fund. (October 2022). World Economic Outlook

In June, the Climate Change Committee (CCC) delivered its annual report to Parliament on progress in reducing emissions. The report’s key message was that, whilst the UK was strong on ambition, in many areas of the economy and society it was failing on delivery. There were also significant risks of a policy gap for over a third of the reductions required to meet the Sixth Carbon Budget. One of the areas struggling or failing to deliver was the buildings sector. This sector contributed 20 per cent of total UK emissions in 2021, and commercial and public buildings produce around 25 per cent of direct emissions from buildings.

In political policy terms, June seems a lifetime ago now. Further, there were press reports in the Autumn that the Energy Bill 2022 (which includes measures relevant to the decarbonisation of real estate) was being paused or possibly scrapped (albeit with the possibility of the proposed reforms being included in other legislation) by the then UK business secretary under the Truss Government[1]. However, the Sunak Government pressed the restart button on this draft legislation at the end of November[2].

Lord Deben observed that a positive step arising from the brief Truss premiership was the announcement of the Net Zero review[3]. In September, the Truss Government commissioned a review to be led by Chris Skidmore (who was the minister at the time who signed Net Zero into law) to ensure delivery of Net Zero by 2050, which is “pro-business and pro-growth”. Notably, the first question in the call for evidence was, how does Net Zero enable the country to meet an economic growth target of 2.5 per cent a year? The review is due to submit a report (including recommendations) by the end of the year to the BEIS Secretary of State. The Government has also passed legislation extending the deadline under the Climate Change Act 2008 for it to respond to the CCC’s 2022 report from 14 October 2022 to 31 March 2023. The explanatory memorandum states that this is because the Government wants to include consideration of the Net Zero review findings in its response and, further, it does not want to pre-empt or undermine the outcome of the Net Zero review by responding to the CCC’s report before the review’s conclusion.

That said, notwithstanding that the outcome of the Net Zero review and the Government’s response to the CCC’s report are awaited, it is still worth considering some of the actions which the CCC considers need to be taken to decarbonise commercial real estate. The discussion below primarily relates to England, as a number of Net Zero policies are dealt with by the devolved governments.

Minimum energy efficiency standards

The main policy levers proposed by the Government for driving energy efficiency were the introduction of an in-use performance rating scheme (ie based on actual energy consumption and emissions) for large commercial buildings, and to require a minimum of EPC B by 2030 for privately rented commercial buildings. The latter proposal also included an interim milestone of EPC C by 2027 and mechanisms to improve enforcement of compliance. The CCC observed that there was limited information on when the performance rating scheme would be rolled out, and the assumptions about how early the requirements for a minimum EPC would flow through to building owner energy efficiency decisions were optimistic.

In a joint letter to Liz Truss, the chairs of the CCC and the National Infrastructure Commission (NIC) stated that the Government lacked credible long-lasting policies to improve energy efficiency in UK buildings. In relation to businesses, they called on the Government to finalise the policies on a minimum EPC B requirement by 2030 for the private rented sector and to introduce a performance-based rating system for large buildings[4].

In the Sixth Carbon Budget policy report, the CCC said that there was an urgent requirement to improve EPCs and to ensure they drive deployment of energy efficiency on a holistic basis and did not disincentivise low carbon heat: onsite generation should not be a replacement for energy efficiency or low carbon heat. A key issue was also the need to reflect the in-use performance of a building. The Progress Report observed that major EPC reform required to ensure EPCs can support energy efficiency and low-carbon heat delivery had not yet been undertaken. Further, poor regulatory enforcement of the EPC regime, an undeveloped supply chain for energy efficiency measures and the problems with EPCs presented hurdles to implementing energy efficiency in commercial buildings.

Heating

Boilers

The Government has also consulted on proposals to phase out installation of new boilers (eg using oil, LPG or coal) in large commercial buildings off the gas grid from 2024, and proposed to phase out the installation of new gas boilers from 2035. The CCC said that the Government “needs to press ahead” with the plans to phase out boilers from the gas grid and to improve energy efficiency. It also considered that the phase out date for new gas boilers in commercial buildings was too late.

Heat networks

Heat networks are seen as a key technology for delivering Net Zero in heat-dense areas like cities or around facilities such as schools and hospitals. The Government announced proposals to provide for the creation of heat network zones and to allow local authorities to designate areas as such zones. The proposals also provided that within a heat network zone there would be requirements for specified buildings or groups of buildings to connect to the network within a prescribed timeframe.

The CCC stated that the Government needed to deliver on the legislation required for heat networks, including implementing a statutory framework for heat network zoning. The Energy Bill contains powers to allow for heat network zoning in England. The CCC also observed that there was lack of clear policies to decarbonise existing heat networks which do not draw on public funds.

Heat pumps

While seen as major low-carbon technology for homes, the CCC considered that the proposed market mechanism for heat pumps is expected to impact smaller commercial buildings. To drive the uptake of heat pumps, the Government’s proposals relied on the phase out dates for new fossil fuel boilers, designing a market-based mechanism to stimulate heat pump installation by requiring boiler manufacturers to sell an increasing proportion of heat pumps compared to boiler sales, some limited government grants and to rebalance gas and electricity prices to make heat pumps cheaper to run.

The CCC considered that more policy work was needed to support the supply and demand side of the market, and that this needed to be implemented in the next year to drive the required growth in heat pump supply chains. The Government also needed to monitor market development and prepare contingency plans to step in if the proposed mechanism did not work. Again, the Energy Bill contains provisions to give the Secretary of State powers to create a “Low-Carbon Heat Scheme” - a market mechanism for heat pumps. Again, the CCC and NIC reiterated the necessity to deliver this policy goal for low-carbon heat[5].

Future Buildings Standard

In December 2021, the Government published the outcome of the consultation on the Future Buildings Standard and said that from 2025, the standard will deliver new commercial buildings which use low-carbon heat and have the best fabric standards possible. The Government stated that it intends to start a full technical consultation in 2023. The CCC thought that this timing risked a slow signal to the market. It also recommended that the Government should ensure that the new standards were implemented by 2025.

Overheating

Heating costs and the winter have been at the forefront of everybody’s mind. However, as well as driving decarbonisation, policies are required to ensure that the building stock is also adapted to deal with climate change. Overheating is a key issue. Whilst an overheating standard has been published for new build homes, the CCC considered that there was a major policy gap in relation to dealing with overheating in existing buildings (residential and commercial) and to ensure overheating is considered in energy efficiency retrofits.

Low-carbon workforce

The CCC report looked at the wider “enablers” required to underpin transition to Net Zero. A key enabler is growing a low-carbon workforce. The CCC considered that whilst the Government had made progress in assessing the impacts of Net Zero on the labour market and identifying the green skills that will be needed, more data collection and monitoring were required to delineate the low-carbon skills landscape to enable delivery of focussed policy in this area (including for supporting those in at risk sectors to transition to new jobs). Further, in the buildings sector, measures needed to be implemented quickly to provide enough skilled workers to deliver heat pump installation, heat networks and energy retrofits at the required pace of change to deliver on Net Zero.

The Government has said that its Net Zero review is to ensure that delivery of Net Zero is “pro-business and pro-growth”. The CCC refers to estimates that up to 230,000 jobs could be created in the buildings sector by 2030. However, as noted by the CCC, government policies to address shortages of skilled workers need to signal employability and profitability to workers and business in the longer term. This brings us full circle back to the quotations at the beginning of this piece. There need to be credible policies to deliver Net Zero and policymakers need to move quickly. There is nothing new in saying this and indeed this was echoed in the Autumn by UK business leaders in letters to the then Government[6].

Footnotes:

[1] Pickard, J. & Thomas, N. (2022, September 15). UK energy security bill paused to prioritise support for businesses. The Financial Times.

[2] HC Deb (29 November 2022). vol. 723, col. 788. Available here.

[3] George, S. (2022, November 1). Lord Deben: The UK’s net-zero review is an opportunity to accelerate delivery, not an excuse to water down ambition. Edie. View here.

[4] Letter from Climate Change Committee Chair and National Infrastructure Commission Chair to the Prime Minister dated 6 September 2022.

[5] See endnote 4.

[6] For example, see the letter from the CEOs of IIGCC, PRI and UKSIF dated 20 September 2022.

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