EPC Grades or Actual Energy Use? Grappling with Net-Zero Chalk and Cheese

Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position. Please refer to official GRESB documents for assessment related guidance.

Radical improvements in the energy efficiency of existing buildings are needed if we are to reach net zero. But should their performance be assessed by their EPC grade or actual operational energy use? Both are the answer, but these are chalk and cheese, so property owners and investors must learn to deal with two very different agendas.

Three levers to achieve the equilibrium between supply and demand

Achieving net-zero requires a balance between zero-carbon supplies (principally nuclear, wind, and solar) and the overall energy demand of the economy (which broadly arises from real estate, transport, and industry). The three levers we have to achieve this equilibrium are:

1. Increasing supplies capacity.
2. Constraining demand through energy efficiency and/or behavior change.
3. Creating the infrastructure to enable the delicate balance to be struck 24/7/52 without supply disruptions.

The tools for this third element comprise mainly batteries, hydrogen, and smart demand-side management.

Navigating this pathway optimally has to be technically feasible, economically viable, politically acceptable in a democratic society, and resilient to the physical risks created by climate change. And in addition, consistent with constraints imposed by the rarity or harmful effects of extracting the materials needed from the Earth’s crust and then concentrating them. This is a very tall order, and it is evident that the complexities and challenges of any of the various solutions make it understandable that politicians and society, in general, have preferred to persist our reliance on cheap and abundant fossil fuels up to now despite their immediate impact on health and well-being (from smog to Deep Water Horizon) and even in the face of the existential threat posed by the climate emergency, as brought home by the increasing frequency of extreme weather events.

Globally, action supporting the net-zero transition is only slowly following the rhetoric, and it is by no means certain that the main goal of the Paris Agreement will be met and catastrophe averted.

The UK has made more progress than most other developed countries, and it is only fair that we should have, given our responsibilities for historical emissions. Plausible pathways for our transition are being laid before us in ever increasing detail through the likes of the Climate Change Committee’s (CCC’s) 2019 Net Zero Report and, more accessible, National Grid’s Future Energy Scenarios (FES). Published recently, FES 2021 makes fascinating reading. It contains graphic detail of three different pathways to net-zero by 2050, their monikers alone arousing the curiosity of even non-technical readers: Consumer Transformation (CT), System Transformation and Leading the Way. 

Notable changes since FES 2020 are down to increased confidence on supply and lower ambition on demand

There are some notable changes since FES 2020. For example, last year’s total electricity supply for the CT scenario in 2050 was 691 TWh. This year there is a 28% increase to 882 TWh. Bear in mind this is almost three times the actual value in 2020 of 304 TWh, of which ‘only’ about half was supplied by zero-carbon sources. It is also a third more than the 645 TWh anticipated by CCC’s net-zero report only two years ago. A couple of factors appear to underlie this change:

1. Confidence has been boosted by the government’s acceptance of the updated, more challenging sixth carbon budget, that the target for renewables capacity should be increased substantially beyond relatively recent expectations. Under CT For example, the offshore wind supply reaches 40 GW by 2030 (in line with the government’s December 2020 Energy White Paper), 80 GW by 2040, and 113 GW by 2050 – no less than a ten-fold increase from the current capacity of 11 GW. Is this plausible? The current pipeline of live proposals (23 GW) and those in tentative early planning (34 GW) will only get us to 60% of the 2050 figure used in CT.
2. Lower ambition for energy efficiency in FES 2021 compared with FES 2020, reflecting stakeholder feedback from FES’s most recent cycle of engagement and CCC’s Citizens Assembly.

Implications for Real Estate

It is two years since UKGBC published a net-zero framework for buildings, including guidance on the stringency of operational energy targets for net-zero commercial offices. At that time, the latest BEIS projection (published in 2018) anticipated 374 TWh of zero-carbon electricity by 2050, much less than half the figure in the FES 2021 CT pathway. The rationale for the net-zero intensity targets was always contingent on the evolution of the ambition for new renewables, as we set out in detail in this peer-reviewed paper published by BSER&T. 

The links between the government, the CCC, and the analysis by FES could be viewed as joined-up thinking or confirmation bias. It is not convincing that the capacity of renewables in 30 years can reach the levels now being touted. And a backlash is likely when it is realized that if every country prefers increasing supply over constraining demand, then, for example, the race for sufficient rare earth elements could result in wholesale habitat destruction by robotic deep-ocean mining, exacerbating other environmental problems. Until there is more certainty on future growth rates of renewables, we would be well-advised to hold our nerve on stringent net-zero performance standards.

Will operational targets become mainstream for real estate? 

With so much of the debate in UK circles now focusing on the real-world challenges presented by the net-zero balancing act, it has been easy to be blindsided from the implications of the perspective of policy makers in the European Commission (EC). Through the Energy Performance of Buildings Directive (EPBD) Article 9 requirements for so-called Nearly Zero Energy Buildings (NZEBs) and via the EU Taxonomy Regulation technical screening criteria for climate change mitigation, the EC has for the moment put most of its energy transition eggs for the buildings sector in the theoretical calculations basket, aka Energy Performance Certificates (EPCs), rather than measured actual energy use. 

The EPC approach deals only with the regulated loads, i.e., heating, ventilation and air-conditioning (HVAC), hot water, and lighting. Furthermore, it assumes “standard conditions of use”. It does not allow for poor control and operation, which are major drivers of the performance gap between design intent and actual outcomes. Unfortunately, non-domestic building EPC grades and actual annual gas and electricity consumption for the same building show absolutely no statistical relationship, as the BBP amongst others has been demonstrating for many years now. The EPC approach may have merit for dwellings but is far from sufficient for non-domestic buildings, for which whole building operational energy targets are and should be the net-zero carbon metric of choice for mainstream property owners and investors. 

Ending this debate is now urgent, as NZEB and operational energy criteria turn out to be chalk and cheese. Verco is supporting its clients to ride both horses simultaneously: improving a building’s theoretical performance is part of the solution, but operational outcomes are what matter in the climate emergency.

Owners and investors with pan-European portfolios may encounter difficulties keeping on top of the NZEB green tape in 28 countries – finding out existing definitions, tracking changes in regulations going forward, dealing with non-English documents, interpreting inadequate documentation of real estate assets, etc. The Buildings Performance Institute Europe (BPIE) has just published an update on the NZEB definition for each EU Member State. Reflecting the challenges for property investors; its headline is that there is a wide degree of disparity. For example, the nZEB standard for (theoretically calculated) primary energy demand (PED) for offices is nearly ten times higher in Malta, at 290 kWh/m2/a, than in Croatia (mid-point value of 30 kWh/m2/a). Other countries lie in the spectrum between these extremes.

Chickens are coming home to roost here – these are just the kinds of issues Building Passports would resolve by harmonizing and regularising a pan-European approach to building descriptions and both theoretical and operational energy performance data. Verco recently participated in leading research on this topic for non-domestic buildings, but progress in take-up has been agonizingly slow.

I can see a lot of effort being expended to identify how existing buildings can most cost optimally be shifted to desired EPC/PED levels, but this may have little impact on operational energy unless control and management are tackled simultaneously. Verco has been helping shift the focus to actual performance in the UK through DfP and NABERS UK. BEIS has just consulted on Mandatory Performance-Based Ratings. We need building owners also to stomach the NZEB requirements and embrace Building Passports. 

Conclusions

It’s intriguing to ponder how long it will take to work through this clash of perspectives, but atmospheric physics is driven by actual emissions driven by actual energy use. Sooner or later, the world must converge on measured performance as the only metric which really matters. These are the key takeaways for real estate executives pondering action to achieve both NZEB and NZC targets:

• No regrets measures will be to reduce energy demand by better control and management. 
• Green alpha: more expensive fabric and plant improvements can be justified by anticipating that high-performance buildings will almost inevitably command asset value premiums within the next five years – it would have been sooner but for covid. This will be not just for their compatibility with the net-zero transition but also because they should produce better quality buildings with co-benefits to occupiers in the form of comfort, health, well-being, and productivity.
• Stranding risk: taking a bet that growing renewable energy supply capacity will marginalize the operational performance of buildings would be a gamble with multiple last-mover downsides.

This article was written by Dr Robert Cohen, Technical Director (Real Estate), at Verco