In 2008, the UK became the first G7 country to sign its commitment to net zero greenhouse gas emissions by 2050 into law. While the UK has seen a steady introduction of legislative changes to encourage the real estate industry to reduce its carbon emissions, the emergence of the energy security crisis in 2022 has shown a real need to accelerate those changes.
In response to rising energy costs, in October 2022 the UK government introduced the Energy Prices Act 2022, designed to support households and businesses with energy costs and to protect them against the volatility of increasing gas prices. The Energy Bill Relief Scheme gives businesses a six-month discount on their energy prices, and will be replaced with the new Energy Bill Discount Scheme for businesses, charities and public sector organisations, which will run from April this year.
In the UK we are also seeing a real push to promote low-carbon electricity generation from renewables and nuclear.
The UK government has committed to reduce the UK’s reliance on fossil fuels, with a target of decarbonising the UK’s electricity system by 2035. In January this year, agreements for lease were awarded for offshore wind projects with the potential to deliver up to 8GW of offshore wind capacity – enough to power up to 7m UK homes.
Prioritisation of renewable energy sources is high on the agenda, with indications that new gas boilers in homes may be phased out and the introduction of trials to see hydrogen being incorporated as an alternative energy source.
In addition to the way in which the built environment is supplied with energy, there have been continued efforts to improve the energy efficiency of buildings, with imminent changes to the Minimum Energy Efficiency Standard on the horizon this year. Last year, we also saw a much-needed review of the way in which the carbon factor is measured in Energy Performance Certificate ratings for buildings, to take account of the increased contribution of renewable energy sources in the production of electricity (although the use of gas in a building can now mean a lower rating).
There are also proposed changes to the ways in which energy efficiency is monitored in large commercial buildings (with the outcome of a consultation on the same awaited from the government) and changes to the Building Regulations last year to ensure more electric vehicle charge points are installed in developments. These are just a small number of the changes taking place, but show that progress is being made in a wide range of areas.
The energy crisis has clearly put pressure on businesses and, in addition to the legislative changes outlined above, some have taken the decision to reduce their opening hours in order to reduce their energy consumption. We are also seeing businesses taking practical steps such as reducing temperatures to reduce heating costs and seeking more energy efficient premises if they are considering a relocation.
In September 2022 an independent review titled Mission Zero was commissioned by the UK government to consider how the UK can better meet its net zero commitments, taking into account the global energy crisis.
This review has sought to identify affordable, efficient and pro-business targets for the UK net zero strategy and shows that the direction of travel is clear. Net zero is clearly driving policy decisions, both on the statute books and on the shop floor.
In recent years, the German real estate industry has faced considerable challenges, on the one hand due to Covid-19 measures, and on the other due to the energy crisis.
Although the industry has been making progress in saving energy for several years through sustainable modernisation and investment in green building technology, government support is also playing a crucial part in overcoming the crisis.
What is the German government doing to prevent a possible worst-case scenario?
First, the German government has adopted a three-stage emergency plan for gas supplies. This indicates at the various crucial stages the extent to which supply security can continue to be guaranteed. The state is authorised to intervene to ensure gas supplies are maintained for certain protected customers, such as hospitals, the police or household customers.
Secondly, with regard to electricity supplies, the possibility of a so-called “brownout” is currently being discussed. If there is a foreseeable situation in the power grid in which more energy is consumed than electricity is produced, the transmission system operators will first resort to using existing power plant reserves. If these are not sufficient, temporary and pre-planned shutdowns would be considered in extreme cases.
Measures that are already showing their potential
The above precautions pose clear challenges for the real estate industry. However, there are also plans that are already showing measurable effects, leading to savings of more than 10% in electricity and over 30% in gas.
The basic framework for this has been established by the German government’s energy-saving regulations. Under these regulations, landlords must optimise the gas heating systems in their buildings and carry out an extensive heating inspection. In addition, both landlords and tenants must keep the operation of outdoor advertising systems and lighting to a minimum, light business premises only during opening hours and reduce the room temperature to the legally prescribed setting.
Furthermore, it is also prohibited to keep store doors open permanently in order to reduce the influx of outside air. To comply with these regulations, many stores have already voluntarily reduced their opening hours.
In addition, the government intends to counter the crisis with a price reduction from this month. This will reduce gas and electricity prices to a certain fixed amount. However, in order to maintain the incentive to use less energy, consumers will first pay the higher price – and only then will they be subsidised. In addition, the power supply is secured by the fact the nuclear power plants that were to be shut down will now remain in operation until April 2023.
France’s focus during the current energy crisis has been centred around educating businesses and households on how to reduce their electricity and gas consumption. The French government has instructed the whole country to be more careful in the way in which energy is used and at what times, in order to avoid having to make any gas or electricity cuts.
Rather than putting actual and binding limits on the energy consumption of businesses and households, the government is trying to help them use energy more wisely and at cheaper times, with the benefit of reducing their energy costs at the same time.
Some financial assistance has also been put in place by the French government, in particular for small companies, and this assistance is replicated for companies which have a high consumption of energy.
Some assistance has also been granted to French households, to help people to pay their energy bills – any household within a certain income bracket has automatically received this help. Additional aid has been granted to people who need their car to go to work, for example.
Overall, the French government has not taken any especially tough, new stance on the energy crisis as there were already various pieces of legislation in place to improve the energy performance of buildings. This includes a prohibition on being able to rent a property to tenants in the future if the building fails to achieve a certain energy rating.
Business on board
The energy crisis is not only an issue for the French government but for companies, particularly given the increasingly important ESG objectives that they set themselves. In France, companies are continually trying to find ways to be more energy efficient (and cost effective) but, even when it is not necessarily cost effective for them, they are still willing to reduce their energy consumption.
This includes companies trying to find ways to reuse their waste heat, or data centre operators cooling down their servers to a lower temperature after establishing that they can function effectively at a lower temperature. We expect to see such changes continue apace, particularly given high energy costs and the increasing importance of ESG.
The US is tackling the energy crisis by offering tax incentives to real estate owners to install and generate renewable energy. The most important piece of legislation on this has been the Inflation Reduction Act, which was passed in 2022 and became the nation’s largest investment to date in combating climate change. The US estimates that the IRA will provide approximately $370bn (£306bn) in incentives.
The most meaningful of those incentives for real estate owners are (i) the investment tax credit and (ii) the production tax credit, which each apply to both commercial and residential real estate.
The ITC encourages real estate investment in solar, wind and other kinds of renewable energy through a one-time credit available at the time that a qualifying project is placed in service. The ITC base credit is equal to 6% of a taxpayer’s cost basis in its eligible property but can be increased to 30% if certain apprenticeship and prevailing wage thresholds are met with respect to the construction, repair or alteration of a project. In contrast, the PTC is an ongoing 10-year credit for the generation of renewable electricity at a qualified facility.
The PTC base credit is equal to the kilowatt hours produced and sold, multiplied by a factor of $0.03 (£0.02), subject to inflation adjustments. The PTC can be multiplied by five if the above-mentioned apprenticeship and prevailing wage requirements are satisfied.
These incentives can be supplemented by additional 10% tax credits in areas that have historically been tied to sites that generate non-renewable energy, such as brownfield sites, areas that employ or derive substantial tax revenue from non-renewable energy sources, and areas where coal mines have closed. Other “bonus” credits can be stacked onto a project, such as a 10% ITC bonus for wind and solar projects located in low-income communities or on tribal land.
On the residential side, the IRA also aims to make energy usage more efficient to reduce energy needs. For example, residential developers can receive credits of $2,500-$5,000 for each qualified dwelling unit that is sold or leased.
From industrial projects to commercial spaces and homes, the IRA is encouraging the development of new energy infrastructure and the reduction of energy usage through the use of tax incentives.
Out of crisis, opportunity
While we have seen countries across the globe implementing increasingly tougher legislation and trying to restrict energy use and reduce carbon emissions in various and often innovative ways, the current energy crisis has served to underline how crucial these measures are. There has never been a more important time for the real estate industry to continue to galvanise its efforts and lead on this issue.
An earlier version of this article appeared in EG on 7 March 2023.
Authored by Rosie Bradford, Ingrid Stables, Andre Lohde, Margot Derumaux, Scott P Campbell and Josh Savage.