Cheap energy does not mean energy is cheap

Published:  03 March, 2016

BESA, Building Engineering Services Association
Potentially seismic for British landlords — Tim Rook.

Plummeting oil and gas prices are not a reason to abandon energy efficiency — especially with legislation affecting commercial buildings soon to come into effect, says Tim Rook of the Building Engineering Services Association.

The topsy-turvy world of energy pricing entered the realms of the truly bizarre at the start of this year when oil became, officially, cheaper than water. While energy companies were still not passing on the full benefits of plunging wholesale oil and gas prices to customers; with oil below $40 a barrel and some petrol prices below £1 a litre, it might seem that we are now in a period of ‘cheap’ energy.

However, as buildings tend to consume gas and power rather than oil and coal, it is the ‘spark’ spread and power price that matter most to our sector. With the spark spread relatively large for both gas and coal, low commodity prices are of more benefit to the power generators than consumers.

The volatility and uncertainty in the power markets means generators are looking to maximise profits that allow them to deal with the difficulties of demand side/frequency response and embedded generation. Therefore, power prices for building owners are unlikely to fall significantly in the long run.

Additionally the risk of rising commodity prices is ever present. The current lows are an anomaly caused by political instability and slowing global economic growth. Betting on continued low energy prices for the long term, i.e. the life of a building, would be a high-risk strategy, whereas building in efficiency and onsite generation is the low-risk path.

So where does this leave the industry’s plans for making buildings more energy efficient?

Tough

Selling energy efficiency on a purely financial basis was always a tough ask even when oil broke through the $100-a-barrel barrier — so it is even less likely to succeed now. Energy costs still figured a long way down most corporate boardroom agendas, even when prices were relatively high — but that doesn’t mean we should give up.

On a national scale, the sum of energy-efficiency measures could mean the difference between having to build another Hinkley Point or not, a small matter of £24 billion, which in turn leads to the question of energy security.

The country faces a huge ‘energy gap’, with demand for electricity likely to outstrip supply by more than 40% by the middle of the next decade, according to a recent study by the Institution of Mechanical Engineers (IMechE).

There are also likely to be localised grid difficulties as generators try to balance conventional generation, large renewables, energy storage and demand changes. Therefore, buildings that can generate and operate in difficult grid conditions will have considerable value to their owners and occupants. To get to this point, it will be necessary to reduce power loads through efficiency measures — and then supply new forms of generation and storage capacity.

Also, the world is already moving on from fossil fuels. We can’t carry on as we were in the wake of the COP21 climate change conference in Paris last December where 196 countries committed to limiting global warming to ‘well below’ 2 K and to ‘pursue efforts’ to keep it at 1.5 K. They accepted the target of cutting the current 46 billion tonnes of greenhouse gas emitted every year to close to zero by 2050.

The UK is one of those 196 countries, and most experts believe that we will have to close all our coal and gas power stations by 2035 to achieve the 1.5 K target. The Governor of the Bank of England, Mark Carney, said the treaty could make the large oil and gas reserves held by the giant energy firms ‘unburnable’ in the long-term.

The Government has stirred up the hostility of climate-change campaigners and engineers alike by signing the Paris accord with one hand while cancelling a raft of carbon-cutting measures, including energy efficiency initiatives like the Green Deal, with the other.

However, one piece of legislation is still on the statute books and has the potential to make greater headway than all previous efforts. Under the terms of the Energy Act 2011, minimum energy standards are to be imposed on all rented residential and commercial properties from April 2018. This will make it unlawful to let any property with an Energy Performance Certificate (EPC) rating of F or G (the lowest two grades of energy efficiency).

Implications

The estate agent Knight Frank says this could have ‘very significant implications for landlords, and for occupiers who wish to assign or sublet space’ with ‘approximately 20%’ of non-domestic properties thought to be in the F and G rating brackets. It also points out that rent reviews taking place now could be affected and that there will be an impact on dilapidations assessments.

Consulting-engineering practice WSP believes the percentage of buildings affected will be closer to 35% because many currently at E will have been downgraded to F by 2018 as EPC scoring tightens up to reflect more stringent Building Regulations.

‘These proposals will have a significant impact on owners’ ability to lease their buildings,’ said Anna Walton, WSP’s lead on EPCs. ‘Many property owners are already reviewing their buildings and developing proactive strategies in anticipation of the regulations and getting ahead of the game, which is the right approach in our view.’

The British Property Federation (BPF) agrees that the standards would have a ‘significant influence on the future quality of the UK’s rental stock’ and that ensuring buildings have an E rating would ‘require significant investment’.

This is potentially seismic for British landlords and not something they can ignore if they want to stay in business. It is also, therefore, a great opportunity for the building-engineering-services sector to promote the logic of upgrading services and putting proper maintenance programmes in place to start shifting the most energy inefficient buildings up the EPC scale.

As well as the short-term benefit of improved facilities for tenants, such upgrades could deliver extremely valuable demand reductions for the UK in the much longer term.

Tim Rook is technical director of the Building Engineering Services Association (BESA), which is co-sponsoring the Building Services Summit at the British Library on 27 November 2016. The summit will be dedicated to improving the performance of existing buildings.



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