Chapter 2: Minimum Standards Improvements & Funding

2.1 Relevant Energy Efficiency Improvements (Regulation 28)

42. For the purposes of the minimum standards, the relevant energy efficiency improvements which a landlord may choose to install to allow a sub-standard property to reach an EPC rating of E (either a single measure, or a combination of measures as appropriate) are any energy efficiency improvements recommended for the property via any of the following:

• a relevant recommendations report^[1] (including the recommendations report accompanying a valid EPC),
• a report prepared by a surveyor^[2], or
• a Green Deal advice report,

44. Details of the energy efficiency improvements which may be specified in any of the above reports, and which may be installed to meet the minimum level of energy efficiency in non-domestic properties, are set out in Appendices B and C of this guidance^[3]. Technically, as the Regulations are currently drafted, the measures set out in Appendix B (the Green Deal Order Schedule) would only apply where Green Deal finance was being used, while the measures provided for through Appendix C (the Building Regulations Approved Document L2B) apply where measures otherwise funded will achieve a 7 year payback. However, in practice there will be significant overlap between the measures represented by these two sources.
45. As noted in chapter one, where a sub-standard property is able to undertake improvements to meet the minimum standard (or can undertake improvements but still not meet the minimum standard), the landlord maywish to arrange for a new, post-installation EPC to be carried out, reflecting any changes to the EPC rating and any improvements made.

2.2 Relevant Energy Efficiency Improvements and Cost Considerations (Regulation 28)

2.2.1  The Seven Year Payback Test

 Installation of the energy efficiency improvements set out in Appendix C (which, as noted above, will in practice overlap significantly with those listed in Appendix B) will only be required for a non–domestic property where the recommended measure (or a package of measures) achieves an energy efficiency payback of seven years or less. (As noted previously, the Regulations also allow for measures which are capable of being funded by a Green Deal finance plan, but at this time Green Deal finance is not available for new Green Deal plans so this funding option is not currently applicable.)

 

46. The formula for the seven year payback test is set out in regulation 28(3) – (8) of the Regulations. Any energy efficiency measure referred to at

Appendix C of this guidance (Table 6 of the Building Regulations Approved Document L2B) is only a relevant energy efficiency improvement if it passes the payback test and has been recommended for a non-domestic property in any of the reports referred to in 2.1 above.

47. A measure, or a package of measures, meets the seven year payback test where the expected value of savings on energy bills that the measure (or package of measures) is expected to achieve over a period of seven years, starting with the date the installation is completed, are equivalent to, or greater than, the cost of repaying

Installing packages of energy efficiency measures

Landlords should note that certain combinations of energy efficiency improvements of the kind relevant to the PRS minimum standards can often work together to increase expected savings on bills, achieving greater savings in combination than they would on their own. For this reason certain measures which might, individually, fail the seven year payback test, may pass the test when installed as a package.

Calculation of the expected savings which might be achieved by a package approach is not a requirement of the Regulations. As such, enforcement authorities do not have powers to undertake enforcement activity where a landlord has chosen only to install a discrete measure where a relevant package was available as an option.  However, Government would encourage landlords to consider packages of measures where they meet the payback test, and landlords should seek advice on package options from a qualified energy efficiency assessor or installer of the relevant, recommended measures where appropriate.

Determining the ‘Value of Savings’ on Energy Bills (S)

49. The Regulations state that the expected value of savings (S) on energy bills for the proposed measure, or measures, must be calculated using: the approved methodology²³, using relevant energy prices.
50. This means a landlord will be required to obtain a £ figure representing the savings which a measure, or a package of measures, is expected to achieve over seven years, based on the energy costs of the property in question, or an informed estimate of those energy costs. The Regulations do not specify who should carry out the savings calculation, but ‘approved methodology’ refers to the methodology for calculating EPCs, therefore unless a landlord has in-house capability, they are likely to require the services of a competent non-domestic energy assessor, such as a level four accredited non-domestic energy assessor (NDEA), who can determine expected savings, incorporating property specific energy price information provided by the landlord. Accredited NDEAs can be searched for here²⁴.

• In the Regulations, “approved methodology” refers to any approved methodologies and software programs that can be used to calculate Energy Performance Certificates in accordance with regulation 24(1) of the Building Regulations 2010.
• ndepcregister.com/searchAssessor.html

 Calculating ‘relevant energy price’

50. Relevant energy price means the “unit cost” of the supply of energy to the rental property. Where the value of savings on energy bills is to be calculated, the landlord must provide the individual undertaking the calculation with the unit cost, calculated as follows:

Where a landlord has access to the most recent 12 months’ worth of energy bills for the property:

• the unit cost should be calculated by dividing the total cost of the supply of that energy for that 12 month period (including any fixed costs charged by the supplier, but excluding VAT), by the number of units supplied in that 12 month period.

Where a landlord has energy bills for the property, but for a period of less than 12 months, from any time in the previous 15 month period which ends on the date that the payback calculation is made:

• the unit cost should be calculated by using the energy bills to estimate the total cost of the supply of energy. The estimate should cover the 12 month period ending on the date that the calculation is made (including any fixed cost charged by the supplier), and estimating the number of units of energy that would be supplied in that 12 month period.  Total estimated cost of supply must then be divided by the total estimated number of units.

Where a landlord has no energy bills for the supply of energy to the property for the 12 month period which ends on the date the calculation is made:

• the landlord must use the cost per unit for the supply of that energy charged by the landlord’s current, or intended, energy supplier on the date the calculation is made.

Determining the Repayment Cost (R)

51. The repayment cost (R) is determined by multiplying the capital cost of installing the proposed energy efficiency improvement (or improvements) by an interest rate factor, and then multiplying this by seven. This is shown below:

Calculating ‘capital cost of installation’

52. The capital cost of installing a measure (C) must be calculated by adding together the cost of purchasing the improvement, and the cost of installing it (including labour costs, and based on labour and installation costs as at the date the calculation is made) but excluding VAT.

Calculating the interest rate factor

53. The interest rate factor (F) must be calculated using a standard annuity Chapter 2: Minimum Standards Improvements and Funding payment factor as follows:

where i  is the Bank of England base rate in force at the time of the calculation^[4].  Annuity payment factor calculators can be found online to carry out the equation calculation if required.

 

Calculating the ‘interest rate factor’ examples   Interest rate factor at 0.25% base rate = 0.14429 Interest rate factor at 0.5% base rate = 0.145729 Interest rate factor at 2% base rate = 0.15451 Interest rate factor at 5% base rate = 0.17282

 

54. Once the landlord has calculated the capital cost of installation (C), and the interest factor (F), they should multiply the cost of installation by the interest rate factor. They should then multiply this figure by seven to determine the

‘cost of repayment’(R) over a seven year period.

Completing the Payback Test

56. If, after having undertaken the above calculations, the value of savings on energy bills (S) is shown to be less than the calculated cost of repayment (R), the measure (or measures) will not meet the payback test and will not be a relevant improvement for the purposes of the regulations and will not need to be installed.
57. However, where the value of savings on energy bills is the same as or greater than the calculated cost of repayment, the measure (or measures) will have met the seven year payback test. They will therefore be relevant improvements for the purposes of the Regulations and must be installed before the landlord can let the property, unless an exemption applies. Table one below shows several worked examples of this test.

Table one

Comparing the Cost of Measure with the Cost of Savings – Worked Examples   Measure Gas Saving[5] (kWh/y) Savings over 7 years (S) Capital plus installation cost (C) Interest Rate Factor (F) (based on 0.5% base rate) 7 year repayment cost (R) (CxFx7) Meets 7 year Payback Condensing boiler ('A' rated) 6,609 £1,750 £2,000 0.145729 £2,040 NO Thermostatic radiator valves 4,213 £980 £600 0.145729 £612 YES Package of measures (boiler plus TVRs) 10,822 £2,730 £2,600 0.145729 £2,652 YES

57. Where a landlord is intending to rely on an exemption because a recommended measure does not meet the seven year payback test, they will be required to provide evidence of the capital plus installation cost (C) in the form of three separate quotes. Please see chapter four for further information on this.

2.3 Relevant Energy Efficiency Improvements and Special Provisions for

Wall Insulation (Regulation 28(2))

59. The Regulations recognise that certain wall insulation systems cannot, or should not, be installed on particular properties in particular instances even where they have been recommended for a property, and where they meet the seven year payback test. Therefore there is a special provision relating to the circumstances in which cavity wall insulation, external wall insulation systems, and internal wall insulation systems should be installed.
60. The special provision is that an energy efficiency measure is not considered to be a relevant measure where it is:

• cavity wall insulation, external wall insulation or internal wall insulation (for external walls), and
• where the landlord has obtained written expert advice which indicates that the measure is not appropriate for the property due to its potential negative impact on the fabric or structure of the property (or the building of which the property forms a part).

60. The expert advice the landlord provides must be obtained from one of the following independent experts:

• an architect registered on the Architect Accredited in Building Conservation register,
• a chartered engineer registered on the Institution of Civil Engineers’ the Institution of Structural Engineers’ Conservation Accreditation Register for Engineers,
• a chartered building surveyor registered on the Royal Institution of

Chartered Surveyors’ Building Conservation Accreditation register,  or

• a chartered architectural technologist registered on the Chartered Institute of Architectural Technologists’ Directory of Accredited Conservationists.

61. Alternatively, if the advice is not, or cannot be, obtained from one of the above experts, advice may be obtained from an independent installer of the wall insulation system in question who meets the installer standards for that measure, as set out in Schedule 3 to the Building Regulations 2010²⁷, as reproduced at Appendix F of this document.

Note: the Regulations define an “independent” expert or installer as a person who is not a spouse or civil partner of the landlord or superior landlord. Where the landlord is a company rather than an individual person, then an independent expert or installer must be someone who is not, and has not been in the last 12 months been:

• a director, partner, shareholder or employee of, or other person exercising management control over, the landlord or the superior landlord, or
• a spouse or civil partner of a person falling within the sentence above.

²⁷ www.legislation.gov.uk/uksi/2010/2214/pdfs/uksi_20102214_en.pdf

62. If a landlord intends to rely on the special provisions relating to wall insulation in order to let a sub-standard property, they must register the property and all required information on the PRS Exemptions Register (see table two in chapter four for more information).

         [1] ‘Recommendations report’ has the meaning given in The Energy Performance of Buildings (England and Wales) Regulations 2012: ‘recommendations made by an energy assessor for the cost-effective improvement of the energy performance of a building or building unit’.

[2] A qualified surveyor is one who is on the Royal Institution of Chartered Surveyors’ register of valuers. The register can be accessed via RICSs website at: www.ricsfirms.com.

[3] The list of energy efficiency improvements in Appendix B appears in the Schedule to the Green Deal (Qualifying Energy Improvements) Order 2012; the list in Appendix C reproduces Table 6 of the Building Regulations Approved Document L2B.

[4] Bank of England base rate is defined in regulation 28(8) of the Regulations.

[5] Please note that there may be additional electrical savings which need to be accounted for. As an example, where variable speed pumps form part of the package of measures to support the installation of a condensing boiler.

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