Sustainability: Estate decarbonisation

01 / Introduction

When designing and constructing a new building to be as carbon efficient as possible, developers can work with the latest technology, techniques, knowledge and materials. Decarbonising existing stock is entirely different. It requires the navigation of often centuries-old techniques and materials, which must be adapted to meet modern decarbonisation standards. Adding to that challenge, each building is unique.

Reducing the carbon impact of existing building stock is a time-critical task for the industry, as the consequences of human-induced climate change are already tangible. In 2022 alone, the UK experienced its warmest year on record, according to Met Office data.

On a global scale, the past year has seen extreme weather conditions such as heavy rainfall, flooding and urban wildfires – and all of these are occurring with increasing frequency.

The scale of the decarbonisation challenge cannot be underestimated. Existing building stock accounts for approximately 23% of UK carbon emissions, according to a 2019 RICS report. In the housing sector alone, the UK Green Building Council estimates that the UK’s 29 million homes must be retrofitted at a rate of 1.8 every minute to achieve net zero by 2050.

02 / Investing in decarbonisation

Compounding the issue of scale, the UK is now in recession. In this period of economic, social and political turbulence, making the investment case for estate decarbonisation is vital if it is to be taken seriously by governments, local authorities and private sector firms, which all face tough decisions about where to allocate their capital.

In the current geopolitical climate, there is a strong case to be made that investing in the efficiency and decarbonisation of existing stock is a wise long-term investment decision. For asset owners, the war in Ukraine has strengthened the viability of investing in energy efficiency and transitioning from fossil fuels to domestic renewables: European gas prices peaked in August at more than 20 times pre-pandemic levels. Prices have since edged downwards but remain historically high, and the outlook is uncertain.

Public sector

Despite immense funding pressure, the UK public sector has in many cases led the way in estate decarbonisation investment. Initiatives such as the Public Sector Decarbonisation Scheme (PSDS), launched by the Department for Business, Energy and Industrial Strategy, are injecting cash into improving public buildings by stripping out carbon and energy inefficiencies. The PSDS has to date provided around £1.6bn in grant funding to help public sector organisations improve the energy use of existing buildings, and to reduce their reliance on fossil fuels. The exciting legacy of these schemes is the sharing of data over the first three years of operation so the impact of the measures can be clearly seen on energy use.

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Additionally, the Public Sector Low Carbon Skills Fund provides grants for public sector bodies to engage specialist advice to develop heat decarbonisation plans on their estates. These plans enable public sector organisations to match their asset lifecycle planning with their decarbonisation plans, and to capture funding – whether future public sector spending or private sector investment for schemes with a return on investment.

The Scottish government, meanwhile, has committed to invest £1.8bn in capital funding for energy efficiency and zero carbon heating over the next five years, and Northern Ireland’s Strategic Investment Board is working with public agencies to review, prioritise and implement carbon reduction measures in their existing portfolios and is investing in energy management and net zero fundamentals training.

Private sector

For private estate owners, the investment case for decarbonising their buildings centres around both celebrating their ESG credentials and preventing assets becoming stranded. Assets can become stranded when their value is vulnerable to external factors such as changing regulation, technological innovation or evolving social norms. In real estate, legislation preventing assets with poor energy efficiency from being occupied is a growing risk. There is also rising pressure from fellow asset owners. Initiatives such as the Net-Zero Asset Owner Alliance requires members to reduce emissions across their global property portfolios.

To mitigate this risk, tools are emerging to help estate owners assess the likelihood of asset stranding. The EU-funded Carbon Risk Real Estate Monitor (CRREM) is a tool that allows investors and property owners to assess the exposure of their assets to stranding risks based on energy and emissions data and the analysis of regulatory requirements.

By setting science-based carbon reduction pathways, CRREM is designed to estimate risk and uncertainty linked to commercial real estate decarbonisation, enabling asset owners to empirically quantify different potential climate risk scenarios and their impact on investor portfolios.

03 / Prioritising expenditure

For the thinly stretched public sector, it is vital to ensure that every pound spent is actively decarbonising an estate. This requires a clear plan, a structured approach and prompt action. Doing this reduces the risk of incurring greater – and more urgent – capital outlay later.

When budgets are finite, estate decarbonisation often requires compromise. For example, should a project focus on eliminating fossil fuels or on reducing energy demand, minimising operational costs or increasing on-site renewable energy supply? Deciding upon the core objectives of a decarbonisation strategy – and making sure they can be measured – is important.

Prioritisation starts with building a clear picture of the task at hand. Estate-wide building assessments can be used to set objectives and overarching goals, before breaking them down into smaller targets. Energy audits of existing assets can establish what needs to be done, helping to identify opportunities to make savings.

There are many private sector funds looking to invest in this space, meaning there is potentially more money to work with for asset owners on projects with a good internal rate of return (IRR). Energy saving and renewable generation projects typically see a good IRR, and the recent rise in utility costs has meant significant improvement on these investment cases. However, with electricity prices rising in line with gas, there is rarely a building-level financially viable project for heat electrification – as the improvements in efficiency are offset by the higher cost of the utility.

04 / Design considerations for decarbonisation strategies

Increasing energy efficiency typically involves improving thermal efficiency and airtightness of the building fabric, along with the installation of energy-efficient plant and smart building control technology. Energy assessments will provide guidance on what is possible at each site.

A fabric-first approach is important: improving mechanical, electrical and plumbing engineering (MEP) systems in a building with a poorly performing external envelope has limited value. In contrast, upgrading facades, adding insulation, and increasing airtightness are all effective interventions and are often the first point of focus when taking on a retrofit challenge.

Embodied versus operational carbon

That said, improving the heat efficiency of the building fabric can often create an increase in whole-life carbon. Decisions on whether to change cladding and glazing are examples of the trade-offs and compromises that often must be made at the design stage. These products tend to have a high embodied carbon impact, and this should be considered before decisions to replace facades are made, cognisant of the building’s residual life. Given their carbon intensity, full cladding replacement is only advisable if the existing system is damaged, performing poorly or nearing the end of its useful life.

A holistic approach should be taken to considering the impact of building fabric changes – overheating and condensation, for example, can be consequences of failing to consider how a replacement building fabric will interact with existing building components.

Once decisions about the external fabric and structure have been made, it is important to understand how a building is used. Heating, cooling and lighting unoccupied space is costly in both monetary and carbon terms, yet if building occupier patterns are fully understood, this is a relatively easy way to quickly reduce carbon output and energy costs. This can be done through installing building-level controls to enable efficient building management. Controls are key to ensuring energy use is minimised and the benefits of natural ventilation are explored and incorporated where feasible. Incentivising efficient occupier behaviour is another important way to reduce energy demand.

Some energy-saving measures have become so commonplace as to be an expectation. LED lighting is an example – but to maximise its efficacy, it ideally needs to be managed by sensitive control mechanisms. Daylight controls, for instance, can detect daylight and adjust internal lighting levels accordingly – reducing the need for artificial light and giving users exposure to natural daylight. Passive infrared sensors (PIR) have featured in office buildings for decades, but often there is scope to improve their granularity. Graded light sensors can improve accuracy and ensure that on sparsely occupied floorplates only needed lighting is triggered. Investing in high-quality building management, monitoring and control systems can pay dividends once a building is fully operational again.

On-site energy generation

Introducing on-site renewable energy generation capability is something developers are often keen to explore, as it is typically a highly visible example of a building’s efforts to be more sustainable and can help achieve higher EPC ratings. However, it should be noted that as electricity sourced from the national grid decarbonises, the operational carbon benefit of on-site production lessens. Full grid decarbonisation is still decades away, but we are swiftly moving towards renewables becoming the dominant source of on-grid power. On-site generation has other valuable benefits, such as energy security and the potential to sell energy to the grid, but electrification of existing plant has the biggest impact on carbon reduction.

Whether in the public or private sector, government policy is evolving and has major implications as there are rising minimum standards which must be met. In England and Wales, incremental changes to the Minimum Energy Efficiency Standards (MEES) for domestic and commercial property are driving investment to improve existing stock.

Residential rental property in England and Wales is currently required to have an EPC rating of at least E, rising to C from 2025. The 2025 changes will be phased – applying to new tenancies initially, and to all tenancies from 2028. For commercial property, it will be unlawful to continue to let space with an EPC rating below E from 1 April 2023. This rises to EPC band C from 2027 and band B from 2030.

05 / Procurement and delivery challenges

When undertaking works across property portfolios, it is worth assessing whether benefits can be obtained from standardising specifications and advance procurement. For example, can projects in close proximity be clustered to generate savings?

Once a scheme is in place, accessing the people required to deliver the project can be difficult. Estate decarbonisation may be a rapidly growing area of interest for investors, but there is a question mark over whether the construction industry is equipped to deliver on the upcoming, rapidly rising tide of work that it will generate across sectors.

The Construction Leadership Council (CLC) recently claimed the UK has less than 2% of the skilled workers it needs for the million homes per year energy efficiency drive alone. The Construction Industry Training Board estimates an extra 266,000 construction workers are required over the next five years – and ONS data shows unfilled job vacancies are at a historically high level.

However, stability of workload and pipeline visibility is an issue for training bodies. Demand must be stable before firms can justify investment in training on any great scale. TrustMark, a government-supported auditing body for trade contractors, is working towards its target to have 30,000 retrofit co‑ordinators in place by 2030. Currently the total is just 506 – a figure the CLC has described as “pitiful”.

It is a big challenge, but it offers a great opportunity. We know we have a long-term need for decarbonisation projects between now and 2050. This gives the industry the chance to develop local talent to implement retrofit works – reducing the cost of the project and investing in local communities. To support this, we need long-term decision-making from central government and long-term, outcome-driven procurement vehicles. An example of this approach is Clear Futures, a partnership between Eastbourne and Lewes councils and delivery partners Aecom and Robertson. Clear Futures will be in place for 20 years, enabling councils to provide clarity on the long-term opportunities for their supply chain and driving stable, predictable investment in training.

There are also materials availability issues. Covid- and war-related disruption to product manufacturing capacity means long lead times continue to dog projects, with delays to elements such as solar panels. There is also evidence global product manufacturers are exiting the UK market in the wake of Brexit and ongoing political and economic volatility.

06 / Taxation

Decarbonisation is not currently incentivised through tax reliefs. Capital allowances do not differentiate between traditional technologies and low-carbon solutions. The government has instead focused on:

• A general drive to incentivise investment in construction through a temporary super-deduction and extended annual investment allowances
• Enhanced allowances in freeports following the UK’s departure from the EU
• Regional incentives in response to the levelling up agenda through investment zones, albeit on a more limited and focused basis than originally planned.

Enhanced capital allowances for energy- and water-saving technologies were withdrawn in 2020, and no replacement has been announced. The only noteworthy incentive relates to brownfield sites, through land remediation relief (LRR). Tackling site decontamination in the ground or within existing buildings attracts a 150% deduction for corporation tax purposes. LRR can be surrendered for a 16% payable credit.

At present, the VAT system actively incentivises demolition and reconstruction of residential property – despite these being much more carbon intensive processes than refurbishment and repurposing techniques. The zero VAT rate for residential new-build compares favourably with the standard 20% or reduced 5% VAT rate for works to existing buildings.

While the challenges to the UK economy are well defined, the tax system could be used within specific limits to incentivise owners and occupiers of property to decarbonise real estate assets.

Capital allowances could be readily enhanced for targeted decarbonisation works. Low-energy equipment, passive construction technologies and prioritising refurbishment and repurposing of existing buildings could benefit from specific deductions and tax credits. These can be time-constrained, with appropriate mechanisms to control the cost and combat abuse.

In the longer term, incentives paid out by the government must be balanced by generating tax revenues from more carbon intensive buildings and associated construction works.

07 / Cost drivers for decarbonisation

If a building or estate needs to remain operational during decarbonisation works, costs can increase significantly. Depending on the building type and the extent of the works, it can be necessary to complete works outside normal working hours, which directly increases labour costs and can extend delivery programmes. Decarbonisation programmes for large campuses or a cluster of buildings tend to run into multiple years, especially as the work required inevitably requires space being created to facilitate out-of-hours working and to relocate personnel or departments in temporary alternative buildings.

From a cost estimation basis, today’s fast-rising inflation makes accurate cost calculations difficult for multiple-year works. The same inflation is also bringing challenges to energy-as-a-service contracts. The rise in utilities costs improves the IRR, but the rise in inflation is concurrently pushing up the IRR investors seek – and as there is volatility in the market, margins are increasing to cover the risk.

A temporary plant room may also be needed to maintain heating and cooling and to provide hot water. Replacement plant is often located in the same place as existing plant, meaning downtime is inevitable.

A hybrid approach can work well if budget constraints prevent a full system overhaul, or if disruption to business as usual means complete systems replacement simply is not feasible. For example, air-source heat pumps (ASHPs) are a popular choice for existing building owners seeking to remove fossil fuel heat sources. ASHPs are powered by electricity and extract heat from the surrounding air, enabling them to operate at a seasonal efficiency of around 2.5, reducing operational carbon compared with fossil fuel alternatives. Latent heat is present in air temperatures as low as -20ºC, making them effective in the UK climate.

A hybrid solution reduces rather than eliminates a reliance on fossil fuels, by introducing an ASHP to support an existing heating system. Heat is provided by the ASHP for most of the year, except for when the temperature is very low. When it falls below the trigger temperature, often around 5°C – at which level the efficiency of the ASHP drops away – the existing boiler kicks in to provide supplementary heating.

ASHPs run at a significantly lower temperature than fossil fuel systems, which has several implications. First, this can make them incompatible with existing pipework distribution networks and heat emitters. Therefore, a gas-fired boiler cannot simply be replaced with an ASHP and the cost of replacing entire systems can be high, both financially and in terms of the disruption caused. Another consideration is that while lower-temperature systems are serviceable for heating needs, a further boost in the form of an additional heat pump may be required for hot water – adding cost, complexity and space issues.

As with all retrofit and refurbishment projects, there is heightened risk in that an existing building will always present surprises. The full extent of the works required is often not revealed until work is under way. It is therefore important to undertake comprehensive condition surveys to build as complete a picture as possible – but once work is under way on site, a robust approach to risk management, supported by an appropriate contingency pot, is a sensible approach.

08 / Conclusions

For real estate owners, thinking ahead of time and having a plan in place for estate decarbonisation will enable them to be nimble and take full advantage when new funding streams or supportive initiatives are announced. Tax policy is one area in clear need of greater government support. That UK policy currently favours new-build developments over refurbishment is bewildering in the face of our climate goals, and needs to change.

Public sector support – directly through grant funding, targeted initiatives and regulatory change – is key, but is only one part of the solution. Private sector action on estate decarbonisation is crucial. The hike in utility bills has improved the return on investment for improving energy efficiency. This is partly offset by an increase in the cost of borrowing, but private sector finance is an important part of the jigsaw that cannot be ignored. More instruments are needed to accelerate this market, whether in the form of a carbon tax or as a shift in the relative prices of gas and electricity or other solutions.

The construction industry, the financial community and asset owners must all pick up the pace on estate decarbonisation if both UK‑specific and other international carbon targets are to be achieved. In the face of soaring inflation, a recession, labour and materials shortages and a lack of knowledge in the sector on the topic, this is an indisputably difficult task. Success in these conditions may be about trade-offs and compromises – as well as collectively creating holistic decarbonisation plans in order to break the decarbonisation challenge down into achievable steps, one project or estate at a time.

09 / About the cost ranges summary

Every building is unique, and therefore the cost of improving energy efficiency can vary considerably from project to project. This makes meaningful cost benchmarking difficult. Presenting the costs associated with a notional project is unlikely to have general relevance and can be misleading. Instead, it is more useful to consider a menu of core costs for different interventions before building a more detailed, and informed, view of project-specific costs. This is provided below.

Indicative cost ranges provided in this cost summary are in Q4 2022 prices, and rates reflect the national average.

Main contractor preliminaries and overheads and profit are excluded from the costs provided.

It is assumed that sufficient grid capacity is readily available to meet requirements. If the local network has surplus capacity, it is simply a case of ringfencing additional requirements. But a steep rise in UK energy demand in recent years means surplus capacity is unlikely in many parts of the country and this can trigger reinforcement work, the cost of which is shouldered by the requesting party. Understanding energy needs and the availability of local network capacity as quickly as possible is important. The cost of reinforcement works can be extremely high.

Other items excluded from the costs given here are: abnormals such as asbestos remediation works; VAT; professional or design fees; design and construction risk contingency; costs associated with planning; commissioning management; works to roads and traffic management; general acoustic requirements and structural reinforcements; man-safe systems and roof-edge protection.

Demolition and alteration of existing wall and building structures, phasing of the works, out-of-hours working, decanting and recanting costs and temporary services can all have a large bearing on the overall cost of existing building decarbonisation schemes. The costs presented here are baseline costs and therefore do not allow for these factors.

10 / Cost ranges for estate decarbonisation options

	Unit	Rate (high)	Rate (low)
Fabric interventions
Window replacement – from single- to double-glazed, including removal of existing windows; higher costs are incurred if bespoke units required	m²	£750	£1,130
External wall insulation – inner side insulation	m²	£350	£350
External wall insulation – outer side installation; excluding scaffolding costs as dependent on building size and constraints	m²	£420
Cavity wall insulation – blown fibre	m²	£40	£40
Roof insulation – glass fibre	m²	£200
Loft insulation – Rockwool; methodology of work can influence cost	m²	£75	£85
Draughtproofing of doors and windows	m	£20
MEP services interventions
Upgrade to air-source heat pumps (ASHP): full low-temp hot water (LTHW), includes removal of existing boilers, provision of new ASHP and ancillary plant, water treatment, plant-room pipework and valve assemblies, upgrade on electrical local supply and associated building maintenance system (BMS); excludes secondary LTHW distribution and heat emitters and electrical infrastructure upgrade; higher rates are incurred for new external plant room if no available roof space	kW	£1,150	£2,300
Conversion from fixed- to variable-speed pumps (installation of inverter drives); includes BMS interfacing	nr	£3,200
New zoning for LTHW network (some circuits being time-controlled zones); differential pressure control valve (DPCV) rate applies to sizes up to 100mm diameter	nr	£5,000	£8,000
New LTHW heating emitters (more efficient units) – assumes LTHW radiators	nr	£1,500
Rectification to damaged MEP insulations to pipes; assumes 25mm diameter, 40mm thick	m	£35
Install runaround heat recovery to air-handling units (AHUs): assumes 2m3/s and sufficient space within AHU enclosure	nr	£15,000
New BMS systems: dependent on mechanical and electrical systems needed to be BMS controlled and monitored	m²	£85	£140
Recalibration of existing BMS sensors for gas boilers, ventilation plant and ancillary plant; includes on-site and offsite engineering and FM training (rate applies up to 10,000m² GIA)	item	£7,000	£10,000
Replacement of existing cooling units with more efficient units; assumes 2kW-5kW split air-conditioning units with reused pipework, power supplies, BMS; wall/ceiling mounted units fall at lower end of range, with concealed/ducted systems at higher end	nr	£3,500	£5,000
New/replacement lighting and controls (more energy efficient fixtures and controls); assumes LED general lighting only; no allowance for external, specialist and feature lighting	m²	£150	£180
Solar photovoltaics (PVs): standard PVs; not green roof PVs; roof reinforcements and battery storage excluded (rate applies for PV panel surface area)	m²	£300	£350
Energy-efficient hand-dryers (upgrade to modern high-velocity variant)	nr	£1,000	£1,200
Provision of cold and hot flow restrictors to sanitaryware	nr	£80	£100
Provision of dynamic thermostatic valves to radiators; excludes modification to pipes and radiator painting	nr	£450	£650
Smart switches for socket outlets	nr	£100	£150
Timeclocks for TVs, printers, vending machines	nr	£100	£150
Sub-meters for chilled water, LTHW and domestic hot water	nr	£1,500	£2,500