Now two reports have backed our call for financial incentives for building owners. The question is: what would work?

The call for financial incentives to improve the energy efficiency of existing stock is getting louder. As part of its Review of Existing Buildings, the government has commissioned the Carbon Trust to produce a report identifying the energy challenges faced by non-dwellings. The Energy Saving Trust (EST) is doing the same for housing. The EST’s report is complete; the Carbon Trust’s should be finished next month.

A main recommendation of both will be the introduction of financial incentives. It will be up to ministers to agree on which ones, and then get the blessing of the Treasury. This will not happen until next year, so in the meantime, what are the challenges we face, and the sort of incentives we might we see?

Opposite and overleaf, we look at the options and the opinions of people from a range of sectors. However, the first point to make is that it is hard to get people to improve buildings even if there is a good economic case to do so. The Carbon Trust calculates that emissions from non-dwellings could be cut 37%, and that a 20% reduction could be achieved cost effectively, saving the public and private sectors £1bn a year in energy bills. The fact that this isn’t happening is where incentives come in.

One barrier to improvements is the divide between landlord and tenant. Landlords have no incentive to improve their buildings because there is no evidence that they would then command higher rents. “There has to be some other incentive,” says Charles McDonald, the real estate strategy manager at the Carbon Trust. “Communicating how the cost can be shared is one of the most challenging issues.”

This indicates that incentives will include educating people about what can be done and providing an incentive to do it. Energy performance certificates will help, as these will make people aware of how performance can be improved. Incentives that bridge that landlord–tenant divide look likely, too.

What about private homes? The EST sees energy certificates as important, but is unsure how they will affect behaviour. Zoltan Zavody, the EST’s strategy manager, says: “The question for the government is whether the certificate is stuck at the back of the home information pack and never read, or is followed up by support and education.” Each certificate rates the dwelling, and suggests improvements – which the EST says equates to an annual energy saving of £300.

The EST says the way to get homeowners to act on the suggestions on the certificate is to offer council tax rebates. “You could argue that people will get cheaper energy bills but they value a rebate on their council tax much more than a lower energy bill – that’s the nature of the society we live in,” says Zavody.

Zavody adds that council tax reductions were also seen as a more compelling incentive than stamp duty reductions.

The most likely scenario is there will be a mixture of incentives because of the diversity of the built environment. For example, direct grants are far more relevant to housing associations than council tax reductions.

One thing is certain, though: whatever the carrots may be, these will be balanced with sticks, with future revisions to Part L bound to be much tougher on existing buildings.

What they want: the property occupiers’ views

The property company

Developer Land Securities believes some incentives would help. Project engineering director Neil Pennell likes the idea of reduced stamp duty, saying it “has the benefit of simplicity”.
He also favours reduced business rates as these would incentivise tenants. “Tenants are normally reluctant to pay to replace a boiler with five years life left in it when they only have five years left on the lease. If you can get the capital cost back in two years then the tenant might agree,” he says.

Land Securities has participated in a pilot scheme to test the impact of carbon tax trading on different types of business. For the scheme to work, a business needs to know how much energy it should be using – and how much it actually uses. Land Securities had the figures, but Pennell points out that many properties are managed by agents or owned by investors who do not collect such data.

There is also the issue of working out which bits of the building each user is responsible for. “Land Securities is responsible for the common areas, but we can’t make tenants turn off the lights or buy new computers.”

He says there were some savings from the scheme. “We saved a few thousand pounds, but by the time you factored in the cost of the audits it was very marginal. To administer this in the commercial area would be challenging.”

What it wants Reduced stamp duty and reduced business rates to incentivise tenants.

The local authority

Sue Brazil, an energy conservation officer in the mechanical engineering department at Newham council in east London, thinks the government is already putting plenty of pressure on local authorities to improve existing buildings.

“The government has done a lot and the legislation is there,” she says. Brazil cites the changes to Part L and the Decent Homes programme to bring homes up to modern standards – this includes improvements to insulation and heating systems. There is also the Home Energy Conservation Act 1995, which requires local authorities to identify energy-saving measures for homes and report on progress.

She is not a fan of grants, but would like to see zero rating on energy efficiency products, despite the council being a zero-rated organisation for VAT. “We have a huge number of owner-occupied Victorian terraces where the occupiers don’t have much money. We have no control over those homes but because of the 1995 act we have to encourage people to make improvements. If it were cheaper, it would make a difference.”

What it wants Zero rating on energy efficiency products to make it easier for owner-occupiers to afford improvements.

The housing association

Circle Anglia is responsible for 28,000 homes nationwide and has already set itself higher standards for energy efficiency improvements than those set out in the Decent Homes programme, which John Shortt, Circle Anglia’s director of asset management, describes as “relatively low”.

He says meeting the government’s 60% target for reducing carbon emissions will require considerably more than Circle Anglia can afford, for example it means expensive technologies including solar panels and combined heat and power.

“We carry out energy efficiency improvements when we are improving a property, but we cannot afford the extra cost needed to achieve the 60% target,” he explains. “As a landlord the will is there, we would like to do the work.”

He says grants are the obvious way forward for housing associations. “The government needs to provide funding for housing associations to do this work and hit its
own target.”

What it wants Government grants to help associations improve their stock

The occupier

Software giant Microsoft part-owns and occupies its property portfolio, which consists of offices and research facilities. Nick O’Donnell, its head of corporate real estate, favours reduced business rates that are directly scaled according to the level of energy efficiency improvement, and VAT cuts on refurbishment schemes.

He is not a big fan of reduced stamp duty, saying it would not affect purchasing decisions, or carbon trading.

“Corporate occupiers need to invest more in greener buildings by putting more money upfront, but we need encouragement at the back end, over the life of the building – that is how the government could help.”

What it wants Reduced business rates directly scaled to cuts in emissions and VAT cuts on refurbishment schemes

The quango

The Environment Agency occupies 112,000m2 of buildings in England and Wales. These range from leaky Victorian structure to a state-of-the-art low-carbon building in Wallingford, Oxfordshire. Garry Gordon, its head of property, broadly supports the incentives listed but is keen to see carbon trading extended to cover more sectors.

“Carbon trading would be most relevant to us,” he explains. “We have been measuring energy consumption for years. Carbon trading would turn this into real money and would help us raise the energy performance of our portfolio more quickly.”

The agency has already created an internal market for carbon by offsetting its emissions, which it achieved by improving its own buildings rather than spending the money on planting trees.
Gordon acknowledges that carbon trading won’t be easy. “The key is capturing the information, which is not as easy as it sounds. You have to meter your own energy use on a monthly basis.”

What it wants Carbon trading extended to turn energy improvements into hard cash

The retailer

Getting rid of taxes that penalise businesses for investing in energy efficiency measures would be a first priority for Paul Browne, the head of property and planning at the British Retail Consortium.

“Installing on-site renewables increases the value of your property, which is taken into account when it is revalued and increases your business rates,” he explains. He says it is more about the principle than the amount of money that would be saved. “If the government is going to start creating incentives for renewables it has to remove every barrier, however small.”

Browne would also like to see the higher business rate levied on air-conditioned properties reduced if the occupier installs more energy-efficient air-conditioning.

Another measure the consortium would support is extending the enhanced capital allowances scheme to cover a wider basket of products, including renewables, although Browne acknowledges that this would be complex to administer.

What it wants Reduced business rates to recognise cuts in emissions, tax relief on a wider range of renewable products

The incentives: What do you think?

Tell us which of the incentives listed below you believe would be most effective in our poll.

REDUCED BUSINESS RATES

Reductions could be directly linked to energy certificates – for example, improving a building with an E rating to a C would attract a fixed percentage reduction in rates.

Advantages
A building with a reduced business rate would be more attractive to tenants, benefiting occupiers and owners.

Disadvantages
How long would the cut would apply for? It is potentially inequitable, as an old, inefficient building made slightly more efficient could attract a lower business rate than a new and efficient building.

REDUCED STAMP DUTY

Alternatively, stamp duty rebates could be given to new owners who carry out energy efficiency improvements after moving in.

Advantages
This is relatively straightforward. Also, tight timescales for improvements would make people implement improvements quickly.

Disadvantages
The Treasury might be reluctant to give up a tax that brings in significant sums, and it applies only when a building is sold.

CARBON TAX CREDITS

A benchmark is set for energy use. Firms that use more energy than the benchmark buy credits from those that have made energy efficiency improvements so have credits to sell.

Advantages
Already in place for manufacturing industry. Government could reduce the benchmark yearly to continually improve performance.

Disadvantages
Complex and expensive to administer, as precise monitoring would be tricky for buildings in multiple occupation.

GRANTS

As in the Low Carbon Buildings Programme, which gives grants for installing renewable technologies.

Advantages
Universally popular. After all, who’s going to say no to a cash handout?

Disadvantages
Grants usually have conditions attached; these can be so complex that the effort needed to get the money makes it not worth bothering with. Also, the government has stated that it doesn’t like giving grants, particularly to companies that can already afford to make changes.

EXTEND ENHANCED CAPITAL ALLOWANCES

Companies receive 100% tax relief in the year they spend money on energy efficiency improvements, rather than getting a small tax relief over a number of years. It already applies to services technologies.

Advantages
The enhanced capital allowances (ECA) scheme is already operating so could be extended relatively easily. Could benefit anyone in business.

Disadvantages
It is already complex to administer as specialist consultants are often needed to take advantage of ECAs.

REDUCE VAT ON ENERGY EFFICIENCY IMPROVEMENTS

Change the VAT rating on energy efficiency improvements from 17.5% to the lower 5% rate.

Advantages
Immediately makes any improvements cheaper. The 5% VAT rate is already in place for some categories of work, so extending it to energy efficiency improvements should be relatively straightforward.

Disadvantages
Only applies to individuals and organisations that cannot claim VAT back from the government.

IMPROVE EXISTING BUILDINGS IN RETURN FOR PERMISSION

Large sums of money are required to improve the energy efficiency of already efficient new buildings. The same amount could buy greater energy efficiency improvements to existing buildings. Developers could be given a carbon reduction target when receiving permission and could opt to improve existing buildings.

Advantages
Developers could achieve higher carbon savings for less.

Disadvantages
Would need a new organisation to administer the scheme.