What a performance

Green is officially the new black. Politicians and companies big and small, alive to growing public concern for the state of the planet, are wasting no chance to declare their unflagging commitment to the environment. But now a European Union directive is demanding that businesses prove their green credentials. The aim of the directive is to transform the continent's buildings from carbon-emitting blots on the environmental landscape into eco-friendly machines.

The energy performance of buildings directive (EPBD) is designed to make the energy consumption of buildings clear to their users through the use of certification. The idea is that this will force landlords to make their buildings more energy-efficient, thereby reducing the damaging effects of heating, air-conditioning and other activities on the environment. There are just two problems for the owners and occupiers of the UK's commercial buildings: first, nobody, including the government, knows how it is going to work in practice, and second, nobody knows whether it will work.

The directive came into force on 4 January this year, but has yet to be passed into UK law (see "What is the EPBD?", on page 32). Although energy certification will soon be required for the sale of domestic properties (as part of the home information packs being introduced in 2007), the government has so far been silent on how energy performance certificates will work in the commercial sector. "It's disappointing and unfortunate that the ODPM hasn't acted on this," says Mike Beavan, principal at architect Arup Associates. "It means we in the industry are second-guessing what's going to happen."

Beavan's sense of dissatisfaction is echoed by many across the property and construction industries, who are frustrated by the lack of guidance from government on how the energy certificates, which are required each time a building of more than 1000 m2 is constructed,

sold or rented out, will work. "The problem is that there is a rule in place but no guidance on how to meet it," says Richard Saxon, the former chairman of architect BDP who now advises clients on construction projects. "This means some projects will probably be held back, as you don't want to get half way through a project and find it's not going meet the right criteria."

The lack of guidance is particularly perplexing to members of the EPBD Article 7/10 Advisory and Working Group, which includes representatives from the British construction, property and energy industries, as well as environmental organisations and the ODPM. The group submitted a report to the government more than a year ago that called for an urgent statement as to how energy certification would be implemented: it has received no response. "We put together a report that went to the ODPM in February last year and it pretty much vanished without trace," says Martin Russell-Croucher, head of certification and accreditation at the RICS and a member of the group.

The report highlighted the need for the development of nationally recognised qualifications and authorised competent persons schemes for those who will actually carry out the energy testing, as article 10 of the directive requires that the certification of buildings be carried out by "qualified and/or accredited experts". But according to Russell-Croucher: "We've had no comment from government at all about whether they think it's a good or bad idea."

An ODPM spokesperson said the department would "make an announcement shortly on the timescale for the implementation [of energy performance certificates] for commercial buildings", but many are unconvinced as this is what it has been promising for well over a year now. "It's done absolutely nothing and has now lost a year," says a source who is infuriated by the government's silence. "The industry is ready to act but it still has nothing to go on."

You can implement something that meets the letter of the directive but saves you not one kilo of carbon and costs £1bn to implement

Source close to the government

This lack of urgency can be traced to a clause in the directive that gives EU member states an additional three years - to 4 January 2009 - to fully apply energy certification if there is "a lack of qualified/and or accredited experts". But some are concerned that the industry will struggle to comply with the directive even within this extended timeframe. "The more they delay, the more you're squeezing what has to be done into a shorter and shorter time," says Russell-Croucher.

And the three-year extension doesn't come without conditions. In order to be granted this period of grace, countries must inform the EU of its reasons for failing to meet the 2006 deadline and provide a timetable for compliance. The government's failure to provide such information leaves it open to proceedings from Brussels.

How much will compliance cost?

Timing isn't the only concern of those affected by the directive; the cost of getting buildings certified is also causing concern. This is something that will hit developers and landlords - and that tenants will need to look out for. "When it comes to leases, we're certainly looking to advise occupiers that any potential costs associated with this legislation are excluded," says James Maddock, head of global corporate services for Europe, the Middle East and Africa at DTZ. "We just don't know how much this is going to cost a company or a building."

A source close to the government suggests that energy certification could create a multibillion-pound industry - and that the nexus between cost and implementation is one reason that the government has been dragging its feet. "The dilemma with the directive is that you can implement something that meets the letter of the directive but saves you not one kilo of carbon and costs £1bn to implement," the source says. "The more onerous you make the directive, the more likely it is that it will save carbon, but you run into the costs going up even further."

Lack of clarity

It is thought that the government is leaning towards energy ratings that would fall in line with the labels on domestic items such as fridges, which are given a an energy efficiency rating of between A and G. It is uncertain whether the certificates for public use will be different from those required when a building is constructed, sold or rented out. It is also unclear which organisations will be deemed to be providing public services to a sufficiently large number of people.

Then there is the question of whether the certificates will distinguish between a building's operational rating - how well it is being operated by the occupier - and its asset rating, which is based on how it was designed and built.

Occupiers are aware of energy certification but at the moment it doesn’t mean that they’ll be prepared to pay £5/ft2 more for a greener building

James Maddock, DTZ

Indeed, it is the minutiae of the certificates that may prove to be an important factor when it comes to the effectiveness of the directive. As the certificates simply provide information, the way in which this data is presented, how reliable it is perceived to be and the consequent market reaction to it, will be decisive.

Some in the property sector doubt that certification will have the intended effect on the market - and hence on carbon emissions. "I don't think people will notice it," says Dave Farebrother, assistant director for environmental services at developer Land Securities. "Even if they do, it's going to take a while to filter down as the movement rate in the commercial sector is so small." While not everybody is so pessimistic, most agree that that it will take time for energy certification to have a real impact on the commercial market. "The market will evolve as the rating of buildings starts to become comprehensive," says Simon Reynolds, partner at GVA Grimley. "It could even create a two-tier market in which green buildings are worth more because people want to occupy them, and redundant buildings could crop up. I think that this kind of change will creep in."

Good news story

If the directive does have such a radical effect on the commercial property market, the catalyst is unlikely to be energy costs, which despite the dramatic rises of recent months still only constitute a small percentage of companies' overall expenditure. It is corporate social responsibility, which the directive harnesses most obviously in its public display requirement (see box, left), that most agree will be the real driver. "If you can say to a corporation that they can tick the CSR agenda box and can save 25% on operating costs, too, you've got a pretty compelling argument for going green," says Reynolds.

DTZ's Maddock suggests that for large firms, the energy rating of their buildings is likely to compel them to build or lease greener alternatives: "Most of the major corporates are now very aware of [the energy certification requirements] and it's becoming quite a key issue for them.

"Going forward, we're seeing that green issues are right at the top of the decision-making agenda. They are asking themselves about the efficiency of a building and how much carbon it is creating, as well as its location and gross floor area."

He thinks that a two-tier market, as suggested by Reynolds, could evolve over time through the rent review mechanism as those carrying out reviews will be able to argue that energy inefficient buildings will not be considered by 30% of the market. However, he adds that the supply of and demand for commercial office space will continue to rule the market. "From a market point of view, the only thing that is a definite is that occupiers are aware of it and are putting it on their schedules. It's part of their decision-making process but at the moment it doesn't mean that they'll be prepared to pay £5/ft2 more for a greener building."

The corporate social responsibility factor isn't the only driver that could lead to the success of the EPBD. George Martin, head of rethinking in Willmott Dixon's construction division, thinks the impact on productivity should compel companies to invest in more energy-efficient properties. Post-occupancy studies show that more sustainable offices have happier, healthier and more productive staff. "When you build an office, it costs one unit to design, five to build, 20 to run and 200 for the salaries of those who occupy it," he says. "If you build a more sustainable building you might save 10% of the running costs. But if people are happier and healthier in the building, you could save 10% of 200. Obviously, that works out to be a lot more."

How energy certification will work in practice remains to be seen. Central government has committed itself to only procuring buildings that fall into the top-quartile in terms of energy performance - however that is measured - which will force the construction industry at least to start paying attention to the EPBD. The property industry may prove a harder nut to crack, but some at least are confident that energy certification has the potential to transform the office market. "It will happen," says Reynolds. "Landlords aren't stupid, nor are tenants. If I'm thinking about it, other people surely must be."