As the introduction of the MEES regulations draws closer, it can be difficult to know which energy-saving measures offer the best returns in commercial buildings. Azita Dezfouli and Adam Mactavish of Currie & Brown find out which kind of offices benefit from different carbon-cutting measures using modelling

1. Introduction

The energy and carbon efficiency of commercial buildings is becoming ever more important in the UK. Currie & Brown undertook research for the Investment Property Forum (IPF) to identify the costs and savings associated with retrofitting energy efficiency measures to existing buildings. The study considers how landlords can address both the imminent minimum energy efficiency standards (MEES) regulations and achieve longer-term carbon reduction targets for 2030. 

The following sections explain legislative and other drivers in the UK, our approach and the summary of findings for one naturally ventilated and one air-conditioned office. The full report will be freely available from the IPF website in January 2018.

The key data tables and analyses are detailed in the full report and may be used to estimate the implications for a specific building and/or technology option. However, the analyses only address six building archetypes and the performance of an individual building can vary considerably.

Figure 1

Figure 1 - Projected costs of commercial energy supply

2. Why it is important

Legislation

The Climate Change Act (2008) commits the UK government to reducing greenhouse gas emissions by 80% compared with 1990 levels by 2050. The most recent report tracking UK performance against current and future carbon budgets raises concerns about progress in the non-residential buildings sector.

The decarbonisation of the electricity grid means that emissions from commercial buildings should reduce in the future. This is not cause for complacency for two reasons. First, the ability to decarbonise in line with the 2050 target relies on the UK becoming more energy efficient. Secondly, the investment needed to decarbonise the grid is likely to result in the cost of supplied electricity increasing in the future. 

Hence, while electricity use may have lower carbon emissions, it is likely to become around 55% more expensive than current costs (Figure 1). Improving energy efficiency of buildings is therefore becoming more significant as a way to reduce electricity demand and running costs. 

The introduction of MEES regulations will prohibit the renewal or issue of new leases of buildings that do not achieve a minimum Energy Performance Certificate (EPC) rating of E from 1 April 2018. From 2023, all leases of F and G EPC-rated buildings must cease. The landlords of the more than 80,000 rental units with EPC ratings of F or G will therefore need to review the opportunities to improve these assets when they are next let (or by the end of 2023). 

Levies and incentives

There are also a series of levies and incentive mechanisms to encourage the adoption of energy-efficient and low-carbon technologies.

Some of the current levy and incentives include:

  • The Climate Change Levy – a tax on electricity, gas and solid fuels, which is set to increase from 2019 to compensate for the discontinued Carbon Reduction Commitment energy-efficiency scheme. 
  • Feed-in tariff – incentivises the generation of electricity via renewable technologies through payment for each unit (kWh) of electricity generated. 
  • Renewable heat incentive – incentivises the generation of heat via renewable technologies through payment for each unit (kWth) of heat generated. 
  • Enhanced capital allowances – government enhanced capital allowances encourage businesses paying income or corporation tax to invest in energy-saving plant or machinery (specified on the Energy Technology List: etl.beis.gov.uk), by allowing them to recoup 100% of the equipment cost from the tax paid on profits in the year of purchase.

3. Approach and methodology

Six building archetypes were created and modelled to represent the existing stock that might be owned by property investors. A range of discrete and combined packages of improvement measures were applied to the buildings and assessed for their cost and their impact on EPC ratings, energy use and carbon emissions. 

These six building archetypes are:

  • Office one – a pre-1940, naturally ventilated, narrow-plan office 
  • Office two – a post-1990, air-conditioned, narrow-plan office
  • Office three – a post-2002, air-conditioned office – highly glazed
  • Office four – a post-2010, air-conditioned office – highly glazed
  • Retail – a post-1990, air-conditioned retail warehouse
  • Industrial – a post-1990, naturally ventilated industrial/storage warehouse.

Energy modelling

Each building was modelled using the Simplified Building Energy Model (SBEM) software (v5.3.a) to demonstrate the EPC rating for the existing building.

For each building, a series of refurbishment measures and packages were selected based on: 

a) MEES legislation of seven-year cost effectiveness 

b) longevity of the measures

c) whether it might be taken as part of landlord works to central plant and communal areas or as part of an occupier’s fit-out/refit of their space (eg lighting and terminal units). 

To indicate the impacts of efficiency measures on actual energy consumption, the analysis of the EPC performance was adjusted to include both additional hours of occupation and unregulated energy. For this study, no allowance has been made to account for inefficiencies in the management of the buildings or the presence of special functions that might impact both regulated and unregulated energy consumption. 

Lifecycle modelling

The cost efficiency of each measure, together with a series of packages, was assessed by quantifying the capital cost and longevity of the upgrade, which was then set against its estimated impact on energy use (and the associated costs) and carbon emissions. Future carbon emissions and energy cost were estimated based on government projections. 

The core lifecycle analysis was undertaken using results from EPC modelling, but for each scenario a second analysis considers a higher level of occupancy and includes unregulated energy. 

New new figure 2 this one

Figure 2 - Capital investment required to improve each building’s EPC rating

4. Findings

Summary findings for each building type are shown below, together with more detailed information on the office one and office three scenarios. Further, more detailed information on these case studies, together with full analysis for other scenarios and the underlying datasets, will be available from www.ipf.org.uk

Cost of improved EPC ratings

Although the study assessed various building types with different ages, condition and levels of servicing, there is a broad level of consistency in the cost trendlines for improving the EPC rating of each asset, as shown in Figure 2. The trajectory and positioning of the cost curves for each building are broadly similar. However, after lighting, which is an important efficiency measure for all buildings, the measures that are most important in improving asset rating vary between buildings. For example, for office one (naturally ventilated) the major savings are achieved through lighting and the use of efficient boilers or heat pumps, while for office four (a post-2010 air-conditioned building) savings are linked to more efficient fan coil units (FCU) as well as lighting. 

In each of the office buildings, the most cost-effective improvements are linked to services upgrades rather than improved fabric, even where the performance of pre-existing building elements is poor (ie single-glazed windows). Although less cost-effective than other measures, fabric improvements do have the benefit of upping comfort levels and the aesthetic quality of the space, and so may well be justified for reasons beyond the impact on the EPC rating and energy use. One exception to this was the industrial building, where a substantial impact could be achieved through inexpensively insulating the roof together with upgraded lighting. 

Figure 3

Figure 3 - Office one: Cost effectiveness (seven-year test) of improvement measures

Figure 4

Figure 4 - Office three: Cost effectiveness (seven-year test) of improvement measures

5. Comparing results for office one and office three

It is interesting to compare the solutions and impacts for different types of building such as office one (an old, narrow-plan, naturally ventilated building) and office three (a highly glazed, modern, mechanically ventilated building). Both buildings start with an EPC rating of F, so the landlord would be required to try to make cost-effective improvements to comply with MEES regulations. 

Cost-effectiveness of measures for MEES compliance

Figures 3 and 4 demonstrate the cost-effectiveness over seven years of individual measures that might be undertaken for MEES compliance. All the analysed measures in both buildings improve the EPC rating to better than E, except for triple glazing in office three – installing this makes the EPC rating worse because it increases the energy required for cooling.

Introducing new, highly efficient lighting improves the EPC rating and would be cost-effective against the seven-year payback requirement of MEES regulations. The energy savings from lighting replacement are even more significant in office three.

Both buildings would benefit from improvements to the heating system, but while this measure just meets the seven-year payback test for office one, it would not be considered cost effective for office three, although it would deliver savings over its lifespan, which should be significantly longer than seven years. 

In office three, refurbishment of existing fan coils with the installation of electronic commutation (EC) drive units delivers a net benefit and achieves an EPC of E.

Return on investment in improvement measures

The measures that pass the MEES regulations also have a high internal rate of return (IRR) over 15 years. Figures 5 and 6 show the IRRs for different improvement measures. In office one, lamp replacements (within existing luminaires) have the highest IRR – over ~30% – followed by boiler replacement, which has an IRR of just over 20%. 

Similarly, in office three, the lamp replacements (within existing luminaires) have the highest rate of return, with an IRR of ~50%. Refurbishment of fan coils to include EC drive units delivers a good return of more than 20%. Similar returns are available from installation of variable speed pumps, albeit the total sum of the energy saving from this option is quite small. 

Reduction in carbon emissions

For both offices one and three it was possible to reduce carbon emissions by circa 80% by 2030, purely through upgrading lighting and HVAC systems (see Figure 7). Over time, the packages  involving the use of heat pumps are more beneficial than those retaining the use of gas boilers.  Measures applied in improvement package 1 include LED lights and high-efficiency gas boilers. Measures applied in improvement package 2 include LED lights and replacement of boilers and chillers (office three) with air source heat pumps (ASHP) for heating and cooling. 

The report also reviews the contribution of the different improvement measures to carbon savings over 15 years. The findings show that the most important improvements relate to lighting and FCU efficiency, while the adoption of electric heat pump technology instead of gas boilers also offers significant savings. 

This last option will become more important as the electricity supplied by the UK grid decarbonises – it is estimated that after 2027 grid electricity will have lower carbon emissions per unit of energy than gas. This reduction in carbon intensity, with the significant operational efficiencies (heat pumps are around three times more energy efficient than boilers), mean they will deliver increasingly large carbon reductions in future.

Figure 5

Figure 5 - IRR for Office one

Figure 6

Figure 6 - IRR for Office three

6. Summary of key findings

  • In all buildings, it was possible to identify some measures that meet the MEES cost-effectiveness test and improve the rating of the building to an E rating or above. For most buildings, these measures cost between £10/m2 to £20/m2.
  • Replacement of older lights such as T8 fluorescent tubes with more efficient versions within the same luminaire is a very cost-effective way of improving EPC rating and saving money. The internal rate of return (IRR) is typically at least 20% and in some cases considerably higher. 
  • For older buildings with inefficient boilers it is beneficial to install a more efficient version. However, using an ASHP should be considered. The reduction in carbon emissions and income from the RHI (if the heat pump is used for heating only) make the net cost comparable to installing a new boiler, but with far larger long-term carbon savings.
  • For air-conditioned buildings with double glazing there is limited benefit from installing higher performance glazing as the reduced heating demand is more than offset by additional cooling load.
  • Where older FCUs are present, refurbishing them to use modern EC drive units will result in significant energy savings and a strong return on investment. 
  • There are fewer cost-effective improvement opportunities in more modern buildings but lighting and EC drive upgrades deliver good returns, even in buildings less than 10 years old.  
  • Investment in efficient replacement lighting and heating, ventilation and air conditioning systems, including electrification of heating, could deliver around 80% reductions in carbon emission by 2030. Much of this saving is achieved through decarbonisation of the electricity supply grid and the avoidance of direct emissions from fossil fuel use on site. However the efficiency measures will also reduce demand for energy and operational costs. 
  • While some measures always deliver a strong IRR, others are best installed as replacements to existing plant that is life-expired. 
  • Meeting the UK’s carbon reduction objectives set out by the Climate Change Act (2008) requires around a 50% reduction in direct carbon emissions such as gas and fossil fuel from non-domestic buildings by 2030. These savings are achievable for each of the buildings covered in this study but require investment in new heating plant. 

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Figure 7 - Carbon emissions relative to 2017