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Energy Efficiency: EU policy makers have lost their way and hope that valuers will somehow make it right

The Union has played a historic, world-leading role in addressing climate change in general and energy efficiency in buildings in particular. It got going with buildings fifteen years ago when only a couple of member states had done anything at all and EU law has been the bedrock and benchmark for all Europe ever since.

There's a lot of regulation, but it boils down to three fundamentals:

  • an obligation to energy efficiency renovate whenever the renovation costs more than 25% of the value of the building or covers more than 25% of the building's outer shell;
  • an obligation on building owners to produce an energy performance certificate (EPC) whenever a building is constructed, sold or rented out to a new tenant;
  • individual and smart metering rollout

Those are major achievements, a key part of the energy transition, but the worm in the EU apple has been not so much the regulation itself as overzealous interpretation and implementation.

The stresser that triggered this is the political and administrative Zeitgeist.

You have to see it to believe it. Climate warming is humanity's greatest challenge and many people in European and national government have a crusader mentality, which is splendid, until it blinds you.

Everybody knows that high energy efficiency and broader sustainability are already part of the Grade A office marketing mix, so those buildings don't need regulatory push. So everyone is focused on lower-end commercial and especially on housing, understandably so, as that's the bulk of the building stock. This is often referred to in Brussels as 'low hanging fruit', meaning a win-win sector where if only home owners would just do those renovations there would be a massive decrease in emissions coupled with rapid 'payback' on the investments through low heating bills. The problem is that the whole policy has come up against some 'inconvenient truths' stemming from the complexities of real estate and human nature.

Concerning the renovation and metering rollout requirements, in the legislative debate over the Commission's proposals the European Property Federation and its allies won a safeguard that the provisions must take account of cost-effectiveness. Sadly, misguided officials and insulation and metering industry lobbies have the safeguards in their sights: right now for individual metering, the Commission is churning out cost-effectiveness 'Guidance Notes' for the member states decreeing that most buildings are in a Commission consultant-invented, technically skewed 'viable class' and won't be allowed to invoke the cost-effectiveness safeguards. Worse, the Commission is indulging in 'policy creep' by interpreting the metering rollout provisions in a too-extensive manner.

More harmful still is that the Commission 'kill cost-effectiveness' culture has trickled down to some member states like Germany:

For energy efficiency renovation, a recent German study (1) enumerates all the ways the German government has miscalculated cost-effectiveness. The law states that regulations may only demand thermal measures that are 'economically realisable' (wirtschaftlich vertretbar) and defines this as paying back, through fuel savings, within these measures' technical lifetime. But the author of the study qualifies this as no more than a "bookkeeping trick" for six reasons:

1. The calculation method compares pre- and post-retrofit theoretical, calculated consumption levels rather than actual, measured consumption levels and the average gap between the two is 30% because, inter alia, real people don't heat their leaky homes as much as comfort demands.

2. Government bookkeeping takes account only of the thermal improvement costs, not the full costs of a retrofit. That makes sense only if the building has to be renovated anyway, but the study points out that "German homeowners do not generally regard their buildings as candidates for serious comprehensive maintenance" and I suspect you can safely replace 'German' by 'European' or even 'human'.

3. The government's assumptions about fuel prices are based on the expected average price of heating fuel over the lifetime of the retrofit measures (25 years). That time horizon is wise in terms of the credibility of any fuel price projection, but it's far too long a for a home-owner especially as he'll be out of pocket for 14 years!

4. Human factors: People don't necessarily have 25 years to wait around for this 'dividend': they move, divorce, lose their jobs or go to a retirement home prematurely.

5. Buildings are stubborn, especially in Europe where they often have aesthetic features that don't accommodate ever-thicker layers of insulation, not to mention that people actually prefer to be able to stand upright in their basements.

6. And when the retrofit is finally done, people heat more than the theoretical calculations would have it because they feel they can afford it, or they don't optimally control the new heating technology, etc.

Result: the German government, long eager to super-implement the EU Directives by tightening thermal standards ever more, is stepping back because it's backfiring: people are renovating less and less.

Another top-down EU mistake is the exclusive obsession with deep renovation

Member states are under EU obligation to devise policies to stimulate deep and staged-deep renovations, and there's lots of EU funding for it, but not a word about, nor a eurocent for, the modest step-improvements that building owners would actually be prepared to envisage with a little encouragement. Perveresely, step-improvements are viewed as a disincentive and a retardant for 'real, deep' renovation! The German study gives a good example of the fallout from this approach:

"Millions of German homes have no insulation in their roofs. In a four-floor apartment block in Aachen, a layer of 12cm of glass wool insulation was applied between the rafters for the cost of €400 for materials plus two days' labour. This reduced the heat loss through the roof by approximately 90%, as previously there were only tiles and a thin layer of building paper … The German government discourages such measures … as they would not meet the new build standard, which requires a thickness of around 22cm. This would have reduced the heat loss by 95%, but would have required the roof to be rebuilt, for the cost of approximately €20 000."

The final mistake has been the recommendations for energy performance improvements in the energy performance certificate (EPC) for buildings

Just like the renovation requirements, this too is a good start gone wrong. EPCs all over Europe were a great achievement. The fact that many of them have energy performance indicators that are anything but reliable can be excused as a growing pain that will eventually work itself out. But here again, too bad that at EU level, instead of keeping to the indicator and making it reliable, they just couldn't resist also imposing that the 'expert' producing the EPC must also make recommendations for energy performance improvements. Even the most energy-sophisticated governments have been unable to implement this because it's way beyond the competence of Europe's legions of EPC 'certifiers'. Buildings are comprised of many systems which interact with each other closely and energy experts need knowledge and qualifications in many disciplines to be able to make cost-effective suggestions for enhancing energy efficiency in buildings. No expert understands all building systems.

And how about the valuer in all this?

He is the centre of current European attention! The high and the mighty expect the valuer to put a price - and a good one! - on energy efficient buildings and to advise the owner on the advantages of energy efficiency renovation. But given all of the above, for the valuer, as Vladimir Ilyich would have asked, What Is To Be Done?

Putting a value

We've seen that in places like Germany, owners are being told by the authorities that they should only energy efficiency renovate under conditions that are clearly not cost-effective while all over Europe the subsidies that could compensate for cost-ineffectiveness are being cut back due to budgetary constraints. Confronted with requirements to renovate to cost-inefficient standards, owners are simply not renovating at all, or are renovating whatever way they bloody want secure in the knowledge that the state doesn't have the big brother infrastructure to control and sanction deviant renovations. How is a valuer supposed to pull a value out of such a hat? What do 'comparables' mean in such circumstances? Compare EPCs? To quote Ursula Hartenberger, RICS Global Head of Sustainability, EPCs are "from a valuation point of view, next to absolutely useless".

Some say the only way out of this hole is to dig deeper; that the valuer must get the full historical technical information on the building from the owner. Good luck with that! And more fundamentally, what would the valuer do with the information and on who's time?

Giving advice

One could make abstraction of value-setting and take the view that the valuer needs this information for his important role as an adviser on energy efficiency renovation. I have my doubts.

A professional valuer does a systemically important, highly complex and sophisticated thing which is an underpinning of real estate and financial market safety and security: he sets a value. His training and experience serve that high purpose - they don't make him an energy nerd. What I wrote above about EPC certifiers applies equally to valuers: No single expert has enough knowledge of construction, heating, cooling & ventilation, building physics and building economics to advise on cost-efficient energy efficiency improvements.

For renovation, certification and metering too much of a good thing gives less, not more. The Commission and many member states need to refit, rollback, regroup and plan a new regulatory phase interconnecting buildings with the rest of the urban environment and gauging renovation in the context of a truly circular, waste-conscious economy. That process has already begun.

(1) Ray Galvin (2014) Why German homeowners are reluctant to retrofit, Building Research and Information, 42:4, 398-408, DOI: 10.1080/09613218.2014.882738

Michael MacBrien is director general of the European Property Federation, Adviser to TEGoVA and a founding partner of the European affairs firm MacBrien Cuper Isnard.

First published in European Valuer