4. Policy Options
This section compares the do-nothing, or business-as-usual, option to the final regulatory option chosen following consultation. Before doing so, the methodology used to assess the impact of upgrading dwellings from their current EPC to various target minimum EPCs is discussed. The results of this modelling, together with turnover rates presented in section 4.2, are used to assess the impact of the regulations.
4.1 Modelling Methodology
The Scottish Government commissioned independent researchers to model the costs and benefits of regulation to inform the deliberations of the REEPS Working group. The research covered both the private rented sector and the owner-occupied sector. Using data from the Scottish House Condition Survey and SAP 2012, the researchers applied a variety of upgrades to each housing archetype to work out which combination of upgrades would achieve various target minimum EPCs at least cost, as measured by the upgrade cost for the initial installation of the measures. Costs for upgrades were derived from the Product Characteristics Database File (PCDF), which contains the costs that are used in EPCs. Where PCDF costs are expressed in terms of ranges, the mid-point or averages were used in the modelling. The benefits of upgrading the dwellings, in terms of reduced energy usage, fuel bills and emissions, were derived from the outputs of SAP.
For the purposes of this consultation, the outputs of the research have been adjusted using the 2017 Scottish House Condition Survey estimates of the total number of dwellings in the private rented sector which have an EPC of E, F and G, as set out in Table 2. This change in the estimated size of the target stock, as well as the fact that the regulations relate only to the private rented sector, accounts for the difference in the numbers reported here and in the research.
In addition to the costs and benefit presented in the research, further costs have been included in the analysis in this impact assessment, namely:
- An allowance for 'hidden costs' has been made. These are costs relating to upgrading the property other than the cost of installing the measure itself. These could be ancillary monetary costs such as the costs of clearing lofts, redecorating, etc., but can also cover the hassle factor, e.g. time spent researching energy efficiency measures, any disruption caused during installation, etc. A factor of 10% of the upgrade cost has been used.
- Once the property has been upgraded, the owner will need to provide proof that the property meets the required standard. We have assumed that this is done through a post-upgrade EPC lodged on the EPC register. Given a plausible range of EPC costs for different dwelling sizes between £40 and £100, an average cost of £70 has been used.
- Some households who have been under-heating their homes to economise on their fuel bills may choose to take the savings from greater energy efficiency partly in lower fuel bills and partly in greater thermal comfort, by heating their home for longer or to a higher temperature. The benefit to the household from a warmer home can be quantified as the portion of their fuel bill for energy used to heat their home above its previous level. Therefore, even if the actual fall in the fuel bill is less than the modelled fall, the full amount of the modelled fall represents the benefit to the tenant, since the difference is the value attributable to comfort taking. Comfort-taking behaviour would though mean that fuel use, and therefore emissions, do not fall as much as modelled. In line with previous Scottish Government practice, it is assumed that 15% of the benefit of modelled fuel bill savings is instead taken as greater thermal comfort.
It should also be noted that the independent research presented results both before and after applying in-use factors, which are designed to account for differences in performance of retrofit energy efficiency improvements in-situ as compared to their modelled performance.
Since the benefits of the upgrades are received over the lifetime of the upgrades, net present values have also been calculated. The assumptions underlying the net present value calculations are:
- The costs and benefits are calculated over a period of 40 years. This ensures that the upgrades with the longest lifetime, such as cavity or solid wall insulation, are appropriately represented. This is because these upgrades often have higher capital costs than other measures, so that if they were valued over a period significantly shorter than their lifetimes, all of their capital costs but only some of their benefits would be captured.
- Since the lifetime of other measures is less than 40 years, replacement costs have been included in the costings, based on the lifetime of each particular measure. As a result, some measures may be replaced more than once over the 40-year period. The original capital cost of installation is used as the replacement cost.
- The prices of upgrades, EPC reports and fuels are assumed to be constant in real terms over time, i.e. to grow at the same rate as inflation.
- Costs and benefits in the future have been discounted using the rates provided in HM Treasury's Green Book: a real rate of 3.5% for the first 30 years, and then 3% for years 31 to 40.
Since regulation is linked to the point of rental, the rate at which tenancies turn over will affect the number of dwellings that are upgraded each year. Analysis based on the Scottish House Condition Survey, set out in Table 3, shows that tenancy length is relatively short in the private rented sector, with around 60% of tenants having been in their current address for two years or less. The data also suggest that tenancy length is somewhat longer in dwellings with a lower EPC. This may be linked to dwellings in lower EPC bands being more likely than other EPC bands to be in rural areas, since rural tenancies tend to be longer than urban tenancies.
Table 3. Length of time at current address in the private rented sector, as a proportion of each EPC band (SAP 2012)
Source: Scottish Government analysis of banded 2014-2016 Scottish House Condition Survey data.
Assuming that length of time at current address is a reasonable proxy for tenure length, Figure 14 illustrates what proportion of dwellings would have experienced at least one change in tenancy by the end of each year after a fixed date (such as the date of introduction of regulations).
Figure 14. Projected proportion of private rented dwellings in which there will have been at least one change in tenancy, by EPC band (SAP 2012)
Source: Scottish Government analysis of banded 2014-2016 Scottish House Condition Survey data
4.3 Groups Affected by Regulations
The costs of upgrading the property, as well as the cost of a post-improvement EPC, will be payable by landlords, while the reduced fuel bill costs, and/or greater thermal comfort, will benefit tenants. However, the extent to which rents rise to reflect the improved energy efficiency will ultimately determine how the impact of regulations is spread between landlords and tenants. Section 2 discussed how it may be difficult for landlords to obtain higher rent for a more energy efficient property if tenants find it hard to value accurately the benefit in terms of lower fuel bills. However, regulation which requires all landlords to meet minimum energy efficiency standards may make it easier for landlords to benefit from higher rents for better properties, because landlords who want to invest to provide a more energy efficient dwelling will be less concerned that they will be undercut by competitors who offer a worse overall product to the tenant. The modelling results set out below show that the overall net present value of upgrading the stock is positive. This means that in most cases the benefits of upgrading exceed the costs, so it is possible that both landlord and tenant could be better off, depending on how rents adjust.
In terms of assistance for landlords whose dwelling falls below the minimum EPC, the landlord can either use the EPC recommendations report as a guide to the work needed to meet the minimum standard or seek advice from Home Energy Scotland. Furthermore, the Energy Act 2011 (Part 1 para 55), which provides the powers for these regulations, sets out the meaning of relevant energy efficiency improvements and as part of this provision is made for works to be financed by a Green Deal plan, an obligation imposed by an order made under section 33bc or 33bd of the Gas Act 1986, or section 41a or 41b of the Energy Act 1989, ECO, and a combination of these, or a financial arrangement as set out in regulations. The Scottish Government already provides for landlords to seek loan funds through the Energy Saving Trust, based on Home Energy Scotland loans, or Resource Efficient Scotland loans.
The resources required to implement and enforce the regulations will be borne by local authorities. To assist in this, the Scottish Government is producing a toolkit to aid the means by which local authorities gather and hold the necessary information, and also a tailored guidance document to provide scenarios and practical assistance to local authority staff involved in applying the regulations within their area. In the first instance the Scottish Government is encouraging a soft launch of the regulations, and will work with local authorities to focus on assisting landlords meet the standard required. It is hoped that this approach will assist in the role out of the regulations, reduce the administrative burden and allow monitoring of the workload.
Other parties will be affected by the regulations are installers of energy efficiency measures, who will benefit from the additional upgrades installed as the result of the regulations, and assessors, who will benefit where a post-upgrade EPC is required to demonstrate compliance with the regulations. Wider society will benefit from the reduced harm from greenhouse gas emissions.
4.4 The do-nothing option
The do-nothing, or business-as-usual option, refers to what will happen in the absence of the introduction of minimum standards of energy efficiency in the private rented sector. Under this option, existing energy efficiency regulations will continue to have an impact. For example, when less efficient light bulbs and boilers reach the end of their lifetimes, their replacements will have to meet the higher energy efficiency levels laid down by these existing regulations. But, on their own, these types of upgrades would be insufficient to bring most properties up to an EPC of E, let alone D.
Therefore, the number of dwellings in the private rented sector with a low energy efficiency rating will only fall under the do-nothing scenario if landlords voluntarily install energy efficiency measures in addition to those required by existing regulations. However, as set out in section 2, there are a number of market failures which reduce the likelihood of this happening. Furthermore, even if these market failures did not exist, voluntary action cannot be relied on where the private net benefit from upgrades is negative, but the social net benefit is large.
Current funding available from relevant Scottish and UK Government energy efficiency programmes mitigates this barrier to an extent, but even with access to funding not every landlord makes an effort to improve the energy efficiency of their properties. Therefore, regulation is required if all privately renting tenants are to benefit from a minimum level of energy efficiency, and the level of carbon abatement required by society is to be delivered.
The conclusion that a combination of existing regulations and voluntary action by landlords is insufficient to produce the required level of improvement is supported by the trends shown in Figure 4 which shows a levelling off in the proportion of FG-rated properties in the private rented sector, and also that significant progress still needs to be made with respect to E-rated properties. This can be contrasted with the trends for the social rented sector in Figure 5, which show minimal levels of FG-rated properties coupled with a continuing strong downward trend in the proportion of E-rated properties, such that only 7% of social rented dwellings fall into the EFG bands, compared with nearly a quarter (24%) of private rented dwellings.
The higher uptake of loft (Figure 12) and cavity (Figure 13) insulation in the social rented sector suggests that the stronger regulation of energy efficiency in this sector has played an important role. In particular, the Scottish Housing Quality Standard, which was introduced in 2004 with full compliance required by 2015, contained specific energy efficiency elements. These have now been updated by the requirement that the higher EPC standards set by the Energy Efficiency Standard for Social Housing be met by 2020. Furthermore, following consultation, the EESSH Review Group agreed a new EESSH2 milestone that all social housing will meet EPC Band B, or be as energy efficient as practically possible, by 2032, within the limits of cost, technology and necessary consent.
Apart from the higher final level of energy efficiency that regulation can help achieve, it will also help accelerate upgrades that would have taken place at some stage. This too is an important benefit from regulation because it brings forward in time the associated fuel bill savings and greater thermal comfort for tenants, and it also reduces the total stock of greenhouse gases in the atmosphere.
4.5 Selected regulatory option
Following consultation on the draft regulations, the following trajectory for improving energy efficiency in the private rented sector has been chosen as the preferred regulatory option:
- From 1 October 2020 landlords of private rented sector properties may not grant a new tenancy for a property rated EPC Band F or Band G (unless an exemption applies). The landlord must improve the rating to a minimum of EPC Band E (or register an exemption if one applies) before letting.
- By 31 March 2022, all private rented properties with an EPC must have a minimum rating of Band E, even if there has been no change in tenancy. From that date, landlords may not continue to let properties with an EPC rating of Band F or Band G, even to an existing tenant (unless an exemption applies).
- From 1 April 2022 a landlord will not be able to let a property unless the EPC rating is a minimum of Band D (unless an exemption applies).
- By 31 March 2025 all private rented sector properties with an EPC will need to have a minimum rating of Band D, even if there has been no change in tenancy (unless an exemption applies).
The trajectory is summarised in Table 4.
Table 4. Trajectory of regulation in the private rented sector.
|Date||Minimum EPC Standard||Properties in scope|
|From 1 October 2020||EPC E||Change in tenancy|
|By 31 March 2022||EPC E||All tenancies with EPC|
|From 1 April 2022||EPC D||Change in tenancy|
|By 31 March 2025||EPC D||All tenancies with EPC|
4.6 Dwellings subject to regulation
The regulations will apply to private rented properties where there is an EPC, and where the tenancy is covered by the repairing standard as defined in section 12 of the Housing (Scotland) Act 2006.
Properties that have been let or sold since 4 January 2009 have been required to have an EPC by the Energy Performance of Buildings (Scotland) Regulations 2008. The data on tenure length in Table 3 suggests that by the second backstop of 2025, around 92% of dwellings which currently have an EPC below D will be subject to the regulations due to having had at least one change in tenancy. This proportion will continue to increase after 2025 as tenancies come to an end.
There will also be dwellings with an EPC for reasons other than a change in tenancy, e.g. as part of the requirements of renewable incentives schemes. Furthermore, landlords who do not have an EPC may choose to get one voluntarily, to allow them to plan any required upgrades rather than being subject to falling under the regulations when the existing tenant chooses to move out. Dwellings with an EPC below the minimum which move into the private rented sector from other tenures in the future will also be subject to the regulations.
For these reasons, the 2017 Scottish House Condition Survey estimates of private rented dwellings with EPCs below the required minimum should give a good indication of the number of stock which will be affected.
The trajectory set out in Table 4 has been chosen so as to minimise the possibility of bottlenecks at particular dates, which could put pressure on the supply chain, while maintaining the pace of delivery so that tenants do not need to wait too long to benefit from higher energy efficiency. For these reasons, the regulations are phased in, starting with the least energy efficient dwellings.
Table 5 applies the length of tenure data set out in Table 3 to the estimated number of dwellings in the target stock, taken from Table 2, to give an approximate profile of when dwellings will be upgraded. Note that the actual profile will depend on whether landlords choose to upgrade their dwellings ahead of the regulatory requirement; for example, landlords whose dwelling has an EPC of F or G may prefer to upgrade to a D in one step, which may be a more efficient and less disruptive than upgrading in two steps.
Table 5. Projected dwellings upgraded based on regulatory trajectory
|% of target stock upgraded||Number of dwellings upgraded|
|Stage to E|
|Total to E||100%||33,000|
|Stage to D|
|Total to D||100%||83,000|
4.7 Costs and benefits
4.7.1 Stage to EPC Band E
The costs and benefits of raising all private rented dwellings to an EPC of E are reported in Table 6.
Table 6. Costs and benefits of raising all stock to an EPC of E
|Dwellings below EPC E||33,000|
|Cost and benefits within private rented sector|
|Post-upgrade EPC cost||£2.3m||£70|
|Annual fuel bill savings (before in-use factors)||£14.5m||£440|
|Annual fuel bill savings (after in-use factors)||£10.9m||£330|
|NPV before in-use factors||£261.2m||£7,920|
|NPV after in-use factors||£180.8m||£5,480|
|Emissions abatement (CO2e)|
|Annual carbon savings before in-use factors (kgCO2e)||0.072Mt||2.2t|
|Annual carbon savings after in-use factors (kgCO2e)||0.052Mt||1.6t|
|Annual carbon savings after in-use factors and comfort taking||0.044Mt||1.3t|
|Annual non-traded carbon savings after in-use factors and comfort taking||0.035Mt||1.1t|
The results indicate that the average cost of upgrading stock currently below an E is around £1,140. On average, these upgrades produce substantial savings in fuel bills, of around £330 per year even on the more conservative basis of applying in-use factors. As result, when valuing the various costs and benefits over a 40-year period, the average net present value is estimated at £5,480, even after applying in-use factors and allowing for hidden and EPC costs. Thus, for dwellings which start with these very low energy efficiency levels, the fuel bills savings will typically comfortably pay back the upgrade costs, producing a net benefit from the regulations even without taking wider social benefits from emissions reduction into account.
The most common measures that the modelling recommends as part of the least-cost, technically appropriate package to meet an EPC of E are loft insulation (49% of dwellings), replacing the secondary heating with a more efficient system (13%), cavity wall insulation (11%), and room-in-the-roof insulation (11%). See Table 12 in Appendix A for a full list of measures.
The regulations set out that if the total cost of the measures required to bring the dwelling up to the minimum EPC exceeds a certain level, the landlord will only have to install upgrades up to the value of the cap. The level of the cap for the stage to EPC E is set at £5,000.
Table 7 sets out the estimated distribution of upgrade costs of upgrading dwellings with an EPC FG to an EPC E. Note that the costs considered in this section relate to the costs of the measures, i.e. they do not include EPC assessment, hidden or other costs. These estimates suggest that only a very limited portion of the stock will be not be able to be upgraded to an EPC C within the cost cap.
Table 7. Distribution of costs for upgrading dwellings with an EPC FG to an EPC E
|Upgrade cost||Number of dwellings with cost in band||% of dwellings with cost in band|
|£0 - £1,000||19,470||59.0%|
|£1,000 - £2,000||6,010||18.2%|
|£2,000 - £3,000||5,950||18.0%|
|£3,000 - £4,000||1,050||3.2%|
|£4,000 - £5,000||260||0.8%|
4.7.2 Stage to EPC Band D
The modelling work undertaken by the independent researchers also estimated the costs and benefits of raising all private rented stock from an initial level of an EPC of E, F or G directly to an EPC D. These estimates, updated using the 2017 Scottish House Condition Survey are set out in Table 8.
Table 8. Costs and benefits of raising dwellings with an initial EPC of E, F and G directly to an EPC of D
|Dwellings below EPC D||83,000|
|Cost and benefits within private rented sector|
|Post-upgrade EPC cost||£6m||£70|
|Annual fuel bill savings (before in-use factors)||£35m||£420|
|Annual fuel bill savings (after in-use factors)||£27m||£320|
|Net present value before in-use factors||£460m||£5,540|
|Net present value after in-use factors||£275m||£3,310|
|Emissions abatement (CO2e)|
|Annual carbon savings before in-use factors (kgCO2e)||0.19Mt||2.3t|
|Annual carbon savings after in-use factors (kgCO2e)||0.14Mt||1.7t|
|Annual carbon savings after in-use factors and comfort taking||0.12Mt||1.5t|
|Annual non-traded carbon savings after in-use factors and comfort taking||0.10Mt||1.2t|
The most common modelled measures when moving from an EPC E, F or G to an EPC D are loft insulation (installed in 35% of dwellings), low energy lighting (29%), a hot water tank jacket (22%), and cavity wall insulation (22%). See Table 13 in Appendix A for a full list of measures.
Given that the regulations propose a stage to E followed by a stage to D, a question that arises is: what are the additional costs and benefits of raising the stock to an EPC of D, once the stock has already been raised to an EPC of E? This issue was not specifically modelled in the independent research. Nevertheless, a good approximation can be derived by subtracting the costs and benefits of raising the stock to E from the costs and benefits of raising the stock to D.
The results are set out in Table 9, and two features of these results should be noted:
- The least-cost package of measures of raising the dwelling to an E first, and then the least-cost package of measures of raising the dwelling from an E to a D subsequently, may differ from the package of measures which moves directly to a D at least cost. If landlords chose to upgrade in two stages their total cost may be higher so there is an advantage to upgrading directly to a D.
- The costings in do, however, assume that landlords pay for a post-upgrade EPC to demonstrate compliance, at both the first stage to E and in the second stage to D. But if landlords go directly to D in light of the trajectory, then they will only need to incur the cost of any post-upgrade EPC once.
Table 9. Costs and benefits of raising dwellings to an EPC of D after they have already been raised to an EPC of E
|Dwellings below EPC D||83,000|
|Cost and benefits within private rented sector|
|Post-upgrade EPC cost||£6m||£70|
|Annual fuel bill savings (before in-use factors)||£21m||£250|
|Annual fuel bill savings (after in-use factors)||£16m||£190|
|Net present value before in-use factors||£196m||£2,360|
|Net present value after in-use factors||£92m||£1,110|
|Emissions abatement (CO2e)|
|Annual carbon savings before in-use factors (kgCO2e)||0.12Mt||1.4t|
|Annual carbon savings after in-use factors (kgCO2e)||0.09Mt||1.1t|
|Annual carbon savings after in-use factors and comfort taking||0.08Mt||0.9t|
|Annual non-traded carbon savings after in-use factors and comfort taking||0.06Mt||0.7t|
The regulations propose that the same exemptions apply at the stage to D as in the first stage of the regulations to E, including the cost cap of £5,000. Thus, where dwellings are already at an E, they will not be required to spend more than £5,000 to raise their EPC to a D.
However, there may situations where even after the backstop date for E of 31 March 2022, the property only has an EPC of F or G, because there was an exemption allowing a lower level than E by 31 March 2022 (under the technical, legal or excessive cost provisions), or because the property has come into the private rented sector since 1 April 2022. In these situations the cost cap for the stage to D would be cumulative, i.e. it would include the £5,000 allowed for bringing the property up to E. This would mean that, where the property's EPC is F or G, the exemption to the D standard for excessive cost would only apply where the total cost of works (including any works previously done towards the E standard) is in excess of £10,000.
The analysis of the impact of the cost cap at the D stage of regulations is therefore broken down into two parts. Table 10 sets out the distribution of the upgrade costs of dwellings which currently have an EPC of E, on which landlords would have to spend no more than £5,000 in trying to raise them to a D. It is estimated that the proposed cost cap would apply to 2% of these 50,000 dwellings, i.e. around 1,000 dwellings.
Table 10. Distribution of upgrade costs to raise dwellings with a current EPC of E to an EPC of D
|Upgrade cost||Number of dwellings||% of dwellings with cost in band||% of dwellings with cost above band||Number of dwellings with cost above band|
|£0 - £1,000||35,660||71.3%||28.7%||14,340|
|£1,000 - £2,000||7,060||14.1%||14.6%||7,280|
|£2,000 - £3,000||3,030||6.1%||8.5%||4,250|
|£3,000 - £4,000||60||0.1%||8.4%||4,190|
|£4,000 - £5,000||3,090||6.2%||2.2%||1,100|
|£5,000 - £6,000||450||0.9%||1.3%||650|
|£6,000 - £7,000||0||0.0%||1.3%||650|
|£7,000 - £8,000||0||0.0%||1.3%||650|
|£8,000 - £9,000||650||1.3%||0.0%||0|
Table 11 then presents the impact of the cost cap on dwellings which currently have an EPC of F or G. Over the two stages of regulation, it is proposed that no more than £10,000 be spent on raising these dwellings to an EPC of D. It is estimated that the cost cap will apply to around 15% of these 33,000 dwellings, i.e. around 5,000 dwellings.
Table 11. Distribution of upgrade costs to raise dwellings with a current EPC of F or G to an EPC of D
|Upgrade cost||Number of dwellings||% of stock below EPC E||% of stock with cost above band||Dwellings with cost above band|
|£0 - £1,000||2,480||7.5%||92.5%||30,520|
|£1,000 - £2,000||3,810||11.5%||81.0%||26,710|
|£2,000 - £3,000||8,720||26.4%||54.5%||18,000|
|£3,000 - £4,000||4,290||13.0%||41.5%||13,700|
|£4,000 - £5,000||3,210||9.7%||31.8%||10,490|
|£5,000 - £6,000||2,800||8.5%||23.3%||7,700|
|£6,000 - £7,000||380||1.2%||22.2%||7,310|
|£7,000 - £8,000||1,260||3.8%||18.4%||6,060|
|£8,000 - £9,000||260||0.8%||17.6%||5,800|
|£9,000 - £10,000||740||2.3%||15.3%||5,050|
|£10,000 - £11,000||1,900||5.8%||9.6%||3,160|
|£11,000 - £12,000||370||1.1%||8.5%||2,790|
|£12,000 - £13,000||1,430||4.3%||4.1%||1,360|
|£13,000 - £14,000||1,150||3.5%||0.6%||200|
|£14,000 - £15,000||90||0.3%||0.3%||110|
It is therefore estimated that by the backstop date for an EPC D in 2025, the cost cap will apply to around 6,000 dwellings, which is 7% of the 83,000 dwellings which currently have an EPC below D. These dwellings will still have to install energy efficiency upgrades which fall within this cost cap.