Burke GreenwoodHaving explained the background to the Home Energy Efficiency Certificates in a previous article/FAQ, this article looks and the practical implications of the certificate, and how you can use it to your advantage.
The European Union and the Energy Certificate Initiative
Over the last decade the European Union has enacted different initiatives to reduce carbon emissions and promote the development of a more energy efficient building stock. As different initiatives turned into laws and Royal Decrees, the population and building owners have had to adjust and comply with, or without, fully understanding its intent. The newest of these initiatives in Spain is the Royal Decreto 235/2013 requiring energy efficiency certificates for all residential units on the market for sale or rent. This initiative follows suite of other European countries who have instituted this policy with the intention of better understanding the condition of their existing building stock with a secondary effect of using market dynamics to incentivize property owners into implementing measures to increase the efficiency of their properties.
Other countries who have implemented the policy, some dating back to 2010, demonstrates that it takes time but as public awareness grows and consumers recognizes the benefits of energy efficient buildings, market forces start to influence prospective tenant and future homebuyers minds in the real estate market. A recent report, “Energy performance certificates in buildings and their impact on transaction prices and rents in selected EU countries*”, discusses how these market dynamics have started to achieve the intended effects as energy efficiency has become part of the standard conversation between landlord and tenant – or – property owner and future buyer.
What the Certificate Can Tell You
The Energy Certificates are a good tool to use understanding a property and ways to improve its efficiency. The requirement to obtain a Certificate has currently put both property owners in Spain, along with the government and service providers, in a frenzy of trying to understand the process, identifying what is required, and how the new Decree is being implemented. As these get sorted, and the new Certificate labels start to appear on the market, the more important issues and questions can start to be addressed. Questions such as: what does the Certificate mean? What information does it contain? Now that I have one, what am I supposed to do with it?
In a basic explanation, the Certificate provides a rating of the property’s energy efficiency compared to a base unit which all properties of similar size and location are compared against. This provides consistency in assessing the results of one property versus another. Receiving the letter grade (somewhere between A-G with A being the most efficient) begins the process of understanding how energy efficiency improvements to the property can improve the letter grade. This information then becomes the catalyst for market forces to take effect as consumer knowledge and demand will push the housing market towards a more energy efficient future.
What are the Options?
With the certificate in hand and a simple understanding of how to improve properties efficiency; this is typically where uncertainty in how to proceed sets in. And to complicate the issue in these early days of the Decree, the ‘next step’ decisions rely on both the property owners understanding of the current market, but also how the local social and political conditions react and implement the law. For simplicity sake of this article, currently it comes down to 2 options for implementing energy efficiency work on residential properties:
1. The current owner improves the property prior to putting it on the market
In a market with high demand by tenants and/or buyers for efficient properties, a property owner will see properties with higher efficiency ratings move quicker off the market and come with a higher price tag. This entices an owner to do the improvements to the property prior to bringing it to the market with the intention that a higher rent, or sale price, will recuperate and/or exceed the cost of the initial energy efficiency measures.
2. The new buyer addresses property improvement at time of sale
The other option is a current property owner determines energy efficiency benefits come over the lifetime or a building from reduced utility bills. Without money on hand, and a belief that the cost will not be recouped in the sale or possibility of higher rent, a property owner might decide to place the property on the market at a lower price with the lower rating. A future buyer might be able to negotiate a lower sale price with the intention of doing the upgrades with the money saved on purchase price.
Which of these approaches will become standard will be dependent upon external conditions such as: local government enforcement and regulation, national and local financial support to the sector through funding opportunities, and new lease and sales agreements addressing energy consumption as part of the contract language to name a few.
In the end, either the person living in the unit will benefit from lower utility bills or a current owner will benefit from higher rent or sale price due to the higher efficiency grade. So the law, without financial incentives or direction from the government, can make it difficult for current property owners to identify possible benefits and how to most effectively use the information on the Certificates.
How to Understand Your Certificate and Take the Next Step
The best option is to use the certificate to start a conversation with an energy efficiency expert or energy professional and assess the recommendations provided by developing a cost/benefit analysis report showing estimated energy savings. This can identify the current condition of the house and how much energy savings each measure can achieve with its associated initial cost.
Here is a simple scenario: The report recommends replacing 3 windows at 350€ each, this could save you 200€ annually. A second recommendation is to air seal and caulk around these same windows to stop the air infiltration. This would cost you 50€ and will save you 75€ annually. Doing the simple math:
Option A – window replacement:
350€ per window * 3 windows = 1,050€ initial cost
1,050€ replacement cost / 200€ annual savings = 5.25 years to recuperate initial cost
Option B – air sealing at windows:
10€ material cost + 40€ labor cost = 50€ initial cost
50€ initial cost / 60€ annual savings = 0.8 years to recuperate initial costs
The results show there is a higher energy savings associated with the replacement of the windows, but the amount of time required to recoup the initial cost is much longer. It is also important for the energy professional to identify how one measure can affect the importance of another, in this instance once the air infiltration is stopped around the old windows, their efficiency will be improved.
By being able to assess your options and understand payback periods, or Savings to Investment Ratios (SIR), a property owner can become knowledgeable and make educated decisions about how best to invest in their properties. Working with professionals in the industry, a home owner can develop an implementation plan meeting their budget and addressing their short term and/or long term objectives for their property.
Where to Go From Here?
Having a plan, and being aware of changes in the market and watching for government support, whether financially or through legislation; a property owner can make educated and informed decisions about how to make the most of the new Certificates – not only in meeting the governments mandates – but also in finding financial rewards from their energy efficient investments.
2013 © Burke Greenwood, All rights reserved
*Bio Intelligence Service, Ronan Lyons and IEEP (2013) Energy performance certificates in buildings and their impact on transaction prices and rents in selected EU countries, Final report prepared for European Commission (DG Energy)
