LEGAL UPDATE: The Energy act and FM

The wide-ranging Energy Act 2011 has implications for all businesses, particularly those involved in energy management, explains Tony Thiaray

19 April 2012

The Energy Act 2011 is a wide-ranging piece of legislation. While mainly of interest to those in the energy sector, the parts that relate to the Green Deal and energy efficiency measures will be relevant to a wide range of businesses, including the FM industry.

The act is best known for implementing the government's flagship Green Deal policy. This is intended to improve the energy efficiency of properties in the UK. It also grants powers for the creation of an 'Energy Company Obligation' and contains provisions to facilitate the roll out of smart meters, the development of carbon capture and storage projects, and the implementation of the offshore transmission regime and a number of other energy-related measures.

The Green Deal
It's nearly six months before the launch of the Green Deal, the biggest energy efficiency programme to hit the UK, and there's still much work to be done before the government's flagship energy efficiency programme launches in October 2012.

So what's all the fuss about?

As facilities organisations will appreciate, most businesses rarely own the premises they operate from. FM companies must be encouraged to work in conjunction with energy suppliers and persuade landlords to invest in energy efficiency measures through the Green Deal. Why? FM companies will be able to do it with no upfront costs and cheaper, warmer buildings will be more marketable to potential tenants. The Green Deal framework has therefore been designed to enable private firms to offer consumers energy efficiency improvements to their homes, community spaces and businesses at no upfront cost. Instead, the costs are to be recouped through a charge added to the end-user's energy bill.

To benefit from the scheme:

• The property must be eligible
• The energy efficiency improvements must be "qualifying energy improvements"
• Conditions must be satisfied relating to the assessment of the property by an authorised Green Deal assessor and Green Deal provider and the terms of the plan 
• A relevant supplier must supply the property.
  

Although the act has targeted the private rental sector, it also contains provisions requiring the Secretary of State to make regulations by 1 April 2018 that will require both domestic and non-domestic landlords to make energy-efficiency improvements to properties they own if the energy efficiency of their properties (as demonstrated by the Energy Performance Certificate (EPC) for it) is below the level set in the regulations.

FM companies specialising in providing energy efficiency services will be able to access funding through the Green Deal to develop efficiency improvements or install renewables as part of retrofitting projects. Initiatives installed as part of the Green Deal remain with the building and not the tenant, occupier or FM organisation. This opens up the options for longer-term projects, with funding available for projects up to 25 years.

The Green Deal should therefore provide one of the biggest opportunities for FM contractors to win work over the coming years and should be available through major contractor supply chains and public sector contracts, as well as directly with property owners.
The Green Deal was developed for domestic properties and does not fit easily with the way that the commercial real estate market works. However, FM companies can encourage commercial landlords and tenants to improve their properties. The underlying message - and where FM suppliers can add value to this whole process - is that they need to work with landlords to get them thinking about the energy efficiency of their buildings. Otherwise they risk not being able to let their property, or having to carry out costly improvements in tight timescales.

Clearly, there are a lot of uncertainties for commercial landlords at present surrounding the whole act. For example, will their property actually fall within the regulations, and if so, what level of energy efficiency they will be required to maintain in accordance with the EPC for the property? How much time will they have to make efficiency improvements if their property is not compliant with their EPC, before being subject to sanctions?

If it works, the Green Deal will provide a valuable cost-reduction option for UK businesses. It will also boost demand for businesses involved in both the development and installation of energy efficiency technologies, and the maintenance of those buildings utilising the same. However, the mechanisms needed to oversee the process need to become clearer as well as the supporting laws and regulations. Once done, however, the scheme may indeed benefit the UK's economy and environment.

Energy Company Obligation (ECO)
There is increasing pressure on commercial landlords as a result of energy-price increases and growing regulatory and statutory demands for energy efficiency.

As a result, under the act the ECO will take over from the existing obligations the Carbon Emissions Reduction Target (CERT) and the Community Energy Saving Programme (CESP). It will also take over in addressing energy efficiency in the domestic sector. So while the Green Deal is a market mechanism, not a grant scheme, it will be supported by the ECO, which is a grant scheme and which will replace CERT and CESP with similar levels of funding (circa £1.3 billion a year).

FM providers must be innovative and to move towards providing a more tailored service geared to the individual building needs of their clients. This effects the provision of services such as diagnostic

asset management, thermostatic control, LED lighting, rain water harvesting, solar PV, retrofitting energy efficiency product, such as Voltage Power Optimisation (VPO), and efficient innovative heating systems, so as to achieve energy efficiency obligations.

Adding value to FM
Energy Performance Contracting also offers an ideal solution for FM providers to offer building owners a balance between achieving environmental targets and limiting capital expenditure by implementing programmes of energy conservation measures (ECMs) and practical engineered improvements could guarantee to pay for their capital cost over a payback period of time.

In such an instance, an Energy Services Company (ESCO) would undertake projects on behalf of the client and assume the technical and performance risk associated with its delivery. With this model, the FM would hand over the responsibility for procurement of the technologies and services to a third party, thus avoiding the costly tendering processes. However, the FM would also lose a degree of control of 'their building' to a third party, allowing the third party to make the changes necessary to hit the target they've been set. This in turn changes the role of the in-house FM to a project manager. If FM providers adopt an EPC model they must ensure that the party in control of energy consuming systems (such as heating, lighting, cooling) has the information and incentives to drive energy efficiency.

FMs opting for a gain-share mechanism, on the other hand, may find themselves heavily involved in the energy management of their building, requiring a new set of initiatives and skills. A fairly drafted gain-share mechanism drawn up between the client and the FM would give incentive to the FM to achieve savings for their client over and above a minimum contracted level, meaning that instead of bringing in an external ESCO the FM would take on this role.

In this view, savings would typically be achieved by improving control and encouraging good energy behaviour among building occupants. The benefit for the client would be a release of additional capital for investment in energy efficiency technologies. However, while an energy manager could very well be involved in EPC contracting, it is important that FMs lead the process internally so as to add value to the services provided to their client. 

Conclusions
1) The Energy Act 2011 act can allow FM companies to take centre stage, diversifying, specialising and becomeing major components of long-term sustainable buildings strategy programmes and sustainability projects. However:

2) The future of FM may well be more towards enhancing the delivery and supply of sustainable facilities management services, where the aim is to ensure that environmental impacts are monitored and minimised. This would be achieved by working with landlords and clients in order to:

• Comply with environmental and other appropriate legislation
• Make efficient use of renewable resources goods and services 
• Minimise waste
• Provide innovative solutions for the next generation of green buildings
• Provide innovative solutions in energy efficiency and building management systems, as well as offering solutions for efficiency in building management systems.
• FM services and service providers must develop to meet market demands and strive ahead with innovation and sustainable solutions by delivering environmental initiatives going forward, more so now that the funding possibilities that the Green Deal and more capital-intensive projects may have to offer.
  

Tony Thiaray is a commercial lawyer at Cushman & Wakefield facilities management