Energy Efficiency (Private Rented Property) (England and Wales) (Amendment) Regulations 2018

Lord Henley Excerpts

Tuesday 26th February 2019 Grand Committee

Moved by

[Lord Henley]

That the Grand Committee do consider the Energy Efficiency (Private Rented Property) (England and Wales) (Amendment) Regulations 2018.

Relevant document: 10th Report from the Secondary Legislation Scrutiny Committee (Sub-Committee A)

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

My Lords, these regulations, laid before the House on 23 November last year, will amend the domestic minimum standard provisions within the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015. In our clean growth strategy, we set out our ambitions to upgrade the energy efficiency of all buildings by the 2030s. The 2015 energy efficiency regulations, which set minimum energy performance targets for properties in the private rented sector, are an important precursor to that work, helping the Government to deliver our fuel poverty and decarbonisation commitments.

Although I appreciate that noble Lords may already be familiar with the minimum standards, some background on the sector and the 2015 regulations may still prove useful before we discuss the specific effect of these amendments. There are about 4.5 million privately rented homes across England and Wales, making it the second largest tenure after owner-occupation. Most of these properties already have an Energy Performance Certificate, or EPC, rating of E or above. However, about 290,000—that is 6% of the market—have a rating of F or G and, as such, are particularly energy inefficient and costly to heat. In fact, it costs about £1,000 more per year on average to heat an F or G-rated home than one rated at band D. Moreover, many tenants of these properties are among the most vulnerable and approximately 45% are in fuel poverty.

The 2015 regulations were designed to drive energy efficiency improvements to these inefficient privately rented homes and established a minimum energy efficiency standard of EPC E for these properties. Since 2018, the regulations have required landlords who let properties below the standard to improve them to EPC E before granting a new tenancy or renewing an existing one. However, the regulations also state that improvements are required only where they can be made at no cost to the landlord, using third-party funding: notably Green Deal finance. Where a home cannot be improved to EPC E, either because funding is unavailable or because of legitimate technical concerns, the regulations permit the landlord to continue to let it, provided they have registered an exemption on the new minimum standard exemptions register. However, access to no-cost funding, particularly Green Deal finance, is more constrained than was originally anticipated when the regulations were made. This means that most F and G-rated properties now qualify for an exemption.

The key amendment under discussion today addresses this by requiring landlords of domestic properties to invest their own funds in energy efficiency measures where third-party funding is insufficient or cannot be secured. To ensure that landlords are not overburdened, this investment requirement will be capped at £3,500 per property, inclusive of VAT and any third-party funding obtained. Ancillary amendments will also be made to the exemptions framework to ensure that the investment requirement delivers improvements where they are most needed.

I shall now briefly discuss the choice of £3,500 for the cap. At consultation, £2,500 was proposed, with a range of other caps presented for comparison. Following overwhelming calls, from 67% of respondents, for a higher cap, and from the results of further modelling, £3,500 was ultimately selected. Our updated modelling shows that of the caps considered in the consultation, £3,500 was the most effective at balancing the costs to landlords against the benefits to tenants and society. Specifically, that analysis shows that under a £3,500 cap: 48% of F and G properties will reach band E, with an average cost of £1,200; the remaining 52% of properties will be able to receive at least one improvement, at an average cost of £2,000; and tenants in improved properties will save an average of £180 a year on their energy bills. The £3,500 cap strikes the right balance between ensuring that a meaningful number of properties are improved to EPC E while ensuring that those improvements are affordable, particularly for smaller landlords who make up the majority of the sector.

However, I should also highlight that, alongside the clear benefits of thermal comfort for tenants, landlords themselves will benefit from the improved energy efficiency of their properties: specifically, in the form of reduced maintenance costs and increases in property capital value, as well as increased tenant satisfaction and following that, one would hope, shorter void periods.

In conclusion, these amendments will help ensure that the domestic minimum standard regulations can operate effectively in line with Parliament’s original intentions and deliver meaningful energy efficiency improvements to the least efficient homes in the private rented sector. I beg to move.

[Lord Fox (LD)]

My Lords, I thank the Minister for presenting this statutory instrument. The noble Lord, Lord Grantchester, is a world expert in the new Green Deal, so I look forward to his contribution and will defer to him in all ways in this area.

First, in many cases we have had to take the Government to task for not consulting but it seems that there has been an extensive consultation in this process, which should be acknowledged.

I became a little confused when I looked back at when this was debated in the other place. I found a debate that goes back to June 2016; if noble Lords can cast their minds back that far, Andrea Leadsom was then the Secretary of State. It appears that this was debated at that time. What happened to it in between—what has been going on? The then Secretary of State refers to all sorts of dates with regard to launching the register, which have passed. Perhaps I have got terribly confused, but it seems that this is the SI that was being debated and that there has been a very long gap in between. In due course I will refer to something the Secretary of State mentioned in that debate.

As the Minister set out, this deals with some of the least satisfactory housing in the country: nearly 300,000 substandard private rented sector homes. As the Secondary Legislation Scrutiny Committee pointed out:

“The Committee is of the view that, as a significant proportion of tenants in ‘substandard’ properties are in fuel poverty”.


The committee recommends that the,

“Department may wish to monitor whether the proposals lead to any adverse impact on vulnerable tenants”,

and recommends that the department might wish to monitor how the proposals lead to the impact on vulnerable tenants and whether they become less or more fuel poor. I would welcome a response from the Minister to that recommendation.

Moving forward, the fact that we have moved from public investment into the new Green Deal to private finance providers flags up concerns—I do not know whether the noble Lord, Lord Grantchester, will go into more detail. We talk about private finance providers. Private finance initiatives in other sectors are clearly not covered in glory at the moment, so I am interested in and concerned about how those finances are regulated and registered and what level of their returns on their finance we are expecting back. What kind of cap do they have on their returns?

As the Minister set out, the key proposal here is the removal of the no-cost-to-landlord aspects of the legislation. I think that that is right, because it is quite clear that work needs to be done and it will come at a cost. The Minister highlights this as being an important element of the green agenda, and it is very clear that there are big wins to be had for relatively small investment.

--- Later in debate ---

So while we support the fact that a cap is now in place that creates an environment for the improvement of properties, removes uncertainty and will necessarily increase minimum standards, nevertheless the assumption that properties in another category of multiple occupancy are still largely excused from the regulations for a further five years is particularly regrettable. We regret that this lower level has been introduced. I ask the Minister whether the Green Deal could be repurposed to provide finance for landlords, above the £3,500 level, to £5,000, such that the future affordability of this very necessary amendment to implement the Green Deal could be brought forward.

[Lord Henley]

The noble Lord would like a higher figure than the one we came to after considerable consultation—the increase from the £2,500 we originally proposed to £3,500, which is what these regulations are about. He has suggested, and I presume this is official Labour Party policy, a figure of £5,000. I suspect that if we had suggested £4,500 or £5,000, he would have suggested £6,000, so I do not think we can win on this. The simple fact is that we thought it right that those landlords who are not making any contribution should be encouraged or made to make some contribution. We are talking only about those 6% of properties that fall below the standard I set out in my opening remarks. The implication behind that is that the landlords of the other 96%—it is actually 94%, I am grateful to the noble Lord, Lord Fox—are doing the right thing, as any sensible landlord would do. It is not just about being good to their tenants—although that has an obvious benefit in encouraging tenants to stay and reducing the amount of void time—but much of the expenditure on improving the property will improve its capital value and be of benefit to the landlord. So although I believe, as a good Conservative, in the rights of property, I think it is right that we offer some encouragement to landlords—and this is more than encouragement—to spend money on maintaining their properties and ensuring that their tenants and the wider public benefit from improving the energy efficiency of those properties to at least band D and to higher bands in due course.

[Lord Grantchester]

I thank the Minister for stating that the added benefit of the rise from £3,500 to £5,000 produces a very considerable increase in the number of properties that would then comply. This would provide a win-win scenario whereby the tenant had reduced future bills for maintaining the property and the landlord saw an increase in the value of his property of more than £8,000: the impact assessment puts the increase at £8,500. Both these figures are considerably higher, so we would have preferred to have seen a £5,000 limit in the regulations.

[Lord Henley]

Again, I note what the noble Lord says; I imagine landlords up and down the country will be listening to his words. We had to make a decision based on a number of factors, but also on the viability of the whole sector. We did not want to see the whole sector being adversely affected on the basis of further modelling of the costs and benefits of the £3,500 cap. The noble Lord, Lord Grantchester, also asked why it had taken so long—four years, as he said—to lay this SI. It took time to build consensus among the wider stakeholder base and to consult properly, which on this occasion was welcomed by the noble Lord, Lord Fox.

The noble Lord, Lord Fox, then confused me by referring to the 2016 debate, implying—I am sure he did not intend to—that that was the debate on these regulations. That debate was to postpone the launch of the exemptions register by six months. It did not relate to this amendment to include a landlord contribution. All this does is to seek that the landlord should make a contribution. These regulations were debated in another place on 14 January this year. They were introduced by my right honourable friend Claire Perry, and it is open to the noble Lord to look at the First Delegated Legislation Committee from that date in Hansard. What happened in between? The 2015 regulations were made on 26 March 2015 and the provisions we propose to amend came into effect in April 2018.

The noble Lord then asked if the register will be made public. Yes, the register opened in 2017, and information registered on it is publicly available and searchable. The noble Lord, Lord Fox, regretted the inclusion of that in the £3,500 cap. We acknowledge that that has an impact on the scale of the improvements that can be delivered, but we nevertheless believe that that is offset by the increase from £2,500 to £3,500. The noble Lord, Lord Grantchester—being more severe than me—would like to take that yet further. Again, these are questions of balance and I believe we got it right with £3,500, even though the £3,500 includes that.

The noble Lord, Lord Fox, asked if the amending regulations are asking landlords to provide three installer quotes and whether that was making it too onerous and complicated. The requirement to provide three quotes applies only where the landlord is looking to avoid making any improvements and to register an exemption on the basis that even the cheapest improvement would exceed the value of the cap. Our analysis showed that virtually all properties can receive at least one measure costing less that £3,500, so we expect this exception to be invoked very rarely. The noble Lord will know that it is plain common sense to get more than one quote. If they are using it to seek an exemption, it is quite right that there should be three.

[Lord Fox]

I appreciate that answer. Clearly, if anyone is considering work, it is helpful to get more than one quote. I was implying that this would be a construct to not do the work rather than to do the work cost-effectively. It is not beyond the bounds of human ingenuity to use the high-cost exemption to get out of doing work. On that basis, I ask that the Minister’s department monitor the use of the exemption and come back to Parliament after some time to tell us whether his thought is correct and it is not being used very often, or whether it is in fact becoming a useful loophole for unscrupulous landlords.

[Lord Henley]

I fully accept the noble Lord’s point that the unscrupulous—we are talking about a relatively small number of very small landlords—could seek exemption by getting quotes from friends and all that sort of thing. We all have our views about certain aspects of the building trade and so on, but I do not think it is worth me going any further at this stage. I give him an assurance that we will do what we can to keep an eye on this issue—to monitor it, as he puts it—and if it turns out that too many exemptions are being sought for the sort of reasons that he mentions, I think my right honourable friend would be the first to say, “This is not working as we intended so we’ve got to try something else”.

The noble Lord, Lord Grantchester, made two other points. The first was about houses in multiple occupation. They will be covered if they are legally required to have an EPC and if they are let on a qualifying tenancy. Some HMOs are not required to have an EPC at this time, but that is something that the department is keeping under review. If we think it is necessary that we act, we will do so.

[Lord Grantchester]

Will the Minister write to me on how many would be exempt and how many would fall into the regulations with which he says they would then have to comply? My understanding was that more would be exempt, and there were a very limited number of occasions on which property in multiple occupancy would have to abide by the regulations.

[Lord Henley]

I offer to write to the noble Lord. I will see if we have the sort of figures that he wants on HMOs and whether I can bring a bit more detail on that.

Finally, I make it clear that the Green Deal has not been cancelled. It still exists. The Government ceased funding it in 2015 but the mechanism remains active and private finance continues to operate in the sector.

[Lord Fox]

I asked one question about the limits on profitability in the private finance investment in the Green Deal. If the Minister wants to write to me on that rather than answering at the Dispatch Box, that is fine.

[Lord Henley]

I apologise to the noble Lord; I am afraid I had not jotted that down. I will write to him in due course and give him an answer on that point. Other than that, I think I have dealt with all the questions.

Motion agreed.