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

Considered in Grand Committee

Moved by

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

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.

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.

Sitting suspended for a Division in the House.

As I was saying, I romped through some questions around private finance providers and details of registration control and the management of that process. I welcome the removal of the “no cost to landlords” clause and the insertion of the £3,500 cap, but there are some issues with that. I note that VAT is included within it, and so obviously it is 20% less than you think. It includes also any other funding that the landlord is able to pull in, including local authority or Green Deal funding. Already, it starts to look like less, as it will not always be the landlord putting the £3,500 in.

I would not call them loopholes, but we then have some other ways for the landlord to invest less. One is the recognition of previous investment, which clearly is often possible. How do the Government expect to avoid that in many cases? The second point I have concerns about is the high-cost exemption. It is not hard to get estimates for jobs. Frankly, if you ask a builder to give you high estimates for jobs, they are usually better at that than they are at low estimates. I suggest that that is a gaping loophole for unscrupulous landlords, sadly many of whom operate in this sector. I would welcome the Minister’s view on that.

Another potential issue was brought up in the debate of 2016 to which I referred earlier. The Secretary of State, Andrea Leadsom, said that,

“landlords will be required to install only measures that cost the same as or less than their expected energy savings over a seven-year period, and they will be eligible for an exemption if the improvements do not meet that payback test”.—[Official Report, Commons, Fourth Delegated Legislation Committee, 8/6/16; col. 4.]

There is no mention of that payback test in the accompanying material to this SI. Could the Minister please explain that status?

My final point is this. The Minister mentioned that those obtaining an exemption will be put on a register. Will he undertake that this will be a public register so that those landlords would be fully knowable to the wider community? I await the answers to those questions.

My Lords, I thank the Minister once again for his exemplary introduction to the regulations before the Committee today. I note that, at last, we have come out of the jurisdiction of no-deal outcomes to look at matters of great importance that are, nevertheless, outwith our previous debates on the tranches of SIs that deal with a no-deal scenario.

We come now to the important aspect of energy efficiency, a necessary and effective part of our infrastructure improvement to reduce and remove carbon emissions in the longer term. I always thought that it was a very key part of the Green Deal, introduced— I hasten to advise the noble Lord, Lord Fox—during the coalition years under a Liberal Democrat Minister of State in DECC, and it was to his great regret that it eventually collapsed, as we showed at the time, through very great difficulties in its construction.

This SI provides amendments to the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, which introduced mechanisms to require landlords to improve their properties so that they could reach the minimum long-term lettable level of EPC band E by 2020 following that primary legislation. If they have not improved to this standard or do not have an exemption certificate after this date, such properties will be deemed substandard, and in principle not legal to let.

The Green Deal came in in 2011 and was of such complexity and difficulty that it took four years to produce the 2015 regulations. However, they were cancelled almost immediately afterwards following their difficulties. The regulations relied extensively on the assumption that bill payers could avail themselves of the Green Deal to improve their properties, and the cost to the landlord was appraised on that basis—that is, if a landlord had an assessment and the improvements were economic up to band E with a Green Deal loan programme, that would discharge his or her improvement responsibility.

However, with the cancellation of the Green Deal, the SI became inoperable; hence it has taken another four years for the 2018 amendment regulations to retain the requirement to improve and the level of improvements to aspire to, but they substitute for the “no cost to landlord” provisions related to the Green Deal a maximum spend for an F-rated or G-rated property of £3,500 by the landlord in order to reach the minimum. If the property cannot be improved to band E for that sum and the landlord can show that he or she has spent the maximum on it, a certificate of high-cost exemption can be applied for, which exempts the landlord from doing further work to bring the property up to band E.

As I said, the original 2015 regulations took four years to arrive following the passage of the Energy Act 2011, and they collapsed almost immediately. As simple arithmetic shows, there has been an eight-year period to bring various features to improve the energy efficiency of homes. They have eventually been laid following tortuous argument about the level of financial liability which landlords should be responsible for when they rent out very poorly insulated properties in bands F and G, and the point at which they should then be able to rent out such low-standard properties after 2020 if exempted from the full cost of raising the standard of the property.

The Government’s consultation proposal was that landlords should be exempted after a maximum of £2,500 of expenditure. This received a frosty reception from consultees, 79% of whom argued that the limit was too low. Among other arguments put forward, it was pointed out that, according to the Government’s own impact assessment figures, only 30% of F and G properties would be uprated at that level; the rest were to be exempted. The favoured level of landlord contribution of £5,000 was endorsed by half of the total number of consultees, and 60% of those said that the £2,500 level was too low. Impact assessment projections suggested that, with a £5,000 level in place, some 73% of F and G properties would successfully be rated up to band E.

The first thing to be said is that on this side of the House we somewhat regret the lower level that the Government put into the regulations. Indeed, the Government’s response to the consultation was to concede the uprated figure of £3,500, which has been incorporated into this SI, as their operational alternative to the 2015 SI. This would mean that 48% of properties would reach the required level. In other words, turning it upside down, it means that 52%, the majority of properties, would end up exempt, with the landlord not required to do any more to an F or G-rated property let out after 2020.

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.

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.