Exemptions for energy generation are very limited and due to expire, while the Energy Act could distort rateable values and actually discourage investment in environmental improvements.

Moving into or owning a green building helps companies both enhance their environmental reputation and, by being more efficient, reduce energy costs.

Great strides have been made in achieving this. Energy Performance Certificates (EPCs), Display Energy Certificates (DECs) and BREEAM assessments have all played their part in reducing the carbon impact of commercial buildings. But the business rates regime is now discouraging further progress towards making property more sustainable.

Limited relief from rates

One example of the looming expiry is on a scheme which allows rates relief for installing micro-generation equipment.

Under regulations introduced in 2008*, small scale heat or power generation equipment is exempt from plant and machinery calculations for rates. The exemptions last only until the end of the current rating list and, while the revaluation has been delayed by two years until 1 April 2017, this is merely a stay of execution for the scheme.

The relief is anyway very limited. Only equipment installed after 1 October 2008 where the output is less than 50KW – that would be the equivalent of a single wind turbine with blades of 15m – is exempt.

Occupiers penalised

When the exemption does end occupiers may find themselves being penalised twice for their efforts.
The cost of the micro-generation equipment will now be rated as plant and machinery. In addition, the rating assessment will take into account the attraction that reduced energy bills would have for a hypothetical tenant, which would now theoretically be willing to pay more rent.

The Energy Act – unintended consequences

The Energy Act 2011 is intended to raise the environmental performance of buildings but due to
the rating system it could have the reverse effect.

The Act makes it illegal, from April 2018, to let premises that have an EPC rating of F or G. Owners of such buildings are likely to argue that the rating assessment should be reduced or exempted as the property cannot be let without a substantial investment – currently rates become payable on most vacant commercial property after an exemption of three months, and six months in the case of industrial buildings.

Instead of making improvements immediately this gives landlords an incentive to delay them until they have found a tenant. By distorting rates assessments in this way the Act will slow rather than speed up the pace of change.

Councils reinforce the effect

The Localism Act 2011 has the potential to reinforce this effect. It allows local authorities to retain 100% of the business rates from buildings with renewable energy schemes. This makes councils more enthusiastic about ensuring rates are collected fully and keen for the Valuation Office Agency to avoid omitting any buildings from its assessments – again making it less appealing to install green features.

An unintended advantage of the rating revaluation being pushed back to April 2017 is to potentially better dovetail the environmental and rating legislation. This is an opportunity that should not be missed.

* The Valuation for Rating (Plant and Machinery) (England) (Amendment) Regulations 2008.

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This article is part of Asset Class winter 2014.