In this global article, we look at how member states will adopt their own national trajectory to reduce energy use in residential and commercial buildings. What does the legislation say and will there be enough flexibility to take into account national circumstances? How will exemptions work in practice in different jurisdictions, and how will the directive work in terms of zero-emission buildings being the required standard for new buildings?

UK

The UK's approach to energy efficiency

While the UK is no longer a part of the EU, its trajectory to net zero began before Brexit. The UK has legislation aimed at imposing a minimum level of energy efficiency, the Minimum Energy Efficiency Standards (MEES).

Except where specific exemptions apply, it is currently unlawful for a landlord (whether of commercial or residential property) to let or continue to let a property that has an EPC rating below E. Importantly, the current position is not the final one but instead a stepping stone towards the UK’s ultimate goal, as shown by the government’s current intentions of requiring that (save for any lawful exemptions):

• from 2027, all commercial properties must have an EPC rating of at least C;

• from 2030, all commercial properties must have an EPC rating of at least B; and

• from 2035, as many residential properties as possible must have an EPC rating of at least C, where cost-effective, practical and affordable.

What does this mean in practice?

The UK outlook could change further, particularly if the imminent general election goes against the current government. This uncertainty is epitomised by the government’s recent announcement that it was doing away with the requirement that all residential properties would need an EPC rating of C or above in the period from 2025 to 2028. Against this unpredictable backdrop, landlords are faced with difficult questions such as:

1. Should we minimise, and potentially even completely avoid, any long-term disruption by immediately raising our commercial property’s EPC rating to at least a B, despite the higher capital expenditure involved and the possibility of the target date of 2030 being pushed further back?

2. The greater the scale of works required to raise the energy efficiency of buildings, the longer the loss of rent period – can we afford to digest that cost?

3. The flipside to those questions is that everyone is becoming increasingly energy conscious, including tenants, whether driven by their own reporting obligations and ESG commitments, or, specifically in relation to tenants, the attractiveness of their lease to potential assignees. Therefore, any landlords that opt to future-proof their properties today may immediately benefit from the ability to command higher rent and simultaneously present themselves as market leaders in the provision of energy efficient commercial premises.

Ultimately, whilst it is challenging to make investment decisions without precision around the UK’s legislative framework, the overall direction of travel is clear: net zero.

Spain

The EPBD included among its objectives for 2020 the requirement for so called nearly zero-energy buildings. These objectives were incorporated into the Spanish system in 2013. In 2017, these requirements were ramped up, accelerating the gradual process to convert all buildings into this definition. By December 2020, new buildings had to be near-zero energy buildings.

In the ongoing battle against greenhouse gas emissions and high energy consumption, in the Spring of this year, the European Parliament approved the revision of the EPBD, which represents an important step forward in the reduction of greenhouse gases and energy consumption of buildings located in Spain and throughout Europe.

For all EU states, the EPBD establishes the following goals:

1. At least 16% of the least efficient non-residential buildings will have to be renovated by 2030, rising to 26% by 2033. In the case of residential buildings, the aim is to reduce consumption by between 20% and 22% by 2035.

2. Member States are required to progressively install photovoltaic installations on the roofs of non-residential buildings between 2026 and 2030.

3. 2040 is set as the date for the elimination of fossil fuel boilers and 2025 as the year in which subsidies for independent boilers will be abolished.

4. New buildings must be climate neutral from 2030 onwards, with this deadline being shortened by two years (to 2028) in the case of new buildings occupied by any public administration.

5. The installation of charging points for electric vehicles must be included in the design of new non-residential buildings.

In this context the National Government in Spain has outlined an ambitious investment program known as the “Urban Rehabilitation and Regeneration Plan”. The main goals of this plan are to promote the rehabilitation of the existing building stock in Spain, as well as to increase the provision of social rental housing in energy-efficient buildings, with an estimated total investment of 15,367 million Euros.

This Regeneration Plan lists a series of reforms and investments, including the “Energy Rehabilitation of Buildings Program”, which promotes the energy rehabilitation of existing residential buildings and other uses, through energy saving and efficiency actions and the incorporation of renewable energies.

As part of this plan the government in Spain has implemented a "Program for the construction of social rental housing in energy-efficient buildings” to substantially increase the supply of rental housing at an affordable price, with the collaboration of the private sector. This program is granted with 1,000 million Euros destined for direct investment by the different regional administrations and will fully or partially cover all costs associated with the development of an estimated 25,000 social rent homes in energy-efficient buildings. These goals can be developed through public-private collaboration structures in which the investment allocated by the Program amounts to 50,000 Euros per home.

Next steps in Spain

The real estate sector in Spain is awaiting the transposition of the revision of the EPBD into the Spanish system, and this is on the agenda of the Spanish Council of Ministers. Among other regulations, the transposition will take the form of a revision of the Technical Buildings Code (Código Técnico de la Edificación), which is the regulatory framework establishing the basic quality requirements to be met by buildings and their installations.

Germany

Like other EU states, Germany has watched eagerly as the European Union spent several years discussing how to revise the EPBD. It has now been formally adopted in April 2024 and is expected to come into force soon. The recast version is more ambitious than the previous version and now explicitly pursues the goal of achieving an emission-free building stock by 2050.

The way in which the revised directive will be implemented in each state depends on the legal situation in each member state. In Germany, significant parts of the new EPBD have already been anticipated or implemented through the Building Energy Act (Gebäudeenergiegesetz; GEG) and several other Acts.

Existing buildings

A clear focus of the EPBD is on increasing the overall efficiency of the existing building stock:

For existing non-residential buildings, maximum threshold values must be set for the overall efficiency of these buildings, which cannot be exceeded from 2033 onwards. For residential buildings, the aim is to ensure that their average primary energy consumption decreases by 16% by 2030 and by 20-22% by 2035. This reduction should be achieved primarily by renovating the worst performing existing residential buildings.

The realization of such a reduction in energy consumption can basically be achieved in two ways: on the one hand, reducing consumption and, on the other, increasing energy efficiency. The focus of the GEG is on specifications for the energy sources used, i.e. energy sources based on fossil fuels should no longer be used. However, there are also specifications regarding the structural requirements of residential buildings, for example thermal insulation. However, these only lead to a very limited obligation to renovate. In any case, the upper storey ceilings must be insulated to prevent heat loss. The new structural requirements only have to be fulfilled or retrofitted if the existing building is to be refurbished anyway.

The requirements of the EPBD on the use of building automation and control systems follow the same approach. The current GEG stipulates that non-residential buildings must be equipped with a building automation and control system by the end of 2024, including the use of digital energy monitoring technology. In addition, the Metering Point Operation Act (MsbG) sets out general requirements, including for the use of smart meter gateways and intelligent metering systems, which means that the installation of other metering systems after 2028 is only possible under strict conditions.

New buildings

According to the EPBD, buildings must be constructed as so-called zero-emission buildings from 2030 onwards. These are buildings that do not cause any CO2 emissions from fossil fuels. This new building standard already corresponds to the standard in Germany, as according to the GEG, new buildings must be constructed as ultra-low-energy buildings whose energy requirements are covered as far as possible by energy from renewable sources.

The EPBD requires solar energy systems to be installed on all new residential buildings by the end of 2029 – at least insofar as the installation is “technically suitable and economically and functionally feasible”. A solar obligation for certain new buildings has already been introduced in Germany, but is based on the state building regulations and varies from state to state.

The GEG only provides for a public inspection obligation regarding the installation of solar thermal systems in new or renovated non-residential buildings. Solar Package I, which was passed in April 2024, is likely to be of greater practical relevance for private individuals; according to this package, the expansion targets for solar energy will be tripled by 2026 and, to this end, their construction and the feed-in of electricity will be simplified and ubsidized.

Exceptions

The EPBD provides for the possibility of creating exemptions for certain types of buildings. In Germany, the result is that the GEG largely does not apply to weekend and holiday homes. Architecturally or historically protected buildings, on the other hand, are not generally excluded from scope.

Next steps in Germany

The greatest divergence between the intended and actual legal situation arises from the means used to achieve the goals. While the EPBD primarily provides for mandatory measures and targets, the German legislator favours incentives and financial subsidies.

The new directive therefore does not represent a fundamental change in direction for the legal situation in Germany, but certain legal adjustments will have to be made by way of European harmonization.

Italy

In Italy all real estate players have been looking with interest as the EPBD has undergone several changes since 2021, until final approval in the Spring of 2024 . The final text leaves a certain discretion to each Member State to determine how to achieve the envisaged targets, a flexibility which is crucial for Italy given its proportion of heritage buildings.

While waiting for publication in the EU’s official journal (after which the two-year period for transposition into national law by each Member State will begin), it is mandatory to understand what the text (really) provides for and what we shall expect over the coming years.

One of the challenges will certainly be where to find the funds for interventions, considering that the EPBD does not provide for specific European funding. Member States however will still be able to draw on EU funds, including the Social Climate Fund, the Recovery Fund and the Regional Development Funds.

Below we set out the main provisions for existing and new buildings:

Existing buildings

As is the case in Germany and Spain, in Italy too existing residential buildings will need to undertake interventions aimed at reducing the average energy consumption by at least 16% by 2030 (with increasing percentages thereafter). In order to achieve this target in Italy this will mean reducing the energy consumption by at least 55% in relation to at least 43% of the residential buildings with the worst energy performance. Similar targets (with similar increasing percentages) are provided for non-residential buildings.

How to identify this 43% of residential buildings will represent a crucial point in the EPBD’s implementation process in Italy.

Member States can also exclude certain categories of existing buildings from the undertaking to intervene: exemptions include listed buildings, church buildings, industrial buildings and (provided that certain occupancy criteria are met) also second homes. These exemptions - if all applied within Italian national law - will likely concern a large amount of buildings in Italy which will make a big difference in practice.

New buildings and renovations

New private buildings will have to be zero-emissions as of 1 January 2030 (1 January 2028 for public buildings). By these dates, Member States must ensure that all new buildings are at least nearly zero energy.

Also, in the case of major renovations (defined as renovations whose value exceeds 25% of the value of the building, or alternatively 25% of the surface area of the building envelope), measures will have to be taken to ensure that the energy performance is improved to meet - 'as far as technically, functionally and economically feasible' - the minimum requirements set out in the EPBD.

Sanctions

It will be up to the Member States to determine sanctions for infringements; sanctions must be effective, dissuasive and proportionate to the financial situation of the landlord (with a special focus on vulnerable households).

Next steps for Italy

Given the characteristics of the Italian building stock, the EPBD is expected to have a significant impact on the real estate market in the coming years. According to ANCE (the Italian national developers’ association), Italy has around 60% of its buildings in the two lowest energy classes, compared to 17% in France and 6% in Germany.

Renovations to the building stock will therefore be considerable; although the efficiency improvements already realized in the years 2020-2024 through the so-called Superbonus (a national law which provided a special tax treatment for certain energy efficiency interventions) will already be instrumental in achieving EPBD’s goals.

U.S.

In the United States, the situation is markedly different as requirements regarding the energy performance of buildings are largely implemented at the state level, if at all. Certain states and municipalities are on the front edge of this movement, such as New York City with Local Law 97, the Climate Mobilization Act, which was passed in April 2019 as part of the Mayor’s New York City Green New Deal.

Under this groundbreaking law, most buildings over 25,000 square feet - covering nearly 50,000 properties across NYC – were required to meet new energy efficiency and greenhouse gas emissions limits as of January of this year, with stricter limits coming into effect in 2030. The ambitious goal is to reduce the emissions produced by the City’s largest buildings by 40% by 2030 and to net zero by 2050. Many buildings are significantly above emissions limits and will require comprehensive retrofits or alternate compliance (through renewable energy credits and/or emissions offsets) by 2030.

Though the federal government has not set requirements for private real estate, it has tried to lead in this direction with respect to its own real estate portfolio. One of the goals laid out in the Federal Sustainability Plan, which was signed on 8 December 2021, is to achieve a net-zero emissions federal government building portfolio by 2045, including a 50% emissions reduction by 2032. The U.S. government, as the single largest energy consumer and building manager in the nation, with 300,000 federal buildings, will work across new building construction, major renovations, and existing real property to electrify systems, decrease energy use, reduce water consumption and cut waste. A few highlights are as follows:

• all new construction and major modernization projects larger than 25,000 gross square feet entering the planning stage will be designed, constructed, and operated to be net-zero emissions by 2030, and where feasible, net-zero water and waste

• all new and renewed leases over 25,000 rentable square feet, where the federal government occupies at least 75% of the building, will be green leases, as defined by the General Services Administration, which includes a requirement of being net-zero emissions buildings by 2030

• federal agencies will set ambitious, data-driven 2030 goals and annual targets for energy and water reductions based on leading performance benchmarks for building type categories and the composition of the agency's building portfolio

• federal agencies will annually divert 50% of building non-hazardous waste and construction and demolition debris by 2025 and 75% by 2030, will pursue net-zero waste buildings, campuses, and installations where feasible and will reduce or minimize the use of toxic and hazardous chemicals and materials, particularly where such reduction will assist the agency in reducing their greenhouse gases.

Next steps in the U.S.

The federal government has also implemented voluntary programs like the Department of Energy Better Buildings Initiative through which more than 900 commercial, public, industrial, and residential organizations share their proven energy efficiency strategies and inspire others to tap into the continued potential for energy efficiency. Leading CEOs and executives of U.S. companies, manufacturers, universities, school districts, multifamily organizations, and state and local governments have taken the Better Buildings Challenge, which is one component of the Better Buildings Initiative, to reduce energy use throughout their portfolios by at least 20% over 10 years. Partners not only agree to share their annual progress but also their solutions that provide replicable models for others to follow. So far, there are over 345 partners across nine key market sectors.

Next steps globally

It is really interesting to see how different jurisdictions try to achieve the ambitious and crucial goal of improving energy efficiency and achieving net zero, whether through legislation aimed at imposing a minimum level of energy efficiency, or through the use of incentives and subsidies or voluntary programs. With many key jurisdictions having a possible change of government on the cards, it will be interesting to see what effect that has. The overall direction of travel is clear and ESG ripples are continuing to be felt across the globe as each jurisdiction grapples with the climate crisis.