5.4
For government
While some near-term interventions on operating efficient sites would fall under the control of individual retailers, many rely on governmental support. The retail industry requires government support to meet its net zero target in several areas:
1. Measures to speed the rapid decarbonisation of the UK energy system including accelerating grid decarbonisation and deployment of zero carbon heat
The Aldersgate Group recently released recommendations for advancing the decarbonisation of the electricity grid and power sector overall.[47] Their policy recommendations are in line with the best guidance for the UK Government:
- Secure a route to market for mature forms of renewable energy such as onshore wind.
- Build on the success of the offshore wind sector by continuing to run competitive auctions…
- Grow the supply chain through concrete opportunities for investment so the sector can catch up with its European competitors.
- Develop a supportive RIIO (Revenue using Incentives to deliver Innovation and Outputs)-2 regulatory regime.
- Grow the market for flexible options, such as increased power storage capacity, increased interconnection and greater use of demand side response…
- Maintain good access to the EU Internal Energy Market after EU exit and support continued investment in interconnection, so that the UK remains plugged into the much larger EU market…
- Resume the carbon price escalator in the 2020s as coal is phased out to provide a clear direction of travel for businesses and offer long-term incentives for investment in low carbon alternatives.
Given the size of heat as a proportion of UK energy demand, the decarbonisation of heat will have broad impacts across the whole energy system. For retailers and many other industries there will be large uncertainty over how best to commit resources in decarbonising their own space heating systems. Therefore, having clarity on the longer-term direction of governmental policy will be essential.
There are a range of technologies which have the potential to offer low carbon heating choices in the future, but there is no consensus on which technologies will be able to achieve this most economically and effectively at the scale required – Clean Growth: Transforming Heat[48]
Current thinking highlights that technologies using electricity, hydrogen and bioenergy all have the potential to make important contributions to the transition to low carbon heating, and in practice it may be a mix of these technologies that forms the final structure of the UK heat network. Apprehension from retailers and industry in general is understandable, as backing the wrong option could be a costly mistake should policy advocate a different pathway. Government leadership and direction for future low carbon heating solutions will be essential to allow industry to more confidently set out their investment and resource strategies.
The Committee on Climate Change (CCC) identified multiple decarbonisation pathways for low carbon heating in the 2016 report, “Next Steps for UK Heat Policy”. Three central pathways were identified:
i) by ‘greening’ the gas supply by shifting to low-carbon hydrogen;
ii) electrification of heat supported by low-carbon power generation; or
iii) by potential hybrid solutions, with the bulk of heat demand, met by electricity, and peak demands met by green gas.
Whichever path is prioritised, government should urgently move to clearly communicate the next steps for businesses to act on in their own efforts to decarbonise heating.
2. Enhance action to drive building efficiency including building standards and efficiency requirements for landlords
It is important to recognise that different opportunities will be available to those retailers in owned premises to those in rented, especially given that 42% of retailers own the premises they occupy, whereas 58% rent.[49]
With such a significant proportion of premises being rented, the limitations on improvements for some retailers can be substantial, particularly for smaller retailers in older building stock. The Government’s primary regulatory mechanism for driving energy efficiency in rented non-residential real estate is the Minimum Energy Efficiency Standards imposed on landlords.[50] From April 2023, the standards will apply to all rented non-domestic properties, not just those with new or renewed leases.
Under these standards, landlords are not permitted to enter new leases or renew leases for premises with an Energy Performance Certificate (EPC) band lower than E. EPC ratings are scores given to buildings as a measure of overall energy performance. Band E is the third lowest EPC rating, which some have criticised as a low bar for rented buildings, especially when better building efficiency can result in lower operating costs.
Further, the Government consultation on the Minimum Energy Efficiency Standards elicited responses that the policy is not creating change at the pace required for non-residential real estate. Critics have noted that the bar was set relatively low and limited enforcement has diminished the impact of the standards. In addition, the Government has acknowledged that a retailer’s requirements for fit out (i.e. lighting, heating and ventilation) and the landlord’s obligations under the standards may differ. In some cases, this can lead to a retail tenant removing recently installed energy efficiency measures that the landlord adopted in order to comply with the minimum standards.[51] This misalignment of incentives can create backwards progress that is regrettable in terms of both sacrificed energy efficiency and costs.
More needs to be done to encourage landlords to improve on building energy efficiency standards to achieve emission reductions for building types across the board. Increasing the Minimum Energy Efficiency Standards to a higher EPC band, tightening exemptions from the minimum standards and creating incentives for landlord-tenant collaboration could all help put retailers in leasehold premises on a level playing field.
3. Support for the upgrade of refrigeration systems to utilise low global warming potential refrigerants.
Whilst existing regulation is encouraging a shift to lower global warming potential refrigerants it must be recognised that it can be costly for retailers to transition completely and rapidly, especially when refrigeration systems must be replaced and decommissioned. For smaller retailers especially, replacing cold storage assets that still have useful lifespans could be prohibitively expensive. Targeted financial support, beyond tax benefits for energy efficient refrigeration, could help ease this burden for retailers.
Further, without forward-looking guidance, retailers may be tempted to phase down to the next-lowest global warming potential refrigerant substitution allowed by legislation. This is not inherently bad, but it may lead to repeated (expensive) replacements of refrigerants or refrigeration systems as retailers chase the legislative targets. Government guidance on a more comprehensive refrigeration transition that prevents retailers from chasing moving targets in the refrigerant global warming potential phase down would be extremely beneficial.
[47] Building a net zero emissions economy: Next steps for government and business (2020). Aldersgate Group.
[48] Clean Growth: Transforming Heating - Overview of Current Evidence (2018). BEIS.
[49] Building Energy Efficiency Survey (2014-15) excluding the proportion of respondents that were not asked which category they fall into.
[50] Energy efficiency: building towards net zero (2019). BEIS.
[51] The non-domestic private rented sector minimum energy efficiency standards: the future trajectory to 2030 (2020). BEIS.