Private rented housing energy efficiency: consultation assessment (part one)

3. Policy options

This section presents the policy options presented in the consultation document, and compares them to the do-nothing, or business-as-usual, option. Before doing so, the methodology used to assess the impact of upgrading dwellings from their current EPC to various target minimum EPCs is discussed. The results of this modelling, together with turnover rates presented in Section 3.2, can then be used to calculate the impact of different options for regulation. Once the final form of the regulations is determined in the light of feedback from the consultation process, the associated costs and benefits will be analysed in the final Business and Regulatory Impact Assessment.

3.1 Modelling methodology

The Scottish Government commissioned independent researchers to model the costs and benefits of regulation to inform the deliberations of the REEPS Working group. ^[28] The research covered both the private rented sector and the owner-occupied sector, using data from the Scottish House Condition Survey. ^[29] Using SAP 2012, the researchers applied a variety of upgrades to each housing archetype to work out which combination of upgrades would achieve various target minimum EPCs at least cost, as measured by the upgrade cost for the initial installation of the measures. Costs for upgrades were derived from the Product Characteristics Database File ( PCDF), which contains the costs that are used in EPCs. Where PCDF costs are expressed in terms of ranges, the mid-point or averages were used in the modelling. The benefits of upgrading the dwellings, in terms of reduced energy usage, fuel bills and emissions, were derived from the outputs of SAP. ^[30]

For the purposes of this consultation, the outputs of the research have been applied to the latest (2015) Scottish House Condition Survey estimates of the total number of dwellings in the private rented sector which have an EPC of E, F and G, as set out in Table 1. ^[31] This change in the estimated size of the target stock, as well as the fact that the consultation relates only to the private rented sector, accounts for the difference in the numbers reported here and in the research.

In addition to the costs and benefit presented in the research, further costs have been included in the analysis in this impact assessment, namely:

• An allowance for "hidden costs" has been made. These are costs relating to upgrading the property other than the cost of installing the measure itself. These could be ancillary monetary costs such as the costs of clearing lofts, redecorating, etc., but can also cover the hassle factor, e.g. time spent researching energy efficiency measures, any disruption caused during installation, etc. A factor of 10% of the upgrade cost has been used. ^[32]
• Where the dwelling falls below the rating required by regulations, the landlord will be able to obtain a minimum standards assessment report which will set out the least-cost, technically appropriate way of meeting the required improvement rating. An allowance of £140 has been made for the cost of this assessment report. It is assumed that each dwelling which is below the relevant standard will obtain such a report.
• Once the property has been upgraded, the owner will need to provide proof that the property meets the required standard. We have assumed that this is done through a post-upgrade EPC lodged on the EPC register. Given a plausible range of EPC costs for different dwelling sizes between £40 and £100, an average cost of £70 has been used.
• Some households who have been underheating their homes to economise on their fuel bills may choose to take the savings from greater energy efficiency partly in lower fuel bills and partly in greater thermal comfort, by heating their home for longer or to a higher temperature. The benefit to the household from a warmer home can be quantified as the portion of their fuel bill for energy used to heat their home above its previous level. Therefore, even if the actual fall in the fuel bill is less than the modelled fall, the full amount of the modelled fall represents the benefit to the tenant, since the difference is the value attributable to comfort taking. Comfort-taking behaviour would though mean that fuel use, and therefore emissions, do not fall as much as modelled. In line with previous Scottish Government and UK Government practice, it is assumed that 15% of the benefit of modelled fuel bill savings is instead taken as greater thermal comfort.
• Results are presented both before and after applying in-use factors, which are designed to account for differences in performance of retrofit energy efficiency improvements in-situ as compared to laboratory testing. ^[33] The factors used are those provided by the UK Government for the Green Deal and Energy Company Obligation ( ECO).

Since the benefits of the upgrades are received over the lifetime of the upgrades, net present values have also been calculated. The assumptions underlying the net present value calculations are:

• The costs and benefits are calculated over a period of 40 years. This ensures that the upgrades with the longest lifetime, such as cavity or solid wall insulation, are appropriately represented: since these upgrades often have higher capital costs, if they are valued over a period significantly shorter than their lifetimes, all of their capital costs but only some of their benefits would be captured.
• Since the lifetime of other measures is less than 40 years, replacement costs have been included in the costings, based on the lifetime of each particular measure. As a result, some measures may be replaced more than once over the 40-year period. The original capital cost of installation is used as the replacement cost.
• The prices of upgrades, EPCs, minimum standard assessments and fuels are assumed to be constant in real terms over time, i.e. to grow at the same rate as inflation.
• Costs and benefits in the future have been discounted using the rates provided in HM Treasury's Green Book: a real rate of 3.5% for the first 30 years, and then 3% for years 31 to 40. ^[34]

3.2 Turnover

Since it is proposed that regulation is linked to the point of rental, the rate at which tenancies turn over will affect the number of dwellings that are upgraded each year. Analysis based on the Scottish House Condition Survey, set out in Table 2, shows that tenancy length is relatively short in the private rented sector, with around 60% of tenancies lasting less than two years in the sector as a whole. The data also suggest that tenancy length is somewhat longer in dwellings with a lower EPC.

Table 2. Length of time at current address in the private rented sector, as a proportion of each EPC band

	A-C	D	E	F-G	All
<1 year	48%	42%	40%	33%	43%
1<2 years	21%	20%	15%	14%	19%
2<3 years	10%	11%	12%	8%	11%
3<4 years	9%	7%	7%	6%	8%
4<5 years	5%	4%	3%	4%	4%
5<6 years	1%	4%	3%	2%	3%
6<7 years	1%	3%	2%	3%	2%
7<8 years	1%	1%	3%	2%	1%
8<9 years	1%	1%	2%	2%	1%
9<10 years	0%	1%	1%	2%	1%
10<15 years	2%	3%	6%	11%	4%
15<20 years	0%	1%	3%	2%	1%
20<25 years	0%	1%	1%	2%	1%
25<30 years	0%	0%	0%	2%	0%
30+ years	0%	1%	1%	5%	1%

Source: Scottish House Condition Survey, banded 2011-2013 data

Assuming that past tenure length is a reasonable guide to future tenancy length, Figure 16 illustrates what proportion of dwellings would have experienced at least one change in tenancy by the end of each year after a fixed date (such as the date of introduction of regulations).

Figure 16. Projected proportion private rented dwellings in which there will have been at least one change in tenancy, by EPC band

3.3 Groups affected by regulations

The costs of upgrading the property, as well as of the minimum standards assessment report and any post-improvement EPC, will be payable by the landlords, while the reduced fuel bill costs, or greater thermal comfort, will benefit the tenants. However, the extent to which rents rise to reflect the improved energy efficiency will ultimately determine how the impact of regulations is spread between landlords and tenants. Section 1.4.1 discussed how it may be difficult for landlords to obtain higher rent for a more energy efficient property if tenants find it hard to value accurately the benefit in terms of lower fuel bills. However, regulation which requires all landlords to meet minimum energy efficiency standards may make it easier for landlords to benefit from higher rents for better properties, because landlords who want to invest to provide a more energy efficient dwelling will be less concerned that they will be undercut by competitors who offer a worse overall product to the tenant. In the modelling relating to raising the EPC to E or D, set out below, the overall net present value of upgrading the stock is positive, indicating that in many cases it will be possible in principle for both landlord and tenant to be better off.

Other parties affected include local authorities, in terms of the enforcement action they will be required to undertake (discussed further below), installers of energy efficiency measures, who may benefit from the additional upgrades installed as the result of the introduction, assessors, who may benefit from demand for EPCs and the minimum standards assessment, and wider society from the reduced harm from greenhouse gas emissions.

3.4 The do-nothing option

The do-nothing, or business-as-usual option, refers to what will happen if the regulations proposed in this consultation are not introduced. Under this option, existing energy efficiency regulations will continue to have an impact. For example, when less efficient light bulbs and boilers reach the end of their lifetimes, their replacements will have to meet the higher energy efficiency levels laid down by these existing regulations. ^[35] But, on their own, these types of upgrades would be insufficient to bring most properties up to an EPC of E, let alone D.

Therefore, the number of dwellings in the private rented sector with a low energy efficiency rating will only fall under the do-nothing scenario if landlords voluntarily install energy efficiency measures in addition to those required by existing regulations. However, as set out in section 1.4, there are a number of market failures which reduce the likelihood of this happening. Furthermore, even if these market failures did not exist, voluntary action cannot be relied on where the private net benefit from upgrades is negative, but the social net benefit is large.

Current funding available from relevant Scottish and UK Government energy efficiency programmes mitigates this barrier to an extent, but even with access to funding not every landlord makes an effort to improve the energy efficiency of their properties. Therefore, regulation is required if all privately renting tenants are to benefit from a minimum level of energy efficiency, and the level of carbon abatement required by society is to be delivered.

The conclusion that a combination of existing regulations and voluntary action by landlords is insufficient to produce the required level of improvement is supported by the trends shown in Figure 5, which shows a slowing in the downward trend in the proportion of E-rated properties, and a levelling off in the downward trend in the proportion of F and G-rated properties in the private rented sector. This can be contrasted with the trends for the social rented sector in Figure 6, which show a continuing strong downward trend in the proportion of E-rated properties, coupled with minimal levels of F and G-rated properties. The higher uptake of loft ( Figure 14) and cavity ( Figure 15) insulation in the social rented sector suggests that the stronger regulation of energy efficiency in this sector has played an important role. In particular, the Scottish Housing Quality Standard, which was introduced in 2004 with full compliance required by 2015, contained specific energy efficiency elements. These have now been superseded by the requirement that the higher standards set by the Energy Efficiency Standard for Social Housing be met by 2020. ^[36]

Apart from the higher final level of energy efficiency that regulation can help achieve, it will also help accelerate upgrades that would have taken place at some stage. This too is an important benefit from regulation because it brings forward in time the associated fuel bill savings and greater thermal comfort for tenants, and it also reduces the total stock of greenhouse gases in the atmosphere.

3.5 Options for regulation

The consultation proposes that the regulation sets the following trajectory for improving energy efficiency in the private rented sector:

• From 1 April 2019, at the point of rental all dwellings must have a minimum EPC of E, or if the rating is lower, a minimum standards assessment must have been carried out ahead of rental and the dwelling improved to the required level within 6 months of the assessment, and all dwellings must have achieved this rating by 31 March 2022.
• From 1 April 2022, dwellings must have a minimum EPC of D at the point of rental (or an assessment must have been carried out and the dwelling improved within 6 months), and all dwellings must have achieved this rating by 31 March 2025.

The impact of each step in this trajectory, relating to a specific minimum EPC, is examined in turn below.

The size of target stock that will be subject to regulation is based on estimates from the 2015 Scottish House Condition Survey for the number of dwellings in each EPC band for the private rented sector, as set out in Table 1. The further into the future projections, the greater the possibility that the stock could differ from the 2015 estimates, due to movement of stock from one tenure to another, ^[37] demolitions and voluntary improvements in energy efficiency prior to a particular EPC being required by regulations. New build will not have an impact on the number of dwellings with an EPC below D due to the energy efficiency requirements laid down in building regulations. ^[38] Nevertheless, the 2015 Scottish House Condition Survey data should give a good indication of the scale of dwellings which could be affected by regulations set at different EPC bands.

3.5.1 EPC of E

3.5.1.1 Costs and benefits

The costs and benefits of raising all private rented dwellings to an EPC of E are reported in Table 3, applying the methodology set out in section 3.1. These summary results are reported on the basis that all dwellings are upgraded in the base year. Depending on the final trajectory chosen, upgrading of dwellings will in fact be staggered over time. This will somewhat reduce net present values due to discounting effects, and mean it will take a few years until the full annual carbon savings are achieved. ^[39]

Table 3. Costs and benefits of raising all stock to an EPC of E

	Total	Average
Dwellings below EPC E	30,000
Cost and benefits within private rented sector
Upgrade cost	£33.2m	£1,110
Hidden cost	£3.3m	£110
Assessment costs	£4.2m	£140
Post-upgrade EPC cost	£2.1m	£70
Annual fuel bill savings before in-use factors	£12.8m	£430
Annual fuel bill savings after in-use factors	£9.6m	£320
Net present value before in-use factors	£226.8m	£7,560
Net present value after in-use factors	£155.6m	£5,190
Net present value of cost of having EPC by Sep 2021	£0.2m
Net present value after in-use factors and having EPC by Sep 2021	£155.4m
Emissions abatement ( CO2e)
Annual carbon savings before in-use factors	0.06Mt	2.2t
Annual carbon savings after in-use factors	0.05Mt	1.6t
Annual carbon savings after in-use factors and comfort taking	0.04Mt	1.3t
Annual non-traded carbon savings after in-use factors and comfort taking	0.03Mt	1.1t

The results indicate that the average cost of upgrading stock currently below an E is around £1,100. On average, these upgrades produce substantial savings in fuel bills, of around £320 per year even on the more conservative basis of applying in-use factors. As result, when valuing the various costs and benefits over a 40-year period, the average net present value is estimated at £5,190, even after applying in-use factors and allowing for hidden, assessment and EPC costs. Thus, for dwellings which start with these very low energy efficiency levels, the fuel bills savings will typically comfortably pay back the upgrade costs, producing a net benefit from the regulations even without taking wider social benefits from emissions reduction into account.

The most common measures that the modelling recommends as part of the least-cost, technically appropriate package to meet an EPC of E are loft insulation (48% of dwellings), replacing the secondary heating with a more efficient system (13%), cavity wall insulation (11%), room-in-the-roof insulation (10%), and low energy lighting (10%). See Appendix A for a full list of measures.

Table 3 also includes a cost relating to the proposal that by 30 September 2021 all properties in the private rented sector which still have an EPC below E would need to have had a minimum standards assessment carried out and lodged, so that completing the required works within the allowed 6-month period will ensure that they are at a minimum of E by the backstop date of 31 March 2022. The cost of this minimum standards assessment for properties with an F or G is included in the assessment costs row in Table 3. However, in some cases there will be an additional cost related to the fact that landlords will need to aware of the EPC rating of their dwelling in order to know whether they must lodge a minimum standards assessment by 30 September 2021.

In the majority of cases, rented properties will already have a valid EPC due to the Energy Performance of Building (Scotland) Regulations 2008, which since 4 January 2009 have required landlords to provide an EPC at the point of rental. For those properties where the tenancy in place on 4 January 2009 has not ended by 30 September 2021, the landlord may need to commission an EPC. Alternatively, if, as is proposed in the consultation, the first stage in a minimum standards assessment would be to calculate the property's current EPC rating when it does not have an EPC under the current methodology, landlords may wish simply to commission a minimum standards assessment, particularly if they believe that their property is likely to fall below an E. In this way, landlords of dwellings below E can minimise their costs by not commissioning both a pre-upgrade EPC as well as a minimum standards assessment.

The impact on landlords from this element of the proposed regulations is that the cost of an EPC will be brought forward from the date on which they would have experienced a change in tenancy to 30 September 2021. The total cost of this requirement has been estimated by applying the data on tenancy length set out in Table 2 to the stock of dwellings in the private rented sector in 2009. ^[40] For dwellings where the tenancy in place in 2009 is only expected to end after 2021, the difference in net present value terms between incurring the cost of an EPC in the year in which it is estimated that there will be a change of tenancy and incurring it in 2021 is estimated at £0.2 million.

3.5.1.2 Turnover and backstop date

The consultation document proposes that the minimum standard of an EPC of E will initially apply to properties where there is a change in tenancy as from 1 April 2019. Table 4 shows the estimated number of dwellings that would need to be upgraded each year due to the tenancy which was in place on 31 March 2019 coming to an end. In practice, the profile of upgrades may be somewhat lagged from that presented in Table 4 since the landlord will have 6 months from the point of the minimum standards assessment (which should be completed before rental) to bring the property up to an E. However, many landlords may choose to undertake the upgrades relatively quickly while the property is vacant before the next tenancy starts.

Table 4. Estimated turnover of private rented dwellings with an initial EPC of F or G

Years after regulation in force	Proportion of initial tenancies terminating during year	Cumulative proportion of initial tenancies terminated by year-end	Dwellings upgraded during year	Cumulative dwellings upgraded by year-end	Dwellings still to be upgraded by year-end
<1 year	33%	33%	9,960	9,960	20,040
1<2 years	14%	47%	4,070	14,030	15,970
2<3 years	8%	55%	2,510	16,540	13,460
3<4 years	6%	61%	1,760	18,300	11,700
4<5 years	4%	65%	1,270	19,570	10,430
5<6 years	2%	68%	700	20,270	9,730
6<7 years	3%	71%	880	21,150	8,850
7<8 years	2%	73%	710	21,860	8,140
8<9 years	2%	75%	710	22,570	7,430
9<10 years	2%	77%	650	23,220	6,780

The number of initial tenancies coming to an end is at its highest level in the first year after regulations are introduced, with around 10,000 dwellings estimated to require upgrading. The annual turnover rate then declines steeply. The lead-in period to the regulations may help mitigate this first-year spike. It is proposed that the regulations come into force two years after this public consultation, and with nearly half of tenancies in the target dwellings expected to be shorter than two years, landlords will have vacant access to a substantial proportion of properties to undertake energy-efficiency improvements ahead of the introduction of the regulations if they so wish.

Table 4 also allows the impact of various backstop dates to be considered. The consultation proposes that all properties must have an EPC of at least E by 31 March 2022, i.e. three years after the regulations come into force. At this stage, it is estimated that around 13,500 dwellings will still need to be upgraded. Again, if landlords take advantage of the two-year period before regulations come into force on 1 April 2019, this could help reduce not only the first-year spike but also any spike at the backstop date.

Table 4 illustrates the role played by the backstop date. Although most tenancies turn over relatively rapidly, there is a small but persistent proportion of tenancies that remain in place for long periods of time - for example, around a quarter of tenancies in privately rented dwellings with an EPC of F or G are estimated to last for more than 10 years. The backstop date will also ensure that situations which may otherwise fall outside the regulations, e.g. houses in multiple occupation ( HMOs), are covered. If tenants in these various situations are to enjoy the same minimum levels of energy efficiency as other private renters, it is vital to have a backstop date.

3.5.1.3 Cost cap

The consultation proposes that if the total cost of the measures required to bring the dwelling up to the minimum EPC exceeds a certain level, the landlord will only have to install upgrades up to the value of the cap. Table 5 sets out the estimated distribution of upgrade costs across the target stock to allow the impact of setting the cost cap at different levels to be considered. Note that Table 5 relates only to the cost of the measures in the least-cost upgrade package, i.e. it does not include assessment, hidden or other costs.

Table 5. Distribution of upgrade costs to upgrade dwellings with a current EPC of F or G to an EPC of E

Upgrade cost	Dwellings with cost in band	% of dwellings with cost in band	% of dwellings with cost above band	Dwellings with cost above band
£0 - £1,000	17,980	59.9%	40.1%	12,020
£1,000 - £2,000	5,430	18.1%	21.9%	6,580
£2,000- £3,000	5,260	17.5%	4.4%	1,320
£3,000- £4,000	910	3.0%	1.4%	410
£4,000- £5,000	210	0.7%	0.7%	210
Over £5,000	210	0.7%	0.0%	0
Total dwellings	30,000

The consultation document proposes that the cost cap be set at £5,000. This will apply to an estimated 200 dwellings, or less than 1% of stock.

3.5.2 EPC of D

3.5.2.1 Costs and benefits

The modelling work undertaken by the independent researchers, updated for the 2015 Scottish House Condition Survey data, also produces estimates for the costs and benefits of raising all private rented stock from its initial level of an EPC of E, F or G directly to an EPC D, as set out in Table 6.

Table 6. Costs and benefits of raising dwellings with an initial EPC of E, F and G directly to an EPC of D

	Total	Average
Dwellings below EPC D	95,000
Cost and benefits within private rented sector
Upgrade cost	£203m	£2,140
Hidden cost	£20m	£210
Assessment costs	£13m	£140
Post-upgrade EPC cost	£7m	£70
Annual fuel bill savings (before in-use factors)	£35m	£370
Annual fuel bill savings (after in-use factors)	£27m	£280
Net present value before in-use factors	£449m	£4,730
Net present value after in-use factors	£264m	£2,780
Emissions abatement ( CO2e)
Annual carbon savings before in-use factors	0.19Mt	2.0t
Annual carbon savings after in-use factors	0.14Mt	1.5t
Annual carbon savings after in-use factors and comfort taking	0.12Mt	1.3t
Annual non-traded carbon savings after in-use factors and comfort taking	0.10Mt	1.0t

Given the trajectory proposed by the consultation, a related question that arises is: what are the additional costs and benefits of raising the stock to an EPC of D, once the stock has already been raised to an EPC of E? This issue was not specifically modelled in the independent research. Nevertheless, a good approximation can be derived by subtracting the costs and benefits of raising the stock to E from the costs and benefits of raising the stock to D.

The results are set out in Table 7, and two features of these results should be noted:

• The least-cost, technically appropriate package of measures of raising the dwelling to an E first, and then the least-cost, technically appropriate package of measures of raising the dwelling from an E to a D subsequently, may differ from the package of measures which moves directly to a D at least cost using technically appropriate measures. Thus, if landlords chose to upgrade in two stages, in some cases their total cost of raising their stock to a D may be somewhat higher than set out here. However, an advantage of setting a clear trajectory is that it gives landlords an opportunity to upgrade directly to a D in the least cost manner, minimising their overall costs.
• The costings in Table 7 do, however, assume that landlords pay for a minimum standards assessment, as well as a post-upgrade EPC to demonstrate compliance, at both the first stage to E and in the second stage to D. But if landlords go directly to D in light of the trajectory, then they will only need to incur the cost of a minimum standards assessment and any post-upgrade EPC once.

Table 7. Additional costs and benefits of raising dwellings to an EPC of D after they have already been raised to an EPC of E

	Total	Average
Dwellings below EPC D	95,000
Cost and benefits within private rented sector
Upgrade cost	£170m	£1,790
Hidden cost	£17m	£180
Assessment costs	£13m	£140
Post-upgrade EPC cost	£7m	£70
Annual fuel bill savings before in-use factors	£22m	£240
Annual fuel bill savings after in-use factors	£17m	£180
Net present value before in-use factors	£216m	£2,280
Net present value after in-use factors	£102m	£1,070
Emissions abatement ( CO2e)
Annual carbon savings before in-use factors	0.13Mt	1.3t
Annual carbon savings after in-use factors	0.09Mt	1.0t
Annual carbon savings after in-use factors and comfort taking	0.08Mt	0.8t
Annual non-traded carbon savings after in-use factors and comfort taking	0.06Mt	0.7t

The most common modelled measures when moving from an EPC E to an EPC D are low energy lighting (installed in 26% of dwellings), hot water tank jacket (19%), floor (17%) and cavity wall insulation (16%).

3.5.2.2 Turnover and backstop date

The consultation proposes that after the backstop date of E is reached (before 1 April 2022), the minimum EPC will be raised to a D for new tenancies as from 1 April 2022.

Again an important consideration relates to the behaviour of landlords whose dwellings have an initial EPC of either F or G, and who therefore must upgrade their dwellings to an E in the first stage of regulation. These landlords could respond either by raising the EPC in stages, i.e. first to an E and then to a D only when the second stage of regulation comes into effect, or they could upgrade their dwelling immediately to a D in the first stage of regulation.

We start by assuming that all dwellings below an E are upgraded straight to D, and thus it is only dwellings with an initial EPC of E which need to be upgraded when the minimum EPC is raised a D at point of rental from 1 April 2022. The profile of upgrades based on this assumption is set out in Table 8.

Table 8. Estimated turnover of private rented dwellings with an initial EPC of E

Years after regulation in force	Proportion of initial tenancies terminating during year	Cumulative proportion of initial tenancies terminated by year-end	Dwellings upgraded during year	Cumulative dwellings upgraded by year-end	Dwellings still to be upgraded by year-end
<1year	40%	40%	25,780	25,780	39,220
1<2 years	15%	55%	9,740	35,530	29,470
2<3 years	12%	66%	7,650	43,180	21,820
3<4 years	7%	74%	4,710	47,890	17,110
4<5 years	3%	77%	2,190	50,080	14,920
5<6 years	3%	80%	1,890	51,960	13,040
6<7 years	2%	82%	1,140	53,100	11,900
7<8 years	3%	85%	2,100	55,200	9,800
8<9 years	2%	87%	1,220	56,420	8,580
9<10 years	1%	88%	600	57,020	7,980

Table 9 sets out the data when the opposite assumption is made, i.e. that all dwellings with an EPC of F and G are only upgraded to an EPC of E during the first regulatory stage. This means that all dwellings with an initial EPC of E, F or G have to be upgraded when the minimum EPC of D comes into force.

Table 9. Estimated turnover of private rented dwellings with an initial EPC of E, F or G.

Years after regulation in force	Proportion of initial tenancies terminating during year	Cumulative proportion of initial tenancies terminated by year-end	Dwellings upgraded during year	Cumulative dwellings upgraded by year-end	Dwellings still to be upgraded by year-end
<1year	38%	38%	35,750	35,750	59,250
1<2 years	15%	52%	13,810	49,560	45,440
2<3 years	11%	63%	10,160	59,720	35,280
3<4 years	7%	70%	6,470	66,190	28,810
4<5 years	4%	73%	3,460	69,650	25,350
5<6 years	3%	76%	2,590	72,240	22,760
6<7 years	2%	78%	2,020	74,250	20,750
7<8 years	3%	81%	2,800	77,060	17,940
8<9 years	2%	83%	1,930	78,990	16,010
9<10 years	1%	84%	1,250	80,240	14,760

Therefore, depending on the behaviour of landlords, the number of dwellings needing to be upgraded in the first year of the EPC D coming into force is estimated to be between 26,000 and 36,000. This illustrates the role the trajectory can play in minimising any bottlenecks by giving a clear direction of travel which allows landlords to upgrade ahead of time where that makes sense. Moreover, landlords of a property with an E could choose to upgrade to a D during the first stage of regulation, or landlords with an EPC of E, F or G could choose to upgrade in the period between this consultation and 1 April 2019 when the first stage of regulations comes into effect. All of these responses could further smooth the trajectory.

The consultation proposes that a backstop date for reaching a minimum EPC of D is set at 31 March 2025, i.e. 3 years after the requirement for an EPC of D at the point of rental comes into force. At this point, it is estimated that around 35,000 dwellings will need to be upgraded, assuming properties with an F or G are only upgraded to an E in first stage of regulation, or 22,000 dwellings if all properties with an initial F or G are upgraded directly to D in the first stage of regulation. The proposed backstop date for D of 31 March 2025 is 8 years after this consultation, or 6 years after 1 April 2019 when the first stage of regulation comes into effect. Thus, potentially even fewer than 22,000 dwellings will need to be upgraded at the backstop date if landlords take advantage of periods of vacant access to upgrade dwellings ahead of the regulatory requirement coming into force.

3.5.2.3 Cost cap

The consultation proposes that the same exceptions apply at the stage to D as in the first stage of the regulations to E, including the cost cap of £5,000. Thus, where dwellings are already at an E, they will not be required to spend more than £5,000 to raise their EPC to a D.

However, there may situations where even after the backstop date for E of 31 March 2022, the property only has an EPC of F or G, either because the minimum standards assessment recommended a lower level, or there was an exception allowing a lower level than E by 31 March 2022 (under the technical, legal or excessive cost provisions), or because the property has come into the private rented sector since 1 April 2022. In these situations we propose that the cost cap would be cumulative, i.e. it would include the £5,000 allowed for bringing the property up to E. This would mean that, where the property's EPC is F or G, the exception to the D standard for excessive cost would only apply where the total cost of works (including any works previously done towards the E standard following a minimum standards assessment) is in excess of £10,000.

The analysis of the impact of the cost cap at the D stage of regulations is therefore broken down into two parts. Table 10 sets out the distribution of the upgrade costs of dwellings which currently have an EPC of E, on which landlords would have to spend no more than £5,000 in trying to raise them to a D. It is estimated that the proposed cost cap would apply to 2.2% of these 65,000 dwellings, i.e. around 1,400 dwellings.

Table 10. Distribution of upgrade costs to raise dwellings with a current EPC of E to an EPC of D

Upgrade cost	Dwellings with cost in band	% of dwellings with cost in band	% of stock with cost above band	Dwellings with cost above band
£0- £1000	46,360	71.3%	28.7%	18,640
£1,000- £2,000	9,170	14.1%	14.6%	9,470
£2,000- £3,000	3,940	6.1%	8.5%	5,530
£3,000- £4,000	80	0.1%	8.4%	5,450
£4,000- £5,000	4,020	6.2%	2.2%	1,430
£5,000- £6,000	580	0.9%	1.3%	840
£6,000- £7,000	0	0.0%	1.3%	840
£7,000- £8,000	0	0.0%	1.3%	840
£8,000- £9,000	840	1.3%	0.0%	0
Total dwellings	65,000

Table 11 then presents the impact of the cost cap on dwellings which currently have an EPC of F or G. Over the two stages of regulation, it is proposed that no more than £10,000 be spent on raising these dwellings to an EPC of D. It is estimated that the cost cap will apply to 14.9% of these 30,000 dwellings, i.e. around 4,500 dwellings.

Table 11. Distribution of upgrade costs to raise dwellings with a current EPC of F or G to an EPC of D ^[41]

Upgrade cost	Dwellings with cost in band	% of dwellings with cost in band	% of stock with cost above band	Dwellings with cost above band
£0- £1,000	2,300	7.7%	92.3%	27,700
£1,000- £2,000	3,420	11.4%	80.9%	24,280
£2,000- £3,000	8,030	26.8%	54.1%	16,240
£3,000- £4,000	3,980	13.3%	40.9%	12,270
£4,000- £5,000	2,920	9.7%	31.1%	9,340
£5,000- £6,000	2,550	8.5%	22.7%	6,800
£6,000- £7,000	350	1.2%	21.5%	6,440
£7,000- £8,000	1,070	3.6%	17.9%	5,370
£8,000- £9,000	210	0.7%	17.2%	5,170
£9,000- £10,000	690	2.3%	14.9%	4,480
£10,000- £11,000	1,750	5.8%	9.1%	2,720
£11,000- £12,000	310	1.0%	8.1%	2,420
£12,000- £13,000	1,330	4.4%	3.6%	1,090
£13,000- £14,000	920	3.1%	0.5%	160
£14,000- £15,000	70	0.2%	0.3%	90
Over £15,000	90	0.3%	0.0%	0
Total dwellings	30,000

It is therefore estimated that the cost cap will apply to 6.2% of the 95,000 dwellings which currently have an EPC below D. These 5,900 dwellings will still have to install energy efficiency upgrades which fall within this cost cap.