Energy Performance Certificate reform – lodgement fees and penalty charges: technical consultation - partial BRIA

Section 1: Background, aims and options

Background to policy issue

The Scottish Government has a longstanding commitment to reform EPCs and has received recommendations from the Climate Change Committee on this issue to ensure that EPCs are better-aligned with net zero objectives^[1]. We have also received recommendations from an independent review of EPCs on the need to improve the quality of EPCs and in particular to strengthen quality assurance requirements around audit and inspection of Certificates^[2]. EPCs play an important role in the property market, ensuring that current or potential owners and tenants of properties have information on a property's energy efficiency and emissions, and on potential improvements that can be made.

Following an initial scoping consultation in 2021, we consulted again in 2023 on a final package of proposed reforms to improve the quality of EPCs and make them more fit-for-purpose in supporting net zero. The Scottish Government has now published its Response to the 2023 consultation^[3], which sets out our final decisions on EPC Reform prior to laying new EPC Regulations in Parliament later during 2025.

Statutory lodgement fees and penalty charges form part of the EPC Regulations and need to, respectively, reflect the costs incurred in running the technical and operational functions of the regulatory system, and act as a sufficient deterrent for any breach of the Regulations. Ahead of that, this technical consultation will inform final decisions on the level of EPC lodgement fees and penalty charges to be set out in the new Regulations.

This Partial BRIA only covers the specific proposals contained in the technical consultation on EPC lodgement fees and penalty charges. A Full BRIA will accompany the new Regulations when they are laid in Parliament, and will cover the full breadth of reforms set out in the Government Response to the 2023 consultation, together with the issues raised in this technical consultation.

Purpose/ aim of action and desired effect

The purpose of this technical consultation is to:

• Set out the Scottish Government's intended lodgement fee levels for reformed domestic and non-domestic Energy Performance Certificates when new Regulations are brought into force during 2026, and to seek stakeholder views on this;
• Seek stakeholder views on the level of penalty charges to be imposed for non-compliance with the new Regulations; and
• Finalise our overall consultation upon EPC Reform ahead of laying the new Regulations during 2025.

The Scottish Government's objectives in making these proposals are to ensure:

• The highest quality EPC operational system for users, so that EPCs continue to provide accurate and reliable information and perform their role as a key feature of a functioning property market whenever properties are sold or let;
• That EPC lodgement fees remain a fair and proportionate reflection of the costs incurred in providing technical and operational infrastructure within the EPC regulatory system (provision of a Register of Certificates, provision of a Calculation Methodology for the production of Certificates, and Audit & Inspection of accuracy and quality of Certificates);
• Best value for any public expenditure in the discharge of these particular regulatory functions under the new Regulations, by continuing to ensure that costs are met wherever possible by users of the service provided; and
• That any penalty charges payable are fair and proportionate

The intended outcome is to maintain a functioning EPC system which remains an integral part of the property market (whenever a property is advertised for sale or let), which consumers can trust, and which delivers high quality, accurate, reliable, and relevant information to help them make decisions on the energy efficiency and contribution to net zero of their property.

These outcomes will be measured through annual data which shows that:

EPC Reform more broadly will contribute towards the Scottish Government's wider strategic priorities of:

• Tackling the climate emergency by investing in green energy and infrastructure, since introducing the new EPC rating system will ensure that consumers have better information on the steps they can make to improve their property for net zero through investment in clean heating and energy efficiency; and the new operational framework will ensure higher quality EPC assessments that consumers can trust; these reforms will underpin proposed regulatory standards that will drive emissions reduction through decarbonisation of heating; and
• Tackling child poverty, since the new EPC rating system will directly assess the contribution that poor energy efficiency makes towards fuel poverty specifically, and child poverty more widely, helping to inform SG's statutory fuel poverty strategy and to better-target government programmes and funding towards improving those properties which are hardest to heat.

Options considered so far

Option 1 – Do nothing (retain current lodgement fee and penalty charge levels in legislation unchanged).

This option would see lodgement fees for domestic and non-domestic EPCs remain at the levels set in 2017^[4], and penalty charge levels remain at the level set in the 2008 Regulations^[5].

The Scottish Government does not believe this is a credible option and proposes to discount it. There are several reasons for this:

• The Scottish Government has not sought stakeholder views since 2017 on whether lodgement fees are fair and proportionate. We have therefore not been able to take into account the general increase in inflation since 2017 of 31%^[6]. In and of itself, the cost of administering the existing regulatory functions around the EPC Register and Calculation Methodology may not necessarily have risen in line with inflation, but there has likely been some impact which has had to be absorbed by the current Register Keeper (EST) and through Scottish Government budgets. It would not be possible to continue to do this without considering changes to fee levels to meet anticipated rising costs;
• The more important reason why doing nothing would be challenging is that the Scottish Government faces unavoidable costs since the existing Register and Calculation Methodology systems are now over 16 years old, meaning this technical infrastructure is now life-expired and must be replaced if we are to introduce the reformed EPC rating system in the new Regulations. The Scottish Government therefore cannot avoid the costs associated with bringing in this new technical infrastructure. Our analysis shows that to cover the costs of replacing this infrastructure, and running the new systems (estimated at £1.27m p.a.), fees will need to rise;
• Likewise, establishing a new independent Audit & Inspection function (to remain aligned with EU law^[7]) requires independence from the existing Approved Organisations (who would continue to lead on desk-based audits) and would have to be funded by the Scottish Government; and
• The Scottish Government has not sought stakeholder views on whether penalty charges remain fair and proportionate, and whether they act as a sufficient deterrent to any breach of the Regulations since the 2008 Regulations were made. The UK Government is now consulting on the level of penalty charges in England & Wales and so Approved Organisations and assessors (who operate across the UK internal market) are already considering these issues, so it is important to look at them again in Scotland to ensure that levels of charge are correct.

Option 2 – Remove lodgement fees and penalty charges.

This option would see the full cost of delivering the three regulatory functions proposed in the technical consultation being borne by the Scottish Government, and therefore by public expenditure in general, rather than by users of the EPC system.

The Scottish Government does not believe this is a credible option and proposes to discount it since it would breach the long-established principle within EPC Regulations that lodgement fees are used to cover the costs of providing a service from which users benefit. There are several reasons for this:

• The three regulatory functions which the technical consultation proposes be covered by lodgement fees are those which most directly benefit users of EPCs by enabling the energy performance of their property to be calculated, certified, registered and verified as part of the normal functioning of the property market when their properties are advertised for sale or for lease. Lodgement fees therefore need to reflect the costs of providing these services, and our analysis shows they will need to rise;
• If these regulatory functions are not covered by lodgement fees then the anticipated £1.27m p.a. cost of running these functions would need to be met by the Scottish Government from its existing budget, at a time when public finances are constrained. This would mean potential reductions in public expenditure elsewhere in order to cover these costs, given that they are statutory functions which need to be resourced;
• The Scottish Government will continue to ensure that other regulatory functions (setting general EPC policy for the rating system, regulations, governance of the system and oversight of the operational framework - including appointment of Approved Organisations) continue to be funded directly from its budget; and
• If penalty charges were abolished, there would be no deterrent to prevent breach of the regulations. This would make it more difficult for enforcement authorities in local government to be able to take action against property owners or landlords who failed to comply with the regulations. This would undermine confidence in the EPC regulatory system and could damage the wider Home Report system which ensures fair and consistent assessment of property condition and value across the property market.

Option 3 – Amend lodgement fees to reflect anticipated costs and ensure penalty charge levels are proportionate and sufficient to act as a deterrent (preferred option).

This option would ensure that both lodgement fees and penalty charges were fair and proportionate. It would see lodgement fee charges amended to ensure they covered the anticipated £1.27m p.a. costs of maintaining the three regulatory functions from which users benefit; and it would ensure that penalty charge levels were sufficient to act as a deterrent.

It would also ensure that lodgement fee and penalty charge levels were reviewed every two years to ensure they remained fair and proportionate – meaning that they could fall or rise in light of evidence.

The Scottish Government believes this is the most credible option:

• It would maintain the existing principle that users who benefit from the service provided should continue to contribute towards the cost of doing so, but would reflect the actual anticipated costs of £1.27m p.a., which current fees are insufficient to cover.
• This means that Approved Organisations would continue to pay lodgement fees when a Certificate is lodged on the Register. Fees would continue to cover the costs of the Register and also meet the added costs to the Scottish Government of providing the new Calculation Methodology, and of the new Audit & Inspection function. AOs would continue to be able to charge this fee to assessors who would then decide whether to absorb this cost or pass it onto the property owner.
• This option maximises cost savings by working with the UK Government to share costs of the new technical infrastructure of the Register and Calculation Methodology from which AOs and assessors benefit. Rather than SG developing these systems on its own, this leads to avoided upfront capital costs estimated at £6.5 million and avoided ongoing running costs of £0.59 million.
• The new Audit & Inspection function will directly benefit consumers who should be able to have increasing confidence that EPCs are an accurate and reliable reflection of their property's energy performance. AOs and assessors will benefit from this function which provides an additional degree of quality assurance of their work, which will drive up standards in the market and act as a deterrent to any actors who are not meeting those standards.
• Penalty charges will be proportionate to the risk of breach of the Regulations, and act as a sufficient deterrent.

Sectors/ Groups affected

The Scottish Government envisages that the following groups may be impacted by these proposals:

• Business - Approved Organisations (AO) and EPC assessors.

• Consumers (domestic and non-domestic) – including home/ building owners, prospective buyers, as well as tenants and building users.
• Local authorities and Housing Associations; and
• Government programmes or regulations which use EPCs.

There are currently six AOs approved under the existing Operational Framework in Scotland. Only one of these organisations is based in Scotland – the other five are based elsewhere in the UK (and operate across the whole of the UK). AOs currently carry out desk-based audits to verify the accuracy of Certificates and lodging Certificates on the EPC Register and ensure that assessors have achieved a required level of competence in order to practice. They also provide other services to their assessor membership (for example, providing insurance, delivering CPD, etc.).

AO's will be directly affected as Lodgement fees are paid by the AO when an EPC Certificate is lodged on the Register. However, AOs in turn charge this fee to assessors, who may either absorb this cost or pass it on to the property owner which could directly affect the consumer.

As such, EPC assessors themselves will also be directly impacted. There are approximately 3,000 EPC assessors registered that cover the country and in 2023, 230,429 EPCs were lodged in Scotland (222,333 domestic and 8,096 non-domestic)

Homeowners, Private Landlords, Local Authorities, Housing Associations, and Scottish/ UK Government programmes which make use of EPCs will be directly impacted by these proposals – assuming that the lodgement fee increase is reflected in the cost of an EPC.