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New study finds 85% of commercial rented buildings face climate crunch due to SME challenge

  • Landlords & tenants will be compelled to improve energy efficiency with new building standards set to move from EPC-E to EPC-B
  • Small & Medium-size Enterprises (SMEs) account for 99.9% of businesses in the UK, 60% of employment, 50% of private sector (£2.3 trillion) turnover and half of commercial emissions
  • Lack of non-domestic smart meter penetration and an unengaged SME community hampering growth in innovative energy efficiency solutions
  • Smart energy services could be solution for SMEs and the commercial property market to cut energy costs and carbon emissions

Commercial landlords and small business tenants in the UK are facing a climate crunch with looming changes to regulations meaning 85% of rental properties will need to improve energy efficiency by 2030 – or be banned from leasing out buildings.

Yet commercial landlords are often reticent to invest in energy saving measures because the financial benefit – lower energy bills – goes to the tenant.

Energy Systems Catapult worked with innovative energy service companies – Q Energy and arbnco – on the Boosting Access for SMEs to Energy Efficiency (BASEE) programme funded by the Department for Business, Energy and Industrial Strategy.

A new report detailing learnings from the BASEE programme has identified compelling opportunities for innovation – both technically and commercially – in providing smart energy services to SMEs.

Energy Systems Catapult business model consultant, James Bagshaw, said: “Selling energy efficiency to small businesses is notoriously hard – with SMEs often citing a lack of time, money or confidence in the solutions available.

“While larger businesses are both incentivised and well serviced to improve energy efficiency – often owning their own premises – there is a huge gap in the market to supply SMEs with smarter energy services that reduce the energy use and carbon emissions.

“The almost one and a half million small business premises in the UK account for 50% of commercial energy use, yet there is potential to reduce energy consumption by up to 40% – which would be a huge contribution to the UK’s Net Zero goals.

“So the market for improving the energy efficiency of commercial property in the UK is compelling and – with regulations set to tighten over this decade – there is undoubtedly a massive commercial opportunity that’s ripe for innovation.

“There are great opportunities for smart energy services that use smart meter data and other digital innovations to better serve SMEs with energy consultancy, low carbon technologies and energy efficiency retrofits utilising innovative financing.”

The challenge for SMEs and landlords

The Minimum Energy Efficiency Standards for commercial rented buildings are currently under consultation to rise from Energy Performance Certificate rating EPC-E to EPC-B by 2030.

The BASEE project found that despite the seemingly strong incentive of cost savings – few SMEs or landlords had invested in improving the energy efficiency of their premises, while some lease agreements restricted the activity a tenant could undertake.

Access to low-cost finance was limited because lending to SMEs was inherently riskier owing to their weaker credit ratings and less certain business longevity.

While there are no well-adopted or mandated standards to ensure quality control for non-domestic energy efficiency. With quality varying between suppliers and installations not always subject to due diligence measures.

The challenge for innovators

The project found most innovators developing energy services for SMEs required a smart meter. Yet only 12% (or around 167,000 out of 1.4 million) of non-domestic properties had smart meters installed and operational in smart mode.

And innovators struggled to access insights about which businesses were part of that 12% – with data on deployment rates across specific sectors or geographic locations being unavailable – meaning services could not be targeted or customers found for trials to improve propositions.

Likewise, the cost of developing smart energy services for individual SMEs, which may include site surveys, engineering designs & performance verification – plus the lack of economies of scale – often ruined the commercial viability of propositions.

Existing energy service providers

While there was a market of existing energy service providers, including energy brokers and energy suppliers, they tended to target propositions at larger businesses customers – which often have mandatory regulatory requirements (e.g. Energy Savings Opportunity Scheme).

And almost all the energy procurement business models of energy suppliers and energy brokers, rewarded greater consumption and did not incentivise energy saving to clients.

Recommendations

The report Barriers to innovation in smart energy services for SMEs developed a range of recommendations, including:

Smart Energy Services

  • Smart energy services provide SMEs with more cost certainty over energy bills and investment returns and payback periods for energy efficiency measures; identify of quick–win, no regrets energy saving actions (e.g. systems calibration, behavioural measures) and may offer additional revenues such as offering Demand Side Response for flexibility markets.
  • Service providers should use more granular and live energy data to deliver better propositions for SMEs that improve customer relationships and trustworthiness.
  • Smart energy services would benefit the creation of smart local energy system business models, especially where high volumes of SMEs in urban centres could provide flexibility services to ease network constraint issues.

Business Models

  • Innovative business models can deliver smarter energy services for SMEs such as: targeted tariffs matched to customer needs on cost or carbon; integrated data-driven energy efficiency projects, including installation and finance; optimisation services including access to behind the meter assets that offer flexibility services.
  • Energy services must be easy to understand, access and focus on the benefits. Customer journeys should be streamlined with clear explanations breaking down complex issues and making transparent recommendations for SMEs without the skills to perform analysis themselves.
  • Aggregating SME businesses together to unlock services and reduce the cost to serve for each individual SME can help to achieve economies of scale – providing lower cost access to energy supply contracts, energy efficiency installations, low carbon technology and finance.

Tenancy Agreements

  • Green leases can offer a more climate-progressive tenancy agreement. Established but poorly defined or adopted, green leases encourage tenant-landlord collaboration, with basic principles such as energy consumption data sharing or more progressive joint investment plans. Greater standardisation and deployment of such lease arrangements would accelerate the decarbonisation of the private rented non-domestic building stock.

Smart Meters

  • Data about the deployment of non-domestic smart meters should be publicly available, so innovators can target propositions better and help kick-start the market.
  • Encourage non-energy suppliers – such as energy brokers, business networks, local enterprise partnerships – to take more of an active role in smart meter rollout.
  • Energy services propositions need to provide better meter data access to SMEs. Energy suppliers are not required to provide any means of accessing data upon installation of a smart meter, unlike domestic properties, which have monitors.

Funding

  • Energy efficiency grant funding for SMEs, currently coordinated by uncertain council-backed schemes (55% funded by the European Regional Development Fund), should be secured, standardised and streamlined nationally.
  • Standards being developed for non-domestic retrofit installations should be made a regulatory requirement when public funding is supporting projects in the same manner as PAS 2030.

Read the Report

Barriers to innovation in smart energy services for SMEs

Business Model Innovation

Drawing on market evidence, systems engineering expertise and consumer insight to create viable businesses models for innovations.

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