New emissions targets for buildings

How will the new EU’s green buildings law affect construction market in Slovakia?

In March 2023, the European Parliament approved its stance on revision of the Energy Performance of Buildings Directive (EPBD) which stipulates legislative framework for the building sector across the EU. The recast EPBD focuses on requesting EU Member States to invest in renovation and reduce the energy consumption of buildings. Although still passing through the legislative process, the law clearly envisages stricter requirements for the planning and construction of buildings across the EU. It is estimated that compliance with new requirements would require the renovation of some 40 million buildings.

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The EPBD is one of the EU’s responses to the lack of energy security, increased costs of living and climate crises. The law’s supporters believe that it will reduce the EU’s dependence on energy imports. According to the European Commission, buildings in the EU are responsible for 40% of our energy consumption and 36% of greenhouse gas emissions. To reach its climate targets, the EU designed a set of legislative measures — the “Fit for 55” package. This package also revises the EPBD in a way aimed at decarbonizing the EU’s inefficient building stock. The EPBD upgrades the existing EU regulatory framework while providing EU countries with the flexibility needed to address differences in the building stock across Europe.

Emissions-reduction targets for buildings

Despite pushback from some Member States, the European Parliament voted for more challenging deadlines and a stronger framework for mandatory renovations. It is not yet possible to fully describe what will be enforced at the national level. However, the proposed deadlines are challenging. According to the European Parliament press release, all new buildings should be zero-emission from 2028, with a deadline of 2026 for new buildings in public ownership. All new buildings should be equipped with solar technologies by 2028, where technically possible and economically feasible, while residential buildings undergoing major renovation have until 2032. Residential buildings would have to achieve, at a minimum, energy performance class E by 2030, and D by 2033 (on the EU’s energy performance scale going from A to G, the latter corresponding to the 15% worst-performing buildings in each Member State’s national stock). Non-residential and public buildings would have to achieve the same ratings by 2027 and 2030 respectively. There is a plan to increase the number of households installing solar panels. The European Parliament voted in favour of the flexibility on heating technologies that include hybrid boilers that can use hydrogen, biogas etc. in a blended mix with fossil gas, which was subject to criticism. According to some critics, flexibility on heating technologies risks undermining the 2035 fossil fuel phase-out date.

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Some changes proposed by the European Parliament were viewed by the Member States as too ambitious to be feasible within the proposed deadlines. Mandatory renovations are likely to be the breaking point of discussions with the Member States who will continue to fight for their national interests when negotiating proposed deadlines, targets and exemptions (e.g. to exclude public social housing). It is expected that legislative resolution on the EPBD will be reached on the EU level by the end of 2023. Afterwards, Slovakia would have to implement the approved changes on a national level.

There are justified concerns that the EPBD could lead to increased costs for businesses and consumers. Thus, the topic of liquidity and financing will be of great importance. Many individual households will also be unable to finance energy renovation costs. Member States will therefore have to invest and establish measures in their national renovation plans to include support schemes and facilitate access to targeted grants and subsidies. Financial institutions will likely react by developing innovative lending products that will play a role in financing these upgrades. Banks may face increasing valuation challenges and a lack of available data.

It is important to consider national specificities when trying to assess the potential impact of the recast EPBD. The structure of the housing market and national ownership profile will have to be considered. Buildings in Slovakia are, on average, quite old. Slovakia is one of the European countries with the highest proportion of buildings heated by district heating. The second most common option is gas boilers. This may give the impression that we have huge potential for energy efficiency improvements. At the same time, Slovakia has high homeownership rate with high proportion of low-income homeowners. Thus, we can expect greater difficulties in funding the necessary energy renovations.

The EPBD as accelerator of action in the real estate sector

The building sector is crucial for achieving the EU's energy and environmental goals. There are no doubts that the EPBD will have an impact on the whole life-cycle carbon emissions of buildings, including manufacturing, construction, and use.

The requirements of the EPBD will add to the costs of construction and renovation projects, as well as increase ongoing operating expenses. Landlords and developers will need to factor these increased costs into their investment decisions. At the same time, the EPBD will create opportunities for companies to provide energy efficiency services, such as fitting existing buildings with more efficient heating and cooling systems or installing solar panels. The EPBD is also driving responsible and sustainable business. Developers will be encouraged to use renewable energy sources and incorporate sustainable design features into their projects, such as green roofs and solar panels.

The EPBD will not only lower emissions. It is the EU’s growth strategy for Europe and will deliver hundreds of thousands of local jobs in the construction, renovation, and renewable industries. Better and more energy efficient buildings will improve the quality of citizens' life, reduce energy poverty and provide better indoor environments for people’s health.

Summary

Both the EU and national legislators will further tighten the existing legislation to make the European building stock energy efficient and resilient to climate change. The real estate industry will therefore have to adapt to constantly changing conditions in the coming years. Those questioning the feasibility of energy renovation complain that the new EU’s green buildings law might be disruptive to implement. Countries with older and less energy-efficient building stock with a high share of low-income homeownership may not have the necessary infrastructure – or the financing tools in place – to meet the mandatory targets. On the other hand, countries with a larger rental market may also need to address the position of tenants since landlords will likely pass their renovation costs onto them.

Compliance with new rules to be implemented in Slovakia based on the recast EPBD will require understanding complex renovation and regulatory requirements. This new EU buildings law together with upcoming new Slovakian construction law effective as of 2024 will place unprecedented challenges on all Slovak construction market players. Despite any concerns about the burden that it would put on the EU countries, businesses, and households, the recast EPBD is a welcome step in the fight against climate change and EU dependence on energy imports.

This article has been brought to you by CMS Slovakia law firm.

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Author: Soňa Hanková

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