What do revised EU regulations mean for the valuation of energy labels?

Buildings in the EU are together responsible for around 40% of total energy use, corresponding to 36% of total GHG emissions. As part of the ‘renovation wave’ strategy, existing buildings have to be renovated in order to bring these total emissions down. Formally, guidelines for energy performance standards can be found in the Energy Performance of Buildings Directive (EPBD).

First introduced in 2003, the directive ‘promotes the improvement of the energy performance of buildings and the reduction of greenhouse gas emissions from buildings within the Union, taking into account outdoor climatic and local conditions, indoor climate requirements and cost-effectiveness.’ It provides guidelines on e.g. the measurement of energy efficiency, minimum energy performance standard for new buildings, and the labeling system. The exact implementation is tailored to the specific member state.

Recently the directive was revised, which added additional plans to accelerate the decarbonization in the building sector in order to reach a net zero-emission building stock in 2050. This post will highlight the most important changes for the residential sector, and reflect on its implications for the value of the energy label.

What is the aim of the energy label?

The label ranges from A to G, starting with the most energy-efficient building to the least efficient ones. Until now, the label was meant to decrease the information asymmetry between the buyer and seller. With the help of the label, the buyer would be more informed about the energy efficiency of the building. When the label is informative on future cost savings, homebuyers can price in this information. This would lead to a higher valuation for more energy efficiently labeled buildings, and vice versa. Over a wide range of studies, we see that this pattern exists. This overview shows that houses with more (less) energy-efficient label categories transact for a higher (lower) price.

A valuation of energy labels in the market is beneficial for the energy transition, because it would mean that homeowners have an incentive to make their homes more energy-efficient. They will then not only do this to benefit from the energy savings themselves, but also because it can lead to a higher selling price at sale.

What does the revised directive change?

One of the important changes is that the directive aims at phasing out the least energy-efficient energy labels in the coming years. More specifically, it would mean that in 2030, houses need to have minimally an F label. 3 years later, the minimum standard will be an E label. (See Figure 1) By focusing on the least energy-efficient houses, relatively cost-effective energy savings can be realized. For non-residential buildings, the same standards have to be reached even 3 years earlier. In order to facilitate the phase-out of these labels, increased harmonization among the member states needs to be reached in 2025. From that year onwards, a G label will correspond to the 15% worst performing buildings in a country, and an A-label means that a building has net-zero emission. The other buildings need to be proportionally distributed among the other categories.

Article 9 Epbd

Figure 1: Article 9: Minimum Energy Performance Standards

This feature is likely to put increased importance on the energy label. It was already expected that owning a house with a low energy label would be a vulnerability in future climate policies, for instance, due to increasing prices of fossil fuels. However, this directive makes the burden even more concrete and visible. Owning or buying these houses now comes with the responsibility of having to improve its energy efficiency in the near future. Therefore, it is possible that the discount that is already observed for these houses is going to increase even more.

An additional benefit would be that labels would be more frequently updated. At the moment, there is no reason to update your label unless you are selling your house. More frequent updating would mean that we get a more accurate picture of the energy performance of the total building stock.

This seems to be a credible incentive from the EU level in order to accelerate the energy transition in the building stock. It is also noteworthy that the EU has a €150 billion budget available in order to financially support the households that are affected by this regulation but lack the means to comply.

Overall, the revision seems a move forward in the importance that is put on the energy label in the residential sector. It will be interesting to follow whether this regulation will lead to increased energy label premia for more energy-efficient houses. The success is dependent on the credibility of sanctions, and the ability to support vulnerable households in the transition.