Why Do We Need Energy Labels for Buildings?

Energy labels in the real estate sector have been generating much discussion recently, as the methodology of the labeling system in force in Estonia is one of the strictest in Europe. Do these threshold values really help achieve green goals, or do they actually limit our competitiveness?

The energy label system supports the achievement of green goals and helps ensure the growth of energy-efficient building construction. An energy label provides information about the energy needs or actual energy consumption of a designed or existing building.

Energy consumption is considered the cost for heating, cooling, heating water, ventilation, lighting, and using electrical appliances in a building. An energy label is a document that shows how much energy a building or its part consumes annually and what environmental impact the energy consumed per square meter of heated floor area has. This also demonstrates compliance with minimum energy efficiency requirements.

Types of energy labels

There are two types of energy labels. An energy label based on projected energy needs (ETA) is valid for two years from the issuance of the building use permit. After that, an energy label based on actual consumption (KEK) must be issued, which is valid for ten years. After issuing a new energy label, the previous one becomes invalid. ETA is based on typical standardized use and temperature, while KEK is based on actual use and actual temperatures.

In many countries, computational methods are used to compile KEK, which can increase the risk of greenwashing. In Estonia, KEK is based on actual consumption data, which provides a more accurate overview of the building's energy efficiency and ancillary costs, as a result of which the label is reliable and motivates the building owner to make adjustments in their consumption behavior as well.

Although the label has a positive effect on the long-term value of a building, energy labels are still underutilized in Estonia: 15% of residential real estate and only 2% of commercial real estate have energy labels. This suggests that our market may not need energy labels or lacks incentive for them, as the value of the label is not understood. But is limited awareness of the actual condition of our building stock beneficial to society? If real estate owners cannot meet the energy class requirements at a reasonable price, they are less motivated to invest in energy efficiency. As a result, there is a small proportion of buildings with energy labels, which does not serve more sustainable management or long-term consumer interests.

Stricter methodology changes the price

Stringent threshold values also have a major impact on real estate development. Due to energy label requirements, construction becomes more expensive and achieving the A energy class requires additional investment. When comparing the costs of achieving an energy label in Estonia with those of neighboring countries, there are significant differences. Due to different label calculation methodologies, the cost of achieving A energy class development in Estonia is 20–30% higher than in Latvia and Lithuania – our neighboring countries use more flexible methodologies, which makes solutions more cost-effective.

The problem deepens in the context of existing building labels, as they take into account the building's actual consumption and use. In non-residential buildings, users value personal comfort highly and want warmer temperatures in winter and cooler temperatures in summer than the standardized use resulting from the energy label provides. Additionally, buildings have many electricity consumers that are not included in standardized use. Some electricity consumers, such as heated ramps and elevators, are allowed to be deducted when compiling an energy label if they are measured separately, but in practice, such meters are usually missing. In summary, this means that the KEK energy label based on actual energy consumption is several classes lower than the preceding ETA

Energy label as a competition issue

This situation creates a risk where international companies, for whom energy labels are important, will prefer to operate in Latvia or Lithuania in the future, where label requirements are more lenient and investment costs are lower. For example, a Lithuanian A++ energy class building can easily receive a C energy class rating in Estonia. In a longer perspective, such radical differences in label systems will affect not only the real estate market, but also the volume of investments and the number of jobs. Indeed, this can already be observed in reality – foreign companies, for whom energy labels are important, make broader decisions affecting Estonia's economy based on this.

Although the goal of being the most diligent in energy efficiency is commendable in every way, it should be balanced with economic reality and competitiveness. With the energy label, attention should be paid to the primary energy consumption of the building and the ancillary costs associated with it. KEK should also have recommended improvement measures listed in the appendix, but the reality is different – the information on recommendations is very general and typically the label issuer does not visit the building. There is a need to create clearly understandable solutions for the consumer, the client, and the building owner.

Perhaps it is time to review our energy label methodology and thresholds? In both new building and existing KEK label methodologies, actual preferences regarding indoor climate should be taken into account to a greater extent and building owners should not be penalized for using buildings longer than the standard use provides. We could consider an approach that would allow us to be both a leader in energy efficiency and an attractive investment destination. However, this would require a leader, a responsible party, and agreements.