ESOS: motivation for slimming down

An EU-initiated scheme aims to help firms cut their buildings’ energy consumption It’s January and, for some, it’s time to start slimming down after another season of festive excess. Coincidentally, this is exactly what the government wants companies to do this year too – but in relation to energy efficiency. In July 2014, it launched the Energy Savings Opportunity Scheme (ESOS) regulations, which aim to make large UK organisations think about the excess energy they have been consuming and put a plan in place to respond to it. The first deadline for ESOS compliance is December 2015. What is ESOS? ESOS was not initiated by the UK. It represents the translation of Article 8 of the EU’s Energy Efficiency Directive into UK legislation. However, had it not been necessitated by the EU, it would have been a good idea to implement something similar. It aims to drive energy efficiency up the boardroom agenda and to facilitate collaboration among those who influence energy consumption in an organisation. ESOS requires a large organisation (€43m balance sheet and €50m turnover or 250 employees) in the UK to calculate its total energy consumption and to identify opportunities to save energy or implement an energy management system. Although the energy saving opportunities identified do not need to be implemented, it is hoped that an organisation going through the process will want to see a return on its investment by implementing them and realising both the cost savings and reduction in carbon emissions. The focus in 2015 will be on the identification of measures; the focus in 2016 should be on their implementation. ESOS and investment The challenge with ESOS, as with the CRC Energy Efficiency Scheme, is that when it comes to the complexities of investment (both equity and property) there is a sizeable first task to establish which entities are in and out of the scheme. The Department of Energy and Climate Change (DECC) expects that around 10,000 organisations will be captured by ESOS, compared with around 2,000 for the CRC. However, it could be more than this, considering the complex structures of many of the institutional investors within the UK, which have multiple funds, SPVs and subsidiary companies that could be captured by ESOS. The second challenge is that most energy consumed in commercial buildings is procured by a landlord but consumed by the tenant and, unlike the CRC, ESOS asks organisations to make this differentiation, which may be easier said than done. However, making this distinction is important as it allows landlords and tenants to identify the energy consumption that they control (through direct management) and that which they can only influence (because it is controlled by other parties in the building). Is ESOS the energy talisman? Once these challenges have been unpicked, owners and occupiers can start thinking about the opportunity that ESOS presents. Within the commercial property market, the main aspiration is that it will facilitate a constructive discussion between landlords and tenants about energy efficiency. ESOS should encourage landlords and tenants to share energy data, which at present is driven only by those proactive parties that have signed up to green leases, which include this requirement. Additionally, to get the best from ESOS, landlords and tenants should attempt to collaborate on the best route to ESOS compliance, considering the most beneficial route for each of them and for the building. ESOS could create a win-win scenario, with the landlord and tenant working together to comply and, in doing so, identifying energy savings measures for the building, which can then be implemented. Landlords should benefit from the improved energy performance of their portfolio and tenants from reduced energy costs. On the flip side, for some organisations, ESOS will not provide any more of an incentive than they had previously to reduce energy consumption. Large UK organisations that participate in existing schemes such as the CRC, EU Emissions Trading Scheme or the Climate Change Agreement already have a strong financial incentive to reduce energy consumption and ESOS represents another compliance process for them to go through with potentially little additional benefit. ESOS will have most effect on the smaller of the “large” organisations that have not previously been captured by other schemes or had their own internal energy management programmes in place. Looming deadlines There are three phases to ESOS. The first of these phases ends on 5 December 2015, with the next two phases each running for four years, ending in 2019 and 2023. December invariably comes around all too quickly and ESOS participants will feel this even more so in 2015. At an event hosted by the UK Green Building Council in November last year with Amber Rudd, parliamentary under-secretary of state at DECC, the concern around the short amount of time remaining in Phase 1 was raised, including the lack of qualified ESOS assessors who are critical to the process. It is possible that if an organisation doesn’t act early it will be unable to fulfil the ESOS requirements by the deadline because there is not sufficient time or not enough ESOS lead assessors available. This is something that the Environment Agency (as the scheme regulator) should keep a close eye on during 2015. The aim is that by next Christmas, large organisations in the UK will have worked out what they need to do to slim down their energy consumption, even if they haven’t started their fitness regime yet. This year will be the preparatory year and it is hoped that 2016 will be the year of action in which there will be tangible results in the shape of lower energy consumption, costs and carbon emissions. Emma Hoskyn is a director at JLL Upstream Sustainability Services