How is the Energy Efficiency Directive changing the way we do business?

Chris Hocknell | Eight Associates

How is the Energy Efficiency Directive changing the way we do business? Is it really achieving its goals or is it just a soft-touch regulation without real tangible achievements?

Overview and Policy Context

Several regulatory instruments have been implemented within the UK to ensure that the UK achieves the cumulative final energy saving target of 27.86 Mtoe by 2020 (2014-2020 period), as per its NEEAP (National Energy Efficiency Action Plan) in line with the Energy Efficiency Directive implementation requirements.

Article 8 of the European Energy Efficiency Directive mandates that energy assessment and energy-saving identification schemes are implemented within the EU member countries. As a method to achieve this, the Energy Savings Opportunity Scheme (ESOS) has recently started. ESOS is therefore a mandatory energy assessment scheme, which came into force in July 2014, and affects:

  • UK organisations of 250 or more employees, or;
  • UK organisations that have an annual turnover exceeding €50 million and a balance sheet exceeding €43 million (i.e. ‘Large Enterprises’ as defined the European Commission).

90 percent of energy usage across all buildings, transport and industrial activities must be measured through energy audits that identify cost-effective, energy-efficient recommendations. The ESOS assessment should be reviewed by a board-level director and compliance reported to the Environment Agency by December 5, 2015.

Implementation

The primary goal of ESOS should be the analysis and evaluation of opportunities for companies to improve their business performance and reduce their energy intensity, and increase energy security. Additionally, it is hoped that the effective implementation of ESOS could increase the UK’s businesses competitiveness.

ESOS was designed to incorporate the core principles of energy management and aims to engage all levels of management within organisations as Director’s sign off is needed for compliance. The intention being that energy management is discussed at a board level so that energy strategies are implemented more effectively, and self-awareness is fostered.

The auditing process and compliance requirements will require organisations to understand their daily activities, energy consumption patterns and above all their inefficiencies to establish targets for improvement. The UK government estimates that the average bill saving per enterprise will be around £35,400 from the initial audit. Surely, this amount of anticipated savings would compel an organisation to act?

The answer would seem to be “it depends”; ESOS is creating a split in energy management. On one side organisations must demonstrate an authentic and rigorous attempt to examine opportunities for reducing energy use and bring them to board level attention, so far so good. However, on the other the regulation fails to require businesses to make any of the recommended changes to save energy.

Proponents argue that if companies understand their inefficiencies they are empowering themselves, creating new knowledge and just maybe changing the way they are do business. This may be feasible, particularly if energy costs can be relocated within the company. Typically energy costs are treated as an overhead and therefore not effectively controlled. If responsibility for energy management can be devolved to the person best placed to manage it within a company i.e. facilities manager in an office, production manager in an industrial facility then active management and behavioural change may be possible.

However, this seems somewhat optimistic. For a company with £38 (€50) million turnover, and say 10% net profit, a £35k saving represents 0.1% saving on total expenses. Most energy management opportunities require a non-trivial capital cost; opportunities with paybacks of less than 2-3 years may not be considered attractive when the risk of non-performance, potential disruption, the company’s required internal rate of return and the opportunity cost of limited in-house capital are considered.

Furthermore, some energy management opportunities may not actually save much carbon at all. Some of the most economically attractive opportunities may involve restructuring demand profiles and consumption patterns to avoid higher tariffs and demand penalties from the energy supplier. This is good for the organisation, but doesn’t help the environment much.

At present it appears that the ESOS framework will probably achieve energy reductions through the discovery of some dreadful energy management practices, and the identification of a few quick wins such as HVAC balancing etc. However, it is hard to share the enthusiasm of some that this will transform UK large enterprise’s relationship with energy going forward. It seems that the scheme would benefit from either of two things:

1. A larger stick that mandates long term energy reductions, open reporting and a publically available roadmap explaining what measures will be taken by the organisations in question.

2. A larger carrot in the form of strings attached Government loans, or preferably, the enhanced mobilisation of Energy Service Companies (ESCos) who cover the capital cost of energy efficiency and whose income is entirely dependent on delivery the stated future savings.

Without a little more bite the scheme may end up being more of an administrative and training exercise than an ambitious energy saving initiative.

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