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The ESOS Performance Gap

January 2015

So a lot has been made of ESOS and the potential it has to positively impact UK businesses (to the tune of £1.6bn according to DECC’s impact assessment) but will it really live up to the hype.  Can it actually deliver the level of saving forecast and will it impact that significantly across the industry?  Whilst there are plenty of assessors mobilising, feedback so far suggests that a lot of the “large undertakings” aren’t fully aware of their obligations nor are they actively looking to assess and audit their energy and emissions.  As part of our on-going series of ESOS themed blogs, this week we are looking at the ESOS Performance Gap to highlight some of the issues that may impede the full potential of the legislation.

The first, and frankly most significant, shortfall is that if you’re not a “large undertaking” you’re not covered by the mandate.  What this means in reality is that the vast majority of UK enterprises have no obligations under ESOS, in fact only 2% of companies will meet either of the qualification criteria.  As a result the majority of commercial building stock and business related transport won’t be audited in any meaningful way through ESOS.  Whilst there is a lot of talk about the trickle-down effect, the reality is that most small and medium sized enterprises will firstly not be aware of ESOS or its requirements and secondly highly unlikely to undertake any form of audit work unless it is clear that a significant business justification already exists.  As a result, it is likely that the breadth of impact from the legislation will be fairly narrow and the uplift in understanding around energy performance and efficiency improvement measures limited.

The second significant deficit of the ESOS policy is an exception for Unconsumed Supplies, i.e. those which are provided to a third party.  The implication of this exclusion is that it will liberate a significant majority of landlords from requirement to comply, as the majority of energy use within their building stock is consumed by tenants (third parties) and hence can be exempted.  As a result a significant proportion of building stock (including importantly a substantial number of older buildings) that is not currently picked up under any major policy is once again excluded.  This further exacerbates the issues inherent with trying to implement efficiency measures in leasehold building stock as well as aggravating fuel poverty issues that often arise for SMEs residing in older building stock.

DECC’s estimate of £1.6bn potential net benefit to UK businesses is defensible in relation to the number of ESOS audits that will be undertaken and the corresponding savings that would be expected to be identified.  However, in its current form ESOS includes no mandate to implement any of the recommended measures, as a result companies have no obligation to make changes that would realise the potential savings.  Whilst it can be argued that many savings will be realised by companies who recognise the business case to do so, the true of the matter is that a great opportunity has been missed by not mandating the change.  This could have been readily achieved in conjunction with a supporting framework or mechanism to help finance implementation and/or offset capital costs against future savings.  An approach well within the remit of DECC and the Environment Agency, but something that is unlikely to evolve in an organic manner from within the industry itself.

As it stands the only information required by the Environment Agency upon reporting compliance is confirmation of the route taken, details of coverage of significant areas of consumption and excuses for missing data.  There is no requirement to submit any further more detailed information and, bar a limited QA process, assurances of quality and rigour lie with the Lead Assessor.  Measures are afoot within the industry to agree a standard approach that will ensure good quality service and robust implementation through a voluntary agreement by those consultants who wish to undertake audit work to the best intentions of ESOS.  However it can already be seen in some quarters that commoditisation is driving approaches and pricing towards the lowest common denominator.  The result of this will be delivery of a minimal effort and minimal impact approach that could render much of the policies intent invalid.

Given the widely acknowledged issues with the other “Performance Gap” (namely the disparity between design expectation and operational achievement) it could be argued that ESOS offered opportunity for gaining wider understanding of the current performance of existing building stock.  However, as there is no requirement to disclose the performance of any assets, (beyond any Display Energy Certificate requirements), then there is no potential for collection and collation of data from all the buildings included in the assessments.  ESOS had the potential to greatly support the on-going efforts to improve and enhance existing building performance benchmarks (CIBSE Guide F, TM46, et al) but this is not something that will be realised in its current form.  Furthermore, the lack of performance reporting means that companies who do have poorly performing assets (and who don’t do anything about them from one compliance phase to the next) won’t be named and shamed.  Nor will their performance have to be communicated within the company, aside from director sign-off.  As a result, most staff will have no awareness of the performance of the buildings in which they work and the public in general will have no idea about what is being done by companies subjected to the ESOS requirements.

ESOS is the UK response to the requirement for all Member States of the European Union to implement Article 8 of the Energy Efficiency Directive.  Whilst the Directive applies in all Member States, each individual manifestation of Article 8 is only applicable within the individual Member State that developed it.  The implementation on a local scale (as with other EU-wide policies) gives no consideration of size and reporting on an EU-wide scale even though the regulation applies across the whole EU; the enforcement is by individual member states who are only focusing internally.  As such any pan-EU corporate group would be handled as a series of individual in country entities each subject to the qualification criteria of the particular Member State in which they reside.  The result of this is that many enterprises working across Europe won’t be required to comply with ESOS or the local equivalent in other Member States as their in-state presence is not large enough.  The fact that they could be responsible for quite significant energy consumption across Europe (especially with intra-European transport) serves to highlight an underlying flaw in the Directive and how it’s been implemented Europe-wide.

Put simply, the current form of the ESOS legislation just isn’t effectively reaching the volume of business and industry that it should. The limited extent of impact coupled with a lack of mandate for implementation of efficiency improvements or at the very least, reporting of performance data, results in another lacklustre policy that fails to deliver on its promised potential.  What is needed is an enhanced ESOS 2.0 to respond to shortfalls of the current policy, picking up on detailed data collection, voluntary reporting and action on audits for a start, come back next week to hear our thoughts for this new version of ESOS.