Mandatory energy audit for large U.K. firms

Decision to implement identified conservation measures remains voluntary
Thursday, February 5, 2015
By Barbara Carss

The United Kingdom’s mandatory energy audit and reporting scheme, now in force for all private companies with at least 250 employees or a balance sheet greater than 43 million euros (Cdn $61 million), has implications beyond the country’s borders. Canadian holders of U.K. properties or enterprises with U.K. subsidiaries will have to comply, while landlords in Canada accommodating companies with U.K. parents could be asked to supply energy consumption data to help their tenants fulfill reporting requirements.

The initiative, known as the Energy Savings Opportunity Scheme (ESOS), also contributes to goals established in the European Union’s (EU) 2012 Energy Efficiency Directive. As one of 28 member nations in the collective effort, the U.K. has committed to an 18 per cent reduction in energy consumption from its 2007 baseline by 2020, which equates to a 26 per cent reduction in final energy intensity for the same period.

“We estimate it could lead to businesses saving over 250 million pounds a year on their energy bills if they reduce their consumption by less than 1 per cent as a result of energy audits,” the U.K.’s secretary of state for energy and climate change, Edward Davey, said in a speech last November. “We estimate that the U.K.’s largest 10,000 firms are unnecessarily spending 2.8 billion pounds a year through using inefficient technologies.”

Designated ESOS participants have until Dec. 5, 2015 to comply with the first phase of the program. That includes an energy assessment to establish a reference year using 12 consecutive months of consumption data — covering buildings, transportation and industrial processes — for a period that must encompass Dec. 31, 2014.

Next, potential savings must be identified through audits of the three energy end-uses, which are to be conducted either by energy management specialists accredited for the purpose or through a combination of the ISO 500001 energy management system and other U.K.-based certifications. Finally, each participating company’s board of directors must sign off on the audit report, which is then to be filed with the applicable government agency in England, Northern Ireland, Scotland or Wales.

This exercise must be repeated on a four-year cycle. However, there is no compulsory requirement for companies to implement any of the energy-saving measures identified in the audits. Rather, U.K. regulators are presupposing that economics and market forces will make the case for them.

“This process will become a burden if the savings identified are not realized. Having paid for the audit, we believe you’ll want to use it,” Davey reasoned in his speech to business leaders. “If you see ESOS as a compliance burden, it will become one. If an ESOS report just ends up gathering dust on a shelf, it will become a dead investment, but if you invest in the process, the opportunities and rewards will flow.”

Similar versions of that strategy are playing out for other purposes and in other jurisdictions around the globe. The “comply or explain” approach for promoting gender equity on boards of directors — in which regulators aim to shape voluntary behaviour through forced public disclosure — is one prominent example.

Examples specific to energy efficiency include by-laws requiring energy-use benchmarking in private commercial buildings in some major U.S. cities (Austin, Boston, New York and San Francisco) and regulations under Ontario’s Green Energy Act mandating conservation plans and energy consumption benchmarking in the broader public sector, including municipalities, school boards, universities and community colleges and health care facilities.

“If we look in our own backyard, we see examples of companies that are motivated by accolades or avoiding shaming,” reflects Eric Chisholm, an engineer and project manager with the green building and energy services team at Halsall Associates in Toronto. “The U.K. program requires auditing and measuring of energy use, but it doesn’t mandate conservation itself, and there are parallels to that conservation program approach in North America.”

Admirers of the U.K.’s approach reiterate that investment should be made in sync with planned capital upgrades.

“Everybody agrees that we want to align energy upgrades with building renewal cycles, except for very, very inefficient assets that should be replaced prior to the end of their useful life,” observes Andrew Pape-Salmon, senior energy specialist with RDH Building Engineering Limited in Victoria. “Upgrading energy efficiency at the time of replacement is cost-effective, including the installation of triple-paned windows with low-conductivity frames.”

He commends ESOS as a means of ensuring capital budgeters will have comprehensive information when it’s time to spend. Ultimately, too, he suggests better information should help landlords overcome reluctance to invest in efficiency measures that are primarily to their tenants’ cost-savings advantage.

“The key is to develop something that will, in fact, assign a value for energy performance that will also be reflected in the value of the property and value of the lease rate,” he adds.

Access to capital is the final piece of the puzzle, which governments generally address through incentives and other more direct financial instruments.

“They are not going to solve that obstacle with this (ESOS) policy, but I am of the opinion that what the U.K. is doing will address two of the three major barriers to energy retrofits, which are information asymmetry and split incentives, ” Pape-Salmon says. “The third being lack of capital.”

Meanwhile, ESOS could shift capital spending priorities.

“We’ve conducted energy audits for organizations that are enthusiastic about conservation and we have also done audits for those that wish only to comply with corporate governance, and the commonality is that we consistently find opportunities to save money,” Chisholm reports. “The sceptics tend to be less interested than the enthusiasts about saving energy, but they are just as interested in saving money.”

Barbara Carss is editor-in-chief of Canadian Property Management