Post-ESOS reflections and breaking the corporate payback ceiling

With the recent passing of the extended compliance deadline for the Government’s Energy Savings Opportunity Scheme (ESOS), the team at Verco have been reflecting on our experience of the policy, good and bad, and what it really means for the most important objective - achieving sustainable energy and carbon reductions.

According to figures published by the Environment Agency this week, 5,941 organisations complied with ESOS by the 29th January 2016, the extended deadline. With a further 1,000 having submitted an ‘intent to comply’ notice, this leaves around 3,000 potentially non-compliant organisations.

With the Government’s strict ‘no gold-plating of EU regulation’ agenda, ESOS was never going to provide all the solutions to a complex set of engrained energy efficiency barriers but should have at least spelled out the ‘what’ and the ‘how’. With no requirement for implementation, the Government pursuing a deregulatory agenda and the threat of Brexit, in many organisations the ‘why’ is still very much up for debate.

In our experience, the motivation to invest in energy efficiency is usually a function of financial return and risk mitigation and the two are inter-linked. Companies generating a positive return from energy investments have a more competitive cost base and reduced risk. By comparison, those who don’t invest in what is a rare controllable cost are at risk of a gradual decline in market share.

A strategic investment approach to environmental projects can enhance financial returns and brand values, and should also mitigate against sudden shocks related to climate change such as extreme weather events or unexpected changes to regulation. We find this risk of rapid shifts in a company’s operating environment more likely to capture the attention of boards than the ‘death by a thousand cuts’ argument, but the combination of the two can make the investment case particularly compelling.

These strategic risks and opportunities are already well understood by multinationals with complex global supply-chains and comprehensive strategies developed in response to the three main sustainability megatrends; climate change, resource scarcity and information transparency. They are also increasingly influencing the decisions made by real estate investors given the long term risk of devalued property assets.

Convincing businesses who do not hold long term assets or do not experience external pressure from shareholders and customers to invest in environmental projects is a tougher challenge and this is where ESOS should be making a difference.

Interestingly, only 11 organisations were fully compliant with ESOS via the ISO 50001 route by the 29th January which should have represented the best long-term option for those wanting to develop a holistic and organisation-wide approach to energy management. This is likely to be a simple function of time and short-term cost constraints for most companies although a few may still be planning to comply via this route which has a later deadline of the 30th June 2016. In addition, only 171 companies used an internal lead assessor, suggesting a shortage of in-house resource and capability in this area and a high reliance on external advisers.

Non-compliance fines of up to £50k and £500/day (capped at 80 days) are a significant penalty for those that have ignored the policy entirely and, whilst I hope this is enforced, should only affect those disengaged with the topic and therefore unlikely to implement measures whatever the audits uncover. It would be even better if the funds collected from non-compliance penalties could be recycled as grants or interest-free loans to those that have complied, but I realise this goes against the current grain of business energy policy simplification (we eagerly await the Government’s response to the Business Energy Tax Review as part of the Budget on March 16th).

The more important element of the scheme in influencing compliance was the announcement that DECC would publish the names of those organisations who complied. Whilst it would have been even more powerful to name and shame those that are non-compliant, the reputational risk was a useful lever to pull on in some cases.

So, once the wilfully non-compliant and disengaged have been discounted, the rest typically fall into one of the following three categories:

1. Leaders – company is already in a leadership position compared with peers, has a track record of creating value from sustainability-related business models and internal funds allocated for further investment. ESOS will have been a bit of a distraction but may have identified a few areas where there is a misalignment between corporate strategy and operational reality. Next steps are likely to include significant capital programmes with post-completion monitoring, more sophisticated employee engagement and demand side management initiatives.

2. Challengers – company buys into the long term opportunity but has not yet invested in the associated strategic execution capacity or set aside capital budget. ESOS will have identified some short payback measures which can be funded from revenue budgets but further progress is likely to require the development of a new business case for additional resource, data systems and internal or external finance.

3. Defenders – company does not see a strategic approach to energy management as a material differentiator in their market so are unlikely to make investments outside of quick wins unless it can be proved that they have underestimated the associated risks and opportunities.

The main success of ESOS in my experience has been in shifting companies from the defender to the challenger position. Our aim is to turn those challengers into leaders before the next ESOS deadline on the 5th December 2019.