Friday, 3 October 2014

Why companies don't have to implement Energy Savings Opportunities

Under the new Energy Savings Opportunities Scheme (ESOS) all large companies must conduct regular energy audits to identify potential cost-effective energy savings. For companies qualifying this December the first audit has to be complete by December 5th 2015 and thereafter every 4 years. However, ESOS doesn’t actually require companies to implement those savings. You might ask - why not?

You might think that any rational company would jump at the chance to make cost-effective savings, especially when they have just spent a considerable amount of money on the audit that identified them, but this is not necessarily the case. For example, suppose you have £2000 to invest. You could buy a new condensing boiler and it would pay back over 4 years (never mind if this is realistic or not for the moment). Or you could spend it replacing your rather unreliable car so that you don’t have to worry about getting to work on time. Or you could buy a new computer so the children can have one each for their homework, and still have enough left to replace the sagging sofa. The point is that you have various things you would like to do for various reasons and you don’t have enough money to do all of them. So you have to prioritise. Whether or not the energy saving option is financially sensible, you might prefer to use your money another way.

That is what companies do. Even if the energy savings really are financially viable, after transaction costs and risks are taken into account  - and not forgetting all the benefits, including tax relief, reduced exposure to future energy price rises and often improved working environments - the energy saving investment still has to compete with other possibilities. The board might choose instead to buy new equipment to increase production, hire new staff, revamp the sales floor to display the goods better, run an ad campaign, or a thousand other possible investments. You could argue that the company could borrow money to do any or all those things - but borrowing is also expensive, it appears on the balance sheet and affects the value of the company. Whatever the company does it has to be justified to shareholders.

If you were a shareholder in the company – what would you want them to do?

ESOS applies to companies with more than 250 employees or a turnover more than €59 million or a balance sheet over €43 million (as of 31 December 2014). They aren’t necessarily public companies but a lot of them will be. If the government were to require companies to implement the energy audit regulations, that might not be in the best interests of shareholders, at least as far as short term dividends are concerned. Not all shareholders are in it for the long term.

So it is understandable that ESOS does not actually require follow through on the audit recommendations – but it is surely a good thing that at least the board will have to look at the options. They are likely to consider them in the light of company strategy - if reducing costs are important, or if sustainability gets a high priority then they can hardly say no. At least we can hope so.


[1] ESOS detailed guidance (www.gov.uk)
[2] ESOS – The Energy Savings Opportunity Scheme (Faithful and Gould)

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