Thursday, January 15, 2015

Do you need to worry about ESOS?

Probably not.

You may not qualify and even if you do the reporting deadline is not until 5 December 2015.  

ESOS is the energy savings opportunity scheme. It implements art. 8 of the EU Energy efficiency directive.  It's a regulation but the Department of Energy and Climate Change (DECC) say that they will operate it with a light touch. Certainly it's very different from CRC. It's not a tax and although there could be penalties they will only apply in exceptional cases.The objective is to save energy, to make organisations more efficient and therefore more competitive, although in the face of collapsing oil prices and falling coal and gas prices the urgency of this may not be immediately apparent. Of course, to a large extent reducing energy usage reduces the nation's carbon footprint which is high on the priority list for DECC.

So is your organisation covered by ESOS?
If your organisation is in the public sector then it is excluded. If you operate in the private sector you are covered by ESOS if you employ more than 250 staff or you have a balance sheet total of more than £34 million or an annual turnover of more than £40 million. The reference date for this is 31st December 2014. ESOS applies to all UK operations which meet the criteria even if the ultimate owner is overseas. It also applies to non-profit organisations which fulfil the other criteria.

Assuming that you are covered by ESOS,  the first requirement is for you to identify the energy that you use in your buildings, your industrial processes and in transport. You must calculate the total use over a 12 month period and present an audit trail to justify your figures. If appropriate, you can use data from other schemes like the CRC or the EU emissions trading system to back up your results.You then have to audit at least 90% of the energy used by your organisation in accordance with the ESOS criteria.Your audit plan must be approved by your lead assessor. This may be an employee or an external consultant. Either way, the lead assessor must be qualified and appear on the Approved Register held by iema (Institute of Environmental Management and Assessment) or by a number of other Approved Organisations. A full list of Approved Registers is on the GOV.UK website.

 Once your audit is complete the report must be signed off by your lead assessor and by a director of the company. It must then be submitted to the environment agency not later than 5 December 2015. The environment agency is the scheme administrator. The next stage is to act on the ESOS audit recommendations.The whole objective of the process is the help organisations find ways of being more efficient and making better use of energy, so this step is arguably the most important. 

The Environment Agency will review a sample of audit reports and may possibly wish to review yours. Apart from that, your only obligation is to produce your next audit report in four years’ time: 2019.

At the time of writing, 15th January 2015, the oil price is around $47/barrel. That means it’s more than halved since the summer. Some say it’s down for the long term and I talk about that in "Energy - the story of 2015". For the moment, ESOS is designed to help save energy and that must sharpen your competitive edge, whatever the energy price. And designing and implementing energy saving strategies now is protecting your organisation against the day the price spikes back up again.

Want to know more? Go to and search for ESOS, or drop me an email: 

Energy - the Story of 2015

Predict the oil price this time next year! Email your forecast to me at before the end of January 2015 and we'll see who's right!

I make no apology for talking once again about energy. Yes, this is the Sustainable Futures blog but everything we do and everything sustainable depends on energy. How we generate it determines our impact on the environment. Fossil fuels and CO2 emissions affect climate change. How we generate our energy determines the cost of energy and its impact on economic activity. As always, your question is “So what - what’s in it for me?” Monitor your energy use and seek out opportunities for saving. Protect yourself, because some commentators expect energy to get vastly more expensive by this time next year, and it might be more difficult to get as well. Here’s why.

In the last couple of weeks several significant events have occurred which make me believe that energy will make the news throughout this year. You remember stranded assets? That was the title of one of my podcasts last month. I was talking about a report issued by the Carbon Tracker Initiative three years ago which stated that we could not exploit all the remaining fossil fuel reserves without making the planet uninhabitable because CO2 emissions would raise global temperatures to unsustainable levels. At the time of my podcast I was concerned that nothing seems to have been done since then. Suddenly we have two more reports on this very topic. The first is an announcement from Mark Carney, governor of the Bank of England, that the Bank will monitor the financial risk of unburnable carbon. What he means is that if companies include coal or gas or oil as assets on their balance sheets as things of value which they own, there is a risk that they later find that these assets cannot be used and their value collapses. If these assets have been used to secure loans then the lenders suddenly find they have no security. Investors in fossil-fuel industries may not get a return and may not even get their money back. Did somebody say “Sub-prime”? We could be looking at another global financial crisis. 

The problem with the short-termism of markets is that traders are not interested in the jobs and industries and assets behind their stocks and shares and bonds. Their aim is to play pass the parcel until everything goes wrong and ensure they’re not holding the toxic assets when the music stops. There’s the dilemma of governments. They can either put sanctions on fossil fuel use, effectively devaluing the assets and torpedoing the economy, or let things go on as they are until global warming is out of control.

The second report which caught my attention was published by Christopher McGlade and Paul Ekins of the Institute for Sustainable Resources at University College London. They looked at how restricting fossil fuel use would affect different parts of the world. For example, if we are to keep global warming below a 2℃ temperature rise then 99% of the coal, 61% of the gas and 38% of the oil in the Middle East must be left in the ground. Canada must stop exploiting oil from tar sands and Russia must limit its Arctic oil production. China, India, Brazil, Mexico and the US must all abandon significant fossil fuel reserves. Even the UK must decide between fracking and continuing North Sea oil production. The political pressures at the next IPCC meeting, scheduled for Paris in December, will be immense. Up till now such pressures have always proved insurmountable.

The big energy news which is going to resonate throughout 2015 is of course the collapse in the oil price. It has fallen from over $100 to just over $40 in less than six months. Although this a dramatic and unprecedented fall there has been little comment about it, except to celebrate falling petrol prices at the pump and to complain that they are not falling even faster. For the motor industry in the US it has been a year of record sales, and the best sales were of gas-guzzling sports cars and 4x4s. The fall in oil prices is a significant part of the fall in UK inflation - down to 0.5%. But what is the reason for the fall? What are the true consequences? And is $40 the new norm?

The basic reason for the fall is on oversupply of oil. Fracking has led to vasty increased production in the United States and Saudi Arabia and the Middle East producers have decided not to reduce their production levels. In the past OPEC, the confederation of mainly Middle Eastern oil producers, was big enough to control the oil price. If OPEC caused a shortage the price went up. They managed the price to give themselves an adequate return without bankrupting their customers. Now there are many more producers around the world and OPEC’s power is limited. Clearly they may not be able to raise prices but they can certainly drive them down by expanding supply. Why would they do this? 

According to the French newspaper Le Figaro the Saudi minister of oil has said that he is ready to drive the price as low as $20. Some say that OPEC is working with the US to “punish” the Russians and Iran, both of whom rely heavily on oil revenues. More probably this is about market share, because the Americans too are suffering from the low price. Saudi and the OPEC producers want to force the Americans to reduce production by making much of their shale gas and oil uneconomic. Congress and the president are currently wrangling over the Keystone XL pipeline. This is an extension to a pipeline which will transport oil from Canada across the US to refineries in Texas. The oil comes from Canada’s extensive tar sands, but at a price any less than $100 it’s not economical to extract. And in that case the pipeline is irrelevant. There have been crisis meetings in Aberdeen because at current prices much North Sea oil is uneconomic as well. Today BP has announced that it is cutting 200 jobs and 100 contractors from its North Sea operations. Shell has abandoned a $6.5bn petrochemical venture with Qatar Petroleum. Most renewables are difficult to justify economically if they are to compete with oil costing less than $100/barrel.

OPEC actions have already bankrupted small fracking operators in the US. They want to push down US supply so that they can regain market share. History suggests that if a business is successful in eliminating its competitors its next action is to push up prices. However, if OPEC did this it would make competing investments viable again. Maybe a sensible strategy would be to set a price around $50: too low to make a lot of shale oil viable but high enough to give the OPEC countries a reasonable income from a restored market share. BP predicts that oil will stick at $50 for the next three years.

In the second half of the year we learnt that the Rockefeller Foundation had decided to divest its holdings in fossil fuels. A bit of a surprise as the foundation’s wealth all came from Standard Oil. In hindsight it looks like a remarkably sensible strategy, given the way that oil company share prices have followed the oil price down. Rockefeller is not alone. California’s Stanford University is avoiding fossil-fuel investments, echoing actions taken by universities and others against South Africa before the end of apartheid. They hope that a boycott will change behaviour. Others argue that selling out will have little effect. They believe that investors can only influence the fossil fuel companies by staying invested, acting as shareholders and demanding that companies change their ways. But Bill McKibben, a prominent US environmental activist, rejects this. If you’re not happy with the way Apple treats its workers or Amazon’s position on tax avoidance you can put pressure on them to change their ways and build a better business. On the other hand fossil fuels are like tobacco. They are all noxious substances and there is no clean, green or socially responsible way of running such industries. We don’t want them to change, we want them to close down.

Of course it would be naive to suggest we could eliminate fossil fuels in anything less than a generation. Nevertheless, the debate has clearly started. If the market does not bring energy prices back up governments may raise them by taxing carbon. Such a tax is probably electorally suicidal, but unless we take carbon seriously there is little hope for our future.

What’s my conclusion? Consider energy as though it’s going to be incredibly scarce and outrageously expensive. Look at every way you use it and every way you can cut that use. If prices don’t rise you’ll still save money. If prices do rise you’ll save a lot of money!

A final thought. What’s your estimate of the oil price this time next year? Today, 15th January 2015, Brent Crude is around $47. My prediction for next January is $65. What’s yours? Send your prediction to me at by the end of January 2015 and this time next year we’ll see who’s right. There will be a valuable prize!