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Abstract We use an interannually forced version of the Parallel Ocean Program, configured to resolve mesoscale eddies, to close the global eddy potential energy (EPE) budget associated with temperature variability. By closing the EPE budget, we are able to properly investigate the role of diabatic processes in modulating mesoscale energetics in the context of other processes driving eddy–mean flow interactions. A Helmholtz decomposition of the eddy heat flux field into divergent and rotational components is applied to estimate the baroclinic conversion from mean to eddy potential energy. In doing so, an approximate two-way balance between the “divergent” baroclinic conversion and upgradient vertical eddy heat fluxes in the ocean interior is revealed, in accordance with baroclinic instability and the relaxation of isopycnal slopes. However, in the mixed layer, the EPE budget is greatly modulated by diabatic mixing, with air–sea interactions and interior diffusion playing comparable roles. Globally, this accounts for ∼60% of EPE converted to EKE (eddy kinetic energy), with the remainder being dissipated by air–sea interactions and interior mixing. A seasonal composite of baroclinic energy conversions shows that the strongest EPE to EKE conversion occurs during the summer in both hemispheres. The seasonally varying diabatic processes in the upper ocean are further shown to be closely linked to this EPE–EKE conversion seasonality, but with a lead. The peak energy dissipation through vertical mixing occurs ahead of the minimum EKE generation by 1–2 months.