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Energy Savings Opportunity Scheme (ESOS) – Compliance deadline 5 December 2015: Should penalties for non-compliance be reduced in the first year?

16 November 2015

The first compliance date under the Energy Savings Opportunity Scheme (ESOS) is 5 December 2015.

By that date, any “undertaking” caught by the ESOS rules must have carried out, and reported, a full energy audit. Failure to comply triggers substantial penalties – including an initial £50,000 fine for failure to carry out an energy audit, rising at £500 a day up to a cap of £90,000.

Last minute amendments

The ESOS regulations were made in July 2014. Unfortunately, the regulations contained a significant error in the definition of “relevant undertaking”.

That error was eventually corrected by amending regulations that came into force on 26 October 2015.

While those amendments came into force before the first compliance date, they left very little time for compliance by undertakings that had not previously thought or realised that they were bound by the rules.

At one level, the amendments merely corrected a technical slip. When implementing the rules the UK government included unnecessary wording to define a “large undertaking”.

That definition originally referred to an undertaking that either:

  • employs at least 250 persons, or
  • has an annual turnover in excess of 50 million euro and an annual balance sheet total of 43 million euro.

The error was in the final element of that definition. It is highly unlikely that an undertaking will have both a turnover in excess of 50 million euro and an annual balance sheet total of precisely 43 million euro.

The amended regulations correct that absurdity, so that the financial test is now a turnover in excess of 50 million euro and an annual balance sheet total in excess of 43 million euro.

The error was, perhaps, obvious. However, a court may well have been bound to conclude that Parliament had chosen its words carefully, and intended to make regulations that were incompatible with the Directive that was being implemented.

In those circumstances, a court could have done no more than to make a declaration of incompatibility, inviting Parliament to reconsider its legislative intention. A court could not simply have overridden the error.

Faced with that prospect, DECC took its first opportunity to correct the error by way of amending regulations. While that tidies up the statute books, it may well leave some businesses exposed to unexpected penalties.

After all, anyone reading the regulations as originally enacted must have been entitled to assume that they accurately stated the law.

It is therefore quite possible that some businesses with fewer than 250 employees might reasonably have concluded that unless they met both elements of the turnover and balance sheet test as it was originally written, they were not bound to comply.

That could present some businesses with a practical difficulty. The amending regulations came into force on 26 October, and because the amendment was highly technical in nature they did not receive widespread coverage.

An undertaking realising for the first time, on reading the amended regulations, that it was bound to comply with ESOS would have had great difficulty in complying in time for the 5 December 2015 deadline.

Compliance requires either:

  • appointment of a suitably qualified lead assessor, or
  • “alternative compliance” through ISO 50001 certification of the undertaking’s energy management system.

By the time the amended regulations had been made, undertakings would struggle to secure the services of a lead assessor.

Further, from a standing start it would be highly unlikely that an undertaking could achieve ISO 50001 certification by 5 December 2015. An undertaking that became aware of its obligation to comply with ESOS only when the amendments were made would face great difficulty in complying in time.

The penalties: is there any scope for lenient treatment?

The principal penalty under the ESOS regime is imposed by regulation 45.

Where an undertaking fails to carry out an energy audit required under ESOS, regulation 45(2) prescribes a penalty of:

  • an initial penalty of £50,000, or such lesser amount as the compliance body may determine, and
  • a daily penalty of up to £500 for each working day the responsible undertaking remains in breach, starting with the day after the service of the compliance notice subject to a maximum of 80 working days.

There is also a “publication penalty”, designed to name and shame undertakings that have not met their obligations.

Given that the amendments required to correct the government’s own drafting error were made at an extremely late stage, leaving insufficient time for an undertaking to achieve compliance by the first deadline of 5 December 2015, there must be room to argue for the exercise of discretion by the compliance body.

The wording of the regulations allows a “lesser amount” to be substituted for the initial penalty of £50,000. It also allows the compliance body to set the daily penalty at a rate lower than £500.

There is a strong argument that the compliance body should be inclined, in the interests of fairness, to reduce the level of penalties following the first compliance deadline where an undertaking is caught only because it meets the amended turnover and balance sheet criteria.