The Energy Savings Opportunity Scheme

In a growing list of climate-related schemes and reporting requirements, the Energy Savings Opportunity Scheme (ESOS) is perhaps a lesser known mandatory energy assessment scheme for qualifying organisations in the UK. The aim of the ESOS is to help organisations identify energy efficiency savings, to support and increase good energy management.
The ESOS Regulations 2014 (the Regulations) give effect to the EU Energy Efficiency Directive (2012/27/EU). Following Brexit (ie at the end of the transition period on 31 December 2020), under the European Union (Withdrawal) Act 2018, the Regulations became part of the body of EU retained law and continue to apply in England. The Environment Agency (the EA) is the UK scheme administrator and is also the regulator for companies registered in England.

Who is caught by the Regulations?

Undertakings that, at the defined “qualification dates”, meet specified criteria are required to carry out and submit an ESOS assessment by the “compliance date” covering the “compliance period”.

Since coming into force, there have been two compliance periods, with a third upcoming:

An undertaking (generally body corporates, partnerships or unincorporated associations) is a “relevant undertaking” for a compliance period and must comply with the Regulations if, on the relevant qualification date for that compliance period, it is a “large undertaking” or a “small or medium undertaking” which is a group undertaking in respect of a large undertaking. Certain public bodies and undertakings undergoing an insolvency procedure are excluded under Regulation 16.

• “large undertaking” is an undertaking which either

1. employs at least 250 people; OR
2. has both:

• an annual turnover in excess of Amount A (being €50 million for a qualification date before 31 December 2020 or for qualification dates after that date, £44 million); and
• an annual balance sheet total in excess of Amount B (being €43 million for a qualification date before 31 December 2020 or for qualification dates after that date, £38 million).

A “small or medium undertaking” means an undertaking which employs fewer than 250 persons and either has an annual turnover not exceeding Amount A or an annual balance sheet total not exceeding Amount B. There are rules as to how the annual turnover and annual balance sheet total are established and who qualifies as an “employee”.
Where in any accounting period, an undertaking meets the threshold for a large undertaking, it retains that status until it falls within the definition of a small or medium undertaking for two consecutive accounting periods (and vice versa).

What is required for compliance?

Undertakings may be required to comply with ESOS on their own behalf. There are detailed rules as to which undertaking must participate and become the “responsible undertaking” if more than one undertaking must comply as a group.

The responsible undertaking must take various steps including the following:

• carry out an ESOS assessment, which includes an energy audit. This includes in summary:

1. A calculation of the total energy consumption (to be carried out after the qualification date for the compliance period based on the energy consumption of assets held and activities carried on by the participant on the qualification date and based on the energy consumption during a specified reference period). Assets no longer held or activities no longer carried out on the compliance date can be excluded in certain circumstances. There are provisions on the definition of energy consumption and identification of “areas of significant energy consumption”.
2. An energy audit for the significant energy consumption or otherwise the total energy consumption based on a certain 12-month period. This must consider energy consumption and energy efficiency/potential for improvements and costs/benefits. In identifying areas of significant energy consumption, you are required to identify assets and activities that amount to at least 90% of your total energy consumption; this means that you can exclude up to 10% of your total energy consumption from any audit or alternative compliance measures (this 10% is known as your “de minimis energy consumption”).

• appoint a lead assessor, provide them with an evidence pack for previous assessments and ensure that they undertake the ESOS assessment;
• maintain a written record of each ESOS assessment and keep it for at least two compliance periods;
• report the ESOS assessment by:

1. Notifying the EA as to compliance for each compliance period by the provision of certain “basic information” after the qualification date and by no later than the compliance date.
2. Appointing a responsible officer to give notification that the officer is satisfied to the best of their knowledge that the participant is within the scope of ESOS, has complied with it and the basic information provided is correct and they have considered the recommendations of the audit (and any alternative routes to compliance – see below).

There are alternative routes to compliance. For example, certain steps under the Regulations can be avoided where:

• A participant’s energy management system is certified within the compliance period as compliant with ISO50001 and that remains valid on the compliance date.
• Where a building occupied by an undertaking benefits from a display energy certificate or qualifying Green Deal assessment relevant to the compliance period and valid on the compliance date.

Enforcement and offences

The EA has broad powers to monitor compliance, carry out inspections and enforce. Where the EA reasonably believes that a responsible undertaking has failed to comply with the Regulations, it may serve an enforcement notice in writing specifying the breach, the steps to be taken to remedy the breach and the date by which the steps must be taken. An enforcement notice can be varied or revoked in writing. The EA has used those powers on companies that have not complied.

Financial penalties can be imposed including for failure to carry out an audit, notify the EA of compliance, maintain records and comply with enforcement action.

There is also a “publication penalty” whereby the EA can publish on its website details of the undertaking, the breach and the financial penalty imposed for at least one year.

The EA published its climate change civil penalties for the last year on May 2022; the fines for breaches of ESOS ranging from £100 to £22,900.

There is a right to appeal certain decisions to the First Tier Tribunal including enforcement notices or penalty notices on the grounds that the notice was based on an error of fact, is wrong in law or is unreasonable.

Proposed changes to ESOS

During the summer of 2021, the Department for Business, Energy and Industrial Strategy ran a consultation seeking views on proposed changes to improve and strengthen the scheme, in particular:

• improving the quality of audits through increased standardisation of reporting requirements;
• the inclusion of a net zero element to audits; and
• requiring public disclosure of high-level recommendations by participants.

On 19 July 2022, the Government announced its intention to include powers to make the necessary changes to the scheme in the Energy Bill in advance of the current third compliance deadline (5 December 2023) together with future changes for the fourth compliance period (6 December 2023 to 5 December 2027) to refocus the ESOS scheme to cover both energy efficiency and net zero.

The proposals to be adopted in the third compliance period on a mandatory basis relate to:

• a standardised template for including compliance information in the ESOS report, generally comprising ESOS information the participant should already have available;
• the reduction of the 10% de minimis exemption to up to 5%;
• the addition of an energy intensity metric in ESOS reports;
• requirement to share ESOS reports with subsidiaries;
• requirement for ESOS reports to provide more information on the next steps for implementing recommendations;
• requirement for participants to set a target or action plan following the third compliance deadline, on which they will be required to report against for the fourth compliance period; and
• collection of additional data for compliance monitoring and enforcement.

In respect of future changes for the fourth compliance period, the Government is proposing to refocus the ESOS scheme to cover both energy efficiency and net zero. The net-zero assessment will identify potential risks to the business of moving to net zero and possible emission reduction trajectories.

A future consultation will consider a new Publicly Available Specification to set out the net zero requirements for an ESOS audit. The Government’s consultation response states that at a minimum, net zero assessments will require confirmation that any ESOS recommendations are aligned to net zero goals and should include recommendations that look to reduce GHG emissions even where these do not currently generate a direct energy cost-saving. The Government will publish an updated Impact Assessment when the above proposed legislative amendments are introduced in Parliament.

Future compliance

The third qualification date (31 December 2022) is imminent. This means that businesses which meet the relevant qualification thresholds at that date will be required to carry out an ESOS assessment for the third compliance period (6 December 2019 to 5 December 2023) and report that assessment to the EA by the third compliance date (5 December 2023) to ensure compliance with the Regulations.