Introduction

Are you aware of a new environmental requirement which applies to corporate groups which have any “large” entities in the UK, known as “ESOS” (the ‘Energy Savings Opportunity Scheme’)?

Article 8 of the EU Energy Efficiency Directive requires Member States to impose mandatory energy auditing obligations on large businesses. A different regime applies in every EU country, and international corporate groups will need to comply seperately with the national regime of each country where they have a "large" undertaking. ESOS is the UK’s regime. It came into force late last year, and requires the first audit to be completed by 5 December 2015.

Your group will have to comply if, on 31 December 2014, the group controlled any company or other corporate body present in the UK which is a “large undertaking”, i.e., it has: 

  • more than 250 employees, or
  • a turnover of more than €50m and a balance sheet exceeding €43m.

 If your group has one large undertaking, all UK entities in the group (however small) have to participate, no matter how far up their common parent is, regardless of whether that parent is foreign or UK-based. The audit process itself is not necessarily onerous, and only needs to be done every four years – but the intra-group analysis to set it up can be cumbersome.

The starting position is that portfolio companies have to comply themselves, unless they sit below another company/branch which is UK-based, in which case, there is a rebuttable presumption that they participate together, with all UK entities sitting below the highest UK parent audited as group. There is also a rebuttable presumption that “orphan” UK companies, however small, participate alone. Both presumptions can be displaced by written agreement between directors of the relevant entities, allowing any combination/s of disaggregation and aggregation, provided all UK based entities do in fact participate.

In our experience, the head office of an international group may need to take a leadership role, because smaller companies and SPVs might not know that they are caught by this regime on the basis that a distant cousin in the group meets a “large” criterion.

Overview

  • The ESOS regime imposes a four-yearly obligation on large UK businesses to procure an audit of their energy consumption from a registered consultant - the audit must include costed recommendations to improve energy performance – and to confirm to the UK Environment Agency (EA) that the audit has been completed. There is a list of authorised auditors on the EA website. The audit must account for at least 90% of the energy use of the participating group.
  • To the extent that any operations are covered by the ISO50001 Energy Management standard, those operations are exempt from the auditing requirement.
  • There is no actual obligation to implement energy saving measures.
  • The EA can inspect the audit or exemption records (which must be maintained) of any participant.
  • The regime applies to UK undertakings, meaning any body corporate or partnership which is constituted, domiciled or otherwise registered with a presence in the UK (eg, a foreign registered company). These are shaded blue on the diagram below, below the red line.
  • For assessing whether a group falls within the auditing regime, regard is had to its size and shape as at 31 December 2014. If companies have left or joined the group since then, they can decide whether to participate with their new or old group.
  • The first audit must be done, and confirmation sent to the EA, by 5 December 2015. The next audit is due on 5 December 2019. 

Applying the regime to corporate groups

  • ESOS applies to corporate groups in the following way (please see the example diagram below):
    • The qualifying criteria work so that if there is any “large undertaking” (over 250 employees or €50million turnover) in the UK in a “group”, then all UK undertakings in that “group” must participate, regardless of how small they are. There are de minimis tests for energy auditing, but not for participation.
    • The regime adopts the “group undertaking” control tests from the Companies Act. The measure of the “group” takes into account foreign companies and, therefore, it does not matter if the UK companies are only very indirectly related, far up a foreign holding chain. 
  • This means any UK company or UK registered branch in the group will be considered part of the group, for example, even UK single-asset real estate SPVs, and even those with foreign parents and which have nothing to do with the “large undertaking” in a completely different part of the business.

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Responsibility for compliance: default position

  • The default positions (shown in green in the in diagram above) are that:
    • each UK undertaking is responsible for its own participation, except for…
    • UK undertakings which are part of a “highest parent group”, which is the whole group below a UK undertaking parent (whether or not all of the companies in the chain are UK undertakings), in which case…
    • for “highest parent groups”, the default position is that the highest parent will participate for all of the UK undertakings in that group. 

Moving responsibility by agreement is permitted

  • All of the default positions can be altered by agreement in writing between directors of the relevant UK undertakings (provided that all UK undertakings still participate in one form or another):
    • Highest Parent Groups can agree to disaggregate so that the members participate independently.
    • Highest Parent Groups can agree to aggregate and participate together, by nominating which UK entity in the group will represent them (and this does not need to be either of the actual highest parents).
    • Individual undertakings within any wider company group can agree to aggregate in any way they like, and participate together, regardless of whether they are all within the same, different or no Highest Parent Group. Again, they can choose any member to represent them.
    • Any combination of the above is allowed, provided the affected parties agree in writing. For example, a group may choose to aggregate its large entities in a particular business area to participate together a long business lines, and have all the smaller, “orphan” entities agree to be represented by one company, as a group catch-all. If aggregation is not planned strategically, a large number of small audits may be needed, which may be highly inefficient.   

Liability

  • The representative of each participating group takes liability for ensuring compliance (including procuring the audit, checking it is correct, confirming this to the EA, and maintaining the records)
    • Under the default position, this liability will fall to the highest parent.
    • If the responsibility to be the representative is moved intra-group by written agreement, this also transfers the liability, leaving the transferring company relatively risk-free.The penalty for not registering, complying with a notice or maintaining records is £5,000 (plus a daily penalty of £500 for up to 80 days, so a total exposure or £45,000).
  • The penalty for not conducting an audit or making a false or misleading statement is £50,000 (with the same daily penalties, so up to £90,000). Although the fines are small, a separate fine could be imposed on every undertaking which should have participated but has not – which may include hundreds or thousands of small companies and SPVs in a large, international organisation. It is accordingly important that all UK entities are identified, and formally appoint a group representative under ESOS, in time to allow a UK group-wide energy audit to be completed before the December 2015 deadline.
  • Although each registering undertaking has to appoint a director as the “responsible officer” who must sign off that the audit has been done, the regulations do not impose any personal liability on that person, and there are no individual offences<a target="_blank" data-cke-saved-href="mailto:vanessa.jakovich@freshfields.com?subject=The UK" href="mailto:vanessa.jakovich@freshfields.com?subject=The UK" s="" esos="" regime'="">