The regulatory burden on businesses associated with energy consumption and carbon emissions has steadily increased in recent years.   The Energy Savings Opportunity Scheme  ("ESOS") Regulations 2014, which transpose Article 8 of the EU Directive on energy efficiency and came into force on 17 July 2014, are intended to help deliver part of the UK's 20% improvement in energy efficiency as against a 1990  baseline by 2020. This article looks at the requirements placed on an estimated 9,400 businesses  with over 200,000 properties and 10,000 industrial plants.

The Energy Savings Opportunity Scheme (“ESOS”) Regulations 2014 require participants to measure energy consumption, identify and evaluate energy  efficiency and management opportunities, store data and notify the Environment Agency by 5th  December 2015 that an ESOS compliance audit has been completed.  The scheme is UK-wide, in contrast  to other energy efficiency regulations such as energy performance in buildings, which differ in detail and timescales as between the different UK jurisdictions. Different Member  States are taking different approaches to the structure of their ESOS frameworks, so undertakings  that have operations or are part of larger undertakings based elsewhere within the EU will need to  pay particular attention to the legal provisions that transpose the Directive in the relevant  Member States to determine how they are affected. In addition, some Member States are implementing  incentive and support schemes to help participants adopt recommendations from energy audits.

Qualifying participants

The ESOS Regulations apply to all "large undertakings". A large undertaking is one that on 31st  December 2014, which is the qualification date for the first ESOS phase, meets any of the following criteria:

  • has 250 or more employees, including all contracted staff, owner managers and partners  employed by the organisation in the UK or abroad; or
  • has an annual turnover exceeding €50m and a balance sheet exceeding €43m; or
  • Is part of a corporate group that includes an undertaking that meets criteria (1) and (2)  above. In this case the entire UK operations of the corporate group will be required to participate  in ESOS. Disaggregation within a corporate group is permitted though all operations must still  comply with ESOS requirements. The responsible undertaking for ESOS will be the highest parent  company group unless all group companies agree in writing otherwise. Global parents and overseas  group undertakings are not subject to ESOS.

Where an undertaking has been both a large and a small/medium undertaking in different accounting periods since 2010 it will need to check its  reports and accounts to determine whether it is an ESOS participant. Any change in status (e.g.  changing from a "large" undertaking to a "small and medium enterprise") will be recognised if the  position is maintained over two accounting periods. For instance, where employee numbers of a  company exceed 250 for three consecutive accounting periods before the first qualification date,  but then fall to 210 during 2014, the organisation will still be covered by ESOS because it did not  fall short of the "large undertaking" criteria for two successive periods based on data available  from December 2010.

Undertakings include public and limited companies, partnerships, trusts, non-for-profit bodies  engaged in a trade or business and unincorporated associations. Public authorities subject to the  Public Contracts Regulations 2006 (and Scottish equivalent) are not required to participate in  ESOS.

Key requirements

ESOS derives from Article 8 of the EU Energy Efficiency Directive 2012, which requires the member  states (including the UK Government) to impose obligations on "non-small and medium enterprises"  operating in their jurisdictions to carry out independent and cost effective energy audits every  four years.

  • For the initial ESOS compliance period (17 July 2014 – 5 December 2015) participants are  required to: measure total energy consumption from assets or activities in the UK for a continuous  12 month period, which can run from and to any date provided that the period overlaps with the qualification date of 31st December 2014. The unit of measurement for all consumption must be  either energy units (e.g. kWh) or expenditure (£). Where compliance with ESOS is to be confirmed in  whole or part through existing certifications (i.e. ISO50001, Green Deal Assessment or Display Energy Certificates) then the relevant certification must be valid on 5th December 2015 and have  been issued on/after 6th December 2011. At least 90% of a participant's total energy consumption,  whether buildings, industrial processes or transport, must be calculated using verifiable data, for example meter readings, delivery notes and stock records. Reasonable estimation techniques may  be used if verifiable data cannot be obtained. The scope of energy that is required to be included  in ESOS is wider than in the EU Emissions  Trading Scheme, Climate Change Agreements, Carbon  Reduction Commitment and Greenhouse Gas Reporting. Therefore, an undertaking may not be able to  rely entirely on data from such  schemes.
  • Undertake an energy audit in accordance with ESOS standards that must cover all areas of "significant energy consumption", which accounts for at least 90% of the participant's total energy  consumption. Unless a participant has ISO 50001 covering all energy consumption, the audit must be  undertaken or approved by a Lead Assessor, who will meet the specified competence requirements (set  out in Publically Available Specification 51215) and be registered with one of the professional  bodies whose professional register has been approved by the Environment Agency (the list of  approved registers was published on 17 October 2014).
  • Where a company undertakes an energy audit in- house it must either have the audit approved  by an external Lead Assessor or the in-house audit must have been undertaken by an in-house Lead  Assessor. Any energy consumption that is within  a certified ISO 50001 scheme or is covered by a  valid display energy certificate or is the subject of  a qualifying Green Deal assessment is not  required to be audited.
  • So far as reasonably practicable, audits must analyse energy consumption and energy  efficiency, identify any way in which energy efficiency may be improved, recommend any such  measures that are reasonably practicable and cost effective and identify the estimated costs and  benefit of any energy saving opportunity. An evidence pack containing the relevant data and  information must be kept for at least two subsequent to compliance periods.
  • Appoint one or more responsible officers who must be a director of the participant or, where  no person falls within that description, a person exercising management control. Where the Lead  Assessor is independent of the company only one responsible officer must be nominated. Otherwise,  two responsible officers must be nominated. No later than 5 December 2015 the responsible  officer(s) must provide notification to the Environment Agency using the ESOS Notification System  as to whether the requirements of the Regulations have been met and whether they have seen and  considered the recommendations of the energy report. Participants are not required to disclose  the  content of their energy audits or to adopt any energy efficiency recommendations.

Consequences of non-compliance

Where a participant fails to comply with the Regulations the compliance body for the undertaking  (whether the Environment Agency, the Scottish Environmental Protection Agency, Natural Resources  Wales or the Northern Irish Environment Agency) may exercise powers of inspection and/or serve a  compliance notice, enforcement notice and penalty notice for the following breaches:

  • Failure to notify the Environment Agency (as scheme administrator) of compliance by the  required date;
  • Failure to maintain adequate records to demonstrate compliance;
  • Failure to undertake an ESOS assessment;
  • Making a false or misleading statement when notifying information to the scheme administrator or when providing information required by a notice.

The penalties are civil rather than criminal and, depending on the nature of the breach, range  between a maximum of £5,000 and £50,000 with subsequent daily penalties for a maximum of 80 days.  Penalties can also be imposed for failure to comply with a notice issued by a compliance body.

The subsequent compliance periods will run from 6 December 2015 – 5 December 2019 (with a  qualification date of 31 December 2018) and 6 December 2019 – 5 December 2023 (with a qualification date of 31  December 2022) and every four years thereafter.

Opportunities

  • ESOS seeks to deliver substantial improvements in energy efficiency to enable the UK to meet  its legally binding 2020 targets. Yet participants are not required to implement the energy savings  and efficiency measures that energy audits are expected to identify – so why have ESOS?  Essentially, the scheme hopes to substantially improve the quality of information provided to key  decision-makers to enable them to better relate investments in energy efficiency to business  performance.
  • take decisions about energy efficiency to a strategic level within an undertaking, out of the hands of the facilities team or a building  manager or other departments whose own remits may be narrower and so not see energy saving and  efficiency as relating to the performance and sustainability of the overall business in the same way that the board has to.
  • Encourage small and medium enterprises to learn from ESOS and voluntarily undertake energy  audits and improvements.

In contrast to ISO 50001, there is no provision in ESOS energy audits for regular reviews and  improvements. Participants committed to improvements may conclude that seeking accreditation under  ISO may bring longer term benefits.

Other businesses will simply see this as adding another layer of regulatory burden, diverting  resources and money away from core revenue generating activities. For undertakings whose strategic  decision-makers are already in command of energy consumption but do not have ISO50001, the scheme  will require either investment in developing an internal Lead Assessor or the cost of an external  Lead Assessor. DECC estimates that the cost of an audit will range between £5,000 and £50,000.

Owing to the current shortfall of available qualified assessors for the scheme, participants are  also advised to complete ESOS assessments as soon as possible after the qualification date. Leaving  compliance to the last minute could mean paying a higher price for an audit owing to the potential  demand for auditors.

Arunsiri Ruengpetch-Yarlett