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.
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.
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.
- 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.