ESOS Phase 2: Compliance date looming

In 2014, the government introduced the Energy Savings Opportunity Scheme Regulations 2014 (“ESOS”). This legislation requires participating organisations to measure and audit their energy consumption and identify energy saving opportunities. By making the identification of business-specific energy saving opportunities mandatory, the policy objective is to create a framework which promotes the adoption of energy saving measures (ESOS Impact Assessment DECC0142 dated 24 June 2014).

The ESOS scheme and associated compliance operates in phases. Broadly speaking, qualification for ESOS is size driven, and thus for each phase organisations need to assess whether or not they fall within the scope of ESOS. We are currently in phase 2 of ESOS and the qualification date for determining participation for Phase 2 was 31 December 2018. It is important to note that in terms of getting ready, the compliance date of 5 December 2019 is looming. In the December 2017 ESOS newsletter, the regulators indicated that prudent operators who expected to qualify for Phase 2 should have been contemplating starting some of their audit work then.

In this context, it is worth noting that in the December 2017 newsletter, the Environment Agency said that for Phase 1 it hadinvestigated 2,400 organisations and served over 400 enforcement notices. Further, some organisations have received civil financial penalties for failing to comply with an enforcement notice and a publication penalty i.e. publication on a regulatory body’s website naming the organisation and providing details of the non-compliance.

Who has to participate in ESOS?

ESOS applies to undertakings. An undertaking is a company, partnership, or an unincorporated association carrying on a trade or business, with or without a view to profit. The regulatory guidance states that this definition includes trusts, charities and UK branches of overseas companies, amongst other types of organisations.

An undertaking must participate in Phase 2 if on 31 December 2018it was a “large undertaking”. An undertaking is a "large undertaking" if it meets either of the following criteria:

• it employs 250 or more people, or
• it has an annual turnover in excess of €50m and an annual balance sheet in excess of €43m.

Additionally, an undertaking which is not a “large undertaking” will qualify for ESOS if it is part of a corporate group containing at least one “large undertaking.” Group membership is determined by the “control tests” in the Companies Act 2006.

The annual turnover and balance sheet totals are those recorded in the annual financial accounts for the accounting period ending on, or in the 12 months immediately preceding, 31 December 2018. There are smoothing provisions dealing with the situation where, broadly, an undertaking has grown or shrunk, and it falls on either side of the thresholds in different accounting years. The regulatory guidance provides more detail on this (in some cases an undertaking may have to look back over a number of years to determine its status); and on how to calculate the number of employees for the purpose of the qualification tests. There are also specific rules about how to determine ESOS responsibility for assets held on trust as between, for example, the trustee, an operator and beneficiaries with more than a 50% interest.

Responsible undertakings and timing issues for Phase 2

The “responsible undertaking” is responsible for the participant’s compliance with ESOS. Within a group, the responsible undertaking for the whole group is, unless otherwise agreed, the highest parent caught by ESOS. There is also flexibility for group undertakings to participate as smaller groups or individually. Participants must participate separately in relation to each trust for which they have ESOS responsibility and their own direct energy use.

A “responsible undertaking” must by 5 December 2019 at the latest notify the Environment Agency of compliance with Phase 2 using the Environment Agency’s notification system. Although this deadline is several months away, timing is critical. This is because the ESOS Assessment must cover energy data for a period of 12 consecutive months which can end no later than 5 December 2019 and there is a requirement to get external independent approval of the ESOS process before notifying compliance.

For an ESOS Assessment:

• The responsible undertaking must, on or after 31 December 2018, calculate the Total Energy Consumption of the participant’s UK assets and activities. The calculation must be based on a reference period of any period of 12 consecutive months which includes the qualification date of 31 December 2018 and ends on or before 5 December 2019. Verifiable data must be used where reasonably practicable.
• Further, the responsible undertaking must, for at least 90% of that Total Energy Consumption (areas of significant energy consumption) (i) use the audit route or (ii) identify an alternative route to compliance. It is possible to use a combination of both routes to achieve ESOS compliance:
  • Audits must identify opportunities to improve energy efficiency and different audits can look at different areas of energy consumption. Energy audits must use a period of energy use which is 12 consecutive months of energy use falling between 6 December 2014 and 5 December 2019 for the relevant asset or activity. This is subject to the requirements that the audit is carried out no later than 24 months after the beginning of the 12-month energy consumption data period in question and it is not based on any data which was used for Phase 1 compliance. Different twelve-month periods can be used for different audits. So where participants know that an energy supply will form part of their significant energy consumption they can carry out audit work prior to calculating the Total Energy Consumption.
  • Briefly, alternative routes to compliance (i.e. where energy consumption does not need to be audited) comprise ISO 50001 accreditation, Display Energy Certificates and Green Deal Assessments which meet specified criteria. An ISO 50001 system can be time-consuming to set-up and is therefore unlikely to be a quick route to compliance for those undertakings that do not have the processes already in place
• The responsible undertaking must appoint a “lead assessor” to check that the participant's ESOS assessment meets the legal requirements (this is not necessary where all energy use is covered by ISO 50001). The lead assessor must be a member of an approved register. A responsible undertaking should not leave it until the last minute to appoint a lead assessor as there may be a lack of lead assessors available close to the compliance date and also this may leave insufficient time for the assessor to review the assessment. 

As said above, the policy aim is to promote the uptake of energy efficient measures by business. The legislation also requires a director (or someone of similar standing) to confirm the participant’s ESOS compliance and, importantly, that he or she has seen and considered the recommendations of any audit. Thus, energy consumption and the opportunity to save energy and costs are escalated for consideration to the highest level in an organisation.

If you require further information about anything covered in this briefing note, please contact Claire Sheppard or Jay Sattin, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2019