ESG Focus - Introduction to the UK Energy Savings Opportunity Scheme (ESOS)

The Energy Savings Opportunity Scheme Regulations 2014 (ESOS), administered by the Environment Agency, is one example of a UK ESG scheme with an outsized impact including fines and public disclosure risks for non-compliance. Its broad applicability criteria means that it applies to a large pool of businesses, both domestic and international (including those with smaller scale UK operations). It can be particularly challenging to apply these criteria to multinationals with complex group structures, which can create unexpected or uncertain regulatory risk. 

ESOS compliance is currently in the spotlight following the expiry of the Phase 3 compliance period on 5 December 2024, with the Environment Agency serving enforcement notices for alleged non-compliance shortly after. 

This article demystifies this scheme and can help you understand what ESOS means for your businesses regardless of where you are on your ESG compliance journey.  

Introduction to ESOS 

ESOS is an energy assessment scheme introduced as part of the UK’s implementation of the EU Energy Efficiency Directive. Its aim is to increase the energy efficiency of large organisations and reduce their carbon emissions. ESOS requires qualifying organisations to conduct comprehensive assessments of their energy use and identify cost-effective energy-saving measures.
The scheme operates over compliance periods lasting four years, with the first phase having commenced in 2014. Each phase requires organisations to assess their energy consumption over a 12-month period and report their findings to the Environment Agency. The deadline for submitting a compliance notification for the latest compliance period – Phase 3 – was extended to 5 June 2024, and in-scope businesses had to complete an ESOS action plan by 5 December 2024. 

Details of the 4th compliance period have already been published by the Environment Agency. It is set to run from 6 December 2023 to 5 December 2027 with a qualification date (i.e. the date at which organisations are determined to be in-scope or not) of 31 December 2026. The compliance date for Phase 4 is currently set for 5 December 2027, though we note that the compliance date originally set for Phase 3 was later delayed by several months. 

Applicability Criteria 

ESOS applies to ‘large undertakings’ in the UK. A UK company or other legal entity is a ‘large undertaking’ for the purposes of ESOS if it exceeds one or both of the following threshold conditions:

1. Employee Count Threshold: The organisation employs 250 or more people; or 
   
2. Financial Thresholds: The organisation has an annual turnover exceeding £44 million and an annual balance sheet total exceeding £38 million.

It is important to note that, if a company or other legal entity within a corporate group is a ‘large undertaking’, then all of the group’s UK operations will be subject to ESOS. The requirement to comply with the ESOS obligations will rest on the company within the corporate group which is the ‘highest-level UK parent’. As such, SMEs which would otherwise be exempt from ESOS for falling outside the definition of a ‘large undertaking’, may nonetheless be subject to ESOS compliance obligations if they are part of a corporate group that include at least one entity that is a ‘large undertaking’. SMEs must not therefore assume that they are by default exempt from ESOS compliance.  

Additionally, while certain public bodies and non-profit organisations are exempt, it is crucial that they verify their status to ensure compliance.

Impact on multinationals with a UK presence  

For multinational corporations with operations in the UK, ESOS presents a unique challenge.

Multinationals must assess their UK subsidiaries and UK operations to determine ESOS applicability. This can give rise to considerable complexity. 

As set out above, where any UK-registered company in a corporate group qualifies as a ‘large undertaking’, then all of the group’s UK operations will fall within the scope of ESOS reporting obligations. The specific legal entity (or entities) that are responsible for complying with ESOS obligations will be the ‘highest-level UK parent(s)’, i.e. the company (or companies) within the corporate group that do not themselves have a UK parent. Thus, an international corporate group headed by an ultimate parent company outside the UK may find that it has more than one company within its group which is a highest-level UK parent and therefore subject to ESOS compliance obligations. This may catch even companies that are not themselves a parent of any ‘large undertaking’, provided that the multinational corporate group as a whole includes a ‘large undertaking’.

As Alan Bates, a barrister at Monckton Chambers explains, “Working out how the ESOS Regulations apply to a corporate group can be complex and produce results that might be thought surprising. For example, a small UK holding company or LLP, with little turnover or assets, not itself involved in any trading activity and not having any subsidiary that qualifies as a ‘large undertaking’, may nevertheless find itself subject to ESOS compliance obligations just because it is part of an international corporate group that includes a UK entity that is a ‘large undertaking’.”

Compliance requirements 

Compliance with ESOS involves several key steps:

1. Energy Audits: Organisations must conduct energy audits to assess their total energy consumption, including buildings, industrial processes, and transport. These audits should identify areas where energy efficiency improvements can be made.
   
2. Lead Assessor: A qualified lead assessor must be appointed to oversee the energy audits and ensure compliance with ESOS requirements. The lead assessor can be an internal employee or an external consultant, but they must be registered with an approved professional body.
   
3. Reporting: Once the energy audits are completed, organisations must compile a report detailing their energy consumption and identified savings opportunities. This report must be submitted to the Environment Agency by the compliance deadline.
   
4. Board-Level Sign-Off: The ESOS report must be reviewed and signed off by a director or equivalent senior manager within the organisation, demonstrating a commitment to energy efficiency at the highest level.
   
5. Record Keeping: Organisations are required to maintain records of their energy audits and compliance activities for at least six years, ensuring transparency and accountability.

As an alternative to – or in addition to – an ESOS audit, organisations can rely one of the below compliance routes: 

1. Certified ISO 50001 energy management system covering all or part of the organisation.
   
2. Display Energy Certificates (DECs) with accompanying advisory report. 
   
3. Green Deal Assessments (GDAs).

Organisations seeking to rely on any of the three compliance routes set out above are nonetheless required to undertake additional actions to comply with ESOS, though their overall compliance burden will be reduced. The necessary additional actions will depend on the relevant alternative compliance route. 

Whilst the time and cost expenditure required to comply with ESOS may seem onerous, the purpose of the scheme is to identify – as its name indicates – energy savings opportunities. ESOS compliance can therefore serve as an endorsement of ESG credentials and certain businesses have also reported overall net costs savings as a consequence of ESOS compliance. 

Enforcement  

The enforcement of ESOS is the remit of the Environment Agency. The agency has the authority to conduct audits and request evidence of compliance from businesses.

Non-compliance with ESOS can result in significant penalties, including:

1. Financial Penalties: Organisations that fail to comply with ESOS requirements may face fines ranging from £5,000 to £50,000 depending on the nature of the breach, with additional daily penalties for continued non-compliance.
   
2. Public Disclosure: The Environment Agency may publish details of non-compliant organisations, potentially damaging their reputation and stakeholder relationships.
   
3. Enforcement Notices: The agency can issue enforcement notices requiring organisations to take specific actions to achieve compliance, such as conducting additional energy audits or submitting revised reports.

How we can help

ESOS plays a crucial role in promoting energy efficiency and sustainability among large organisations in the UK, while also representing an additional burden on companies already dealing with substantial ESG regulatory hurdles. 

As the ESG regulatory landscape shifts, Bird & Bird can help you determine applicability, achieve regulatory compliance and manage relationships with regulators. With market leading legal and regulatory expertise, we provide creative, timely and pragmatic advice.  

For more information about ESOS and its potential impacts on your business, please get in touch with Andrew Dean, Hadrien Espiard or Kathryn Parker.