Background

ESOS is a mandatory energy assessment scheme for UK organisations that meet certain qualification thresholds. ESOS requires these organisations to calculate and audit their energy use in four-yearly cycles. Under the scheme, organisations must analyse their energy consumption to identify ways they can become more energy efficient.

Scope of the new legislation

The Regulations have not changed the ESOS qualification thresholds, meaning that Phase 3 of ESOS continues to apply to all UK organisations (and their corporate groups) that were classed as large undertakings on 31 December 2022. A UK organisation is considered a large undertaking if it either:

• Employs 250 or more people.
• Has an annual turnover in excess of £44 million and an annual balance sheet total in excess of £38 million.

If one entity in a corporate group meets this threshold, the whole corporate group will be within the scope of ESOS.

Key changes to Phase 3

1. Timing

As a result of the changes announced, ESOS participants are not required to submit their compliance notification for Phase 3 of ESOS until 5 June 2024. This is a change from the previous deadline of 5 December 2023.

2. Requirement to submit additional data in the compliance notification

ESOS reports now require significantly more information than under the previous legislation. The additional requirements include providing:

• Further information on the corporate group, including Standard Industrial Classification code(s) and information on the group's corporate structure.
• Further information about assessors and contributors to the report (e.g., personnel who drafted parts of the report or gathered data).
• Additional energy consumption information (including the energy intensity metric discussed below).
• Greater and more in-depth exploration of energy savings opportunities (including the implementation considerations discussed below).

For the full details, the Regulation includes a table (as a new Schedule 3) setting out the information that will need to be notified to comply with the Phase 3 requirements.

3. Requirement to include an energy intensity metric in ESOS reports

ESOS reports will now need to include an overall energy intensity ratio in kWh for each organisational purpose. This energy intensity ratio will need to be included in the notification of compliance and subsequently reported against in future phases so as to allow comparisons between phases.

This energy intensity metric is similar to the intensity ratio required for Streamlined Energy and Carbon Reporting (SECR), though it relates to energy consumption, whereas the SECR metric relates to greenhouse gas emissions.

4. A change to the Significant Energy Consumption (SEC) de minimis exemption

Under the Regulations, the SEC de minimis exemption has been reduced from 10% to 5%. This means that a participant's energy assessment must now cover at least 95% of its Total Energy Consumption (as compared to 90% under Phase 2).

5. Requirement for ESOS reports to provide more information on next steps for implementing recommendations

As well as providing information on the next steps (referred to as "implementation considerations" in the Regulations), ESOS reports are now required to include considerations on how the opportunities identified could be implemented. This should include:

• Providing an indicative programme of options that combines a selection of options recommended in the ESOS report and outlines the combined costs, benefits, and payback period for the package.
• Recommending a programme for implementation for any opportunity identified. For example, when renewing a transport/equipment lease or when replacing existing equipment.
• Providing information on government schemes that could support businesses to implement energy savings opportunities recommended in the report.

6. Requirements for participants to produce an ESOS action plan and report against it on an annual basis

The Regulations require ESOS participants to submit an ESOS action plan following the Phase 3 compliance deadline (by 5 December 2024). This should include details on the implementation of energy-saving measures during the compliance period.

ESOS participants are then required to report against this action plan annually to provide an update on any measure that has or has not been implemented.

7. Requirement to share ESOS reports with subsidiaries.

Under the Regulations, where an ESOS participant is part of a corporate group, the "responsible undertaking" that is responsible for ESOS compliance of the group will be required to share information in the ESOS report with any subsidiary undertakings and to report that they have done so.

The information subsidiaries should be provided with includes details of site visits, data gathered or energy consumption profiles specifically for that subsidiary, as well as any relevant energy savings opportunities for that subsidiary and the costs and benefits of such opportunities. The information should also include the implementation considerations relevant to those opportunities.

Changes to Phase 4 and beyond

Although not covered by the latest Regulations, the government has announced that it intends to introduce a "net zero element" into Phase 4 ESOS reports. Earlier in 2023, the government developed a PAS standard to cover this additional net-zero requirement but confirmed that net-zero reporting is voluntary for ESOS Phase 3. The addition of a net zero element to the audit is intended to enable businesses to make investment decisions that consider both shorter-term energy efficiency opportunities as well as longer-term decarbonisation needs.

The impact

The new Regulations aim to increase the impact of the ESOS regime and encourage participants to actually take steps to implement the energy savings opportunities that they have identified through their energy assessments. The enhanced reporting requirements, particularly around the submission of the action plan and subsequent annual report, add additional compliance points that businesses will need to take care to meet, particularly because of the powers granted to the Environment Agency to impose financial penalties for non-compliance.