Introducing ESOS: a corporate reporting burden or cost saving opportunity?

In July 2014, the Energy Savings Opportunity Scheme ("ESOS") Regulations 2014 came into force, implementing the requirements of Article 8 of the EU Energy Efficiency Directive ("EED") into UK law.

What is ESOS?

ESOS is a new UK scheme that requires ‘large’ UK undertakings and their corporate groups (but not public bodies) to carry out mandatory energy assessments and report compliance to the Environment Agency every four years (starting from 5 December 2015). The notion of ‘reporting compliance’ is an interesting one and discussed further below.

Do we qualify?

ESOS will apply to any ‘large undertaking’ (including companies, trusts and partnerships) that carries on a trade or business as at the ‘Qualification Date’ (31 December 2014 for phase one) and any corporate group where at least one member of the UK group meets the ESOS definition of a ‘large undertaking’.

A ‘large undertaking’ is a single entity that either employs at least 250 people or has an annual turnover in excess of €50 million and annual balance sheet in excess of €43 million.

As under the CRC Energy Efficiency Scheme ("CRC"), the extent of the wider participant group will be determined using relevant Companies Act 2006 tests. This, again, will provide a particular challenge for private equity and other complex group structures.

What do we need to do to comply?

Qualifying participants must undertake an ESOS Assessment and notify the Environment Agency ("EA") of compliance by the ‘Compliance Date’ for each four year phase (5 December 2015 for phase 1).

1. measuring total participant energy consumption, including for buildings, industrial processes and transport, over a consecutive 12 month Reference Period (which must include the Qualification Date for phase 1);
2. carrying out Energy Audits of at least 90% of participant energy consumption to identify cost-effective energy saving measures for areas of significant energy consumption (although, of note, there is no legal obligation to implement these recommendations); and
3. reporting compliance to the EA, after having the ESOS Assessment signed off by a Director and an approved Lead Assessor (and keep an evidence pack for at least two subsequent compliance periods).

The requirement to self-assess and then notify the EA of compliance, although not triggering allowance costs or tax payments, will still place a considerable administrative burden on industry.

Note, however, that organisations will not need to undertake an ESOS Assessment if they are fully covered by the ISO50001 energy management system standard, Green Deal Assessments or Display Energy Certificates. In that case, all that is required is to notify the EA of compliance.

Under ESOS, like CRC, a participant group may either comply as a single participant (generally under the highest UK group parent and its subsidiaries) or ‘disaggregate’ into one or more smaller participants. Disaggregated operations will still be required to participate in ESOS, but will be responsible for their own compliance.

What are the sanctions for noncompliance?

To date, the UK government has indicated that it intends to adopt a light touch approach to regulation of the scheme. That said, in the event of non-compliance, the EA or other relevant regulator can serve an enforcement notice or issue civil sanctions, including financial penalties up to £50,000 (for failure to undertake an ESOS Assessment) and, potentially, an additional penalty of £500 per day of non-compliance, up to a maximum of 80 days.

Non-compliance may also give rise to potential reputational concerns, which, given the increasing focus of investors on ESG type issues, may be of greater impact.

How does ESOS relate to other UK energy efficiency schemes (such as CRC)?

ESOS will operate alongside the various other UK regulatory regimes which require organisations to measure and report on energy consumption, such as the CRC, Green Deal, Climate Change Agreements, EU Emissions Trading System and mandatory greenhouse gas reporting. Participants will be able to use data collected through these and some voluntary regimes for their ESOS assessment.

However, because qualification requirements and scope vary across the various regulatory and voluntary regimes, it is likely that additional data will need to be collected in most cases. It is this data collection which is seen by industry as the greatest burden.

What about the rest of Europe?

Since each EU Member State is required to implement Article 8 of the EED into national law, similar requirements are being introduced throughout the EU. Accordingly, organisations with operations in other EU jurisdictions should pay careful attention to local requirements to ensure compliance.

ISO50001 certification may be helpful here, since the EED expressly states that organisations with certified ISO energy management systems should be exempted from the EED requirement to carry out an energy audit.