Key ESOS Phase 3 milestones

The ESOS Phase 3 compliance period runs from 6 Dec 2019 to 5 Dec 2023, and qualification is based on the status of an organisation on 31 Dec 2022. Qualifying organisations need to complete an ESOS audit or an alternative route to compliance and notify the Environment Agency online of compliance by 05 June 2024 (currently 05 December 2023).

Proposed changes to strengthen ESOS:

The Department for Business, Energy, and Industrial Strategy’s (BEIS) consultation on strengthening ESOS closed on 28 September 2021.

On 19 July 2022 the Government announced its intention to include powers to make the necessary changes to ESOS in the Energy Bill via an amendment.

In the May 2023 ESOS newsletter the Department of Energy Security and Net Zero (formerly BEIS) indicated that the proposed changes to the ESOS Regulations are subject to legislative scrutiny and timetable, with the enabling primary legislation (The Energy Bill) currently passing through Parliament. We are waiting on the final decisions and will communicate these as soon as they are available.

In the June 2023 ESOS newsletter the Department of Energy Security and Net Zero indicated that to ensure reasonable time for participants to meet the new requirements and for assessors to carry our assessments, ESOS Phase 3 participants will not be required to notify compliance until 05 June 2024 (currently 05 December 2023).

It has been confirmed that the qualification criteria for Phase 3 will not change, but the thresholds are now set in GBP, and all businesses that are large (250+ employees OR with a turnover of £44m+ and a balance sheet of £38m+ on 31 December 2022) will need to comply.

The key proposed changes which will be introduced in ESOS Phase 3 are in bold below, with the other core proposals being introduced in ESOS Phase 4.

Participants can implement the Phase 4 changes on a voluntary basis in Phase 3.

Setting stronger standards for ESOS:

A standardised template for including compliance information in the ESOS report, generally comprising ESOS information the participant should already have available

The reduction of the 10% de minimis exemption to up to 5%, which will require that a minimum of 95% of the participants total energy consumption be audited and included in the report

The Government and the Environment Agency will work with ESOS Professional Bodies to identify which changes could be made to improve the quality of ESOS audits in Phase 3 through more active monitoring of ESOS lead assessor's work

• An appropriate site sampling methodology

• Full use of available energy data including the use of half hourly data

• Improved analysis of energy data

• Improved information on energy management practices

• Remove Display Energy Certificates and Green Deal Assessments as routes to compliance

• Ensuring that ESOS assessors are appropriately trained and monitored

ESOS and net zero:

• Introducing a net zero element to the existing audit

• Net zero benchmarking

Reporting and disclosure:

Requirement to share ESOS reports with subsidiaries

Collection of additional data for compliance monitoring and enforcement

The addition of an energy intensity metric in ESOS Phase 3 reports

• Public disclosure of reported data

• Aligning ESOS and SECR requirements

Widening participation in ESOS:

• Extending ESOS to Medium-Sized Enterprises

Stimulating action based on ESOS reports:

• The potential for making uptake of recommendations mandatory through ESOS

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

Requirement for participants to set a target or action plan following ESOS Phase 3 compliance deadline, on which they will be required to report against for Phase 4


Reconsidering de minimis:

As well as introducing a more standardised format for reporting, it is also proposed to make changes that ensure that the ESOS report covers more of an organisation’s estate. Currently participants may exclude up to 10% of their total energy consumption through de minimis rules, meaning that there may be whole sites excluded or organisations which never audit their transport energy use. They therefore propose to reduce the de minimis to 5%.

Net zero audits:

Following the UK’s commitment to net zero carbon emissions by 2050 there is a recognition by many businesses that short term measures are not sufficient, and that longer term thinking is needed. Refocusing ESOS on strategic considerations could also help drive better engagement with ESOS at a higher level within organisations, rather than being seen as a small-scale compliance and cost reduction exercise.

ESOS can provide a standardised framework for businesses to address these issues. It also demonstrates that government is committed to helping businesses understand their responsibilities in moving towards a net zero future and provides an impetus for organisations that have not yet considered net zero to make a start on this.

In addition to the current audit requirements, it is proposed that the ESOS audit should also include an overall assessment of carbon emissions and other greenhouse gas emissions resulting from energy use in buildings, transport, and industrial processes which the organisation will need to address to be carbon neutral or net zero by 2050.

This assessment should identify what the low and/or zero carbon options are for each technology, the potential for investment and cost-effectiveness in the shorter or longer term, and when a suitable intervention may be (for example end of life of current plant/equipment/vehicles).

The Environment Agency’s Enforcement and Sanctions Policy as it applies to the Energy Savings Opportunity Scheme (ESOS):

The ESOS Phase 1 & 2 enforcement approach for breaching Parts 4 and part 5 of the ESOS Regulations for failing to conduct an energy audit and submitting a notification of compliance by the compliance date to the Environment Agency (EA) are summarised below.

• The EA issued a compliance notice followed by an enforcement notice

• The company would have 3 months from the date of the enforcement notice to complete the audit/s and notify the EA online of compliance

• If the company met the above requirements and notified the EA of compliance on or before the 3-month period, then the EA would not normally apply a penalty

• The EA will record the failure to undertake an energy audit and submit a notification of compliance by the compliance date i.e., 05 December 2019 for ESOS Phase 2

• The non-compliance will be considered when assessing the level of any penalty in the event of any future non-compliance.

The new penalty provisions which came into effect on 8 February 2022 are summarised below.

Failure to notify:

A UK organisation that qualifies for ESOS must notify the Environment Agency that it has complied with its ESOS obligations (regulation 29). Regulation 43 sets the maximum penalties for failing to do this - they are all of the following:

• an initial penalty of up to £5,000

• a daily penalty of up to £500 for each working day the responsible undertaking remains in breach, starting on the day after the service of the penalty notice, subject to a maximum of 80 working days

• the publication penalty

Failure to undertake an energy audit

Chapter 3 of Part 4 requires responsible undertakings to undertake an energy audit, where alternative routes to compliance do not apply. Regulation 45 sets the maximum penalties - they are all of the following:

• an initial penalty of up to £50,000

• a daily penalty of up to £500 for each working day the responsible undertaking remains in breach, starting on the day after the service of the compliance notice, subject to a maximum of 80 working days

• the publication penalty

• any steps the compliance body requires the responsible undertaking to take, including conducting or completing an ESOS assessment, to remedy the breach

Procedure for imposing ESOS penalties

We will normally impose a penalty for each separate breach of the ESOS Regulations.

Where additional daily penalties apply, we follow a different procedure. We will first serve an initial notice of civil penalty which will state all the following:

• the breach

• the maximum initial penalty for which the responsible undertaking is liable

• the amount of the additional daily penalty, and that it will accumulate from the day after the date of the notice, until the responsible undertaking returns to compliance, or it reaches the statutory maximum number of days (80)

The notice is not the final decision, no payment is required at this point, and we will not publicise it. We will not apply our discretion at this stage. Once we have determined the total penalty (initial and daily penalties) we will serve a notice of intent to impose the penalty, setting out our proposed final penalty amount. At this point the organisation can make representations, which we will consider in determining the final penalty.

Need ESOS guidance and compliance support?

If you need ESOS guidance and compliance support, then we would welcome the opportunity to discuss your requirements with you and indicate how we can help you achieve fast and cost effective ESOS compliance.

Please feel free to contact us on 03300 881451 to discuss your specific ESOS requirements.