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ESOS – Lessons Learned and Looking to the Future

Large businesses will remember the challenges of trying to comply with Phase I of the Energy Savings Opportunity Scheme (ESOS) in the run up to Christmas 2015. “Trying” was the operative word because “lead assessors” (who are key in assessing and signing off on a business’ ESOS compliance) proved to be in such short supply during the last minute rush of Q4 2015 that the Environment Agency had to extend the notification deadline of 5 December 2015 by six weeks.

ESOS operates on a 4 yearly cycle, so the submissions that were made in December 2015/January 2016, or since then, were in respect of Phase 1.  Phase 2 has now started, with a compliance deadline of 5 December 2019, by which time further audits must have been carried out and compliance reports submitted by businesses that are required to participate.  As with Phase 1, a business must participate in Phase 2 of ESOS if it is either (a) a UK company that (i) employs 250 or more people or (ii) has an annual turnover of more than €50m and an annual balance sheet total of more than €43m or (b) an overseas company with a UK registered establishment which has 250 or more UK employees paying income tax in the UK.  A corporate group must participate as a whole if one or more of the companies in it is large enough to fall within the Scheme.  ESOS does not distinguish between property investors, developers, occupiers or funders, so any business that is large enough to meet the qualification criteria is required to participate in it.

Given the difficulties that participants had in the lead up to the Phase 1 deadline in finding lead assessors, and auditors to carry out their audits, the Environment Agency is wisely encouraging businesses to start work on their Phase 2 energy audits well in advance of 5 December 2019.  An Environment Agency newsletter issued to participants in June says:

“If you know that you will qualify for Phase 2, there is no reason why you shouldn’t start doing your energy assessments now.  You will not be able to carry out the assessment of your ‘total energy consumption’, as this has to include the qualification date of 31 December 2018. However, where you know that an energy supply will be included in your ‘significant energy consumption’, you can do the audit work on this supply.”

In June this year, the Environment Agency also published the results of their analysis to date of the Phase I submissions. Hundreds of businesses could be fined as much as £50,000 if they incorrectly claimed that they did not qualify for the scheme by 29 April 2016, which was the ultimate deadline for Phase 1 of ESOS (allowing for late submission after the (extended) December 2015 deadline).  The highlights of those results are as follows:

  • Of the Environment Agency’s initial estimate of about 14,000 participants (which was revised down to about 10,000 in 2016, and then again in 2017 to an unconfirmed number given the complexity of corporate groups) about 6,800 had submitted compliance notifications by the end of January 2017.
  • Approximately 1,500 businesses that the Environment Agency had thought might have to participate in ESOS had not contacted the Environment Agency at all. The Environment Agency has issued 300 enforcement notices to businesses in this group and confirmed to another 500 that they do not need to comply.  It expects to issue more enforcement notices to businesses in this group by the end of this year.
  • Approximately another 1,000 businesses contacted the Environment Agency to say that they did not need to comply; the Environment Agency has disagreed with “a number” of these businesses and will be issuing enforcement notices to them as well.
  • The Environment Agency audited 200 of the 6,800 ESOS compliance notifications received, and found only 16% of them to be fully compliant.  75% undertook remedial actions when asked to do so, which then made them compliant as well.  This does raise a concern over the quality of the audits and auditors that were engaged by participants, which had previously been flagged by some lead assessors advising businesses on Phase 1.
  • Of the remaining 9% of the sample, 4% were found to be from businesses that did not qualify for ESOS and 5% were non-compliant and did not undertake remedial actions.

Given the concerns about the quality of some of the audits that were undertaken in Phase 1, we encourage businesses to start thinking now about their strategy for compliance with Phase 2 of ESOS, and in particular to engage now with the auditors and lead assessors that they would like to instruct while those individuals still have capacity to undertake the necessary work.  A last minute rush in Q4 2019 is perhaps inevitable, but businesses that can get ahead of it should get better quality audits and allow themselves plenty of time to ensure that they have complied in full, especially where careful analysis of complex corporate group and/or property ownership structures are required to ensure that they have complied in respect of the correct group entities and properties.  There is always the possibility of implementing sooner something that may actually save energy and money, too.

Despite previous speculation about the immediate future of ESOS, which stemmed both from its inclusion in the 2015 Government review of energy efficiency taxes and the Brexit vote (given that the Scheme is the UK’s implementation of Article 8 of the European Energy Efficiency Directive), the Environment Agency confirmed last month that the Scheme will continue to operate as planned, effectively putting an end to such speculation. We previously blogged here on a potential expansion of ESOS as part of a replacement of the Carbon Reduction Commitment Energy Efficiency Scheme but, as nothing further has been heard on this, we assume that it won’t be happening any time soon.  So for now, businesses will need to think about compliance with the next Phase of the CRC, too, as the qualification year for that started in April this year.