ESOS Phase 3 introduces new compliance requirements for large UK businesses. If your organisation meets the criteria of over 250 employees or an annual turnover above £44 million, it’s crucial to understand these changes, especially regarding ESOS Phase 3: what you need to know.

This article will outline the key updates, eligibility criteria, and necessary steps to ensure you comply with ESOS Phase 3 standards.

Introduction to ESOS

The Energy Savings Opportunity Scheme (ESOS) is a mandatory energy assessment and energy-saving scheme in the UK. It targets explicitly large businesses and organisations. Its primary objective is to help these entities identify energy-saving opportunities and uncover areas of significant energy consumption for efficiency improvements.

By conducting regular energy audits, participants can comprehensively understand their organisation’s energy consumption and usage and pinpoint where they can make impactful changes.

ESOS is designed to reduce energy consumption, lower energy bills, and contribute to the UK’s ambitious carbon reduction targets. Through the scheme, organisations can achieve substantial energy savings, supporting the broader goal of environmental sustainability. Thus, the Energy Savings Opportunity Scheme (ESOS) is crucial in promoting energy efficiency and fostering a culture of sustainability within the UK’s corporate sector.

Key Takeaways

• ESOS Phase 3 mandates large UK businesses to undergo comprehensive ESOS energy audits, increasing audit coverage from 90% to 95% of total energy consumption to enhance energy efficiency.
• Organisations must meet specific eligibility criteria, including employing over 250 staff or having an annual turnover above £44 million, with stringent implications for corporate groups regarding compliance.
• Non-compliance can result in severe penalties from the Environment Agency, including fines of up to £50,000, highlighting the critical importance of adhering to ESOS regulations.

Understanding ESOS Phase 3

The Energy Savings Opportunity Scheme (ESOS) is a compulsory energy compliance program specifically intended for large businesses in the UK. Its primary goal is to help organisations reduce their energy costs and carbon footprint by identifying energy-saving opportunities through a comprehensive ESOS energy audit. The scheme, overseen by the Environment Agency, covers almost 12,000 organisations, making it a significant initiative for promoting energy efficiency.

ESOS Phase 3, currently implemented by most businesses, represents the latest iteration of this ongoing effort. Large enterprises across the UK are working to meet the new requirements, which include more stringent audit and reporting obligations. The scheme’s reach is extensive, affecting a substantial portion of the corporate sector, and it aims to drive significant energy savings annually.

A key new requirement for Phase 3 compliance is calculating the energy intensity ratio, which quantifies energy consumption about specific outputs or characteristics, such as energy use per unit area for buildings or per per energy unit output for industry.

Projections indicate annual savings of 1.65 TWh from buildings alone. From 2024 to 2037, the total energy savings achieved are expected to reach 28 TWh. These figures underscore the potential impact of ESOS Phase 3, not just in compliance but also in fostering a culture of sustainability and cost efficiency within organisations.

Who Does ESOS Affect?

The Energy Savings Opportunity Scheme (ESOS) affects large UK businesses that meet specific criteria. To qualify for ESOS, a business must have:

• 250 or more employees
• An annual turnover of £36 million or more
• An annual balance sheet total of £18 million or more

If a business meets these criteria, it is considered a “large undertaking” and must comply with ESOS. This includes firms in the private sector, not-for-profit organisations, and charities.

ESOS affects individual businesses and corporate groups. If a corporate group has at least one UK-registered company that meets the qualification criteria, the entire group must comply with ESOS. This ensures that all significant energy consumers within the group are included in the energy efficiency efforts.

It’s worth noting that public-sector organisations are exempt from ESOS, as they are subject to separate energy efficiency regulations. However, some may participate in ESOS voluntarily to benefit from the energy savings and efficiency improvements.

Overall, ESOS affects many businesses and organisations in the UK, making it a crucial tool for reducing energy consumption and promoting energy efficiency. By identifying areas of significant energy use and implementing energy-saving opportunities, organisations can achieve substantial energy savings and contribute to a more sustainable future.

Eligibility Criteria for ESOS Phase 3

To determine if your organisation needs to comply with ESOS Phase 3, it’s essential to understand the eligibility criteria. Large undertakings are those employing over 250 staff or having an annual turnover above £44 million. Additionally, organisations must meet a yearly balance sheet total of £38 million as of the qualification date, which for Phase 3 is December 31, 2022.

Public bodies are generally excluded from ESOS participation unless they opt to self-declare as private-sector institutions. Likewise, UK branches of foreign companies must comply if any part of their global group meets the qualification standards.

This inclusive approach ensures that all significant energy consumers are captured under the scheme, promoting widespread energy efficiency improvements and transport energy use.

ESOS Phase 3 Requirements

ESOS Phase 3 requires large UK businesses to report on their energy use and identify possible ways to save energy. Companies need to identify energy-saving opportunities as part of compliance with the Energy Savings Opportunity Scheme (ESOS). The scheme aims to help companies to reduce their energy consumption and carbon emissions. To comply with ESOS Phase 3, businesses must:

• Appoint a Qualified Lead Assessor: A certified lead assessor must be appointed to oversee the compliance process and sign off on the final report. This ensures that the assessment is thorough and meets regulatory standards.
• Compile Energy Consumption Data: Gather data on energy use from the specified period, including transport fuel, industrial processes, and energy used for heating and lighting buildings. This comprehensive data collection is crucial for understanding total energy consumption.
• Measure Total Energy Consumption: Calculate the organisation's total energy consumption, covering all significant areas of energy use. This includes everything from industrial processes to office lighting, ensuring a complete picture of energy usage.
• Exemptions: Organisations can exclude up to 5% of their total energy consumption from the audit. This allows businesses to focus on significant energy consumption areas without being bogged down by minor details.
• Calculate Energy Intensity Ratios: Determine energy intensity ratios, which quantify energy consumption about specific outputs. This includes energy use per employee, square meter floor space, and production unit. These ratios help contextualise energy use and identify areas for improvement.
• Write an Audit Report: Analyse all the collected data and compile it into a comprehensive audit report. This report should include recommendations for improving energy efficiency and providing actionable insights for the organisation.
• Notify Compliance: Submit a compliance notification through the Environment Agency’s online compliance portal (MESOS). This step is crucial for documenting compliance and ensuring regulatory requirements are met.
• Prepare an Evidence Pack: Create an evidence pack that includes details of the organisation, the ESOS audit, and the methodology used. This pack should be thorough and well-documented, providing a clear record of the compliance process.
• Share the ESOS Report: Distribute the ESOS report to all undertakings within the company group and make it accessible on the company website. This transparency helps ensure that all parts of the organisation are aligned with energy efficiency goals.
• Write an Action Plan: Develop an action plan that outlines specific measures to improve energy efficiency. This plan should include a timeline for implementation and a budget, providing a clear roadmap for achieving energy savings.
• Submit Annual Progress Reports: Provide two annual progress reports in the two years following the action plan deadline. These reports should detail the progress in implementing the action plan, ensuring ongoing accountability and improvement.

Key Changes in ESOS Phase 3

Before: ESOS Phase 3 introduces several significant changes designed to enhance energy efficiency compliance among organisations.

One of the most notable adjustments is the increase in audit coverage requirements. Previously, businesses were required to cover 90% of their total energy consumption in audits; this has now been raised to 95%.

This change ensures a more comprehensive analysis of potential energy-saving opportunities, providing a clearer picture of where improvements can be made.

After: ESOS Phase 3 introduces several significant changes to enhance organisations' renewable energy and efficiency compliance. Here are the key adjustments:

1. Increase audit coverage requirements from 90% to 95% of total energy consumption.
2. Ensures a more comprehensive analysis of potential energy-saving opportunities.
3. Provides a clearer picture of where improvements can be made.

Organisations can now exclude energy consumption that accounts for less than 5% of their total usage from their audits. This allows businesses to focus on significant energy consumption areas without being bogged down by minor details. Additionally, organisations consuming less than 40,000 kWh are exempt from appointing a lead assessor but must still have compliance notifications signed by two directors.

Calculating Total Energy Consumption

Calculating total energy consumption is a crucial step in achieving ESOS compliance. This calculation must include energy use by all organisational assets or activities, covering everything from industrial processes to heating and lighting. Accounting for all energy consumption sources helps businesses comprehensively understand their usage and identify areas for improvement.

Determining energy intensity ratios for categories like buildings and transport supports these calculations. These ratios provide a detailed breakdown of energy usage, helping businesses identify which activities account for at least 90% of their total energy consumption.

The reference period for these calculations is 12 months before the compliance deadline, ensuring that the data used is current and relevant. This detailed approach allows businesses to pinpoint significant energy consumption areas and develop targeted strategies for reducing energy usage.

Identifying Significant Energy Consumption Areas

Identifying significant areas of energy consumption that consume considerable amounts of energy is essential for ESOS compliance. Organisations must account for at least 95% of their energy usage, focusing on the most significant consumption areas. This thorough approach ensures that most energy usage is analysed, providing a solid foundation for identifying energy-saving opportunities.

The limit allows businesses to exclude up to 5% of their energy consumption from audits. This exemption can benefit organisations with diverse energy usage patterns, enabling them to concentrate on the most impactful areas.

Conducting ESOS Audits

Conducting energy audits is a cornerstone of ESOS compliance. These progressive energy audits are designed to identify specific energy-saving opportunities and improve overall energy efficiency. To align with government standards, businesses must conduct ESOS energy audits on identified energy consumption areas, covering 95% of their total energy consumption, using verifiable data collected over the previous 12 months.

The audit process involves comprehensive data collection and site visits to assess energy usage accurately. This hands-on approach ensures that the audit findings are based on real-world conditions, providing actionable insights for businesses. The audit report must detail all the energy-saving opportunities identified and their potential benefits and associated costs.

Once the audit is complete, the findings are compiled into a report summarising the recommendations. These recommendations should be ranked by ease of implementation and expected cost savings, helping businesses prioritise their energy efficiency measures. A lead assessor and board-level directors must review and sign off the report, ensuring the findings are validated and aligned with organisational goals.

Developing a Compliance Plan

Developing a compliance plan is a critical step in the ESOS process. This plan should be based on the suggestions derived from the ESOS audit and outline specific measures to improve energy efficiency. While it is not compulsory to implement all identified measures, businesses can choose which recommendations to adopt based on their feasibility and potential impact.

The compliance plan must be signed off by a director and submitted by the specified deadline, which for Phase 3 is March 2025. Please follow these deadlines to avoid potential penalties.

The plan should also include calculated energy intensity ratios to contextualise energy consumption based on relevant metrics, providing a clear framework for tracking progress and achieving energy savings.

Reviewing and Approving Your Report

The lead assessor is pivotal in reviewing and approving the ESOS report. This individual oversees the assessment process, ensuring all components comply with ESOS regulations. From the initial approach approval to the final review, the lead assessor plays a critical role in validating the report's accuracy and completeness.

The lead assessor and a board director must sign the compliance report. This dual approval process ensures that the report has been thoroughly reviewed and endorsed at the highest organisational levels. The involvement of certified lead assessors, accredited by several professional associations, further enhances the credibility and reliability of the ESOS report.

Submitting Compliance Notification

Submitting a compliance notification to notify the Environment Agency is crucial in documenting your organisation’s energy consumption data and identifying saving opportunities. This notification must be submitted through an online system as soon as possible and retained for documentation purposes.

Public disclosure of key recommendations and additional information facilitates compliance monitoring and transparency, ensuring that organisations are accountable for their energy management efforts.

Public Disclosure

Public disclosure is a key aspect of ESOS Phase 3, which aims to enhance transparency and accountability. The Environment Agency will publish most of the information in the compliance notification, including details on total and significant energy consumption. This will also encompass an estimate of the potential energy consumption reduction that could be achieved and the energy savings realised during the previous compliance period.

ESOS Deadlines

Phase 3 of the Energy Savings Opportunity Scheme (ESOS) is officially over, but you still have until March 2025 to submit your action plan. Some businesses may also still be working on their initial report after missing the August 2024 deadline.

Here are the key dates you need to be aware of:

• Qualification Date: 31 December 2022. By this date, organisations must determine whether they meet the criteria for ESOS Phase 3.
• Compliance Deadline: 5 June 2024 (extended to 6 August 2024 due to IT problems with the online compliance portal). By this date, organisations must have completed their energy audits and submitted their compliance notifications.
• Action Plan Deadline: 5 March 2025. Organisations must submit action plans detailing the measures they will implement to improve energy efficiency.
• Progress Report Deadlines: 5 March 2026 and 5 March 2027. These annual progress reports are required to track the implementation of the action plan and ensure ongoing compliance.

Looking ahead, the deadlines for ESOS Phase 4 are not yet confirmed, but the qualification date is expected to be 31 December 2026, and the compliance deadline is expected to be 5 December 2027. Staying informed about these dates will help organisations prepare for ongoing compliance and progress towards greater energy efficiency.

ESOS Action Plan and Annual Progress Updates

Creating an action plan is an essential part of the ESOS compliance process. This plan should detail specific measures to reduce energy usage, implementation timelines and anticipated energy savings over four years. All organisations participating in the previous ESOS compliance date must produce an action plan and provide annual updates, except those reporting zero energy consumption.

Annual progress updates are required to track the implementation of the action plan. Due by December 5 each year, these updates must detail the progress made against the plan, including measures implemented or deferred. The Environment Agency will publicise these updates to enhance transparency and accountability, encouraging organisations to stay committed to their energy efficiency goals.

Penalties for Non-Compliance

Non-compliance with ESOS Phase 3 can lead to significant financial penalties and other consequences. The Environment Agency imposes fines of up to £50,000 for substantial breaches. Additionally, a more lenient penalty of £5,000 is imposed on new entrants who fail to comply, acknowledging the challenges faced by organisations new to the scheme. These penalties highlight the importance of adhering to ESOS regulations.

Beyond financial penalties, organisations may face ongoing daily fines until compliance is achieved. Failure to notify compliance can result in an initial fine of £5,000, with additional daily penalties for continued non-compliance.

Future Developments

ESOS Phase 4 is already on the horizon, with a qualification date set for 31 December 2026 and a compliance deadline of 5 December 2027. One of the significant new elements introduced in this phase is the ‘net zero element,’ which requires organisations to assess the actions needed to meet their future net zero commitments. This addition underscores the importance of aligning energy audits with broader sustainability goals.

The Environment Agency, as the scheme administrator, is expected to continue strengthening enforcement actions and issuing penalties for non-compliance. Therefore, organisations must stay up-to-date with the latest guidance and regulations to ensure compliance and maximise the benefits of ESOS. By doing so, they can avoid penalties and contribute to a more sustainable future.

Why Choose Focus Green for Your ESOS Audit?

Choosing the right partner is crucial to achieving ESOS compliance. Focus Green is a trusted provider with a proven record of delivering comprehensive ESOS audits. Our team of experienced ESOS lead assessors brings a wealth of knowledge and expertise, ensuring that your organisation's energy consumption is thoroughly evaluated and optimised for efficiency.

Our tailored approach means we work closely with your organisation to identify energy-saving opportunities that align with your business goals. Don't wait until the compliance deadline approaches! Contact our ESOS assessors now to ensure your organisation is on track for compliance and ready to seize the benefits of improved energy efficiency.