Updates to ESOS legislation passed in Parliament: Here’s everything you need to know

Even though large businesses make up less than 1% of the total companies in the UK, they generate half of the turnover and contribute to a third of employment. However, they also consume an excessive amount of energy. In fact, they account for 50% of all energy consumption in industrial buildings and are responsible for emitting large quantities of greenhouse gas emissions into the atmosphere.

The Energy Savings Opportunity Scheme (ESOS) was first introduced in 2014 to address the information failures and behavioural barriers that discouraged the adoption of energy efficiency measures. Up until now the legislation has required qualifying UK organisations to conduct an audit of the energy usage in their buildings, industrial processes and transport every four years. In turn, this audit provides energy efficiency recommendations tailored to the organisation, which must be signed off by a board member.

The scheme is currently in its third compliance period, known as ESOS Phase 3, and participants are required to submit their notification of compliance by the 5^th of June 2024.

Following the passing of the Energy Act 2023 on October 26^th, secondary legislation was introduced on November 7^th, (effective 29^th November), bringing about the long awaited changes to the ESOS scheme.

Changes to ESOS have been passed by Parliament

Earlier this year, the ESOS Phase 3 submission deadline had been extended by the Environment Agency until the 5^th of June 2024, giving reasonable time for participants to meet the new requirements.

Changes to the de-minimis rules

The changes announced by the government include a reduction of the de minimis from 10% to 5%, ensuring that ESOS assessments now account for 95% of the Total Energy Consumption (TEC). It also requires additional data to be captured in the compliance notification, introducing energy intensity metrics and a comparison of ESOS Phase 1 and 2 data.

Required targeting and reporting

The update to ESOS legislation also made a few changes to ESOS Phase 4, mandating organisations to set a target or action plan by the 5th of December 2024 and report on progress against targets on an annual basis going forward.

Increased standardisation of audits

While a fully standardised reporting template wouldn’t be suitable due to the diverse range of sites falling under the scope of ESOS, it was agreed that some standards should be incorporated into the ESOS reports.

A few of these standards include organisational details such as corporate group structure, reason for ESOS qualification, route(s) to ESOS compliance used, ESOS lead assessor details, Total Energy Consumption (TEC), Significant Energy Consumption (SEC) and de minimis exclusions, among other aspects. For a full list, please view the government’s Impact Assessment.

This change aims to improve the quality of ESOS audits and recommendations for qualifying organisations.

Public disclosure of ESOS data

Public disclosures will raise the potential for energy and emissions savings from ESOS due to rising reputational pressure which can drive increased board-level engagement in energy efficiency. To execute this initiative, businesses will need to set a target and annually report progress against performance, either as part of their Streamlined Energy and Carbon Reporting (SECR) compliance or through the ESOS web portal.

This change in the ESOS scheme could have various impacts, such as enhanced firm reputation, greater insight for investors, an understanding of benefits and drawbacks regarding the effects of disclosure on the cost of capital, the potential to improve internal reporting systems, and an increase in public awareness.

Inclusion of a net-zero element to ESOS audits

Through this change in ESOS audits, the report will be able to offer more in-depth information on the steps organisations need to take to ensure their methods of consuming energy are consistent with net-zero. This last amendment will ensure that ESOS is aligned with the government’s net-zero and sustainability goals.

While the inclusion of the net-zero element in the audit is voluntary for Phase 3, it will become mandatory for Phase 4.

What does this mean in practice?

There are currently no specific details available regarding the net-zero, audit standardisation and public disclosure elements that will be required. The Environment Agency is yet to update their full guidance for Phase 3, and the portal for lodging compliance still needs to be launched. The updated online system is expected to be in place by the end of 2023.

Do you need help with ESOS Phase 3 compliance?

The Phase 3 deadline was extended to the 5^th of June 2024 to provide participants with sufficient time to meet the new reporting requirements. However, this date is drawing closer, and the window for completing the work required for you to be compliant is also getting smaller. If you haven’t already put your ESOS Phase 3 plans in place, the time to act is now.