Demystifying decarbonisation: Energy Savings Opportunity Scheme (ESOS)

What is ESOS?

ESOS was introduced to encourage large businesses to monitor and evaluate their energy consumption, and consider making changes to improve energy efficiency and reduce carbon emissions. Companies that qualify for ESOS must audit a year's worth of their energy usage every four years, to identify areas of significant consumption and where energy might be being wasted. The scheme envisions that the costs of carrying out an ESOS audit will be considerably outweighed by the potential energy savings that can be gained from implementing its recommendations.

Who has to comply with ESOS?

ESOS applies to "large" UK undertakings and their corporate groups. A "large" undertaking is any company that meets one or both of the following criteria:

1. It employs 250 or more people, and/or
2. It has an annual turnover of £44 million or more and an annual balance sheet total of £38 million or more.

If a company's corporate group includes a company that meets either of these criteria, then the whole group must comply with ESOS. A company's group will include parent undertakings, subsidiary undertakings and sister subsidiary undertakings (i.e. other subsidiaries of a common parent). For the purpose of ESOS, these terms all use definitions from the Companies Act 2006.

There are some blanket exemptions to ESOS: companies don't need to comply if they are subject to an insolvency procedure, or if they are defined as a public body under the Public Contracts Regulations 2006. This defines public bodies as companies established for the specific purpose of meeting needs in the public interest, that are financed or managed by the state.

How do you comply with ESOS?

If a company qualifies, then it (along with its group, if relevant) should carry out the following steps for a reference period of twelve months:

1. Measure total energy consumption: The company should calculate the total energy used by the assets it holds and the activities it carries out. This includes energy supplied to it and consumed by its buildings, industrial processes and transport.
2. Identify significant energy consumption: This will be energy that accounts for at least 95% of the company's total energy consumption. The remaining 5% does not need to be subject to the ESOS audit at step 3.
3. Audit significant energy consumption: The audit should analyse energy efficiency, identify energy saving opportunities and incorporate site visits. If the company has valid ISO 50001 certification, or Display Energy Certificates or a Green Deal assessment in respect of its buildings, then it may rely on these as an alternative to carrying out the audit.
4. Sign off from an ESOS assessor: ESOS audits should be signed off by an appointed ESOS lead assessor (who is a member of the government's register of approved assessors) unless the company has consumed less than 40,000 kWh over the reference period.
5. Provide an ESOS report to the Environment Agency: A compliance notification should be submitted to the Environment Agency through the online compliance system, signed off by one or more board level directors (or equivalent people with management control) from the qualifying company or group.
6. Keep records in an evidence pack: Records should be kept of the information used to comply with ESOS, including the data used for calculating energy consumption and the lead assessor's notification to the Environment Agency.
7. Submit a forward-looking action plan: The action plan should set out what the company intends to do to reduce its energy consumption and the estimated savings associated with this.

What if a company fails to comply with ESOS?

The Environment Agency are entitled to issue civil sanctions, including financial penalties, to qualifying companies that fail to comply with their ESOS obligations. According to stats published by the government in 2023, the highest single penalty handed out for the previous phase of the scheme was £67,500.

What are the benefits of complying with ESOS?

ESOS's primary function is of course to reduce the carbon emissions of large entities in the UK for the benefit of the environment. However, ESOS compliance is designed to mutually benefit both the environment and the scheme's participating companies. Aside from avoiding a potentially hefty fine for failing to comply, proper compliance should bring energy and cost savings to participating companies, leading to operational improvements and potentially increased profitability. ESOS compliance is also a great way for a company to demonstrate its commitment to corporate social responsibility and to boost its green credentials in a tangible way.

Our decarbonisation team

At Stephenson Harwood, we have market-leading expertise in three sectors that will be the key pillars in decarbonising and achieving net zero:

• energy,
• transportation and trade, and
• the built and natural environment.

This gives our clients the benefit of cross-sector insights as we support them on their pathway to net zero.

Our decarbonisation team is international, with specialists spread across eight offices in Europe, Asia and the Middle East. When coupled with our strategic relationships with other key independent law firms, this means we can support our clients wherever their business interests are based.