The deadline to complete audits and make compliance filings for phase 2 of the Energy Savings Opportunity Scheme is 5 December. In advance of that, Simon Keen urges readers to check whether they need to participate and, if so, what needs to happen next.
Back in late 2015, large businesses all over Europe were busy finalising their energy audits and compliance filings to comply with Article 8 of the EU Energy Efficiency Directive.
Large businesses in the UK were no different, as the UK government had implemented Article 8 by bringing in the Energy Savings Opportunity Scheme (ESOS). Critical to the compliance process are the “lead assessors” who are closely involved in assessing and signing off on a business’ ESOS compliance, and the energy auditors who undertake the necessary assessments and produce the reports on which ESOS compliance is based.
However, they were in such short supply in the closing months of 2015 that not everyone could get all their audits and assessments completed by the notification deadline of 5 December 2015. The Environment Agency ended up extending the deadline by six weeks to allow more time for participants and lead assessors to complete the compliance process.
ESOS operates on a four-yearly cycle, so the deadline for large businesses to complete their audits and make their compliance filings for phase 2 is 5 December 2019. Awareness of ESOS is much higher now than it was in 2015, especially among the several hundreds of businesses which received enforcement notices from the Environment Agency after phase 1 ended.
Many large businesses are therefore already well ahead of the game this time around. Not only do they want to avoid the threat of a fine of up to £50,000 for incorrectly claiming not to qualify, and the negative publicity that could arise from having enforcement action taken, but also they are conscious of the high public and political profile that sustainability and energy efficiency matters now have. ESOS fits reasonably well with the steps that a lot of large investors and major corporate occupiers will be taking across their portfolios anyway, given the pressures they may well be seeing from their clients, peers and shareholders to achieve high rankings in things like the annual GRESB survey and the need to have good news to announce in their now compulsory annual Streamlined Energy and Carbon Reporting.
Let’s not also forget that, while there is a financial and administrative cost to complying with ESOS, doing it properly should result in a suite of recommendations that businesses can implement to reduce both their energy consumption and their carbon emissions. Implementing those recommendations should therefore save businesses money on their utilities bills. Data from various consultancies which advised businesses on compliance with phase 1 showed the possible financial savings from implementing the recommendations were often greater than the costs of compliance, particularly when considered in the context of increasing energy prices. While it is not yet compulsory for businesses to implement the recommendations from their ESOS energy audits, with the government having legislated for the UK to achieve net zero carbon by 2050 it is entirely possible that this will be a future change to the scheme – especially as the Business, Energy and Industrial Strategy Select Committee concluded earlier this year that only 5% of the participants in phase 1 of ESOS implemented the recommendations from their audits.
Many of the changes that could be made will also help to improve energy performance certificate asset ratings, which in turn should help to future-proof investments from redundancy as the threshold for letting buildings under Minimum Energy Efficiency Standards becomes stricter.
Who qualifies for ESOS?
The flowchart summarises the qualification criteria. A corporate group must participate as a whole if one or more of the companies in it is large enough to fall within ESOS, which gives the scheme quite a wide reach. It is also important to note that ESOS does not distinguish between property investors, developers, occupiers or funders, so any business that is large enough to meet the qualification criteria must participate in ESOS (along with the rest of its corporate group) regardless of its role in the property supply chain.
It is possible for a company to “disaggregate” from its wider corporate group, allowing it to participate in ESOS in its own right. To disaggregate, the subsidiary and its highest UK parent company must agree that the subsidiary will participate separately and record that agreement in writing, signed by individuals with management control of each entity (such as their respective board-level directors). Where a group of companies disaggregates from its wider corporate group, they must nominate one of their number to be the lead participant on behalf of the others.
Disaggregation may be desirable where, for instance, a corporate group contains functionally separate businesses that might each more sensibly participate in ESOS in their own rights, rather than doing so together (for instance, if they have different energy management processes or separate financial accounting arrangements).
A particular benefit of disaggregation is that responsibility for compliance sits solely with the relevant business, so if one disaggregated business fails to comply properly, the other will not be liable for that failure. However, disaggregation may result in some economies of scale being lost, and so it may not be the right answer in every situation.
If you don’t qualify for ESOS, you can tell the Environment Agency directly at www.gov.uk/guidance/energy-savings-opportunity-scheme-esos. Disaggregation is not a way to avoid qualification; if disaggregation occurs, both resulting businesses must fully comply with ESOS in their own right.
What do ESOS qualifiers have to do?
Basically, everyone who qualifies for ESOS must undertake a series of audits of the energy efficiency of their UK real estate and engage with a lead assessor to validate those audits and the recommendations arising out of them. Once that has been done, a compliance filing can be prepared ready for submission online (at www.gov.uk/guidance/energy-savings-opportunity-scheme-esos). The compliance filing will confirm things like the steps taken, which organisations it covers (and whether there has been any disaggregation), and who the lead assessor was.
For complex corporate groups, there is the option to upload a list of all the organisations in your participant group, either as a standard template (which is downloadable from the notification system) or in another format, such as a group structure chart. Careful legal analysis may be needed to ensure that all the group organisations that must comply with ESOS have undertaken the necessary audits and are captured in a business’ filings; this was one area where the Environment Agency found a lot of non-compliance in phase 1, often disagreeing with businesses over which group companies should have been included.
Before the compliance filing can be submitted, both the assessment report and the draft filing must be reviewed by at least one board-level director from an undertaking in the participant group. The director must confirm that they have reviewed the recommendations and that they are satisfied, to the best of their knowledge, that the business is within the scope of ESOS and has complied with it, and that the information in the notification is correct.
An evidence pack must also be maintained, in case the Environment Agency audits the accuracy and completeness of the filing. About 200 of the 6,800 ESOS compliance filings that were made for phase 1 were audited, and only about 16% of them were found to be fully compliant. Of those 200, about 150 were remedied in response to the Environment Agency’s comments.
Given the degree of non-compliance in phase 1, businesses should expect the Environment Agency to audit a large number of phase 2 filings, and so should take seriously the need to keep a full evidence pack. One of the lead assessor’s key roles is to advise participants on what they should include in their packs, but generally it will contain details of the reason for using any estimates in the energy audits and the methodology used in making those estimates, copies of any written agreement in relation to disaggregation within a corporate group, and any information that informs the approach taken to compliance.
The degree of non-compliance for phase 1 does raise a concern over the quality of the audits and auditors that were engaged by participants. Some lead assessors advising businesses on phase 1 did flag this as a concern at the time, and the closer we get to the 5 December 2019 deadline for phase 2, the greater the risk that audits are done in a rush and are therefore of a similarly dubious quality.
Final word
5 December is not that far away! So, if ESOS is not already on your short-term horizon, check whether or not you have to participate in it and, if you do, engage quickly with a lead assessor.
Simon Keen is a counsel at Hogan Lovells
