Energy Savings Opportunity Scheme (ESOS)
The Energy Savings Opportunity Scheme (ESOS) is an energy assessment and energy saving scheme and is established by the Energy Savings Opportunity Scheme Regulations 2014 (ESOS Regulations). The scheme applies to large undertakings and groups containing large undertakings in the UK.
An undertaking, as defined in the Companies Act 2006, is:
- a corporate body or partnership
- an unincorporated association carrying on a trade or business, with or without a view to profit.
You must take part in ESOS if your organisation, or any UK undertakings in your organisations group, qualifies as a large undertaking on the qualification date. We have just entered into the third compliance period, which started on 6th December 2019 and will end on 5th December 2023.
A large undertaking is any UK undertaking that meets either one or both of the conditions below:
- it employs 250 or more people; or
- it has an annual turnover in excess of 50 million euro and an annual balance sheet total in excess of 43 million euro.
Where your accounts are quoted on £ GBP Sterling then you should use the Bank of England exchange rate at close of business on the qualification date.
You must also take part in ESOS if your undertaking is part of a corporate group which includes at least one UK large undertaking. Where a corporate group participates in ESOS, unless otherwise agreed, the highest UK parent will act as the ‘responsible undertaking’ and be responsible for ensuring the group as a whole complies with the requirements of ESOS.
The type of work that your organisation carries out and the amount of energy your organisation uses are irrelevant to whether you qualify for the scheme. If your organisation is a UK large undertaking and the qualification criteria above are met then you will need to participate in ESOS. Examples of undertakings that can qualify for ESOS include:
- limited companies
- public companies
- private equity companies or limited liability partnerships
- unincorporated associations
- not-for-profit bodies
- universities which get more than half their funding from private sources
- care homes that do not qualify as public bodies.
- Higher Education Institutions (HEIs)
Public bodies are excluded from the scope of ESOS, however public body status in the HEI sector does not universally apply. This reflects different funding levels from public and private sources.
To find out if you qualify you will need to use your total employee numbers and your turnover and balance sheet totals used in your accounts for the financial year ending either:
- on the qualification date;
- in the 12 months immediately preceding the qualification date.
Turnover, in relation to an undertaking, means the amounts derived from the provision of goods and services falling within the company’s ordinary activities, after deduction of:
- (a) trade discounts,
- (b) value added tax, and
- (c) any other taxes based on the amounts so derived.
Most investment companies are simply investment vehicles for their shareholders. As such, they do not supply goods or services to customers and have no turnover. Where investment companies do not have turnover and also employ fewer than 250 persons they fall outside the scope of ESOS in their own right. However investment companies with at least one group member that provides goods and or services, and meets the definition of a large undertaking, qualify for ESOS. This means all the group’s activities within the UK, including the investment companies, fall within the scope of ESOS.
Balance sheet total means the aggregate of the amounts shown as assets in the company’s balance sheet (that is before deducting both current and long-term liabilities). Therefore it is the gross figure not the net figure.
If your undertaking is registered in the UK but directly owns or runs overseas activities which aren’t overseas registered subsidiaries, then you should include the turnover and balance sheet total contributions of these activities when assessing whether that undertaking is a large undertaking. If a UK company owns overseas registered subsidiaries then the turnover and balance sheet totals of those companies aren’t included in the assessment of qualification for the UK undertaking.
A corporate group is defined in the Companies Act 2006. Sections 1158 to 1162 of that Act explain how to identify if an undertaking is a parent to, or subsidiary of, another undertaking.
The highest UK parent of a group is the undertaking which has no parent, or only has parents which are overseas undertakings. All subsidiary undertakings of that highest UK parent are by default part of the same participant for ESOS. By default the highest parent acts as the responsible undertaking – this means it will complete the ESOS Assessment and notify the Environment Agency of compliance for itself and subsidiary undertakings. Another undertaking within the highest parent group can be chosen to act as the responsible undertaking provided all undertakings in the highest parent group agree this in writing, and keep this agreement.
Undertakings within a highest UK parent group can disaggregate from one another for the purposes of compliance with ESOS, provided they agree in writing with their highest parent. Undertakings that disaggregate must each report compliance as two or more separate participants.
If a corporate group contains overseas parent undertakings, the corporate group may consist of more than one highest UK parent group. In this instance, if one highest UK parent group is in scope of ESOS then every other highest UK parent group in the same global group must also participate in ESOS. However, the default in this circumstance is that each highest UK parent group will participate separately. If the highest UK parent groups within the same corporate group wish to comply as one participant (to ‘aggregate’) all highest parents in those highest parent groups must agree in writing which of them is to be the responsible undertaking in relation to the participant’s compliance with the scheme.
Undertakings within a highest UK parent group can disaggregate from the rest of the group if they wish. When undertakings choose to disaggregate:
- individual undertakings participating on their own act as their own responsible undertaking;
- undertakings participating as smaller groups must agree which one will act as the responsible undertaking.
To disaggregate, an undertaking must have an agreement in writing with the highest parent. The agreement in writing should be made between individuals with management control of the undertakings involved (board directors or equivalent). Disaggregation does not exempt subsidiaries from participating in ESOS. Each resulting participant, after disaggregation has been agreed, will need to fully comply on their own behalf including working out their total energy consumption and ensuring that 90% of their energy is covered by a compliance route. The answers you provide to the questions in the ESOS notification will show your regulator that disaggregation has occurred. Where there is no agreement in writing from both parties, the liability for compliance will rest with the organisation that has been determined as the responsible undertaking for the participant containing the highest UK parent in the group (either the highest UK parent itself or another agreed undertaking).
Where agreement in writing for the disaggregation for both parties can be evidenced and one party has not complied then liability for compliance will rest with the responsible undertaking of the participant that has not complied.
If you have an ISO 50001 Energy Management System (EnMS) that’s certified by an accredited certification body and covers all your energy use (for the whole corporate group in the UK), this counts as your ESOS assessment. To be compliant:
- the certification must remain valid at the compliance date;
- the Energy Management System must cover all of the assets held and activities carried on by your organisation as at the qualification date.
If you are compliant via this route you would not need to calculate your total energy consumption. However you will still need to:
- get a board level director to confirm that they have reviewed findings of your ISO 50001 certification, the organisation is compliant and the information which is going to be entered in the notification is correct;
- make a notification to the Environment Agency to specify that this is how you are compliant with ESOS.
If you don’t have an ISO 50001 energy management system which covers all your energy use, you must carry out an ESOS assessment. To do this you will need to do all of the following:
- measure your total energy consumption;
- identify areas of significant energy consumption;
- consider available routes to compliance;
- ensure areas of significant energy consumption are covered by a route to compliance;
- appoint a lead assessor (unless you don’t purchase any fuel and use any energy);
- get one or more board level directors to review the findings of the assessment;
- make a notification of ESOS compliance online.
We trust that the description above has provided you with a good understanding of the ESOS regulations, but if you would like to hear even more details about the overall process and submission, please scroll down…
Unless you are fully covered by ISO 50001, you must calculate your total energy consumption. This must be calculated in a common unit, which can either be an energy unit (such as kWh) or energy spend in pounds sterling. Please note that CO2 is not an energy unit. Your total energy consumption includes all input energy use, e.g. buildings, industrial processes and transport. All energy consumed in the UK by a qualifying group needs to be included. Use the Government conversion factors for company reporting to help you measure energy consumption in common units. If a fuel you use isn’t listed, you should contact your fuel provider to get information about its properties.
The purpose of this calculation is to help you identify what energy your assets/activities use and which assets/activities you will subsequently need to ensure are covered by a route to compliance. Under ESOS, energy is defined as all forms of energy products, including:
- combustible fuels;
- heat (excluding your organisation’s surplus heat from industrial processes);
- renewable energy;
- fuel used in transport.
There are no fuel type exemptions in ESOS.
Energy that is both supplied to and consumed by an organisation is in the scope of ESOS. For the purposes of calculating your total energy supply, which is done to identify your areas of significant energy consumption, you only need to consider input energy. Only include heat where you are importing the heat to your site or process. Where the heat is obtained by converting another source of energy such as gas into heat (on site) then exclude the heat produced to avoid double counting. However please note that all heat must be included in your audits and energy profiles.
“Energy supplied” means any energy that your organisation uses under an agreement with a supplier or third party. This includes energy that’s supplied to assets you hold or activities your organisation carries out, and includes buildings, installations, transport and construction activities. Energy used in the offshore gas and oil industry within UK waters is included in ESOS.
Only energy consumed in the UK by a qualifying group needs to be included. Do not include energy which your organisation uses overseas unless it involves international travel in which case special rules can apply.
You only need to include energy consumption in relation to activities that you are carrying out and any assets that you held on the qualification date and still hold on the compliance date. You may elect to exclude from the total energy consumption calculation energy consumed by any asset which is no longer held by you, or by any activity which is no longer carried out by you on the compliance date. Note that holding an asset doesn’t mean you have to own the asset (e.g. you may be borrowing, using, renting or leasing the asset).
In relation to multi-tenanted buildings and landlord-tenant relationships, under ESOS the responsibility to include energy within an organisation’s total energy consumption calculation is determined by whether the participant is supplied with that energy and consumes that energy by the assets it holds or by the activities it carries out.
Where that participant supplies energy to another organisation and it is measured or can be reasonably estimated, that energy does not form part of their total energy consumption calculation. The landlord and tenant should determine between themselves who is responsible for the energy based on the information above and bearing in mind that the organisation with the ability to control the energy use should take responsibility for the energy supply and audit it to identify energy saving opportunities.
Where an ESOS participant moves from one building, or asset, to another during the period between the qualification date and the compliance date then they must include in their total energy consumption calculation, the energy use for the activities that are carried out in the original building and are being moved to the new building (such as use of computers, copiers, manufacturing processes, etc.), where the energy is measured or can reasonably be estimated, but not energy uses associated with the buildings themselves (such as heating, ventilation air conditioning, lifts, etc.).
You will need to include the energy used in the building in your total energy consumption calculation even if the building is unoccupied on the qualification date. Where an employee works from home, you do not need to include the energy used by them within their homes, in your total energy consumption calculation.
Energy consumption from transport is included in ESOS. You are only required to include transport where your organisation is supplied with the fuel for business purposes, not where you procure a transportation service that includes an indirect payment for the fuel consumption. When calculating your energy consumption from transport activities, you may make reasonable estimations based on verifiable data (e.g. expenditure) in cases where you do not have actual usage data (e.g. litres). For instance, you could use the number of expensed miles multiplied by an average fuel consumption factor to estimate the usage.
Where estimates are used the reason and method of estimation should be kept in your evidence pack. Energy consumed for the purposes of transport means energy used by a road going vehicle, a vessel, an aircraft or a train.
The energy consumption of a participant includes energy which is consumed for the purposes of transport by an aircraft or a vessel during the course of any journey which—
- ends, or
- both starts and ends
within the United Kingdom. A participant may elect to include energy consumed for the purposes of transport by an aircraft or a vessel, during the course of a journey which both starts, and ends, outside the United Kingdom or energy consumed outside the United Kingdom for the purposes of transport by a road going vehicle or a train.
The following activities should be included in your calculation of your total energy consumption:
- Fuel used in company cars on business use.
- Fuel used in fleet vehicles which you operate on business use.
- Fuel used in personal/hire cars on business us.
- Fuel used in private jets, fleet aircraft, trains, ships, or drilling platforms which you operate.
The following activities should not be included in your calculation of your total energy consumption:
- Fuel associated with train travel of your employees where you do not operate the train;
- Fuel associated with flights your employees take where you do not operate the aircraft;
- Fuel associated with taxi journeys your employees take where you do not operate the taxi firm.
- Fuel associated with transportation of goods where you subcontract a firm or self employed individual to undertake this work for you (this fuel will be included in the subcontractor’s total energy consumption calculation if they qualify).
The following types of energy are not in scope of ESOS:
- unconsumed energy that your organisation doesn’t use, and supplies to a third party;
- energy consumed outside the UK;
- energy consumed for international travel or shipping where the journey doesn’t start or end in the UK (unless the organisation wishes to include their international travel);
- Energy used in flares at petrochemical works.
You can deduct unconsumed supplies from your total provided:
- the supply is measured (for example with metering),
- the supply can be calculated based on verifiable data, or
- it can be reasonably estimated.
Where a reasonable estimate is made, please keep the details of the assumptions and methodology in your evidence pack.
You must calculate your total energy consumption over a reference period of 12 consecutive months. The reference period must include the qualification date and end before the compliance date. If you can’t use data for a full 12 months, then you should use as close to 12 months as is reasonably practicable and explain why in your evidence pack.
The reference period should be the same 12 month period for all energy supplies. If you don’t have data for part of your reference period, you can use estimates to fill in any gaps.
When calculating your total energy consumption, you must use verifiable data where reasonably practicable. Verifiable data is data you can prove, for example:
- an invoice or delivery note;
- meter reading records and schedules for electricity or natural gas;
- stock records and readings for stored liquid, solid fuels and waste;
- automatic meter reading or smart and half hourly meter data outputs, for electricity and natural gas.
If you can’t obtain verifiable data of energy use or spend you should:
- explain why in your evidence pack;
- use a reasonable estimate derived through calculation (based on other verifiable data, if possible), and show how you got this figure;
- keep records in your evidence pack.
If you can’t get verifiable data, you can fill in the gaps by estimating data. To do this, you could use:
- direct comparison;
- pro-rata extrapolation;
Direct comparison means using figures from another comparable time period to fill the gap, (for example the same day/week/month in another year).
Pro-rata extrapolation means using figures you have for one period of time to get average consumption figures for a shorter period. For example, you could use the average day rate of energy use for 1 March 2019 to 25 March 2019 to estimate the energy used between 26 and 30 March 2019.
Benchmarking means using the energy consumption of one asset or activity as a proxy to estimate the consumption of another asset. For example, you could use the annual energy use of one retail outlet to estimate how much energy another retail outlet uses, particularly if they were similar size, age, or build.
After you’ve calculated your total energy consumption, you must identify assets and activities that amount to at least 90% of your total energy consumption. These are your areas of significant energy consumption and comprise the assets and activities you will audit or ensure are covered by an alternative route to compliance. This means you can exclude up to 10% of your total energy consumption from any audit or alternative compliance measures. This up to 10% is your “de minimis energy consumption”. You can classify whichever activities you choose as de minimis energy consumption. It is suggested that you include the energy from all your large undertakings in your significant energy consumption. This means you can exclude energy on:
- a group basis – for example excluding the consumption of a one or more undertakings;
- a site basis – for example excluding the consumption of a particular site or number of sites;
- an asset/activity basis – for example excluding the consumption of an asset or activity, or a defined list of assets or activities;
- a fuel basis – for example excluding consumption associated with the use of a particular fuel or fuels.
- You could also exclude energy using a combination of the above.
If you do not choose to identify your areas of significant energy consumption then you must audit your total energy consumption or cover it under another route to compliance. You must choose one or more routes to compliance that cover all your areas of significant energy consumption. You can demonstrate that you’ve made a compliant ESOS assessment using:
- ISO 50001 certification;
- Display Energy Certificates (DECs);
- Green Deal Assessments (GDAs);
- ESOS compliant energy audits.
If you choose to comply with ESOS using an existing certification or assessment for the second compliance period for example, it must have been issued after 5 December 2015 and be valid at the compliance date – 5 December 2019. Previous audit work, for instance performed as part of other energy audit schemes, can be used towards compliance for ESOS, provided it was conducted within the compliance period, meets the minimum requirements of an ESOS energy audit and was not used for other phases’ compliance.
You will need to appoint a lead assessor to check that your assessment meets ESOS requirements. You must specify who your lead assessor is when notifying the Environment Agency that you comply with ESOS. A lead assessor can be an employee of your business (“in-house”) or a third party. If you hire a lead assessor from outside your business, the overall ESOS Assessment, recommendations of any audit or alternative routes to compliance must be checked and signed off by one director. If your lead assessor works for your business, the overall ESOS Assessment, recommendations of any audit or alternative routes to compliance must be checked and signed off by two directors.
Your lead assessor must review your ESOS assessment to consider whether it meets the requirements of the scheme. This will involve:
- reviewing the calculation of total energy consumption;
- reviewing the determination of the assets and activities in your significant energy consumption (at least 90% of the total energy consumption);
- confirming that the necessary certifications and evidence exist for any alternative routes to compliance;
- reviewing that the audits undertaken meet the minimum criteria for ESOS.
Your lead assessor can either carry out your ESOS assessment and audits themselves or check that the assessment and audits done by people who aren’t lead assessors meet the requirements.
Their role in the ESOS audits could involve undertaking, advising on, or reviewing the following activities:
- determining energy use profiles;
- calculating energy/cost savings of measures identified – life-cycle cost analysis (LCCA) or another method like Simple Payback Period (SPP);
- identifying energy saving opportunities;
- presenting audit recommendations;
- developing a process for how new audits should be done;
- developing a sampling approach;
- developing an audit timetable;
- determining the number of site visits required;
- pulling together data for the ESOS evidence pack – this is an information pack that shows how you carried out the assessment and audit.
Alternatively, other individuals can undertake these activities and the lead assessor can review them. You’re still solely responsible for:
- compliance with ESOS (your lead assessor will not be held responsible for compliance by the regulators);
- appointing a lead assessor;
- highlighting any audit work that’s already been done and which you wish to have reviewed by a lead assessor for the purposes of ESOS compliance;
- agreeing the work that the lead assessor is undertaking;
- getting directors or senior managers to sign off that they have reviewed the audit findings or recommendations.
If your lead assessor reviews your ESOS assessment and does not believe that your organisation is compliant, you may still choose to submit your notification. In this case you should confirm that the assessment has been reviewed by a lead assessor and indicate that they do not believe you are compliant and why. Organisations that do not carry out a compliant audit where required will be in breach of the Regulations and liable to potential enforcement action.
Having completed the ESOS Assessment, board level director(s) from one of the undertakings in the participant group will need to confirm that they:
- have reviewed the recommendations of your organisation’s ESOS assessment or alternative routes to compliance (e.g. Display Energy Certificates);
- are satisfied, to the best of their knowledge, that the organisation is within the scope of the scheme;
- are satisfied, to the best of their knowledge, that the organisation is compliant with the scheme;
- are satisfied, to the best of their knowledge, that the information provided in the organisation’s notification is correct.
Where your lead assessor is external, one director will need to provide this confirmation in writing (to be kept in your evidence pack). Where your lead assessor is internal, two directors will need to provide this confirmation in writing (to be kept in your evidence pack). There is no prescribed format for how you need to present the findings of your assessment to your director(s). As long as you have confirmation in writing to confirm the four points above and keep this in your evidence pack then that is sufficient.
Use the on-line notification system to notify the Environment Agency that you are ESOS compliant. The Environment Agency will collate the notifications from all participants on behalf of all the other regulators.
Compliance and Enforcement
Organisations that are subject to ESOS, but do not meet the requirements of the scheme, may be liable to compliance and enforcement activities. Three types of notice are available under the ESOS Regulations. These are:
- a compliance notice – this is an information request from the regulator to the participant. The compliance notice asks for information so the regulator can determine if the participant is complying with its obligations under ESOS;
- an enforcement notice – this tells you what you must do to comply with a requirement of ESOS;
- a penalty notice – this imposes civil penalties for breaches of the ESOS regulations.
However, under the regulations the regulators are able to waive or modify enforcement action and penalties relating to non-compliance.
The Environment Agency has published its approach to enforcement of ESOS in its Enforcement and Sanctions Policy. The deadline for compliance is set in the EU Energy Efficiency Directive and ESOS Regulations 2014. The scheme regulators cannot amend this deadline. Qualifying organisations that do not complete a compliant ESOS assessment and notification by the compliance deadline will be at risk of enforcement action including the possibility of civil penalties.
This is a list of possible non-compliances the associated Regulation and range of penalties that could apply:
Failure to notify – Regulation 43
- A fixed penalty of up to £5,000
- An additional £500 for each working day starting on the day after service of the penalty notice until the notification is completed, subject to a maximum of 80 days
Failure to maintain records – Regulation 44
- A fixed penalty of up to £5,000
- The cost to the compliance body for undertaking sufficient auditing activity to confirm that an organisation has complied with ESOS
- The penalty notice may specify steps to remedy the breach.
Failure to undertake an energy audit – Regulation 45
- A fixed penalty of up to £50,000
- An additional £500 for each working day starting on the day after service of the compliance notice, until the breach is remedied, subject to a maximum of 80 days
- The penalty notice may specify a requirement to undertake an ESOS Assessment.
Failure to comply with a compliance notice, an enforcement notice or a penalty notice – Regulation 46
- A fixed penalty of up to £5,000
- An additional £500 for each working day starting on the day after service of the penalty notice, until the breach is remedied, subject to a maximum of 80 days
False or misleading statement – Regulation 47
- A fixed penalty of up to £50,000
If you’re subject to the publication penalty, the regulator will publish details on their webpages of:
- the person on whom the penalty was imposed;
- the legal requirement that was not complied with;
- the amount of any financial penalty imposed.