04 Jul 2016

The first compliance deadline under the Energy Savings Opportunities Scheme (ESOS) passed with little apparent effect on 5 December 2015. Faced with widespread non-compliance, the Environment Agency (EA) published two revised deadlines:

  • 29 January 2016 for organisations caught by ESOS to notify the EA of compliance with the requirement to conduct a full energy audit, and
  • 30 June 2016 for organisations seeking to use the "alternative compliance" route to achieve ISO 50001 certification of their energy management systems.

The EA took no enforcement action against organisations that missed the 5 December 2015 compliance deadline. That lenient approach reflected the EA's acknowledgment that levels of awareness relating to ESOS remained low, despite a string of articles, seminars and stakeholder workshops. It also reflected the potential effect of a very late amendment to the ESOS regulations, made in October 2015 to correct a drafting error in the original version. However, having taken a pragmatic and lenient approach to the first missed deadline, the EA is now gearing up to serve enforcement notices and, in what they consider to be the most serious cases, to impose penalties of up to £90,000 for failure to conduct an ESOS-compliant energy audit. With up to one-third of the 10,000 or so undertakings caught by ESOS still apparently failing to comply, enforcement could soon be widespread and headline-grabbing.

Is your organisation caught by ESOS?

ESOS applies to any "undertaking" that has at least 250 employees, or that meets a financial test. The financial test is in two parts. The undertaking must have:

  • an annual turnover in excess of €50 million, and
  • an annual balance sheet total in excess of €43 million.

Expression of the financial test in euros reflects the fact that ESOS was introduced to implement Article 8 of the EU Directive on Energy Efficiency. It applies to any business, whether or not structured as a company. It also applies to any corporate group where at least one member of the UK group meets the ESOS criteria. Most public sector bodies are excluded, but universities and similar institutions may well qualify.

The October 2015 amendments corrected an error in the financial test. Originally, the regulations referred to a turnover "in excess" of €50 million but to a balance sheet total "of" €43 million. Given that it a highly unlikely that an organisation with a turnover exceeding €50 million would have a balance sheet of precisely €43 million, most organisations with fewer than 250 employees might credibly have argued that they had considered the regime, and decided that they were not caught. The October amendments removed that argument, but came too late to allow time for compliance by 5 December.

Why is compliance difficult?

ESOS is essentially concerned with the gathering and analysis of data concerning energy consumption, covering an undertaking's total energy use. For many undertakings, elements of the required information will have been gathered for purposes such as compliance with the CRC Energy Efficiency Scheme. However, CRC is much narrower in scope, and is concerned with emissions rather than energy consumption. Data gathered for CRC purposes must therefore be assessed and reported in a different way, and it must be brought into a far more extensive audit covering total energy consumption.

As well as the need for different methodologies, ESOS compliance requires the appointment of a suitably qualified "lead assessor". There is nothing to prevent a lead assessor coming from within an undertaking, and working only for that undertaking. However, given the specialised nature of the lead assessor's role most are independent consultants – and most were booked up well in advance of the 5 December 2015 deadline, and they remain in heavy demand. ESOS suffers from a significant skills shortage, meaning that undertakings that have woken up to its requirements at a late stage will find it extremely difficult to comply.

There are further potential compliance traps. The ESOS regulations specifically provide for "alternative compliance" where an undertaking's energy management system achieves ISO 50001 certification. The crucial risk is that ISO 50001 certifications only counts as full compliance if it covers the undertaking's total energy consumption. Any element of energy consumption not covered by that certification must be accounted for by a separate, ESOS-compliance energy audit. Strictly, the penalties for non-compliance in relation to any element falling outside ISO certification could reach the maximum level of £90,000. The EA has some discretion to moderate the penalty, but as with any of its enforcement functions, the EA tends to adhere to the principle that compliance must always be less expensive than breach. That principle is applied to ensure that breach cannot result in cost savings which might distort markets or disadvantage those who have incurred the costs of compliance.

Who is responsible?

Responsibility for ESOS compliance lands at board level. An undertaking's ESOS assessment must be signed-off by a director, or by two directors where the lead assessor is in-house.

As well as placing responsibility firmly at board level, the requirement for directors' sign-off is intended to ensure that the board is aware of the true level of energy consumption, and can use that information to identify and pursue opportunities for savings. At root, ESOS is designed to ensure that undertakings accurately measure, and can therefore manage, their energy consumption.

The "carrots" are cost-saving and, perhaps, enhanced energy security. The "stick", however, takes the form of potentially significant financial penalties, "naming and shaming" and a degree of scrutiny from the EA that might well extend to other regulatory regimes falling within its portfolio, such as CRC or EU-ETS. The EA has since late March 2016 been contacting undertakings thought to be in breach of ESOS. Enforcement notices and penalties are now a real, and imminent, prospect.

How can Bond Dickinson assist with this?

For many years Bond Dickinson has advised major consumers of energy across a wide range of industry sectors on regulatory regimes such as the CRC or the EU-ETSs; advising on who is caught within the scope of the relevant regime and what steps need to be taken to ensure that an organisation is compliant. We are therefore well placed to help organisations avoid both the financial penalties that can flow from a failure to comply with the ESOS regulations and the reputational risks that also arise. Given that responsibility for ESOS compliance is expressly stated to be at board level, directors of any company caught by the regime need to be aware that the reputational risk arises both on a company level and at a personal level for the directors involved.

Bond Dickinson has a wealth of experience from advising developers and consumers on the installation of carbon reducing measures, including on-site or private wire renewable generation projects, and energy saving measures across portfolios of properties. This experience means that once an organisation has established its base line energy demand, we are very well placed to assist in implementing energy and carbon saving measures and ensuring that the full upside from those projects is captured. This can include advising on the most efficient structures to minimise or avoid the capital outlay that can be involved in implementing such a programme of measures.