ESOS phase 3: what you need to know

ESOS Phase 3: The government’s Energy Savings Opportunity Scheme (ESOS) is now in phase 3. Here’s what you need to know.

ESOS phase 3: what you need to know

The government’s Energy Savings Opportunity Scheme (ESOS) is now in phase 3, and UK businesses have until December 2023 to comply. Here’s what you need to know.

ESOS in brief

ESOS is a mandatory scheme requiring large UK companies to measure and report on their organisation’s energy use and efficiency. The overall goal is to encourage UK companies to become more energy efficient.  The scheme runs in four-year phases. Phase 2 closed in December 2019 and we are now in Phase 3, with a December 2023 deadline.

Who it applies to

If your company was in scope for ESOS phases 1 and 2, it is highly likely that phase 3 applies to you too. But it’s worth checking. The official criterion for a business that must take part in ESOS is that you must meet the official definition of a “large undertaking”. That is, you either:

  • employ 250 or more people; or
  • have an annual turnover in excess of €50 million (£44 million) and an annual balance sheet total of over €43 million (£38 million).

If you’re very close to the qualification threshold in either direction, or if the size of the business has changed substantially in the past few years, you should check the full government guidance on complying with ESOS. The key date for assessing whether or not you qualify is 31 December 2022; if your company meets the conditions for ESOS on that date, you must comply.

If you’re based overseas, you still come under the scope of ESOS if you employ 250 or more people in the UK.

If you don’t qualify

If you qualified for ESOS phase 2 but don’t qualify for phase 3, perhaps because the size of the business has changed, you must inform the Environment Agency (the administrator for the scheme). At the time of writing, the best way to do this is by emailing ESOS@environment-agency.gov.uk .

What you need to do

  1. Measure your company’s total energy consumption

This means carrying out an audit of all the energy consumed by your business in the UK, including from buildings, industrial processes and transport. These should be recorded in a common unit, either an energy unit like kWh or in pounds sterling. So, for example, a litre of petrol would need to be recorded either in terms of the energy consumed or the cost, but it wouldn’t be acceptable to record it in terms of miles driven or carbon emissions produced.

  1. Identify areas of significant energy consumption

ESOS requires you to identify which company assets and activities make up at least 90% of your total energy consumption. You are allowed to leave out up to 10% of your company’s energy consumption by categorising it as “de minimis”. For example, you might choose to leave out a particular site or usage of a specific fuel. However, you are not obliged to do this; you can just include your total energy consumption in your ESOS reporting.

  1. Audit the areas of significant consumption (or just audit everything)

You must now carry out an audit of all the areas of the business that make up 90% of more of your energy use. The audit must meet certain standards to be considered ESOS-compliant. The government guidance has details on these standards.

  1. Identify possible ways to improve energy efficiency

This step is the whole point of ESOS: getting businesses to identify opportunities for energy saving. You should list as many ways as possible to improve energy efficiency, but all suggestions should be practical and also explain the estimated costs and benefits of the action.

  1. Get the report checked over

Most businesses will need to hire a lead assessor to check that their ESOS report meets the standards. There are a few exceptions:

  • If 100% of your energy use is already covered by ISO 50001 certification;
  • If the company’s total annual energy consumption is below 40,000kWh;
  • If you have zero energy supplies (although you will still need to notify the Environment Agency and get a director to confirm this).

The lead assessor should review your report, then the company directors should do the same before signing it off.

  1. Notify the Environment Agency

You will need to inform the Environment Agency that you have completed your energy audit.

What’s changed between phase 2 and phase 3

The information about companies with zero energy supplies is new for phase 3.

Phase 3 also requires a tiny bit more paperwork:

  • If you choose to exclude some of the energy consumption from your company’s buildings, you should now keep copies of any notes or emails to support this.
  • If a business is part of a parent company and chooses to disaggregate from the parent company for the purposes of ESOS, you will need to have an agreement about this in writing and include it in your evidence pack.

The biggest difference between phase 2 and phase 3 may not be in the requirements themselves, but in how they are enforced. Businesses that received enforcement notices for non-compliance with phase 2 were offered an extension, in recognition of COVID’s impact. By the end of 2023, it is hoped that UK businesses will no longer be struggling as a result of the pandemic, and this may mean stricter enforcement of the deadlines.

When to start on ESOS phase 3

There is no obligation to start on ESOS phase 3 straight away, but there are plenty of benefits to doing so. The reference period for your ESOS report should be a 12-month period that includes the qualification date of 31 December 2022 and ends before the deadline of 5 December 2023. So the start of your reference period could be any date between 1 January and 6 December 2022.

However, no business should confine the measurement of its energy use to just the reference period for ESOS reporting, because it is important to have the data on such an important aspect of the business. If you were in scope of phase 2, your company will have established processes for measuring your energy use which hopefully won’t require much organisational effort to maintain. Likewise, if you are in scope of SECR, you will already be gathering data on your energy use for the purposes of compliance with that.

If your business is completely new to any kind of energy reporting, it is even more important to get started now, so you can resolve any logistical problems and fill any data gaps before the start of your ESOS reference period.

Beyond compliance to business benefits

Your ESOS obligations revolve around submitting an accurate report, but it would be a huge missed opportunity to leave it at that. If you were in scope for phases 1 and 2, you will have received a host of recommendations for cost-effective ways to boost your company’s energy efficiency. There is absolutely no obligation to implement any of the measures suggested, but to ignore them would be to miss an open goal. At a time when many businesses are making hard decisions to survive, energy efficiency is a painless way to cut significant unnecessary costs.

ESOS phase 3 may not require urgent action right now, but engaging with it early will result in the best business outcomes.

For more advice on ESOS, get in touch or check out our frequently asked questions on ESOS.

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