On 17 July 2014, the Energy Savings Opportunity Scheme (“ESOS”) came into effect, which implements various elements of the EU Energy Efficiency Directive 2012. ESOS requires companies over a minimum size threshold and some other organisations in the UK to carry out mandatory energy saving assessments. Participants are required to calculate their total energy consumption, carry out energy audits, identify where energy savings can be made and notify the Environment Agency that they have complied with the scheme. These measures are part of the EU’s strategy to cut greenhouse gas emissions by 20% by 2020.

Is my company required to carry out an assessment?

The ESOS scheme will apply to companies (and some other undertakings) which either employ at least 250 people or have an annual turnover of over €50 million and a balance sheet of over €43 million, based on their most recent annual financial statements. Companies meeting these criteria on 31 December 2014 will fall within the scope of the scheme. In addition, any other undertakings within the same group will fall within the ESOS scheme, even if they would not meet the minimum size threshold themselves, although a corporate group may carry out one assessment for all of its undertakings. Overseas companies are not required to participate in ESOS, but if an overseas parent has a UK subsidiary which qualifies for the ESOS scheme, that subsidiary and any other UK undertakings within that group will be required to participate in ESOS. This approach is similar to that used to determine group undertakings under the CRC Energy Efficiency Scheme, and poses similar challenges to companies with complex group structures.

Who else?

Trusts, partnerships, some joint ventures, some funds, unincorporated associations, not-for-profit bodies engaged in a trade of business and some universities will have to comply with the scheme if they meet the minimum size threshold or if they are in the same group as an undertaking that meets the minimum size threshold.

When does my company have to start to carry out an assessment?

ESOS assessments have to be carried out for each “compliance period”, which take place every four years. Qualifying organisations must carry out their first ESOS assessment and notify the Environment Agency that they have complied by 5 December 2015. Following this first assessment, further ESOS assessments will have to be carried out every four years.

What does my company need to do to carry out an assessment?

Carry out an ESOS energy audit and appoint a lead assessor

Companies should arrange for an ESOS energy audit to be carried out which measures their total energy consumption over a continuous 12-month reference period. Total energy consumption consists of energy supplied to the company, energy consumed by the assets it holds and energy used in the course of its activities. This includes energy consumption in buildings, transport and industrial processes. Landlords will have to include energy supplied to the common parts of buildings and, in some cases, energy supplied to their tenants.

Companies should try to use verifiable data. Where this data is not available, they should make a reasonable estimate, notify the Environment Agency and record how the estimates were calculated and why verifiable data was not used. Participants that have a current certified ISO 50001 energy management system, and buildings with display energy certificates or that have been assessed under the Green Deal, will be exempt from the scheme.

ESOS energy audits must be carried out, overseen or reviewed by recognised lead assessors registered with a professional body. In most cases, the audit must be signed off by a director or by an equivalent senior manager within the company. Companies do not have to file the audit itself, but they must notify the Environment Agency that they have complied with the scheme.

Determine areas of significant energy consumption

Companies may identify areas of significant energy consumption, which must account for at least 90% of total energy consumption. Once these areas have been identified, a company is required to carry out an ESOS assessment on these areas. An undertaking does not have to identify areas of significant energy consumption, but if it does not, its entire energy consumption will be subject to ESOS compliance requirements.

Identify energy saving recommendations

The energy audit should analyse the company’s energy consumption and energy efficiency and make recommendations for reasonably practicable and cost-effective ways to improve them. There is currently no requirement to implement these recommendations.

What are the sanctions for non-compliance?

The Environment Agency has powers to publish details of companies’ non-compliance, serve enforcement notices on companies that are in breach of the scheme and issue civil financial penalties. For example, the Environment Agency may issue a penalty of up to £50,000 for failing to carry out an energy audit and may charge additional financial penalties for continuing non-compliance.

There are a number of legal and practical issues that need to be considered when complying with these regulations which may present particular challenges for foreign parents with multiple UK subsidiaries and other groups with complex structures. Our experience in advising clients on complying with similar requirements (e.g. the CRC Energy Efficiency Scheme in the UK) makes us well placed to advise on the legal requirements of this new scheme.