ESOS phase 3: what you need to know

The UK government’s  (ESOS) is currently in Phase 3. The final deadline for this phase is 5 June 2024. (It was extended from December 2023 to give businesses a better chance of meeting new, stronger requirements.)

What ESOS is

The Energy Savings Opportunity Scheme is a mandatory scheme requiring large UK businesses to report on their energy use and identify possible ways to use less energy. It runs in four-year phases, and we are currently in Phase 3. If your business is in scope, you must comply with the scheme’s requirements or face possible penalties. See our ESOS FAQs for lots more detail on the scheme.

Check your business is in scope for ESOS Phase 3

The qualification date for Phase 3 of ESOS is 31 December 2022. If your organisation counted as a “large undertaking” on that date, it is in scope of ESOS.

For the purposes of ESOS Phase 3, a large undertaking is any UK company that:

• employs 250 or more people
• has an annual turnover in excess of £44 million, and an annual balance sheet total in excess of £38 million.

The government has confirmed that there will not be any changes to these criteria before the qualification deadline. If your company meets these criteria on the qualification date, it must carry out ESOS reporting, even if it subsequently changed in size and no longer meets the criteria.

If you don’t qualify

If your organisation qualified for ESOS Phase 2 but does not meet the criteria for Phase 3 on the qualification date, you are advised to submit a DNQ (Do Not Qualify) notification to the Environment Agency. This should be done through the same online portal that you would use for your compliance notification. The portal is not available yet, but should be up and running by the end of 2023. 

When to start

The data you use as the basis for ESOS Phase 3 reporting should be based on a 12-month period that includes the qualification date (31 December 2022) and ends before the compliance date (5 June 2024). This is known as your reference period. The earliest it could have started is 1 January 2022 and the latest it could end is 4 June 2024. So you have a period of two years and just over five months to choose from. Any consecutive 12 months within that timespan is fine.

What you need to do

1. Measure your company’s total energy consumption

During your 12-month reference period, you need to carry out an energy audit to calculate all the energy consumed by your business in the UK. That includes transport fuel as well as the energy used for industrial processes, heating and lighting buildings and so on. 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.

2. Identify areas of significant energy consumption

The ESOS rules for Phase 3 allow you to exclude up to 5% of your organisation’s energy consumption by categorising it as “de minimis”. You might choose to leave out a site, a particular activity or usage of a specific fuel. The 95% or more that remains is your “significant energy consumption”. You are under no obligation to use your de minimis exemption. Some organisations may choose to exclude an area where it would be particularly hard or expensive to cut consumption. But others will find it more straightforward just to report their total, which they will already have calculated anyway.

3. Analyse the data

Your audit report should analyse your organisation’s energy consumption and how energy-efficient it is. It should recommend possible ways in which your organisation can become more energy-efficient and give the costs and benefits of these measures.

4. Get the report checked by a lead assessor

The ESOS rules specify that you will need a qualified lead assessor to check your report. There are a few exceptions to this rule:

• 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.

Asking the experts

It is mandatory to get a lead assessor to check your ESOS reporting, but many companies go further and hire an external lead assessor to do the whole audit. Whichever option you choose, your lead assessor must be on the approved ESOS lead assessor register. You can find a list of registers as part of the gov.uk ESOS guidance.

When to start on Phase 3

The reference period for your data collection must end before 5 June 2024, which means the latest it can start is 6 June 2023. So your organisation should already be in data-gathering mode. You will not be able to submit your compliance notification until the notification portal is ready (expected to be the end of 2023). But this should not stop your business from getting the actual measuring, calculating and reporting done.

If your organisation was in scope of Phase 2, hopefully you will have established ongoing processes for measuring your energy data and can just continue with this best practice for your Phase 3 data.

It makes sense to get started on the other elements of Phase 3 compliance as soon as possible. The closer we get to the compliance deadline, the more demand there is for qualified lead assessors and many are booked up early.

Beyond compliance to business benefits

The whole point of ESOS is to encourage businesses to carry out energy-saving measures that will ultimately benefit them by saving money as well as carbon. Treating it as a purely compliance exercise means that your organisation will miss out on these benefits. .

What about Phase 4?

The next phase of ESOS makes the direction of travel clear: the government wants businesses to take more action on their ESOS recommendations. In Phase 4, businesses who do not carry out the cost-effective, practical measures suggested in their reports will be required to explain why.

There will be many other changes too. Both Display Energy Certificates and Green Deal Assessments are being phased out as routes to ESOS compliance, which means they will not be valid for Phase 4.

The Energy Advice Hub will bring you updates on any changes to the ESOS scheme as they happen, so keep an eye on our site.

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-Anthony Mayall