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ESOS Phase 3: Everything You Need to Know

Written by: Jamie Young

January 6th, 2023

What is an ESOS audit?

Essentially, an ESOS audit is an energy assessment that allows organisations to measure and report on their energy consumption as well as explore opportunities for improving their energy efficiency.

ESOS is the UK’s implementation of the EU’s Energy Efficiency Directive. The underlying intention of the initiative is to minimise business energy consumption.

Who needs to perform an ESOS Phase 3 audit?

If by the 31st of December 2022, an organisation has more than 250 employees, then it must comply with ESOS and undertake an ESOS Phase 3 audit. The ESOS-centric definition of an employee can be found in more detail on the UK government website, but essentially, an individual can be considered an employee if they are under contract of service with an organisation, this includes owners, partners and managers. This also applies to overseas organisations that have 250+ employees in the UK.

Financial performance is another qualifying criterion. Companies that have an annual balance sheet total in excess of £38mil, plus a turnover greater than £44mil are required to meet the standards of ESOS compliance.

But that is just for compulsory participation, voluntary compliance is also possible for those organisations that don’t meet the criteria but wish to improve their energy efficiency and general sustainability through a recognised framework.

How is Phase 3 different to previous phases?

In Phase 3, there have been a number of changes, the most significant of which are noted below:

· Improvements to sampling – there is now further guidance on sample selection and more specific criteria to assist in creating more representative data. Ultimately, this change is an attempt to make sampling more robust, so that sizeable businesses that have a large number of sites can more accurately report their energy consumption and explore ways to improve their overall efficiency.

· De minimis energy – in previous years, businesses could neglect up to 10% of total energy consumption, and still comply without investigating this energy user any further. For example, if an organisation’s fleet energy consumption was 9%, this could be neglected. However, in Phase 3 the threshold is now 5%. The hope is that this change will increase the visibility of all energy users.

Please note that much larger changes are expected for Phase 4, with the four-year compliance Phase running from December 2023 to December 2027 (qualification date 31st of December 2026).

What is required in a Phase 3 ESOS audit?

The first action of an ESOS audit is to clearly outline the scope. This is particularly important for multi-national organisations with complex business structures – as ESOS is a UK-specific initiative, large/non-UK departments of the business may not be relevant. Clarity in this matter will help an organisation to truly understand what is being measured.  

Next is to measure total energy consumption. This needs to consider all potential areas of the business, such as buildings, manufacturing process, transport etc. Data should be derived from 12 consecutive months and be verifiable where possible, if not possible an explanation is expected within the evidence pack. The purpose of this is to ensure that all sizeable energy consumers are eventually covered by a route to compliance.

Following on from this, the business must select assets and activities for auditing. As aforementioned, Phase 3 de minimis energy consumption is now 5%, so significant energy consumption must be selected for audit (at least 95%).  

ESOS audits are typically carried out with the support of a certified Lead Assessor who confirms the ultimate findings of the audit with a nominated company director (for signature) and verifies the information within the report. The report typically summarises the findings of the audit, including a detailed breakdown of sampled sites, a description of site systems and projects for improved energy efficiency alongside further analysis. Throughout the process, the Lead Assessor will support the business on the route to compliance and select a path that makes sense for the organisation.

When is the deadline for Phase 3 compliance? How long does an audit take?

The deadline for Phase 3 compliance is the 5th of December 2023. Phase 3 commenced immediately following Phase 2 (December 2019). The qualification date for Phase 3 was the 31st of December 2022.

According to EECO2’s ESOS Lead Assessor and Senior Energy Manager, Gabriel Hurtado Gonzalez, organisations should now be looking to take action towards Phase 3 compliance, “it depends on the company and the type of business, but ESOS audits can take between 3-6 months to complete. The typical best practice is to perform an audit as soon as possible, at least every 4 years, within each compliance period”.

Should an organisation fail to meet this timeline, the penalties for failure can be severe - a penalty of up to £50,000 plus another penalty of £500 for each working day that the organisation is in breach of ESOS, with The Environment Agency launching civil proceedings against non-compliant businesses.

Historically, organisations that have failed to comply have also been the subject of negative press, with some well-known brands ending up in news headlines for the wrong reasons.  

What are the other benefits of completing an ESOS audit, besides compliance?

As ESOS is specifically focused on improving energy efficiency, ESOS audits can unveil numerous on-site energy efficiency projects that local site teams and surrounding management were previously unaware of. At a time of increasing energy costs, measures to improve energy efficiency are only becoming more appealing due to the associated reduction in operational expenditure. It is also worth noting that due to the ongoing energy crisis, the payback time on many energy-reducing projects has significantly reduced, encouraging the rapid implementation of these measures.

Another factor worth considering is that of corporate social responsibility (CSR). By exploring energy efficiency, businesses can implement significant energy-saving opportunities and record this within their CSR reporting. According to the United Nations, buildings around the world need to improve their energy intensity by 30-50% per square metre if we are to limit global temperature rise to 1.5°C, as concluded in the 2015 Paris Agreement. Clearly, energy efficiency has a significant role to play in net zero delivery, particularly as energy demand has only increased in the wake of the coronavirus pandemic.

ESOS Phase 4: What’s next?

There is the potential that the UK government takes steps to encourage the implementation of projects identified through the ESOS process. Currently, there are no specific guidelines or incentives to do this within ESOS.

Also, there is the possibility that eventually, ESOS will be used to tackle an organisation’s impact on climate, as the UK heads toward a net zero future by 2050, as was published by the government in 2021. However, it is worth noting that the initiative does not yet consider carbon dioxide or other greenhouse gas (GHG) emissions within the reporting structure, and current pathways to compliance, such as ISO 50001, do not cover net zero.

In Phase 4, participants will be expected to set a target and report on the progress towards energy reduction. If the target is not met, then an explanation must be submitted by the participating organisation.  

Concrete changes are yet to be announced, yet government-level objectives, such as net zero, will no doubt reshape the way ESOS is delivered in the coming years. But one thing can be certain, the original intention of the ESOS programme – to reduce organisational energy intensity through energy efficiency – will remain pivotal throughout.

Still have questions about ESOS? Ask a Lead Assessor today!


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