Are you ready for energy efficiency scheme phase 3 compliance?

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In seeking to address the concerns of organisations that are regulated under the UK Government’s flagship mandatory energy efficiency scheme (ESOS), resulting from the long-delayed introduction of the Environment Agency’s (EA) ESOS IT system, the ESOS Phase 3 compliance notification deadline has recently been extended to 5 June 2024. The deadline was previously 5 December 2023.

What steps do organisations need to take?

Rather than amend the ESOS legislation, which would have provided greater certainty to both organisations and the UK regulators, the Environment Agency has amended its non-statutory ESOS Guidance to advise that ‘organisations should look to meet this compliance notification deadline [5 June 2024] where possible’. 

Addressing this fudge further, they go on to explain that the steps organisations will need to complete to avoid any possible enforcement action by the Environment Agency, or one of the other UK environmental regulators, are:

  • Registering an ESOS account in the Manage your ESOS portal (MESOS) by 5 June 2024
  • Submitting the notification of compliance by 6 August 2024.    

Following submission of the notification of compliance, things move quickly. An ESOS action plan will need to be completed, signed off by directors or equivalent and submitted to the Environment Agency by 5 December 2024. Annual progress reports will then need to be submitted by 5 December 2025 and 5 December 2026. 

To further complicate matters, some important changes to ESOS were introduced last year. These include:

  • More information to be included in energy audits.
  • The production and submission of ESOS reports, energy reduction action plans and annual progress reports.
  • A requirement to publicly disclose high level ESOS audit recommendations.

If you don’t qualify for ESOS Phase 3 but did qualify for phase 1 and/or phase 2, you need to let the Environment Agency know.

What are the risks of failing to comply with the energy efficiency scheme?

There are potential consequences of failing to comply with ESOS. The legislation sets out the level of civil penalties available to the Environment Agency for addressing non-compliance. 

Further detail about how the Environment Agency makes its decisions, both in terms of whether it would take any enforcement action and the level of any civil penalty it may decide to impose, is set out in its Enforcement and Sanctions Policy

The maximum amount of a financial civil penalty for failing to comply with ESOS, include:

  • Failure to carry out an energy audit - £90k. 
  • Failure to notify the EA of compliance with ESOS obligations - £45k.
  • Failure to comply with a notice issued by the EA - £45k.
  • Making a false or misleading statement - £50k.
  • Failure to maintain records - £5k.

Subject to any appeal against enforcement action, details of any penalties issued will also appear on a publicly available register.

What should organisations do if the Environment Agency gets in contact about a potential non-compliance?

In my many years as a senior lawyer for the Environment Agency I have advised on enforcing and defending civil proceedings, including successfully defending more than 100 appeals in the First-tier Tribunal and the Upper Tribunal, including ESOS appeals. Therefore, one of the most important pieces of advice I’d offer to any organisation is to proactively seek legal advice in relation to environmental compliance, both in terms of ensuring the appropriate systems are in place and all legal obligations have been met. 

Likewise, legal advice should be sought in the event of being contacted by the Environment Agency. Having the correct compliance systems in place and demonstrating a willingness to cooperate with the Environment Agency are both very important factors that the Environment Agency must take into account when it makes any decision whether to pursue enforcement action and in setting the amount of any financial penalty. Similarly, from experience, I can say that in any appeal, when a tribunal is deciding whether to reduce or quash a civil penalty, it will put a lot of weight on those same factors.

However, if the Environment Agency does decide to issue a civil penalty, or an enforcement notice requiring you to do certain things, there is the option of appealing to the First-tier Tribunal. But that must be done quickly.

Looking forward – is ESOS another tool in environmental reporting and achieving net zero?

For organisations that are subject to the mandatory Streamlined Energy and Caron Reporting (SECR) scheme, ESOS Phase 4's new reporting requirements will look familiar. SECR, introduced in 2019, requires organisations to disclose information about their energy consumption and carbon emissions in their annual accounts. Although SECR only focusses on carbon emissions, as opposed to energy, ESOS represents a similar structure by requiring the submission of an annual report detailing progress against a prescribed energy reduction action plan.

Both ESOS Phase 4 and SECR reflect a broader trend in corporate sustainability reporting. Companies are increasingly expected to be transparent in communicating their efforts to address environmental impact and seek to achieve net zero. 

The gradual alignment of ESOS Phase 4 and SECR, and the disclosure of a long-term energy reduction action plan, is not just a regulatory requirement but an opportunity to manage legal and reputational risks, reduce costs, reduce emissions and contribute to broader environmental goals.

For further information on the ESOS Phase 3 deadline, please contact the business risk and regulation team.

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