What is ESOS?
ESOS (the Energy Saving Opportunity Scheme) is the UK variant of the EU-wide application of Article 8 (4 to 6) of the EU Energy Efficiency Directive (2012/27/EU). ESOS was formalised in 2014, is administered by the Environment Agency and is now in its third phase as the scheme renews every four years (2015, 2019 and 2023).
The main objective of the regulation is to ensure that large organisations assess their energy usage every 4 years and are made aware of how to reduce energy consumption at their operations. Companies meeting the qualification threshold must report 100% of their energy consumption in a 12-month period, covering buildings, transport and process.
In its essence, Article 8 of the EU Energy Efficiency Directive (and therefore ESOS) aims to force large organisations, through compliance obligations, to identify and address energy and energy-efficiency improvements. Technically, the only requirement is for energy audits (or equivalents) to be carried out at around 90% of an organisation’s sites. Up until now, ESOS did not require the recommendations of those energy audits to be applied. However, the EU regulators were clearly hoping that on average, this would lead to the implementation of significant energy-efficiency measures across the continent as opposed to a simple tick-boxing exercise. As we will see later on, this has not necessarily been the case since the application of Article 8 of the EU Energy Efficiency Directive (EED). This may change after this third Phase for the UK at least, as UK regulators have published their intention to require follow-ups to the energy audits in the form of “Action Plans”. Currently, those would be required for completion by December 2024 and organisations would need to report progress against them annually.
ESOS or EED Article 8?
Even though ESOS and Article 8 of the EED have common origins, there are a number of key differences in their application depending on the country that you are looking into. This is particularly relevant for large organisations with legal entities, operations and sites across several European countries.
At its core, Article 8 of the EED defines large undertakings (i.e. organisations requiring to comply to the obligation of energy audits) as organisations employing more than 250 people; which have an annual turnover above 50 million €; and/or an annual balance sheet total exceeding 43 million €. In practice, the application of these thresholds can vary from country to country. For example, whereas some countries may stick to the letter of the original EU-level definition above, others choose to include companies that only satisfy one of the two financial thresholds. Other countries (albeit the minority) do completely away with those compliance thresholds and use other definitions or metrics. Finally, the definition and / or relationships between legal entities within a single group also vary from country to country and may impact the qualification of a particular organisation.
The application of deadlines can also vary from one country to the next. While most will choose 5th December of the compliance year (2023 for Phase 3), a small number apply different rules such as a four-year period since the last audit or compliance exercise.
Beyond the administrative / formal elements of EED Article 8, its technical application also generates differences between geographies. The “de minimis” rule (i.e. the minimum percentage of an organisation’s operations that can be excluded from the auditing process) as well as clustering or sampling allowances (the ability to extrapolate audit results for sites of a very similar nature) can be applied differently between countries, some of them refusing to allow them at all.
Finally, the necessity to have a qualified individual (such as a Lead Assessor in the UK or member of BAFA in Germany) from an accredited national organisation review and sign off the audits varies from non-existent, to basic, to reasonably involved. Similarly, while most countries will require some form of final submission to the local regulator, others (the minority) do not ask for any formal submission but make it clear that the organisations can be subject to random compliance audits as deterrent.
While perfectly illustrative of the variety of approaches and sensibilities that exists within Europe, these subtleties can nonetheless be tricky to navigate. Ensuring a detailed understanding of those differences is crucial to achieve compliance.
The view from the industry
As we are nearing halfway of the compliance year for this third Phase, some observations can already be made, based on our experience with current and prospective EED Article 8 clients and conversations within the industry.
First, there is still a wide spectrum of awareness on the matter. While we may have expected that as the scheme enters its third phase and its 12th year, organisations would be more in tune with the usual requirements and compliance obligations, it does not seem to necessarily be the case. We are still seeing companies either ignorant of the scheme or with minimal knowledge of the consequences of inaction. One possible explanation for this is the long wait between each phase: since 2019, quite often individuals who were leading the delivery of ESOS / EED Article 8 projects have left or be replaced; and their first-hand knowledge has departed with them. Another explanation, quite often witnessed, is a lack of communication or ownership between relevant departments on the matter: often Real Estate won’t discuss it with Sustainability nor Compliance, resulting in a lack of progress.
Comparable to the wide spectrum of awareness is the large range of attitudes towards it. While some organisations make a concerted effort to approach it in a constructive and progressive manner, choosing to see this as an opportunity; others will only agree to a minimalistic box-ticking exercise. This can be due to a lack of time, resources, or even interest, but in any case, this tends to be detrimental to the company in the mid to long term.
Second, and that was also true for Phases 1 and 2, during the compliance year (2023 for Phase 3), an obvious early mover advantage can be observed. Similarly to what was observed with the recent Minimum Energy Efficiency Standards (MEES) deadline, organisations which choose to tackle this exercise early will undoubtedly enjoy several benefits. From the ability to budget appropriately and in a timely manner to reaching compliance faster or avoiding penalties and reputational damage for non-compliance, it is clearly preferable to plan early. From a cost point of view too, the later in the compliance year energy audits are carried out, the more expensive they are likely to be due to energy auditor fees going up in periods of heavy demand.
Third and last, since the last Phase in 2019 the world has moved on a Net Zero path. From countries to cities to companies, commitments to various degrees of Net Zero, adherence to Science-based Targets have rocketed and remain on an upward trend. As a result, this compliance exercise is now much easier to relate to efforts or commitments that organisations have made in that area, instead of being a standalone compliance task, living in relative isolation to anything else.
In 2019, many organisations were stopping where compliance requirements ended, barely reading the contents of the energy audits which would remain closed on a shelf or buried in an email folder. This was somehow a missed opportunity, at odds with the aims of Article 8 of the EED, but it was understandable as real estate managers constantly have to deal with a variety of conflicting imperatives. For Phase 3, the overall attitude towards the compliance exercise seems to have shifted: for an increasing proportion of companies, this is now an chance to progress the implementation of their newly established carbon or net zero commitments. In order to progress on a path to Net zero, it’s essential to have a thorough understanding of energy consumption at all sites, particularly the largest ones. Being required to perform energy audits achieves just that – so why not use those findings to inform the required next steps towards Net Zero?
Ultimately, any regulation tends – at least initially – to be seen as a burden requiring effort, time and capital to ensure compliance. EED Article 8 & ESOS certainly fall in that category. But if it can be tackled early, planned thoroughly and seen as a opportunity, there is a real prospect that it may actually help organisations towards their wider ESG goals.
For more information, please contact our Sustainability team.
