UK: Preparing for ESOS Phase 4

The UK’s Energy Savings Opportunity Scheme ("ESOS") is an energy usage assessment scheme that requires in-scope organisations to audit their energy usage every four years. The audit assessments must cover energy consumed by buildings, industrial processes, and transport, with a view to identifying opportunities to reduce energy usage. 

Key takeaways 

• The ESOS Phase 4 qualification date (31 December 2026) is fast-approaching. While the compliance date is 5 December 2027, companies should allow good time to refresh / assess scoping analyses given potential complexities.
• Changes for Phase 4 mean previous routes to compliance have been removed as part of Phase 4. Companies will be reliant on external Lead Assessors or having ISO 50001 certifications to demonstrate compliance.
• Phase 4 guidance is anticipated in early 2027. This should be monitored for to assist company compliance efforts.
• Phase 3 saw active enforcement activity by the Environment Agency. Those who received letters and compliance notices in particular should ensure they are ready to comply with Phase 4.

Scoping

ESOS applies to large UK undertakings – and their corporate groups.

An undertaking will qualify as a “large undertaking” for ESOS Phase 4 if, on 31 December 2026, it:

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

Where an undertaking meets this threshold, all other UK undertakings within its corporate group will be in-scope. 

An undertaking’s corporate group is defined by reference to the Companies Act 2006 and captures parent undertakings, subsidiary undertakings, and sister subsidiary undertakings (i.e., another subsidiary of a shared parent undertaking). 

Determining the corporate boundary, whilst in some cases able to be based on existing approaches to reporting and understanding within businesses, can require a less than straightforward control analysis (e.g., where dealing with fund and/or JV structures) and so should be reviewed well ahead of the 31 December 2026 qualification date. 

Responsibility for compliance

The obligations under ESOS will fall on – in the first instance – on the “highest parent” undertaking, which is the de facto “responsible undertaking”. This is the entity in-scope (in its own right or by virtue of being in a corporate group containing a large undertaking) which has no in-scope parent undertaking (i.e., it is the “highest” UK undertaking in the group structure). 

It is possible to rearrange or re-scope responsibility for ESOS compliance within a corporate group:

• Corporate groups can together appoint an alternative “responsible undertaking”. This must be done in writing, with the approval of all undertakings in the corporate group. This shifts the responsibility for compliance with ESOS to another undertaking in the corporate group.
• The “highest parent” undertaking can “disaggregate” parts of its corporate group. This must be done in writing. This does not exempt any part of the corporate group from complying with ESOS. Instead, it means the “highest parent” is no longer responsible for the compliance with ESOS of the disaggregated undertaking (or group of undertakings), which must comply with ESOS in its own right (under a new “highest parent” or alternative “responsible undertaking”.

Key obligations 

The “responsible undertaking” must demonstrate to the Environment Agency that it / its corporate group has complied with ESOS. 

In practice, this means that by 5 December 2027, the “responsible undertaking” must notify the Environment Agency of its compliance with ESOS Phase 4. 

In practice, this will involve:

• calculating their (i.e., the responsible undertaking and its corporate group) total energy consumption across a 12-month reference period (which must overlap with 31 December 2026 and end before 5 December 2027);
• appointing a Lead Assessor to conduct an energy audit in respect of their areas of significant energy consumption (which must account for at least 95% of total energy consumption) that identifies energy savings opportunities (unless an alternative compliance method is used – see below);
• asking a director or equivalent senior manager to sign off the ESOS assessment (attesting that ESOS applies, has been complied with and the information provided is correct – and that the director has seen and considered any recommendations on energy savings opportunities);
• using the Managing your ESOS (“MESOS”) system to complete the notification (which should include the director compliance confirmation and information on the responsible undertaking, who is covered by the notification, the identify of the director and lead assessor and information on any alternative compliance methods used and where estimates have been used instead of verifiable data). 

ESOS assessments should be supported by evidence packs that demonstrate compliance. 

Alternative compliance route: Where responsible undertakings can show that a certified ISO 50001 energy management system is in place covering (any part of) their energy usage, they do not need to appoint a lead assessor to assess the energy usage covered by that certified system. Those with a total energy consumption below 40,000 kWh also do not need sign-off from a lead assessor.

Changes from Phase 3

Phase 4 sees some changes from the previously applicable rules for Phase 3:

• Use of Display Energy Certificates and Green Deal Assessments no longer possible. These will no longer provide viable alternative compliance routes to appointing a lead assessor or relying on an ISO 50001 energy management system.
• Progress against action plan commitments required. Action plans were introduced in Phase 3, with progress updates required annually. The assessment must include a continued update against the plan, and where any commitments have not been met this must be explained.

Other changes were planned for Phase 4 (including to scoping thresholds and to add a focus on net zero as well as energy efficiency more generally), but these have been postponed until Phase 5 (2027-2031). 

Further changes are possible, with the UK government having previously indicated that it would consult this year on the future of ESOS alongside the Streamlined Energy and Carbon Report (SECR) regime given the recent introduction of more comprehensive sustainability reporting regimes (e.g., through the Listing Rules, Companies Act 2006) and the introduction of the ISSB standards in the UK. 

For more information on Phase 3, see our previous blog post. 

Enforcement

The Environment Agency seemed to take a more proactive approach to enforcement of ESOS as part of Phase 3. 

Companies thought to be in-scope, but which had not notified compliance by the deadline received letters following up and we are aware of a number who subsequently received compliance and enforcement notices. Although a number of these did not result in fines, the Environment Agency may take an increasingly stringent approach to enforcement as part of Phase 4 – particularly for those found to be repeat offenders. 

For larger companies, the fines themselves are not significant (failures to notify and maintain records are punishable by initial penalties of up to £5,000 with an additional £500 daily penalty for a maximum of 80 days; although for failures to undertake an energy audit the initial penalty is up to £50,000). 

However, with the current focus on sustainability and the potential for such assessments to support related climate targets (and performance towards them), Phase 4 ESOS is more than just a box-ticking compliance exercise and there may be broader reputational and business impacts connected with non-compliance.