Friday 15 December 2023

ESOS Phase 3 – will it be worth the wait?

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The ambition of ESOS (the Energy Savings Opportunity Scheme), established 12 years ago, was to champion energy efficiency and mitigate greenhouse gas emissions by encouraging large businesses to identify and implement energy-saving measures. This core concept of moving energy awareness to boardrooms and uncovering opportunities for savings, aligned with national Net Zero goals by strategically reducing intensive on-site energy use and associated carbon emissions. Now the final details of Phase 3 have finally been agreed, is ESOS any closer to achieving this ambition?

Despite this admirable ambition, the scheme to date, having already moved through Phases 1 and 2, has faced significant criticism. One major drawback lies in the absence of a mandatory commitment for organisations under the scheme. While organisations are obligated to identify energy saving opportunities, there is no corresponding mandate to act on these findings. This lack of enforcement makes it easy for businesses to merely check a box without implementing meaningful changes. To incite positive change, there must be a motivational driver, and the current structure of ESOS falls short.

Another challenge stems from the inconsistent quality of ESOS assessments, because of inadequate government regulations. The absence of guidelines ensuring auditors possess industry-specific experience relevant to the organisation hampers the effectiveness of the process. Auditors should be matched with organisations in their field to provide tailored, meaningful recommendations. Additionally, while audits require approval from a qualified lead assessor, there are no stipulated qualifications for the on-site auditor. Consequently, some organisations receive generic recommendations that do not align with their operations and have reported a lack of confidence in the scheme due to the poor guidance that has resulted in poor quality outputs. Many of these organisations see ESOS as an additional cost to their business without any corresponding benefit.

Moving into Phase 3, the Government needed to win back confidence in the scheme by demonstrating strong leadership, an understanding of the issues and by implementing changes to the scheme that addressed the issues.

What has happened so far in Phase 3?

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ESOS Phase 3 compliance should at this point be wrapped up and all reports submitted, as the prescribed deadline for submission was the 5th December 2023. Unfortunately, despite establishing the rolling four-year framework over a decade ago, the final details for this phase were only actually signed off by the Government on 29th November with extending the deadline to the 5th June in order to account for the delays. This lack of detail and certainty has led to widespread confusion among organisations seeking compliance. It has also caused significant disruption and financial challenges for the energy consultancies that handle compliance for clients; orders taken could not be completed, and therefore invoiced, before all the details were known; staff levels were prematurely

increased to account for the additional ESOS workload and in some cases other work was turned away because of the level of ESOS orders

While certain headline changes, such as the mandate to cover 95% of energy consumption (up from 90%), were communicated over the past year, the lack of substantive details left consultancies and end user organisations in the dark regarding specific requirements for data coverage, analysis, and the scope of site audits. In order to meet deadlines, work had to go ahead under phase 2 requirements with a best guess approach as to what will be required.

Guidelines were finally released on the 30th of November, leaving just 6 months to meet the new requirements. This narrow timeframe has added pressure to an already strained compliance process, further challenging businesses and consultancies to adjust swiftly and efficiently. The delayed release of guidelines has not only disrupted the compliance timeline but has also impacted the invoicing process and strategic planning for consultancies.

What are the new requirements?

The key changes in the recent guidance can be summarised as follows:

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1. Organisations are required to publish a ‘programme of implementation’ as an action plan in line with their recommendations. Whilst this is a useful step, submission is not required until December 2024 and is not currently backed up with a requirement to follow through with that plan.

2. Energy consumption streams, intensity ratios and recommendations must be split into defined ‘organisational purpose’ categories. The categories

that have been provided overlap and are not prefaced with a rationale. This will cause variation between auditors’ selections. For example, categories for recommendations include training, control, and behaviour change. This displays a poor understanding of behaviour change interventions as both training and elements of control should fit underneath behaviour change. To address this, JRP has developed a procedure to standardise selection and demonstrate the interpretation of these categories. It is worth noting that at least one energy intensity ratio is required for each recommendation, and it is likely that the ratio chosen will remain for future phases which therefore requires careful selection.

3. Any data estimates made where actual data is unavailable must now be justified. Reports must note why and how an estimate is made. This is a positive measure as it promotes only estimating where absolutely necessary and traces what has been done which allows for future use of the work.

4. Organisations must now stipulate actions that have been undertaken for energy conservation since 2019. This is a good measure as it builds a picture of progress and ties into future strategy. However, this should have been communicated over a year ago to enable good, complete and accurate data.

5. Auditors must provide a rationale for the selection of sites chosen as a representative sample for auditing. This is something that should be done anyway, so making it a requirement ensures good practice measures are in place for quality assurance.

6. Grants/incentives that are available in line with recommendations must be stipulated. Whilst this is a useful addition for organisations, there has been no guidance released that lists

grants available, despite being a government scheme. This is another example of creating barriers rather than facilitating positive change.

Overall, whilst there are a few positive additions in terms of quality assurance, the changes do not strengthen the scheme’s ability to deliver positive change. The guidance is still inherently lacking and has left a large margin for error. This will likely deepen variation in quality of work and therefore lack of confidence in the scheme.

What has been missed?

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Whilst requiring an action plan is a good step in building a pathway to action, it is not powerful enough this late in the scheme - organisations can simply state that they do not intend to act upon any of the recommendations. Similarly, under the requirement to identify any actions to date, it is sufficient for organisations to state that no action has been taken since 2019. The hope is that these measures are laying the groundwork for demanding tangible proof of action in Phase 4. However, setting such a requirement for 2027 leaves minimal time to achieve interim Net Zero targets by 2030 in accordance with climate science. Waiting another four years for action sacrifices substantial cumulative savings and will hinder the timely progress necessary for meaningful contributions to climate goals.

It is also worth highlighting the surprisingly considerable requirements in Phase 3 for those who are certified to the ISO 50001 energy management standard. Many organisations have previously invested in ISO 50001 compliance with a view to achieving best practice energy management whilst benefitting from a smaller time and resource investment for compliance under ESOS. Under DESNZ’ guidance, they are now not receiving this benefit, which is an opportunity lost in terms of incentivising exemplar energy management systems. However, for those certified to ISO 50001, there is still much to gain. They will reap the benefits of having a certified energy management system that will reduce their energy consumption and position them as leaders in energy conservation.

What can organisations do now to ensure best value from Phase 3?

Given the delays in defining the details, the shortened period for submitting reports, the inevitable increased costs of the additional audit requirements, it is even more important than ever to ensure that the process delivers value for an organisation by doing the following:

1. Chose a Lead Auditor with experience of your sector

2. Make sure your in-house auditor has the appropriate experience

3. Make sure you understand what information is required and that you have it available before you start the process – inadequate, incomplete data is the biggest cause of delays and additional costs.

4. For ESOS Phase 1, 75% of ESOS submissions were not fully compliant and therefore liable to a fine. With the increased level and complexity of information required in Phase 3, there is now a much higher probability of non-compliant reports being submitted. For peace of mind, chose a consultancy/lead auditor that will give a compliance guarantee.

5. And finally, remembering the original objectives of the scheme, commit to a plan to implement the opportunities identified.

The curate’s egg? Good in parts?

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Unfortunately, the roll out and final delivery of ESOS phase 3 has done much to strengthen previous criticism of disorganisation and missed opportunity for the scheme. In fact, failure to meet the Government’s own deadline this year has caused exceptional disruption. Better, clearer planning is an absolute requirement for phase 4.

However, there are some positive takeaways – New guidance is building a framework for improved energy conservation strategies. When done properly, ESOS reports are being built into Net Zero targets and action plans where organisations are proactive. As a consultancy, we have many customers who recognise the potential in the scheme and are seeking to implement their recommended energy conservation measures, which benefits their bottom line and is a great step toward Net Zero.

For more information on any of the above, or to discuss your ESOS requirements, email info@jrpsolutions.com or call 0800 6127 567.