ESOS Phase 4: The latest updates

We are now in Phase 4 of the Energy Savings Opportunity Scheme (ESOS). While the government has not yet finalised all the details of this phase, new updates from the Environment Agency reveal what businesses can expect.

Background

In 2022, when ESOS was still in Phase 3, the government announced plans to strengthen the scheme. However, ESOS was originally established in 2014 through powers granted by the European Communities Act 1972, which was repealed after Brexit. So the government had to pass a new act giving itself the powers to make regulations related to mandatory energy assessment schemes. In 2023 it passed the Energy Act (originally the Energy Security Bill).

The government had already committed to:

• Strengthening and standardising audit requirements;
• Improving ESOS audits;
• Adding a mandatory net zero element to ESOS audits;
• Requiring public disclosure of high-level ESOS assessment recommendations.

The Energy Act gives the government powers to do all this.

Net zero assessments delayed until Phase 5

When Phase 4 of the scheme was first announced, its requirements included a mandatory net zero assessment. However, due to “delays to the introduction of Phase 3 legislation and guidance” during the pandemic, mandatory net zero reporting will not come into effect until Phase 5, which will run from 2027 to 2031.

Previously, the British Standards Institute (BSI) planned to coordinate the development of an international standard for net zero assessments, which would form the standard that Phase 4 participants would have to meet. While businesses will not be obligated to report on net zero until Phase 5, they will still be encouraged to include net zero considerations in their Phase 4 reporting.

The BSI and UK Government have worked together to develop two Publicly Available Specifications (PAS) to guide this process:

1. 51215-1:2025 Energy and decarbonization assessment – Part 1: Process – Specification
   This standard outlines the process for conducting combined energy and decarbonisation assessments, resulting in an implementation plan.
2. PAS 51215-2:2025 Energy and decarbonization assessment – Part 2: Competencies of lead assessors and assessment teams – Specification
   This standard specifies the competencies required for lead assessors and assessment teams involved in energy and decarbonisation assessments. This standard updates the previous PAS 51215:2014 by strengthening the existing energy competencies that assessors need and incorporating new ones for GHG and net zero.

Longer-term thinking

Businesses participating in earlier phases of ESOS may have focused on the “quick wins” of energy efficiency measures. While ESOS still encourages cost-effective improvements, the forthcoming net zero assessment requirement of Phase 5 means businesses need to think longer-term. This means mapping out possible routes to net zero, choosing the most viable and ensuring that today’s energy efficiency measures do not jeopardise progress in future. For example, if a business invests in a more efficient gas-powered heating system, this could delay the move towards heating electrification and bigger energy savings in future.

Businesses should also consider the potential risks and costs of moving to net zero as well as the potential benefits. They should compare the risks of all possible trajectories before settling on a route to net zero.

The government estimates that the eventual net zero requirements could add “between £600 and £7,500” to the cost of an ESOS audit. However, it argues that the extra planning will mean better investment decisions, with the implication being that some of this cost will be offset by that.

Other Phase 4 changes

As well as delays to mandatory net zero reporting, the Environment Agency has also announced that adjusted scope thresholds to align ESOS with Streamlined Energy and Carbon Reporting (SECR) requirements will also not be taken forward in Phase 4. This means that businesses in scope of ESOS must still meet the Companies Act definition of a “large undertaking”, with 250 or more employees, an annual turnover of over £44 million and a balance sheet over £38 million.

Elsewhere, the Environment Agency has confirmed its proposed smaller modifications will go ahead in Phase 4, including:

• Display Energy Certificates and Green Deal Assessments are no longer valid routes to compliance. These were already “discouraged” despite being technically allowed in Phase 3, so their removal brings welcome clarity.
• Progress against action plan commitments must be included in the ESOS assessment.
• A requirement to act on your ESOS audit recommendations. If your business decides not to carry out any of the recommended measures, you have to explain why – and this disclosure will be public.

More updates as we get them

ESOS Phase 4 began on 6 December 2023 and the deadline for compliance is 5 December 2027. While the rules for compliance with this phase are not yet finalised, we know enough to get started on the data-gathering required. Businesses should also be working on their Phase 3 Action Plan, which is due on 5 March 2025. The Energy Advice Hub will continue to bring you updates as they happen. In the meantime, seeking professional advice could help your ESOS Phase 4 work go more smoothly. Get in touch with the ESOS team at Sustainable Energy First for support, using the form below.