ESOS Phase 4: What we know so far

We are now in Phase 4 of the Energy Savings Opportunity Scheme (ESOS). But the government has not yet finalised all the details of this phase. What can businesses 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However, ESOS was originally established in 2014 through powers granted by the European Communities Act 1972, which was repealed after Brexit.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. It also confers the power to extend the scheme to medium-sized businesses and make energy efficiency measures compulsory. These two latter measures are still under consideration.

Net zero assessments

The most significant change announced for ESOS Phase 4 was the addition of a mandatory net zero assessment. Around 35% of businesses have set themselves a target to reach net zero by 2050, but this new requirement will force all businesses to think in a lot more detail about what that means.

The British Standards Institute (BSI) is coordinating the development of an international standard for net zero assessments, which will eventually be the standard that Phase 4 participants have to meet. The BSI announced in June 2024 that the new standard will be launched at COP30 in November 2025.

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 net zero assessment requirement 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 new net zero requirements could add “between £600 and £7,500” to the cost of your 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

Other changes we know are coming in Phase 4 include:

Adjusted scope thresholds to align ESOS with SECR. Previously, to be in scope of ESOS you had to meet the Companies Act definition of a “large undertaking”. This meant having 250 or more employees, an annual turnover of over £44 million and a balance sheet over £38 million. From Phase 4, the government has announced the turnover threshold will be £36 million and the balance sheet threshold will be £18 million. (The employee threshold stays the same.) This puts more businesses in scope of ESOS than before.

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.

A requirement to use an existing auditing standard for your ESOS reporting. For example, ISO 50002, which specifies the principles of carrying out energy audits.

Display Energy Certificates and Green Deal Assessments no longer valid routes to compliance. These were already “discouraged” despite being technically allowed in Phase 3, so their removal brings welcome clarity.

More updates as we get them

ESOS Phase 4 began on 6 December 2023 and the deadline is 5 December 2027. The rules for compliance with this phase are not yet finalised, but we know enough to get started on the data-gathering required. You should also be working on your 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.