For companies operating in the United Kingdom (and elsewhere in Europe), the push to comply with varying climate change initiatives continues to gather pace. This briefing note examines an important recent development that UK based companies should be aware of. With the introduction of the Carbon Reduction Commitment ("CRC") Energy Efficiency Scheme, companies operating in the UK now face a daunting range of new regulatory schemes. The impact of the CRC on property issues is significant as appropriate lease provisions will need to be inserted to set out how costs of the CRC are to be apportioned between landlords and tenants.
What's new?
Following the publication by the UK Government of the Energy White Paper in May 2007, the CRC was announced. The CRC is a UK based carbon trading scheme that is compulsory for large businesses, which are not energy intensive, and public sector organisations operating in the UK. (Energy intensive businesses are caught by the European Union Emissions Trading System.)
The CRC was set up to reduce carbon emissions and encourage energy efficiency and carbon reporting in this new sector. It is a small scale cap and trade system that requires a company to participate in the event that the organisation's energy use meets a certain threshold.
For organisations caught by the CRC, they will be required to estimate their UK based CO2 emissions from all of their energy sources during the compliance year1 and buy allowances to cover their actual energy consumption.
Who will be caught by the CRC?
The CRC is likely to affect large commercial and public sector bodies that own multiple properties consuming substantial energy. These may include retailers, serviced office providers and private equity funds. Special rules apply to groups of undertakings; joint ventures, private finance initiatives and public private partnerships; franchises; utility companies and public sector organisations.
An organisation, which had at least one half-hourly meter (HHM) settled on the half-hourly market during calendar year 2008 (the qualification year for the introductory phase), must either register or make an information disclosure.2
If an organisation's total half-hourly electricity use in the UK exceeded 6,000MWh during the qualification year, registration is required with the Environment Agency. As a rough guide, where an organisation has a total electricity bill of around £500,000 or more, there is a strong presumption that the 6,000MWh threshold is likely to be exceeded.
If its energy use was less than 6,000MWh but it had at least one HHM settled on the half-hourly market, it does not have to participate in the CRC. However, it does still have to make an information disclosure. This involves providing a list of all HHMs settled on the half-hourly market (including the Meter Point Administration Number for each settled HHM) and calculating how much electricity was supplied through all HHM (including any AMR meters) during the qualification year.
What is the timeline for the CRC?
The introductory phase of the CRC came into force on 1 April 2010. If qualification is met, registration or information disclosure must take place before the deadline of 30 September 2010.
Once registered, participants must produce a comprehensive and accurate record of their CO2 emissions during April 2010-March 2011 (the footprint year).3 This involves adding up all energy supply across an organisation including electricity, gas and other fuels such as coal, LPG and diesel. The data should then be used to produce a footprint report to be submitted along with an annual report by 29 July 2011. The first sale of allowances will take place from April 2011 when participants may purchase allowances at a fixed price to cover their forecast emissions for the 2011/2012 period.
An annual Performance League table, which ranks participants in the order of how well they reduced their emissions, will be published in October 2011. As the Government intends to recycle revenue raised by the sale or action of allowances back to the CRC, participants will receive a revenue recycling payment on the basis of their performance. In July 2012, participants should surrender allowances for their actual emissions for the 2011/2012 period along with their annual report.
The scheme will become fully operational from April 2013 when the total pool of allowances for all participants will be capped and sold at auction. The expectation is that without a surfeit of allowances participants will be either forced to reduce their CO2 emissions or purchase credits in the market.
How does the CRC apply to groups of undertakings?
The highest parent undertaking4 in the UK will need to consider the energy use and report on behalf of the entire group (unless another UK based undertaking within the group assumes responsibility). If the highest parent undertaking is based outside of the UK, it should nominate a UK based undertaking to report on the UK energy consumption of the whole group.
Qualification is based on the organisational structure of the group on the last day of the qualification year of each phase (even if it has changed since).5 For the introductory phase, this is 31 December 2008. The group's subsidiaries are determined by applying the definitions of "parent undertaking" and "subsidiary undertaking" set out in the Companies Act 2006.6
Subject to certain specified conditions, an organisation may also consider the option of "disaggregating" the energy use of any of its large subsidiaries, which qualify as an SGU7 under the CRC. If disaggregated, an SGU participates in the CRC as a separate participant to the group. The deadline for registration to disaggregate was 30 June 2010, but this has now been extended to 31 July 2010.
What is the position of landlords and tenants for the purposes of the CRC?
The energy supply in leased buildings is the responsibility of the customer who has the contract with the energy supplier (whoever pays the energy bills). Organisations that own both tenanted buildings and buildings for their own use need to aggregate the energy use of both types of buildings.
Provisions are likely to be included into leases as participating landlords will want to recover the costs of the CRC from tenants, while tenants will wish to benefit from the revenue recycling payment.
What are the penalties for non-compliance with the CRC?
Non-compliance with the CRC may trigger a substantial fine, publication of non-compliance and/or blocking the trading accounts of the offending organisation. Some breaches, such as making false or misleading statements, amount to a criminal offence. Failure to make a required information disclosure results in a fine of £500 per settled HHM not disclosed.
What if an organisation's emissions are regulated elsewhere?
For any organisation that participates in the European Union Emissions Trading System (ETS) or has entered into a Climate Change Agreement (CCA), it will be exempt from the CRC if the ETS or a CCA covers more than 25% of its energy emissions (not just half-hourly electricity) under the CRC.
In relation to groups, if a company within it has more than 25% of its CRC emissions covered by ETS or a CCA, that company (but not its subsidiaries, if any) is exempt from the CRC. Its energy consumption is deducted from the group's consumption for CRC purposes but the rest of the group will still have to participate in the CRC. However, the whole group is exempt from the CRC if after deducting the exempt company's electricity supply, the remaining companies of the group had less than 1,000MWh of qualifying electricity supplies.
If this exemption applies, an organisation must still register as a participant and it should claim the exemption when registering.
Conclusion
With the deadline for registration looming, affected organisations should take the following steps promptly:
- Work out the extent of the organisational structure for the purposes of the CRC (considering the option of disaggregation).
- Assess whether the organisation can take advantage of an exemption.
- Identify the electricity supplies that the organisation is responsible for.
- Aggregate the total half-hourly electricity during the qualification year to establish whether the threshold for qualification is met.
Due to the administrative burden involved, the key is for organisations to be well informed and efficient in preparing for the CRC. Strong performance in the Performance League table can result in improving an organisation's reputation and minimising its costs. Organisations should therefore be addressing the above issues now in order to achieve a strong as possible position in the CRC carbon market.
Footnotes
1.Each compliance year runs from 1 April to 31 March of the next year.
2.A settled HHM is (1) able to measure electricity supplied at least every half hour and (2) used by electricity suppliers, generators, distributors and transmitters to calculate the balance or imbalance between electricity generated and consumed. The organisation's electricity supplier will be able to confirm whether the organisation has any HHMs settled on the half-hourly market.
3.The financial year 2010-2011 is the qualification year for the second phase so half hourly-electricity during this period should be monitored.
4.The highest parent undertaking will be the undertaking at the top of a group that is not itself a subsidiary undertaking of any other undertaking.
5.Special rules apply in relation to reporting of emissions when there are large-scale changes to an organisation during the scheme, such as selling or buying an SGU (or entire participant).
6.Please see the Companies Act 2006 at http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en_1
7.An SGU is an undertaking or group of undertakings within an organisation, which itself would meet the threshold criteria for participation in the CRC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
