UK: CRC Simplification Consultation Launched

On 27 March 2012 the Department of Energy and Climate Change (DECC) published long awaited proposals to simplify the CRC Energy Efficiency Scheme (CRC), the mandatory UK-wide scheme in respect of carbon emissions. The deadline for responses to the consultation is Monday 18th June 2012. If effected, the proposed changes will come into force in April 2013 during phase two of the scheme. The accompanying impact assessment estimates that the Government's preferred option will reduce administrative costs by £337m and increase the cost of purchasing allowances (through increase of coverage) by £207m which will result in a net reduction in costs of £130m.  

The consultation proposals will be of interest to all organisations which have qualified for phase one of the scheme, those which may fall within the scheme on the next qualification year (1 April 2012 to 31 March 2013) and those involved in energy supply and generation. However, those who had previously reviewed and determined no responsibility for supply under CRC should also carefully consider the impact of the proposals.

Whilst the proposals generally follow the simplification proposals published in discussion papers in 2011, depending on which aspect of business and the supply chain organisations are involved with there are other major changes in respect of supply criteria (such as the removal of the requirement for payment) and also discrete parts of the consultation document which require additional review. There are other changes impacting the financial services industry via the treatment of trusts and the property industry generally as a result of supply rules proposals and unconsumed supply provisions.

Although the Government recognises the current uncertainty caused in relation to responsibility for CRC as between landlords and tenants the Government does not propose fundamentally changing the rules.  In the absence of an industry consensus the Government believes that the current approach with the CRC obligation on the party responsible for the electricity contract  is the most appropriate.  The Government has, however, expressly called on trade and industry to develop guidance in respect of landlord and tenant issues. 

There is a major new proposal which is the abolition of electricity generating credits (EGCs) which will have a significant financial impact on some organisations and will be of interest to the PFI and energy generating industry. At the moment the ability to apply EGCs to offset the number of allowances otherwise required under the scheme can create a substantial financial benefit to the generator of the electricity (and their participant group). The proposed removal would increase the amount of carbon emissions for which allowances would be required in certain situations and claw back some of the reductions effected due to other simplification proposals such as the reduction of fuels covered and qualification criteria changes. The significant proposed change is being presented as a "simplification" but addresses unintended consequences of the existing scheme in circumstances where the input fuel related to the energy generation for which EGCs are claimed is not captured by the scheme.  

Objectives of the simplification proposals

The Government has publicly pledged to reduce the administrative burden of the scheme. The proposals include the following objectives:-

  • Provision of greater business certainty by introducing two fixed price sales of allowances a year (one forecast and one retrospective), rather than auctions of allowances in a capped system;
  • Greater flexibility for organisations to participate in 'natural business units';
  • Reduction of the reporting burden in particular by reducing the number of the categories of fuels reported from 29 to 4; using only electricity measured by settled half hourly meters (HHMs) for qualification purposes; ending the requirement for footprint reports; and other practical measures such as reduced requirements on maintaining records;
  • Reducing scheme complexity by removing the residual percentage rule ('90% rule') and CCA exemption rules and to reduce overlap with other schemes so that organisations covered entirely by CCAs do not need to register and no longer requiring EU ETS installations to purchase allowances for electricity supplies.

Summary of specific proposals

Due to the number of changes covered only the main proposals are outlined below. There are other proposed changes (in all 46 measures):-

  • Narrowing of qualification criteria:  qualification should be restricted to supplies through settled half hourly meters.
  • Amendment to supply rules: CRC responsibility for energy supplies should reside with the party most able to improve energy efficiency (as interpreted in the consultation document) which could include supply at the direction of another party. There is also a plan to remove the requirement for payment for supply.
  • Additional unconsumed supply scenario restriction: the tenant is to be responsible for supplies where the landlord provides land on which the tenant builds its own building, under a ground lease arrangement with a duration of 40 years and provides a building for the tenant to occupy. There are also other restrictions to unconsumed supply application.
  • Revision of emission factor for self-supplied electricity: removing the transmission loss aspect of the emissions factor for self-supplied electricity to recognise the efficiency benefits of on-site electricity generation.
  • Reduction in the number of fuels covered by the scheme: the only fuels covered shall be electricity, gas, gas oil (diesel) and kerosene (the latter two solely when used for heating purposes).
  • Removal of 90% rule: the 90% rule and associated reporting requirements are removed and replaced with 100% reporting of emissions arising from the proposed 4 fuels stated above.
  • Removal of 'CCAs/EU ETS' facilities:the removal of all CRC obligations in respect of the energy supplies to facilities already covered under Climate Change Agreements and/or EU Emissions Trading Scheme.
  • Removal of EGCs.
  • Disaggregation: any undertaking within the group to be able to disaggregate for separate participation without having to meet the minimum qualification threshold provided that mutual agreement is reached by all parties.
  • Redefinition and renaming of Significant Group Undertakings (SGUs), designated changes and review of liabilities for designated changes.
  • Changes to the treatment of trusts: assessing trusts at an individual level rather than a group i.e. treating trusts as an undertaking and rules seeking to implement the principle that the CRC responsibility should lie with the party with the greatest influence over energy efficiency.
  • Retrospective allowance sales in the introductory phase, removing a cap on allowances available, fixed price sales of allowances in phase two, extension of the surrender of allowances.
  • Removal of detailed rules on Performance League Table metrics from legislation into guidance to allow greater flexibility.

Next steps

Following responses to the consultation the Government plans to publish implementing amending legislation in April 2013. According to the British Property Federation, HM Treasury is conducting its own review of the CRC, with a view to presenting industry with two alternatives for consultation at the Chancellor's Autumn Statement: a simplified CRC (which will likely be the product of the DECC consultation issued today) and an alternative environmental tax. Compliance with the existing scheme in the interim should be maintained.

How to respond

Click here to access the following consultation-related documents:

  • Consultation on simplifying the CRC Energy Efficiency Scheme
  • Impact Assessment: Simplification options for the CRC Energy Efficiency scheme to help business: CRC (Amendment) Order 2013
  • Administrative cost of the CRC Energy Efficiency Scheme: KPMG report

Responses to the consultation can be provided online by clicking here or responses by email to crc@decc.gsi.gov.uk by Monday 18th June 2012.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 28/03/2012.

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