UK: The Carbon Reduction Commitment Is Due To Commence In January 2010. Is Your Organisation Ready?

KEY FEATURES OF THE CRC

• Mandatory scheme for large non-energy intensive businesses (such as large offices, hotels, large shops, supermarkets, shopping centres) and public sector organisations (local authorities and central government departments) whose annual half-hourly metered electricity use is above 6,000 MWh.
  
  

• Based on 'cap and trade' and designed to cut carbon dioxide (Co2) emissions.
  
  

• Who is covered? Those who have: (i) half hourly metering; and (ii) aggregate annual electricity use above 6,000 MWh (c. £500,000 p.a.) measured across the entire "organisation".
  
  

• What energy use needs to be measured and when? Initially, electricity use in 2008 in order to determine whether the scheme applies to you and then energy use from January 2010.
  
  

• Requires data gathering of total 2008 electricity use and submission of data by June 2009 to confirm whether the scheme applies.
  
  
• Scheme commences January 2010 with a three year introductory phase (fixed price allowances and no cap). From 2013 there will be a Government imposed cap on the number of allowances and such allowances will be sold by auction each year.
  
  

• A "light touch" approach – relying on self-certification of emissions rather than third party verification.
  
  

WHAT IS CRC?

The Carbon Reduction Commitment (CRC), formally adopted as Government policy in the Energy White Paper 2007, outlines the Government's strategy to cut CO2 emissions by 1.2 million tonnes carbon per year by 2020.

It is a UK mandatory 'cap and trade scheme' imposed by the Government on commercial and public sector organisations whose annual halfhourly metered electricity use is above 6,000 Mega Watt hours (MWh) (and 70kVA metering systems in Northern Ireland) (inclusion threshold).

In general, organisations with half hourly metering and spending more than £500,000 per year in the UK on electricity are likely to be included in the scheme.

Once above that initial inclusion threshold, CRC targets both direct energy use emissions (from burning gas, oil, etc.) and electricity use emissions.

Energy-use which is already covered by the EU Emission Trading Scheme (EU-ETS) and UK Climate Change Agreements (CCA) will be exempt. Companies within an organisation's corporate group with more than 25% of their energy-use emissions in CCA's will also be exempt from CRC.

WHO IS COVERED BY CRC?

This involves answering several questions.

• Is any electricity used by your business half hourly metered? If so, who is the party directly responsible for payment of electricity delivered via the half hourly meter?
  
  

• Who is the "highest UK parent company" (ie ultimate UK controller) of that party?
  
  

• Is the annual electricity consumption by the "highest UK parent company" or equivalent and all its subsidiaries (i.e. the group) more than 6,000 MWh? If so, the group is covered by CRC.
  
  

The phrases "parent company" and "subsidiary" have the same meaning as in the Companies Act 2006 and are often commonly understood. However, this language is not particularly helpful in many other instances, eg public sector, joint ventures, outsourcing and mulit-let shopping centres.

Private Sector: in most cases it will be clear which organisation is responsible for a particular source of energy-use. The highest UK parent organisation will be identified by reference to the definitions of organisations and subsidiaries set out in the Companies Act 2006. In the case of an overseas parent company with several intermediate UK holding companies, the Government proposes to group them to form a single CRC organisation (effectively, the 'UK arm' of the overseas based business).

Joint Ventures: in the case of majority stakes (51% or more), the joint venture's energy-use will be aggregated with the majority stakeholder. Where an organisation only holds a minority stake (50% or less) of a joint venture, the joint venture company's energy-use should not be aggregated with that of its minority shareholders. In such case, if the jointly owned company meets the inclusion threshold it would qualify in its own right for the scheme.

Public Sector: all central government departments are included in the scheme, regardless of whether they meet the inclusion threshold. Details are still being finalised in respect of the National Health Service. The Government does not propose grouping public sector organisations, instead the majority of public sector organisations within the scheme will participate as separate CRC organisations. For example, the Government proposes that the energy use from the colleges of Oxford, Cambridge and Durham universities should be grouped under their respective universities.

PFI/PPP/Outsourcing/Facilities Management: often, a business or government outsources the procurement of its energy to a third party and the third party/contractor takes on the obligation to supply energy to the business/government facility. In such instances where more than one party has an interest in the use or procurement of the same energy, the default approach is that the highest UK parent organisation of the 'counterparty to the electricity supply contract', will be the CRC organisation responsible for the emissions. In the above outsourcing example, the 'counterparty to the electricity supply contract' will usually be the contractor and therefore the contractor will responsible for the energy use under CRC.

Real Estate Sector: in the case of owner-occupiers and sole tenants under a full repairing lease, the tenant will almost certainly be paying the half-hourly metered electricity bill and responsible for the energy use under CRC. In the case of multi-let properties, the landlord may be paying the half-hourly metered electricity bill for all electricity use within the building. This electricity will count towards the eligibility threshold for the landlord's highest UK parent organisation. This is the case even where the costs incurred are passed to the tenant through the service charge (based on simple floor area or the extent to which an individual tenant's energy use is separately sub-metered).

In the case of multi-let properties, such as shopping centres with separate metering for tenant space, the landlord will be responsible for energy use in the common areas and the tenant will be responsible for the energy use in their tenanted area.

What is important to remember is that the CRC inclusion threshold is group wide and when calculating the amount of electricity consumption, you are required to add all electricity consumption of your UK subsidiaries/ operations.

AUCTION AND LEAGUE TABLE

The CRC will operate on a cap and trade basis. Organisations covered by the scheme will need to measure and record their energy-use and calculate their CO2 emissions. They will then be required to purchase 'allowances' corresponding to their CO2 emissions from energy-use. At the end of each year, the organisation will have to show that they have a sufficient number of 'allowances' to cover the CO2 they have emitted. If they hold too few 'allowances', they will have to reduce their energy consumption accordingly and/or buy allowances from other participants. If they hold too many, they can sell them.

There is a three-year introductory phase commencing January 2010, during which time organisations will be required to buy carbon 'allowances' at a fixed price of £12 per tonne of CO2 from the Government. There will be no cap during this introductory phase.

The capped phase will begin in January 2013, at which time these 'allowances' will be auctioned. A 'safety valve' will be used to prevent prices rising too high, in the form of a buy only link to the EU-ETS but with a minimum floor price.

The CRC is intended to be broadly revenue neutral and the Government plans to recycle most of the money raised in the introductory phase and auction process back to the CRC participants, proportional to their 2009 emissions, adjusted by a bonus or penalty related to their performance on the published CRC league table.

The league table will be calculated based on the CRC participant's performance in three different areas:

• 'absolute' metric - the organisation's percentage emissions reductions, comparing their current annual emissions to their average emissions over the preceding rolling five years (i.e. not including the current year);
  
  

• 'early action' metric - a measure to give recognition for good energy management undertaken prior to the start of the scheme. The metric will be based on a) the percentage of emissions covered by voluntarily installed automatic metering beyond the legal minimum and b) the percentage of the organisation's emissions covered by the Energy Efficient Accreditation Scheme¹; and
  
  

• 'growth' metric – designed to give recognition to organisations that are able to grow cleanly within the scheme, as well as accounting for the effects of organisational decline. The metric will be based on the organisation's percentage reduction in emissions per unit turnover (revenue expenditure for public sector), comparing their current level relative to their average over the preceding rolling five years.
  
  

The three metrics are to be weighted 60:20:20 (absolute: early action: growth). It is proposed that the Government will eliminate the early action metric at the end of the introductory phase and maintain the 3:1 ratio between the absolute and growth metrics.

PENALTIES AND AUDIT

Due to the lightly regulated nature of the scheme, the penalties for noncompliance will be strict and nonparticipation in the CRC will be a criminal offence. The main types of offences will be: 1) failing to participate; 2) the supply of false or misleading information; and 3) failing to supply data or failure to register or surrender allowances. Such offences will be punishable by a penalty or a fine. Noncompliance will also be stated in the league table, which could result in an adverse stakeholder reaction. Further details of penalties will be included in the summer 2008 consultation on the draft CRC regulations.

To ensure compliance and adherence to the self-certification regime and accompanying criteria, a risk-based audit will take place during the introductory phase, resulting in an audit of 20% of CRC organisations annually.

MORE INFORMATION

The CRC scheme is still subject to enactment through regulations; the draft of which will be consulted on in the coming months.

Also see the Defra website: www.defra.gov.uk/environment/climatechange/uk/business/crc/index.htm

Footnote

^{1. the independent emission reduction award scheme in the UK (EEAS) supported by the Carbon Trust}

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.