UK: Carbon Reduction Commitment Energy Efficiency Scheme Regime Explained

Last Updated: 2 December 2009
Article by Neil Amner and Vivienne Stuart

In brief

Participation in the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) will be mandatory for organisations that fall within its scope.

Your organisation will fall within its scope if it has at least one Half Hourly Meter (HHM) settled on the half hourly market and consumed more than 6,000 Mega Watt Hours (MWh) of electricity through HHMs in the calendar year of 2008. Organisations that have at least one HHM but consumed less than 6,000 MWh during 2008 will not be required to participate fully but will still be required to make an information disclosure on energy consumption.

During September 2009, the CRC scheme administrators (SEPA in Scotland, EA in England and Wales) were due to issue qualification packs to the billing addresses for each half hourly meter on the half hourly market and those packs will have contained further details of registration for the scheme. As the billing address might not be your organisation's "head" office you should seek to ensure that qualification pack(s) are passed to the relevant person(s) in your organisation.

Participating organisations must register with the scheme administrator between 01 April 2010 and 30 September 2010.

What is the Carbon Reduction Commitment Energy Efficiency Scheme?

The CRC is an emissions trading scheme the participation in which is based upon electricity consumption in the calendar year 2008.

Electricity consumption is simply used to determine whether organisations qualify as participants for the introductory phase. Thereafter, participating organisations will have to purchase allowances for every tonne of CO2 they emit based on all energy consumed and not just electricity consumed. CO2 emissions are determined by calculating all energy consumed whether it be electricity, gas or other fuel types e.g. coal, LPG, diesel and then converting those figures into CO2 emissions by means of conversion factors for each fuel type. Section 3 of the draft CRC User Guide (available from SEPA's website) contains information on calculating your total emissions and which of those emissions are to be included in your CRC total. Once enacted, the relevant legislation will also provide a framework for this exercise. It is anticipated that the collection and collation of relevant data will be carried out in-house by participating organisations or by environmental consultancies acting on their behalf.

Please note that not all of an organisation's CO2 emissions count towards its CRC emissions. For example, emissions from transport and activities covered by Climate Change Agreements and the EU Emissions Trading Scheme do not require the purchase of CRC carbon allowances. It is up to organisations to determine which of their emissions should be included in the CRC and guidance is provided in section 3 of the draft CRC User Guide. It is understood that 20% of participants will be audited in an attempt to ensure participants accurately collate and report their energy consumption data.

Electricity suppliers will confirm to scheme administrators (SEPA/EA) which organisations have half hour electricity meters.

Qualification for the CRC's introductory phases is based upon an organisation's consumption of electricity during the qualifying period. An organisation will qualify as a full participant in the introductory phase if, during 2008:

  • It had one or more half hourly meters on the half hourly meter market; and
  • Its electricity consumption in 2008 through all its Half Hourly Meters was 6,000 MWh or more.

If an organisation has at least one half hourly meter but its electricity consumption falls below 6,000 MWH during 2008 then it will not need to fully participate in the CRC. However, it will have to make appropriate information disclosures to the scheme administrator (SEPA/EA).

The scheme will be split into phases. The introductory phase will last for three years and subsequent phases will last for seven years each. The first two years of each new phase will overlap with the final two years of the previous phase. Each phase has:

  • An Energy Use monitoring period - during which organisations must measure energy consumption to determine whether they must participate in the CRC. The energy use monitoring period for the introductory phase is the calendar year 2008;
  • A Registration period – during which organisations falling within the scope of the CRC must register as a participant or make an information disclosure to the scheme administrator (SEPA/EA). An information disclosure must state all of an organisation's HHMs settled on the half hourly market and how much electricity was consumed through all HHMs. The Registration period for the introductory phase is April 2010 – September 2010;
  • A Footprint Year – during which participants must monitor and collate their total energy consumption and, by converting that figure, state their total CO2 emissions for the purposes of the CRC. This information must be submitted to the administrator in a footprint report by the last working day of July (four months after the end of the footprint year and, for the introductory phase, by 29 July 2011). Failure to submit a footprint report on time incurs a fixed fine of £5,000. For each subsequent working day of failure to submit the footprint report there is a fine of £0.05 per day for each tonne of CO2 emitted by your organisation. The footprint year for the introductory phase is April 2010 – March 2011. All of the data and information used to complete the footprint report must be kept in an evidence pack which should contain information specified at section 3.6 of the draft User Guide; and
  • A number of compliance years which run from April to March. During the first month of a compliance year, organisations must purchase allowances for each tonne of CO2 they think will be required to cover their CO2 emissions. Energy usage must continue to be monitored so that the anticipated and actual usage can be reconciled. Organisations are not required to purchase allowances in the first year of the CRC. The first compliance year is April 2010 – March 2011.

Why is the Carbon Reduction Commitment Energy Efficiency Scheme being introduced?

The CRC is designed to encourage energy efficiency and thereby reduce carbon dioxide emissions. In turn, this should assist the UK in meeting its obligations under international law. In particular, it is intended that the CRC will make a small contribution towards assisting the UK to meet its targets of reducing greenhouse gas emissions by 2050 by at least 80% of 1990 levels (the "baseline" figure). The draft user guide for the CRC also states that the scheme will assist participating organisations in saving money as a consequence of their anticipated heightened energy efficiency. The CRC is designed nonetheless to be revenue neutral for the Government, with revenue being recycled to the CRC scheme. As a further incentive for organisations to perform well in respect of the CRC, better performance will mean a higher position in the annual performance league table to be published by the Government. CRC participants who reduce their energy use will be rewarded by receiving a recycling payment based on their position in this league table.

Who does the Carbon Reduction Commitment Energy Efficiency Scheme affect?

The CRC applies to qualifying persons and organisations in the public and private sectors. This is likely to include large offices, retailers, transport facilities, local authorities and governmental departments, amongst others, who fall within the qualification thresholds set out in the opening paragraph above. If an organisation is a subsidiary or part of a larger group then, generally, its highest parent organisation will participate on behalf of all organisations within the group. More detailed guidance is available at section 2 of the draft User Guide for the CRC. Specific rules apply to: parts of an organisational group (e.g. subsidiaries); government departments; joint ventures; franchisees and franchisors; schools; local authorities; and universities. In particular, subsidiaries that are large enough to qualify for the CRC in their own right can choose to participate in it separately from the highest parent organisation although the HPO's agreement to this arrangement is required.

Landlords, tenants and the sale of property

The draft User Guide states that the energy use in a leased building is the responsibility of the customer who has the contract with the energy supplier.

Therefore, if it is the tenants who have contracted with the supplier then they are responsible for that energy use under the CRC. If the landlords have contracted with the supplier then they are responsible for that energy use under the CRC. Whilst the Government has recently indicated that there will be additional provision in the CRC regulations requiring tenants to cooperate with their landlord organisation for the purposes of complying with the CRC (and we shall wait to see if the final form regulations clarify what this entails) the Government has intimated that the CRC regulations will not provide means by which landlords can, or should, pass down to their tenants the cost of allowances or pass on the benefit of any recycling payments. Therefore, for new leases this will be a matter to be negotiated and dealt with contractually between the landlord and tenant under the lease.

For existing leases the legal position may not be clearly defined. It will depend on the provisions of each lease but it may be that its terms are not specific enough for the cost of CRC allowances to be passed down to tenants. In such cases, if tenants do not wish to agree to a lease variation to deal with the issue, landlords may need to pay the costs of complying with the CRC themselves.

Although many landlords and tenants may not initially be directly affected by the CRC as participants, parties will need to give consideration to the impact of the CRC as it will affect the sale and purchase of properties. For example, a non CRC participant landlord of a multi-let property may sell the property to a CRC participant. In those circumstances the purchaser will no doubt be keen to see provision in the occupational leases allowing the landlords to pass on the cost of CRC allowances to their tenants. Additionally, organisations who are not affected by the scheme at the outset may find that as the CRC scheme develops and its ambit is reviewed in later phases, that they do fall within its scope.

Guidance has been produced by the British Property Federation relating to the CRC responsibilities and obligations of landlords and tenants.

The draft User Guide also indicates that the Government is planning to issue more detailed guidance for landlords and tenants in due course.

What do I need to do and what happens if I don't?

If your organisation qualifies for the scheme there are two levels of participation:

  • Full participation; and
  • Information disclosure.

CRC Participants must register using the online registry during the registration period (01 April 2010 – 30 September 2010 for the introductory phase). Organisations who qualify for participation in the CRC and who fail to register will have to pay a fixed fine of £5,000. For each subsequent working day of the failure to register, there will be an additional £500 fine.

Full participants must purchase carbon allowances equivalent to their CO2 emissions in each year. If an organisation emits more CO2 than it has carbon allowances for, it will have to purchase further allowances to make up the difference. If an organisation's emission levels are less than had been expected, it can sell its surplus allowances to other organisations.

One allowance = one tonne of CO2. Initially, allowances will cost £12 per tonne but from 2013 they will be sold by auction with no cap on the cost. For the largest organisations costs are expected to run into millions of pounds per year. Six months following the purchase of allowances, the revenue raised by the purchase of allowances will be re-distributed with either a bonus added or a penalty levied depending on the quantity of energy an organisation has (or has not) saved in the previous year.

When do I need to take action?

The CRC is expected to commence in 2010. The scheme is divided into various set time periods or "phases" with the introductory phase running for three years whilst subsequent phases will last for 7 years each. The first two years of a phase are preparatory and overlap with the previous phase.

The CRC administrator was due to send out qualification packs in September 2009 to the individual billing addresses for each Half Hourly Meter on the Half Hourly Market which will include further registration details as well as details of the electricity consumed through that meter during 2008. This will assist organisations in quantifying their electricity consumption and in determining whether they will participate in the scheme.

Click here for the link to draft Carbon Reduction Commitment User Guide

Click here for the link to British Property Federation

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.

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