UK: CRC: Carbon Reduction Commitment Energy Efficiency Scheme - A New Challenge for UK Business – No time to lose

Last Updated: 23 April 2010
Article by David Leedham

CRC: In context

UK legislation and policy have set a trajectory for transition to a low carbon economy – one operating off substantially less fossil fuel – to reduce Greenhouse Gas (GHG) emissions and minimise energy poverty and insecurity in the UK.

The Climate Change Act 2008 ("CCA") set national targets for emissions reductions (80% by 2050 compared to 1990 levels) and along with the Energy Act 2008 laid foundations for establishing mechanisms to reduce the UK's fossil fuel consumption. Such mechanisms will fit in amongst a matrix of other factors - such as in the short to medium term, the UK's energy security profile and potentially higher energy costs – which will influence behaviour and infrastructure change in the private and public sectors to achieve such reductions.

Such mechanisms include CRC – to start April 2010 – which will squeeze the public and private sectors, through financial and reputational drivers, to make energy reductions year on year. Financial incentives to encourage the uptake of small scale renewable energy systems are being introduced this year (Feed-in Tariffs) and next (Heat Incentive Tariffs) and the CCA has started the move towards mandatory carbon reporting for companies by 2012.

A business's energy performance and strategies may become necessary indicators for future value. That will be particularly so, if the cost/risk profile of fossil fuels increases and CRC and other mechanisms reveal the extent of a business's dependency on fossil fuel.

CRC: An overview

CRC is to be a mandatory, UK-wide, cap and trade scheme for emissions allowances commencing 1 April 2010. Circa 5,000 of the large, but non-energy-intensive, private and public sector organisations are expected to have to participate– examples of likely participants include banks, retailers, landlords, data centres owners, private equity funds, large JVs, PFIs, PPPs, franchises, government departments, local authorities. Private sector participation will be based on groupings determined by share ownership or control; foreign entities with an operation in the UK can be caught. Another 20,000 who do not qualify for CRC participation will have to make certain information disclosures.

CRC will operate in phases; 2010/2013 is the 1st and introductory phase. Subsequent phases, each of 7 years, run to 2043.

An organisation must participate in a phase if, in a phase's qualifying year the organisation: (i) had half hourly metered, UK electricity consumption of 6,000 megawatt hours (MWh) or more; and (ii) was supplied with electricity though a settled half hourly meter. The qualifying year for the 1st phase is 2008 and for the 2nd phase, the year commencing April 2010.

CRC will seek to drive down energy consumption by:

  • annual measuring and reporting obligations for participant's energy consumption (excluding energy for domestic or transport use);
  • financial drivers – participants will have to buy and surrender, for each year, allowances sufficient to cover their emissions. Money collected on annual allowances sales by the Government will be recycled to participants, after each year, adjusted according to performance; poor performers will be funding the better performers; and
  • reputational drivers - public annual league tables showing participants' comparative performances in reducing emissions.

This will all be backed by stiff civil (and criminal) penalties for non-compliance. Members of a CRC organisation will have joint and several liability for CRC compliance.

Investments (eg equities, assets, Joint Ventures) may bring investors within CRC's first or subsequent phases with all attendant obligations, risks and opportunities. Or, whilst investments may not be caught within an investor's own CRC organisation the investment may be in another CRC organisation. As mechanisms develop to evaluate the impact of carbon/sustainability, it seems that value will be affected.

For landlords and tenants, where the tenant has the energy contracts for the building then it will be responsible for the building's emissions. But, often in multi-let buildings, the landlord has the energy contracts and so will have the emissions responsibility. It will want to look to its tenants to contribute towards any costs. But mechanisms may not exist to allow recovery. CRC (and other mechanisms focusing on energy and sustainability) will create not only new tensions in landlord and tenant relationships but also additional reasons to collaborate and not just on a voluntary short term basis (particularly as there are innumerable existing leases with years to run).

Green leasing (clauses to introduce sustainability considerations into the lease) in new lettings is only a small part of what will need to be addressed. Whilst a lease ties a tenant to a building, CRC will create a symbiosis between the landlord and tenant businesses on a wider scale. There is no direction in CRC as to how to handle CRC between landlords and tenants. We have developed structures to address CRC and other key elements of the sustainability agenda within the landlord and tenant relationship.

Those involved with developments may find that the energy consumed during construction affects their own or the land owner's CRC qualification and/or performance. This may need consideration in the building and/or development contracts. The owner/investor and user will have their own concerns as to energy sources and consumption of the final product.

Carbon dependency – a developing determinant of value?

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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