Special Report

The regulator is ready and waiting

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Special Report: Carbon Reduction Commitment

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The Environment Agency, the overall administrator of the government’s new energy efficiency scheme, is confident it is ready for the challenge. Paul Hatchwell talks to the agency’s CRC head, Andrew Hitchings, about the systems being put in place and the last few outstanding issues

The long-awaited launch of the trail-blazing Carbon Reduction Commitment (CRC) Energy Efficiency Scheme on 1 April will come as something of a relief for the Environment Agency.

The scheme’s overall regulator has had to await the outcome of a long iterative process involving three consultations and various delays. It has also had to deal with late policy changes, develop a complex electronic data management system and identify the organisations covered from scant utility billing records.

The CRC order gives the agency statutory powers to request data to be supplied by specified deadlines; audit, verify and publish this data; issue emissions allowances; inspect premises; issue enforcement notices and penalties; and charge an administration fee.

While enforcement will also be carried out by the agency’s devolved peers, the Scottish Environment Protection Agency (SEPA) and the Northern Ireland Environment Agency (NIEA), the Anglo-Welsh regulator will be responsible for its central administrative functions. This role includes managing registration, selling allowances and publication of the league table. Most of these tasks will be handled centrally through an online portal (see box), which should reduce overall costs and the administrative burden for both the regulator and the regulated.

Andrew Hitchings, overall CRC project executive for the Environment Agency, concedes preparation for the launch has been a challenge. But he believes the agency is on track.

He heads a team of about 20, but expects it to reach 35-40. This will probably include up to ten externally contracted auditors because the agency wants to draw on existing expertise.

The team should eventually be self-financing, paid for by participants’ £950 registration fees and annual subsistence and audit fees of £1,290. The budget will be £4.5-6m a year on the basis of 3,500-5,000 fee-paying participants.

Online portal

The biggest hurdle by far has been the development of the £3m IT system, says Mr Hitchings. He points out that to meet the April 2010 start date, specification of the system had to begin before government policy was finalised. Policy changes in October 2009 delayed delivery from January to March 2010 and probably added another £200,000-300,000 to costs - almost 10% of the build contract, but within contingency funds, says Mr Hitchings.

The main reason for the redesign was a fundamental change to the treatment of principal subsidiaries in conglomerates. Business had successfully pushed for large, essentially autonomous organisations loosely linked by a holding company parent to ‘disaggregate’ for CRC purposes. There was also some impact from a change in the treatment of foreign-held companies.

The exclusive status of the Carbon Trust Standard as the only acceptable measure of achievement under one half of the ‘early action metric’ was overturned following complaints that this created a monopoly.

The energy and climate department (DECC) published new guidance for the agency in February on the certification of equivalent standards. The agency is now discussing applications with other potential providers (see pp 6-12).

The other major challenge has been to raise awareness of the scheme, particularly among smaller organisations, Mr Hitchings told ENDS. This has had to go hand in hand with identifying those affected by the scheme, both full participants and those required to make information disclosures.

Starting from addresses supplied by utilities, the agency built in information from data on companies and the public sector, and from participants’ enquiries and feedback to validate its initial estimate of 4,000-5,000 participants before disaggregation. Added to that is a much larger number of ‘declarers’ with half-hourly meters but electricity use under 6,000MWh through these in 2008 who must still submit an information disclosure.

DECC originally thought organisations caught by the CRC emitted 52 million tonnes of carbon dioxide per year, but recent agency research pushes the total to at least 57.5MtCO2. Uncertain emissions figures from the health, IT and communications sectors could lead to a further, similar increase.

About 95% of CRC participants appear to fall under the Environment Agency’s jurisdiction, mainly because of the number of companies headquartered in London, says Mr Hitchings. The remaining 5% are split between Scotland and Northern Ireland and tend to be public bodies.

However, the full picture of the size and profile of CRC participants will have to await their first footprint reports in July 2011.

There have been continuing warnings, notably from consultancies with a vested interest and some trade bodies, over a lack of awareness of CRC obligations ahead of the launch, but the agency believes these paint too bleak a picture.

Since the CRC helpdesk went live in April 2009, there have been 8,000 enquiries on a wide range of issues, 80% from the private sector and 20% from the public sector. The numbers are in line with expectations, says Mr Hitchings. Analysis reveals these came from more than 5,000 different organisations. The sophistication of queries has also increased, suggesting understanding of the scheme is growing.

The 13,000-strong list of interested parties signed up to DECC’s email alerts is also encouraging, believes the agency. However, quite a few of these will actually be consultants or journalists.

"When you compare that number with somewhere between 4,000-5,000 participants and about 15,000-20,000 declarers, the overall conclusion we draw is that awareness is high among participants, and growing in declarers," Mr Hitchings notes. Even organisations just starting now should still be able to meet the September 2010 registration deadline and the crucial July 2011 deadline for the first annual emissions reports.

The agency has put considerable resources into awareness-raising. Apart from the helpline, two postal notifications and press coverage, it has contributed to regional workshops and, together with DECC, spoken at some 140 events. The CRC user guide has also been updated.

"If there’s a lack of awareness, it’s not for the lack of us trying," Mr Hitchings says.

Even so, there are bound to be difficulties in reaching smaller organisations outside trade associations that need to submit information disclosures: "I think the declarers are just structurally harder to reach," he admits. He adds that the agency is continuing efforts to reach these organisations.

Meter checks

One of the agency’s first regulatory jobs will be checking for ‘orphaned’ half-hourly meters - those on the list provided by electricity companies but not listed in any registrations or information disclosures - to ensure figures are robust and comply fully with registration obligations. But there will be a ‘risk-based’ approach focusing on meters with high consumption.

There are stringent penalties for abuse and serial offenders, but the agency expects this to be rare given previous experience with many of the organisations to be regulated. Ironically, any pressure for strong enforcement has come from business, concerned at the possibility of ‘free riders’. But Mr Hitchings stresses that the main objective is to support participants, particularly in the introductory phase, rather than pursuing enforcement action.

CRC regulations also allow for an appeals process, in line with other regulatory regimes. Mr Hitchings notes that participants could appeal over their league table position but because this is automatically calculated from the data they input, there would be limited scope for this.

There is also a relatively low cost of compliance compared with the EU emissions trading scheme (EU ETS), he notes, with a 95% threshold for data accuracy compared with more than 99% for a major EU ETS installation.

Third-party verification will not be required, but the agency expects to audit 20% of participants each year. All can expect an audit at some point during each capped five-year phase.

While the CRC’s core requirements are clear enough, some details are yet to be resolved. One example is the status of insolvent organisations. Mr Hitchings concedes the legislation is not clear on this point, but adds "it is not unusual for such interpretation issues to get addressed as a scheme progresses". Treatment of franchises, both the interpretation of their definition and what constitutes an ‘exclusive’ franchise, have only just been settled.

So is the agency really ready for April?

"We’re confident that the IT system will be ready, and we will be publishing additional guidance before April 2010," says Mr Hitchings. "But we do recognise that people still have concerns and questions and we intend to continue addressing these.".

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