Special Report

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Special Report: The Carbon Reduction Commitment


Roz Bulleid tracks what organisations are – and should be – doing to prepare for the Carbon Reduction Commitment

The energy and climate change department (DECC) hopes the Carbon Reduction Commitment (CRC) will empower energy managers and make energy consumption a boardroom issue. The Carbon Trust says it should hardwire energy efficiency into an organisation’s DNA.

But with the start of the first compliance period less than a year away, it is unclear how many of the 5,000 organisations expected to fall under the scheme even know it exists.

Most of those who do are still working out how it will affect them and where their electricity and gas meters are, not drawing up intricate emissions reduction plans or complex trading strategies.

To some extent this is understandable. Energy bills have traditionally been only a minor concern for most participants and the scheme is a complex one with consultations on the final details still under way. Even DECC does not know exactly which organisations it will cover.

Still, the winners will be organisations that are ahead of the game: getting to grips with their carbon dioxide (CO2) emissions to make reductions, rise up the CRC league table and, most of all, cut fuel bills. If those are not big enough incentives, consider the fines and penalties, described by various participants as “eye-watering” and “mind-concentrating” (see box).

There are no convincing surveys assessing awareness levels among the firms and public sector bodies likely to fall under the CRC. DECC and the Environment Agency, which will regulate the scheme, only have a list of billing addresses for half-hourly meters to work from, leaving the scheme’s coverage a mystery until registration ends in September 2010. Neither have yet attempted an awareness study.

Pleasant surprise

But Andrew Hitchings, leader of the agency’s CRC team, is upbeat. His staff run a CRC helpdesk and have held a series  of regional seminars. He is “pleasantly surprised” by the levels of awareness and understanding they have encountered.

More than 9,000 organisations have signed up to DECC’s CRC email list, he says. This is a positive sign, but the number is likely to include consultancies and other non-participants.

It also suggests considerable gaps among the 15,000 smaller organisations thought to have half-hourly electricity meters but consumption below the CRC’s 6,000 megawatt hour (MWh) registration threshold. By law, they must still submit an information disclosure by September 2010 with details of any half-hourly meters settled on the half hour market. And if their annual consumption exceeds 3,000MWh, their total electricity use through these meters in 2008 must also be disclosed. There is a £1,000 fine for failing to do so, but the agency is unlikely to chase small organisations early in the scheme.

Anecdotal estimates of awareness from other quarters are less optimistic. Environmental consultants say they still come across potential clients unaware of the CRC and Emma Wild, principal policy adviser at the Confederation of British Industry, warns that many of those professing to understand it do not have a strong grasp of how to comply.

NGO group Business in the Community found only 29% of 266 senior managers and directors had heard of the CRC. But respondents ranged from one-man operations to firms employing thousands of staff – clearly not all would be covered by the scheme.

Even if someone within an organisation is aware of the CRC and is on DECC’s mailing list, there is work to be done promoting the scheme internally to relevant colleagues. At the moment, it falls under the energy manager’s remit in some organisations and to the property, environment or purchasing departments in others. All will need to be involved in final implementation.

CRC reports must be signed by a member of the board, so they must also be alerted to it and have confidence in any data. Similarly, councils must make sure councillors are briefed. For most participants, energy costs represent only 1-2% of turnover and so have escaped scrutiny. DECC is using the CRC to force energy efficiency onto boardroom agendas and into business models. It also wants to empower energy managers further down organisations who have ideas for improving efficiency but struggle to get them heard.

The prospect of the CRC league table is certainly generating plenty of concern but some organisations seem resigned to a place in the lower half. Companies with ambitious expansion plans – Tesco and McDonald’s included – expect to come out relatively badly, as do water companies, data centre management firms and councils with big clutches of schools. For some, their position relative to their peers appears more important than overall placing.

Whatever an organisation’s final position, the scheme will also affect cash flow. Tesco expects to spend £40m on allowances in the first 2011 purchasing window when participants will buy for both 2010/2011 and 2011/2012. Given its current emissions figures, the Environment Agency will pay £780,000 per year for allowances while Devon and Fife councils estimate their annual expenditure at £726,000 and £1m respectively.

Organisations finishing around the middle of the league table will get all this back, but it will still be a budgetary concern for finance teams. There will also be administrative costs – extra meters, data management systems and man hours – which some firms suspect DECC has underestimated.

Many organisations have yet to work out who will have ultimate responsibility for CRC compliance. David North, director of governance affairs and communities at Tesco, thinks the scheme’s financial implications mean it will be passed to the energy buying and finance departments. At Sainsbury’s, compliance will be managed by the head of energy and environment but ultimate responsibility will rest with the firm’s commercial director. Extra staff have already been hired to help meet the demands of the scheme.

One of the first jobs for a potential CRC participant once  responsibility has been assigned is to track down every gas and electricity meter and identify other fuel purchases to estimate its emissions footprint. This might sound simple but some will have thousands of bills arriving at multiple addresses with no coordinated system for pulling them together and extracting data.

Derby City Council had to send its property department out on the road to match meters to buildings. Participants in last year’s Carbon Trading Councils trial discovered even the data they initially trusted looked threadbare when exposed to greater scrutiny (see box).

Automatic meter reading

One much-touted solution – which will be rewarded with extra points under the league table’s early action metric – is the installation of automatic meter reading (AMR) systems. AMR meters cost more to install but send out half-hourly or hourly readings allowing an organisation to monitor its emissions through the year, to identify potential inefficiencies and plan allowance purchases. They also free up staff who might otherwise be sent out reading meters, enabling them to develop energy-saving strategies instead.

Few organisations seem to have set up AMR systems specifically in response to the CRC, but those that have include Punch Taverns, Royal Mail and Leeds City Council. Sainsbury’s already has an automated and centralised electricity metering system and is assembling a similar network to monitor gas consumption.

Any organisations relatively advanced in this area might also consider certification through the Carbon Trust Standard – another winner under the early action metric. To be certified, an organisation must be able to show it can measure and manage its CO2 emissions and a clear reduction over the past three years.

This costs at least £5,000 and will not suit everyone but the Carbon Trust expects a high degree of interest. Seventy organisations have been certified since the scheme launched last summer.

Some CRC participants already have strategies for measuring and cutting energy use and emissions that can provide the basis for compliance. National Grid is drawing up carbon budgets for its different departments and the networks established for this will enable CRC data to be collated with relative ease. “The CRC will be part of what we’re already doing,” says Ian Glover, knowledge manager for safety and environment. “But we can use this as a catalyst to bring a bigger focus on energy efficiency.”

As heavy energy users, Yorkshire and Thames Water also have well-developed monitoring programmes and are starting to think about building the CRC’s requirements into their systems. Laura Owen, Yorkshire Water’s lead adviser on climate change, says the firm has calculated the CRC’s impact on its own business and is working with its parent company, the Kelda Group, to decide how to coordinate monitoring and reporting efforts across the group and assign responsibilities.

From 2010, Yorkshire Water will develop a more sophisticated carbon management system to optimise its allowance purchases in the more uncertain capped phase of the CRC post-2013.

But even the best prepared firms are likely to face difficulties under the CRC. Their existing benchmark years and reporting strategies, especially for renewable energy and green electricity tariffs, may be quite different to those required by the CRC (see p 17) and the ‘low hanging fruit’ – the easiest energy savings and emission reductions – will have already been snapped up.

As a result, some may find there is disparity between the impressive carbon saving claims made in their own corporate reports and their position in the CRC league table. Furthermore, an organisation’s conventional carbon footprint is likely to be much larger than its CRC footprint. The latter excludes transport and supply chain emissions and will generally omit emissions associated with buildings where the organisation is a tenant.

It may offer little comfort, but the agency is also likely to find itself with a big gap between its own emissions story and its CRC league table ranking, especially after wet years when it has lots of pumping to do. Its five-year plan for a 30% CO2 reduction is due to finish in April 2011 and Mr Hitchings thinks it may have some explaining to do in its corporate reporting.

Some early movers have been vocal about their treatment under the scheme, but DECC thinks such concerns have been overplayed. It suggests the better an organisation understands its energy usage, the more it will be able to make savings and use new technologies. The scheme’s architects also believe that the kind of cost-effective energy savings the CRC is meant to trigger will always be worth taking – as early as possible – purely on their financial merit.

This point is reinforced by Harry Morrison, manager of the Carbon Trust Standard. He says that if an organisation’s electricity use is converted into carbon emissions, it will pay £180 for each tonne of CO2 emitted. This figure dwarfs the extra £12/tonne allowance costs it would save under the CRC and suggests those delaying efficiency schemes to come higher up the league tables will be guilty of economic incompetence.

Family ties

Buildings at night, courtesy of JLImages/ Alamy
Buildings at night, courtesy of JLImages/ Alamy
For some organisations, the CRC will require a new level of  cooperation between sister and parent bodies. Probably the most extreme scenarios are for foreign firms with multiple but entirely unconnected UK subsidiaries, but most parent bodies – primary members in CRC terms – are likely to have a hard time collecting information from subsidiaries with different reporting structures and billing systems and incentivising energy savings.

Coordinating and motivating partner organisations will likewise be an issue for franchise businesses, landlords and councils.

A thorny issue for the CRC is the landlord-tenant problem, a familiar bugbear for anyone trying to promote energy efficiency in buildings and thereby unlock huge potential CO2 savings. Neither the landlord nor the tenant has a strong enough incentive to invest money in improving the energy efficiency of their building and both will tend to insist the other party should pick up the tab. At best, the CRC will bring about a new level of collaboration between landlords and tenants on saving energy. At worst, it will cause more energy-related conflicts and resentments.

After toying with various options for dividing responsibility between landlords and tenants, the government now favours a simple rule making the CRC the responsibility of the counterparty to the electricity bill – the organisation that has the agreement with the electricity supplier. This is usually the landlord, although various parts of the bill – sections relating to lighting and appliance use, for instance – may be passed on under tenancy agreements. Some leases may also enable landlords to pass on the cost of CRC compliance, but by no means all of them.

Multi-tenant buildings may also be a problem if meters are shared and some tenants are more willing to participate than others.

Patrick Brown, senior policy officer at the British Property Federation (BPF) admits the traditional landlord-tenant divide has been a barrier to saving energy. The CRC will take them “into strange waters”, he says. It is unlikely that many landlords will be able to force existing tenants to take on the cost of allowances upfront, but Mr Brown says it is something they should consider with new tenancy agreements or ones due for renewal.

The BPF has been working with the Carbon Trust and other bodies to develop a data collection and exchange system known as the landlord’s energy statement and tenant’s energy review (LES-TER) and Mr Brown suggests this as a starting point for CRC participants.

Some larger landlords are ahead of the game. Land Securities, for example, has submeters fitted in its buildings allowing it to track individual tenants’ energy use. It is starting to roll out voluntary compacts with them covering environmental issues such as energy use and is thinking about setting up an internal league table for its tenants, similar to the CRC one.

This system would enable it to collect contributions towards the CRC – where leases allow it – and recycle any repayments in proportion to tenants’ energy use and savings. Tenants will be included even if their leases prevent Land Securities passing on CRC costs and the firm has to stump up for allowances itself.

The larger local councils – counties and unitaries – that will come under the CRC face similar problems engaging schools. Despite accounting for up to 75% of their carbon emissions, schools and colleges are not under their direct control. Expanding computer use and longer opening hours are pushing up energy use.

The government’s school-building and refurbishment programme and the potential for copying successful emissions reduction projects to other schools means big energy efficiency improvements may be possible – but only if councils build a good relationship with their schools.

Some find it hard to get electricity bills from schools or access to their meters. Others report a skills gap among staff with some schools having no idea where their meter is.

Internal league tables have also been proposed here, as have dedicated energy advisers. Bath and Northeast Somerset and Brighton and Hove have already tried the latter and report good results.

Firms that are franchisees will, like schools, participate indirectly in the CRC. In their case the franchisor – the owner of the brand name – is responsible for compliance. Here again the scheme’s success depends on the relationship between individual franchisees and the main franchisor.

McDonald’s and its franchisees have 2,500 meter points at 1,200 sites. In preparation for the CRC, the firm has been contacting the independent franchisees that run 60% of its outlets to collect meter details. It already has a fair idea of its energy consumption after being certified through the Energy Efficiency Accreditation Scheme, a predecessor to the Carbon Trust Standard. Like the standard, this will count in the early action metric.

Even so, there have been surprises: “It is very important to get metering data. If a multi-site company is hoping to get a list of meters together in February next year they’ll have problems,” says Peter Schroeder, environmental consultant for McDonald’s UK. “We’ve certainly had a few come out of the woodwork – forgotten meters in places like staff rooms.”

The firm negotiates power deals centrally but each franchisee receives its own bills. The head office cannot force them to cut their consumption but provides daily emails charting energy use over the previous day and regular benchmarking advice to help franchisees compare their performance.

There is no guarantee that these are read, but the head office also sources energy-saving technologies – more efficient lighting systems and warning devices to alert staff to systems that have been left on, for example – and offers them to franchisees with free fitting. “We’ve had not far off 100% sign up for lots of technology installations,” says Mr Schroeder.

Marginal cost curves

Few organisations have developed emissions reduction plans specifically for the CRC at this stage, but the advice from all quarters is to compile a marginal abatement cost curve (MACC, see box). These show how much CO2 any energy efficiency measure would save per annum, and at what price per tonne. Thus they can tell bodies what measures and technologies to prioritise and the likely carbon savings. That in turn will tell them how many CRC allowances they need to buy and at what sort of price.

At the initial £12/t price for CRC allowances, the solutions worth pursuing will tend to be the less glamorous ones: more energy-efficient lighting for hospitals, schools and offices, behavioural change (for example, switching things off when they are not being used) and simple efficiency devices rather than solar panels or wind turbines. These changes will cut carbon emissions cheaply and effectively, creating real cost savings.

So organisations concentrating their efforts on reforming the CRC or planning complicated gaming strategies to optimise their league table position and trading are missing the bigger picture.

The mechanics of the CRC may seem fiendishly complex but its message is worth heeding: go out and measure your energy use, then start cutting it. It really is a win-win.

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