Cash, kudos and energy efficiency

The CRC forces thousands of public and private sector organisations to start managing their climate impacts for the first time. Roz Bulleid considers how the new regime will work in practice

Shops, offices, industrial sites and schools across Britain are spending millions of unnecessary pounds - and emitting many tonnes of carbon dioxide - simply through corporate inertia.

Energy bills typically represent a few per cent of turnover for such organisations. Efficiency measures are routinely overlooked.

It is this wastage that the government’s pioneering new Carbon Reduction Commitment (CRC) Energy Efficiency Scheme is designed to address.

Five years in the making, it is a compulsory cap-and-trade programme covering 4,000-5,000 large organisations. It can be head-spinningly complex. The government’s basic user guide runs to 99 pages. No one quite knows how it will all work out.

"We’re optimistic, I think we have to be," says Emma Wild, the Confederation of British Industry’s principal policy adviser on climate change. "It’s really important these sectors get to grips with energy efficiency."

Despite a softer start than originally envisaged, the deadlines are tight. Conglomerates wanting to make use of rules allowing them to split off or ‘disaggregate’ major subsidiaries must register with the Environment Agency, the scheme’s main administrator, before July. The CRC registration process takes several weeks so they must start soon.

The CRC makes use of two drivers for changing corporate behaviour: one financial, the other reputational. The first requires participants to buy enough carbon allowances to cover their annual CO2 emissions and surrender them at the year’s end.

This is waived in the scheme’s first year, running from April 2010 to March 2011 (see figure, p 5). For the rest of the introductory phase, running to March 2013, participants can buy as many allowances in the annual government sale as they like at a fixed price of £12 per tonne of CO2. Later, allowances will be limited and auctioned.

The reputational driver is an enormous annual performance league table designed to strike fear into the hearts of image-conscious organisations.

Bonuses and penalties

In reality the trading scheme and league table are linked. An organisation’s ranking in the table affects the share of revenue the government raises from its annual allowance sale that organisations set back in October. Organisations at the top receive their share of the revenue plus a bonus, while those at the bottom get a penalty deducted.

This means the CRC is revenue-neutral. But only from the government’s point of view. The pot of money used to make repayments will not reflect prices in secondary market sales between participants, or include government income from sales of allowances through the ‘safety-valve’ mechanism from the EU emissions trading scheme (EU ETS).

Participants who buy from these sources might get less back than they expect. As repayments are based on participants’ share of emissions in the 2010-2011 base recycling year, returns could also diminish quickly for rapidly growing firms that cannot prevent their energy use growing too.

The CRC sprung from a 2005 report by the Carbon Trust. Consultations followed in 2006, 2007 and 2009 with the government response to the final consultation only released last October. As recently as late January, an addendum was published alongside the draft order establishing the CRC.

"This is ground-breaking… a completely new thing," energy and climate minister Joan Ruddock said during a debate on the CRC order in Parliament in February. "We need to get it right… we thought it necessary to consult at such great length."

However, this incremental approach has helped make the scheme more complicated. "They almost listened too much… what you end up with is complex," says Gareth Stace, head of environment at manufacturers’ association EEF.

The last-minute changes have delayed publication of the Environment Agency’s guidance on the scheme. As ENDS went to press in March, there was still nothing on the evidence packs that participants must compile and keep updated through the year.

"Government never seems to understand that industry needs certainty," says Mr Stace. Some companies have 1,000 sites; they know roughly what information is required but need to be sure they are putting the right reporting frameworks in place from the start. Matt Foley, in charge of compliance across 4,000 Ministry of Defence sites, is in a similar boat (see p 17).

There is likely to be a mad rush to register in September, says Chris Stubbs, director of consultants WSP Environment and Energy. Whether the agency is sufficiently prepared, or decides to penalise late entries remains to be seen.

"There are still some uncertainties causing a lot of concern," agrees Ben Wielgus, lead CRC adviser at KPMG. He half expects the interpretation of a franchise to change, making brand owners responsible for more types of franchisee. He is also worried that the treatment of firms that go into administration or have to be supported by the state is not clear enough.

During February’s parliamentary debate, shadow energy and climate minister Greg Barker alleged the changes made to the CRC were "more a response to individual lobbying rather than a part of a coherent overall vision for the scheme… [This] has left those who squealed loudest early on well catered for, and those who quietly got on with business less fairly dealt with."

Mr Barker also said the CRC put an unnecessary burden on non-participants by requiring an information disclosure from every organisation with a half-hourly meter, however large its electricity consumption.

Yet the forthcoming election is unlikely to bring further uncertainty to the CRC. The Conservatives say they support the scheme, and are unlikely to make radical early changes to it.

Like others, Mr Baker also suggested the government could have achieved significant efficiency improvements simply by mandating reporting of CO2 emissions. Just collecting detailed data and scrutinising it for obvious problems - malfunctioning equipment, for instance, or lights left on in unoccupied offices - can cut energy use by 10%. These easy energy saving wins are equivalent to £200/tCO2 reduced. This far exceeds any monetary gains in the CRC itself, from reduced allowance bills or bonus payments.

The league table’s workings make it hard for participants to predict their ranking. If the CRC succeeds in evoking a strong energy efficiency response across all the organisations covered, those hoping to top the table will have to do more. A weak overall response will make it easier to rank high with a modest effort.

Tom Bainbridge, partner in law firm Nabarro’s energy team, is so unhappy with the league table’s arbitrary nature he says it should be dropped, making the CRC a more conventional cap-and-trade scheme.

Predictions of the scheme’s coverage and potential benefits have also varied. The energy and climate department (DECC) currently expects the CRC to have 4,000-5,000 full participants and cover 10% of UK greenhouse gas emissions. It believes the scheme will save UK plc £1bn a year by 2020 but only cut annual CO2 emissions by 4Mt, or 0.6% of the current UK total. This is modest, given the effort and complexity involved.

Uncertainty over the number of participants stems partly from the limited billing data that electricity companies made available to the government ahead of the scheme. The potential savings are also sensitive to changing energy prices.

Analysis by the Environment Agency, building on the experience of running its CRC helpdesk, suggests there could be only 3,500 participants before disaggregation. It puts the savings at a more respectable 11.6Mt/yr by 2020. Surprisingly, a carbon price of £40/t would only boost overall savings by 0.37Mt/yr.

The government has promised to keep the CRC under review but Mark Johnson, knowledge leader on emissions trading at AEA Technology, which has helped DECC and the agency prepare for the CRC, thinks substantial early changes are unlikely.

The scheme needs time to bed down, agrees the CBI’s Emma Wild, but she wants a thorough review at the end of the introductory phase in early 2013. She suggests introducing sector-specific league table metrics. However, the most common prediction is that the CRC’s coverage will increase after a few years.

The government’s original proposals would have included any organisation using more than 3,000 megawatt hours of electricity a year through half-hourly meters. This was later raised to 6,000MWh. Nonetheless, more detailed disclosure requirements for organisations using 3,000-6,000MWh/yr keep the door open for expansion.

Lingering concerns

DECC is also consulting at the moment on plans to move smaller EU ETS installations - boilers in hospitals for instance - into alternative regimes.

Other candidates for reform are found among a cluster of problem issues that caused headaches through the consultations, especially the division of responsibility between landlords and tenants (see pp 6-12).

Organisations with onsite renewable energy systems are also unhappy with their lot. If they claim subsidies for them under the Renewables Obligation or the new feed-in tariffs, they have to report the electricity they use from them as if it had the same emissions as the rest of the electricity grid.

DECC’s original justification for this rule was to avoid carbon savings being counted twice. It now says it is to ensure the scheme’s focus is on energy efficiency and to prevent double subsidies.

There have been more outlandish concerns over the CRC too, from IT experts suggesting it will prompt a wave of server outsourcing among companies keen to shift carbon emissions to other organisations, to rumours of government procurement contracts being based on league table positions.

Computer data centres are admittedly a large and growing percentage of organisations’ energy use. But only a company desperately concerned about its reputation would outsource purely as a response to the CRC, says Mr Wielgus at KPMG. The financial implications alone are not enough. "It’s an overreaction - the CRC is not going to be as onerous as people think," he says. The procurement rumours are also unfounded, insists the government.

Another of the CRC’s unknowns - one with the potential to completely throw it off course - is the reaction to the league table. Expect a public relations offensive from low-ranking firms come November 2011 and 2012 explaining that their CRC performance does not reflect the full picture across their operations.

Some public sector organisations fear they will have little money to invest in energy efficiency measures during the coming lean years. That may put them near the bottom of the table, so they would end up losing money to organisations such as, say, Tesco or the big banks. That might make for some difficult tabloid headlines.

But Andy Johnston, head of the centre for local sustainability at the Local Government Information Unit (LGIU), thinks public bodies could actually do rather well.

From his work with the public sector, he thinks organisations wanting to rank near the top of the table when the early action metric (EAM) holds sway (see pp 6-12), will need to have the Carbon Trust Standard, or equivalent, and voluntary automatic meter reading (AMR) systems across most of their electricity and gas supplies.

Private companies have traditionally had better energy reporting systems but public organisations are catching up, says Mr Johnston. This will help with the EAM but also give public bodies a host of easy emissions reductions in the CRC’s early years. Furthermore, the budget restraints mean most are unlikely to grow.

Still, the sums participants can expect to earn from topping the league table are not huge. The value at stake in the scheme’s fifth year - the difference between the top and the bottom ranking - is only equal to about 10% of most organisations’ annual fuel bill.

Uncertain impacts

Opinions also differ on the impact this enormous league table will have on reputation. Will the media be bothered to pick through it? Will recognisable brands be hidden behind bland-sounding holding groups?

DECC says the table’s format still needs to be finalised but should include basic emissions figures and participants’ performance on each metric. It is likely to allow organisations to compare themselves directly with their peers, the department adds.

EEF’s Mr Stace thinks the table’s impact depends largely on its presentation. He and WSP’s Chris Stubbs point out that the results of climate change agreements are released every other year to little or no press interest.

Most CRC participants will have no experience of carbon trading. There are various theories as to how liquidity and pricing might develop in the scheme.

The allowance limitations of the introductory phase should minimise the price fluctuations and liquidity problems that troubled the EU ETS in its early days. But KPMG’s Ben Wielgus says the market could still crash towards the end of the phase because allowances cannot be carried forward and participants will want to offload any excess. He, like many, expects most organisations to be cautious and buy more allowances than needed.

Some organisations seem to think there are unlimited allowances during the first years, says AEA’s Mark Johnson. Not so; even though there is no cap on the number of allowances bought each April, the number in the system from that point on effectively sets a cap for that year. This means the price could go up if cold weather boosts energy demand or there are widespread mistakes in forecasting emissions.

"While the rules are relatively straightforward, how that translates into a market is a different matter," he says. Some companies will end up being surprised.

And whatever patterns emerge in the introductory phase are bound to change once emissions are capped and allowances are sold at auction. The government’s Committee on Climate Change has begun work on setting caps and will advise government later this year.

It had been thought that the cap would need to fall by 3% a year to keep sectors in the CRC on a steady path towards the UK’s 2050 emissions goal. Recent rumours hint at a gentler introduction.

That though, is some way ahead. The challenge for now is to ensure everyone who should hear of the scheme has done so and has the data needed to comply. DECC’s not altogether reassuring view is that "many participants are aware of the CRC and their obligations, at least in broad terms. Many are highly informed."

Evidence from other quarters suggests some of last year’s worries over awareness and preparation levels have faded. Sales of AMR systems are shooting up and 250 organisations have the Carbon Trust Standard in preparation for the early action metric.

Some of the initial concerns among participants are also subsiding, says Andrew Hitchings, head of the agency’s CRC team. "The CRC cuts across many roles, including finance, facilities, energy management, compliance and procurement. It can look daunting for the individual who has to deal with it, but there should be the necessary expertise within organisations."

The lengthy discussions of the scheme’s intricacies mean awareness of energy efficiency issues has already risen.

Even Nabarro’s Tom Bainbridge, not the CRC’s biggest fan, acknowledges this benefit. "It’s far too complicated and unpredictable… but where it succeeds is that it’s got everyone looking at energy efficiency."

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