Reform of CRC takes shape

The energy and climate department (DECC) has published discussion papers on options for reforming the Carbon Reduction Commitment (CRC) energy efficiency scheme.

Simplifying criteria for entry into the Carbon Reduction Commitment (CRC) and removing the need to measure small emissions sources are among the options for reforming the scheme, the energy and climate department (DECC) has suggested in a series of discussion papers issued in January.

DECC says the options have been identified through feedback from regulated companies and public bodies since the scheme came into force in April 2010.

Late last year DECC kicked off the review in response to criticism that the scheme was too complicated (ENDS special report, December 2010).

One discussion paper looks at how the qualification criteria for CRC participation could be simplified.

There are two criteria based on electricity metering. First, an organisation must have one or more meters settled on the half-hourly market. Second, it must use a total of 6,000 megawatt-hours of electricity per year through half-hourly meters including settled meters, non-settled meters (such as automatic meter readers) and dynamic supply.

DECC says the complexity of restricting the first criterion to settled meters and extending the second to other types of meters has caused confusion. It also acts as a disincentive to fit AMRs since they could bring an organisation into the CRC.

It proposes to simplify the rules by limiting the second criterion to settled meters. The 6,000MWh threshold would also have to be reduced to maintain the CRC’s coverage at the same level.

DECC identifies the rules governing how companies are regulated under the CRC as another priority area for reform.

For a firm that is a subsidiary of a parent firm, qualification for the CRC brings in the entire group to the highest UK level. Parent groups can register such subsidiaries, called SGVs, separately if it does not mean the group would fall out of the CRC.

DECC says feedback has been mixed, with some participants complaining that the rules cause problems for foreign-owned groups which have to nominate a UK subsidiary to manage the CRC. Complex corporate structures like joint ventures have also struggled with the rules.

DECC proposes six options for change. One is to allow subsidiaries of any size to register separately, not just SGUs. It says this flexibility might allow participation at a level that is more closely aligned with the way energy is managed in the company.

However, very few SGUs have disaggregated from the CRC due to the extra costs of duplicating energy management within the parent group. Few firms may take up the extended provision.

Bottom-up

Another option would take a ‘bottom-up’ approach to regulation, with qualification for the CRC assessed for the individual firm. To do this, the energy use threshold would have to be lower. Firms could aggregate up to group level in order to centralise energy management and CRC administration.

But DECC warns if CRC regulation is fragmented in this way, with more participants, the costs of the scheme may increase. Moreover, lowering the threshold would extend the CRC to smaller firms.

A further option would use existing accountancy rules to determine organisational structure under the CRC. Responsibility for CRC compliance would be placed on the parent firm that consolidates accounts for the group.

DECC suggests the CRC’s energy supply rules, which are used by organisations to calculate what emissions they are responsible for, could be simplified.

Responsibility now falls on the party that pays for a metered energy supply. Feedback has shown that deciding who pays is difficult in bodies with complex contractual relationships. DECC also says some supply arrangements may not meet the definition and be regulated under the CRC.

DECC suggests ways to simplify the rules. Responsibility for a supply could fall on the party supplied with energy through a contract. The payment and metering requirements could be jettisoned. But the move would raise the CRC’s coverage by capturing unmetered, private wire and supply chain energy supplies.

Another option would apply the energy supply rules at the participant level, rather than to individual undertakings, simplifying complex inter-group arrangements.

DECC could also adopt a site-based de-minimising approach where parties report energy or fuel sources constituting more than 10% of the site’s total energy use.

DECC also raises the possibility of assigning responsibility for emissions on the basis of use rather than supply. This would result in moving the CRC obligation from landlords to tenants.

While this makes sense under the ‘polluter pays’ principle, it is landlords rather than tenants who have most influence to improve the energy efficiency.

Residual percentages

One important option for changing supply rules is the proposal to remove the residual percentage rule. It would also reduce the overlap of the CRC with the EU emissions trading scheme (EU ETS) and climate change agreements (CCAs).

Currently, participants must submit a footprint report at the start of each phase of the CRC accounting for at least 90% of emissions from energy supplies regulated by the EU ETS, CCA and the CRC. If they do not add up to 90%, firms must include emissions from residual sources such as liquid fuels until 90% is achieved.

The footprint report must provide certainty that emissions are properly regulated. The 90% rule was introduced to cut the burden of accounting for minor emissions sources. Yet DECC says it has caused “significant confusion”.

Instead, DECC could require participants to annually report 100% of electricity and gas supplies outside the EU ETS and CCA and exclude residual fuels. Raising the percentage would make up for the loss of emissions coverage from liquid fuels.

This would have the benefit of abolishing the requirement for bodies to report EU ETS and CCA emissions under the CRC.

One concern is that removing liquid fuels from the CRC could encourage their use.

DECC says another priority is designing allowance sales and emissions trading under the CRC. Another issue is the change from retrospective emissions sales at the end of a compliance year to an upfront sale.

In October’s comprehensive spending review, DECC moved the first sale of allowances from the start to the end of 2011/12 . DECC says this was to simplify the CRC by relieving parties of the burden of forecasting their emissions. But moving back to an upfront sale creates the issue of a double sale of allowances in one year. Upfront sales are needed to enable emissions trading, a legal requirement of the scheme.

DECC suggests one option is to hold two fixed-price sales from 2013/14. The first would be an upfront sale and the second a retrospective sale. In between, participants could buy and sell allowances on the secondary market. To encourage a shift towards upfront purchases, the price of allowances could be higher in the second sale.

DECC also says it wants to review the main mechanism for trading in the CRC, but it says little about alternatives. Options include replacing allowance auctions with an unlimited sale of fixed allowances, as proposed by the Committee on Climate Change (ENDS Report 428, pp 5-6).

The consultation closes on 11 March.

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