Summary

From April 2010, the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) - a new mandatory cap and trade scheme for carbon dioxide (CO²) emissions aimed at incentivising energy efficiency - will come into force in the UK. Technology companies operating in the UK and consuming energy in their own right and/or on behalf of others (e.g. through a data centre) may be required to participate.

Whilst the CRC has the potential to deliver benefits to the technology sector such as an increased take-up of clean tech services and products, it could also result in UK technology operations (in the event of non-compliance) incurring increased costs, damaged reputation and criminal prosecution.

With energy costs and environmental regulation in the UK on the increase, it is essential for the technology sector to take action now to plan and budget for compliance in order to maintain market competitiveness.

What is the CRC?

The CRC is a mandatory emissions trading scheme for the UK, designed to reduce energy use and encourage investment in new technology aimed at reducing CO² emissions. Emissions falling outside of the CRC include emissions from transport, domestic consumption, consumption outside the UK and activities covered by the EU Emissions Trading Scheme and/or climate change agreements (subject to certain thresholds).

From when will it apply and for how long?

The CRC is due to commence on 1 April 2010 and it will run for set time periods known as “phases”. The first phase (known as the “introductory phase”) will run for three years and subsequent phases will each last for seven years. Each year in a phase (known as a “compliance year”) will run from 1 April to 31 March.

Who is required to participate?

Qualification criteria

Organisations will be required to participate in the CRC where, during the “qualification period” (i.e. the 2008 calendar year for the introductory phase, and the financial year (April-March) prior to the first compliance year for subsequent phases), their UK operations:

  1. consumed at least 6,000 mega-watt hours of electricity (equal to approximately £50,000 of electricity bills /annum); and
  2. had at least one “half hourly electricity meter” (a meter which records total energy consumption every half hour and automatically transfers this information to the energy supplier).

Organisations participating in the CRC may include UK and non-UK incorporated companies, partnerships and other unincorporated associations which carry on business (and use electricity) in the UK.

Group company participation

For the purposes of qualification, group companies will be treated as a single entity under the CRC and the group’s total UK electricity consumption will be aggregated. Groups may disaggregate Significant Group Undertakings (SGUs) (i.e. group members which would be capable of meeting the CRC qualification criteria in their own right) where the remainder of the group still qualifies for CRC participation. Following disaggregation, the group and the SGU will participate separately in the CRC.

Where a group company, meeting the qualification criteria, has a UK based parent company, that parent company will, by default, act as the group’s “primary member” (i.e. the organisation held to be responsible for complying with the CRC on the group’s behalf). However, the group may choose to nominate another UK based group member (such as the highest placed group company in the corporate structure) to act as its primary member. This nomination will be particularly relevant where a group’s parent company is based overseas.

Landlord and tenant participation

In relation to leasehold property, the party having responsibility for the provision of energy to the building (i.e. as counterparty to the electricity bill) will have responsibility for CRC compliance (should the qualification criteria be met). Where responsibility for CRC compliance rests with the landlord, the tenant will be legally required to “cooperate” for the purpose of CRC compliance.

Outsourcing Service Providers (OSPs) and Third Party Data Centres (TPDCs)

OSPs (such as call centres) and TPDCs will be responsible under the CRC for the electricity used on behalf of their customers (should the qualification criteria be met). Such facilities meeting the qualification criteria will normally exceed 5,000 square feet.

Non-qualifying organisations

An organisation which has a half hourly electricity meter, but fails to meet the electricity consumption threshold (as set out in the qualification criteria), may still need to disclose certain information to the CRC Administrator including how much electricity it has consumed through all half hourly electricity meters.

What will CRC participation involve?

Registration: CRC participants will need to register with the CRC Administrator for participation in each phase of the CRC. The registration period runs from April to September during the first compliance year of each phase.

Calculating emissions: Participation in the CRC is governed by calculation of an organisation’s CO² emissions from its energy use (i.e. consumption of electricity, gas and any other types of fuel such as coal, LPG and diesel) minus exempt emissions (e.g. emissions relating to energy used for transport or onward supply). A CRC participant’s CO² emissions will determine the number of allowances that it will be required to purchase (and surrender) to comply with the CRC scheme.

Purchasing allowances: For each compliance year, CRC participants will need to purchase sufficient allowances to cover their annual CO² emissions. One allowance will be the equivalent of 1 tonne of CO².

There are two markets for purchasing allowances:

  • Primary market - CRC participants will be able to purchase allowances from the CRC Administrator during the first month of each compliance year. During the introductory phase (i.e. the first three compliance years), allowances will be sold for the second and third compliance years only at a fixed price of £12/tonne CO². However, from April 2013, the total pool of allowances will be capped and subject to auction.
  • Secondary market - Following the initial sale of allowances on the primary market, CRC participants may buy and sell allowances on the secondary market.

To protect against the price of allowances becoming too high on the secondary market, the CRC has a built in “safety valve” through which CRC participants can ask the CRC Administrator to issue extra allowances throughout the year. Allowances purchased under the safety valve will be more expensive than £12/tonne CO² but cheaper than allowances sold on the EU ETS market.

Organisations holding more allowances than they need may bank allowances for future use. The only exception to this is that in the final year of the introductory phase, all remaining allowances will be cancelled.

Emissions management: CRC participants will be encouraged to develop systems to manage their CO² emissions and to improve their energy efficiency. CRC participants using more energy than they originally predicted will need to purchase additional allowances to fulfil their CRC obligations with obvious cost consequences.

Annual report: CRC participants will be required to submit an annual report to the CRC Administrator detailing their emissions in addition to information required to assess each participant’s performance (by comparison to previous compliance years). Annual reports must be submitted by the last working day of July following the relevant compliance year (e.g. July 2011 for the first compliance year of the introductory phase (2010/11)).

Footprint report: The footprint report will include information on a CRC participant’s total CO² emissions from energy consumption in addition to details of any exempt emissions. CRC participants will be required to submit a footprint report by the last working day of July following the end of the footprint year (the first compliance year in each phase).

Performance Commitment: CRC participants will be required to surrender allowances corresponding to their total CO² emissions to a cancellation account by the last working day of July after the end of a compliance year (with the exception of the first compliance year in the introductory phase). The CRC Administrator will then cancel the allowances.

League table: Following annual reporting, the CRC Administrator will publish a league table showing how all participants have performed under the CRC scheme. Participants will be ranked in the league table according to how they have performed against three metrics - (1) early action (i.e. fitting automatic meter-reading equipment and/or meeting Carbon Trust (or equivalent) standards prior to CRC participation); (2) absolute growth in emissions (i.e. percentage change in emissions); and (3) relative growth in emissions (i.e. carbon intensity of any growth or decline in turnover). Whilst the league table will be weighted in favour of the early action metric in the first compliance year of the Introductory Phase (i.e. April 2010-March 2011), early action will not be considered from April 2013 onwards and the league table will be largely calculated with reference to the absolute growth metric.

Opportunities for the technology sector

Recycled payments: Based on ranking in the league table, revenues received from the sale of allowances will be recycled back to participants. In essence, this means that high performance (and therefore league table position) will be rewarded by bonuses in the form of “recycled payments” (predicted to equate to up to 150 per cent of the original outlay for allowances by 2020) in addition to good publicity.

Cost savings: Compliance with the CRC has the potential to make CRC participants more energy efficient which could facilitate cost savings.

Demand for clean technology: The CRC may serve to promote the use of clean technology by CRC participants where such products enable them to function more efficiently and to reduce emissions. For example, logistics software can optimise fleet movements and electronic communications can reduces paper use and travel.

Demand for remote working technology: The CRC may increase the amount of organisations encouraging employees to work from home. Where employees work from home, their energy use will be classed as “domestic” and will therefore fall outside of the CRC scheme.

Demand for OSPs and TPDCs: The CRC is likely to lead to the significant growth of TPDCs and OSPs as CRC participants look to outsource their IT infrastructure and other energy emitting functions in order to: (a) reduce their emissions (and thereby achieve a better position in the league table); and/or (b) fall below the qualification criteria for participation in future phases of the CRC.

Onsite renewables: Whilst electricity from renewable sources consumed onsite by a CRC participant is not deemed to be carbon neutral under the CRC scheme (unless government incentives under the Renewables Obligation and Feed in Tariffs are not claimed), details of a CRC participant’s onsite renewable energy generation will be published alongside (but separate to) the league table resulting in good publicity (but no financial rewards at this stage).

Risks for the technology sector

League table ranking: Participants who fail to perform under the CRC will be “named and shamed” by the publicity of the league table, and will in effect bear extra costs (because they will not benefit from recycled payments). This risk is particularly relevant for UK OSPs and TPDCs. In particular, the league table will not: (a) show which organisations have transferred their energy use to a TPDC or OSP; or (b) compare emission improvements by industry (comparing like for like).

League table metrics: Participants seeking to expand their UK operations may be penalised by the league table ranking system which (following the introductory phase) largely considers a participant’s absolute growth in emissions which would naturally increase with an expansion in business operations/growth. This risk is particularly relevant for UK OSPs and TPCDs where demand for their services increases as a result of the CRC.

Contractual issues for OSPs and TPDCs: OSPs and TPDCs operating in the UK which qualify for participation in the CRC (as a result of their customers’ energy use) will be required to bear the entire cost of CRC compliance. New customers and existing customers (which are usually subject to long term contracts) are likely to be unwilling sign up to contractual terms (or to amend their existing contractual terms) which oblige them to share the cost of CRC participation. Whether such terms are accepted will depend on the bargaining strength of the OSP or TPDC (which, due to increasing competition from overseas, is generally considered to be weak).

Cost: The CRC is likely to significantly increase the cost of using energy in the UK as participants will need to purchase allowances in proportion to their energy consumption. In addition, participants will be required to meet the administrative costs of scheme participation and may need to appoint consultants for compliance advice.

Civil liability: In the event of non-compliance with the requirements of the CRC scheme, the CRC Administrator may impose civil penalties and may publicise the non-compliance. For example, in the event of failure to register within the scheme deadlines or for failure to submit an annual report, a fixed penalty of £5,000 (and daily fines thereafter) may be levied. In the event of failure to carry out the performance commitment, a fine of £40/tonne of CO² may be levied in respect of each allowance that should have been obtained.

Criminal liability: CRC participants may incur criminal liability where, for example, they have failed to comply with an enforcement notice or attempted to deceive or mislead the CRC Administrator. Criminal penalties can include fines up to £50,000 (on conviction in the Magistrates’ Court), or an unlimited fine (on conviction in the Crown Court). Group companies participating in the CRC as a single entity will be jointly and severally liable.

Directors’ and officers’ liability: Individual directors and officers may be subject to personal liability where an offence is proved to have been committed with their consent, connivance or neglect. In extreme circumstances, they could be subject to imprisonment for a term not exceeding three months on conviction in the Magistrates’ Court, or for a term not exceeding two years on conviction in the Crown Court.

Steps to become CRC ready

Potential participants can prepare for the imminent implementation of the CRC by taking the following steps.

  1. Assessing qualification: Obtain information on electricity consumption for 2008 (the proposed base year). Eligible organisations may request the necessary data from their energy suppliers.
  2. Establish organisational responsibility: Appoint a CRC Co-ordinator (preferably a director or senior manager) to be responsible and accountable for CRC participation and supported (as appropriate) by a team of CRC Officers to assist in data collection /purchasing of allowances.
  3. Budget for compliance: Assess the likely costs of CRC participation including administrative costs and the costs of purchasing allowances to allow for forward planning/budgets. Although the cost of purchasing allowances has the potential to be recycled back at a later date, the time lapse between purchasing allowances and receiving any recycled payment (approximately 6 months) will inevitably affect cash flow.
  4. Data capture and reporting: Participants may consider implementing new systems such as automated data collection networks (sub-meters) to make the capture of data more efficient, regular and reliable.
  5. Maintain records: Familiarise the designated CRC team (including the CRC Co-ordinator and CRC Officers) with the record keeping requirements under the CRC and plan for on-going compliance (e.g. data collection and filing). Training programmes may need to be set up for this purpose.
  6. Plan for energy efficiency: Plan to reduce CO² emissions through, for example, retrofitting buildings with energy saving technologies and providing staff training and incentives to reduce energy use, and consider signing up to the carbon trust (or equivalent) standards in order to benefit from the early action metric.
  7. Climate Change Agreements (CCA): Going forwards, the technology industry could consider jointly entering into a CCA which could exempt certain emissions from being included in the CRC (in addition to providing an 80% relief from the climate change levy (or 65% relief as of April 2011)). The CCA would, however, not affect an organisation from participating in the Introductory Phase of the CRC and it runs the risk of labelling the technology industry as being a serious polluter (as is the stigma of CCA singatories).