What CRC means for funds

After many years of gestation, the carbon reduction commitment (or CRC) will be with us in April 2010. The CRC is a mandatory carbon trading scheme for large non-energy intensive organisations in the UK. Organisations obliged to participate in CRC will have to buy carbon allowances in respect of emissions attributed to energy consumed by their operations. Qualifying funds and fund managers will be obliged to participate in the scheme.

Regardless of current environmental performance, the CRC is something that, if ignored, may impair your fund's financial performance. However, if you respond wisely to your CRC obligations it should help you to find energy (and hence cost) savings, increase profitability and demonstrate green credentials. This briefing sets out some steps you can take now to prepare for the CRC.

Work out your CRC participant organisations

Whilst we await the final detail of the scheme (now due to be published in late autumn 2009) organisations should establish the entities that will comprise a "CRC group". There are two relevant filters:

  •  if you (alone or with other members of your CRC group) are billed for or are deemed to have consumed more that 6,000 MWh of electricity through half hourly meters in the calendar year to 31 December 2008 you are obliged to participate; and
  • you need to define your "CRC group or groups" – in most circumstances (because the test of grouping is based on Companies Act grouping) you will discover that a fund manager will be a separate participant to the funds it manages and, dependent upon ultimate ownership, certain funds may be consolidated into the "CRC group" of another entity.  

Your analysis may conclude there are multiple participant "CRC groups" in your fund structures. Each participant will then be represented in a public league table, highlighting performance, and entitled to a return cash payment based on such performance. Good performers will be paid a bonus, with poor performers penalised.

 If you have half hourly metering but total CRC group electricity consumption is less than 6,000 MWh through half hourly meters, you will still be obliged to provide certain information to the Environment Agency but will not be obliged to participate in the scheme.

What needs to be done now?

To wait for the final details of the scheme may be unwise as you may restrict your ability to fully benefit from the opportunities presented by CRC. You should not wait for the scheme start date to embark upon:

  • capturing information on your "CRC group", half hourly meters and total energy use (note that CRC covers more than just electricity and also captures use of gas and other fuels);
  • considering arranging for energy supplies to be made directly to tenants wherever possible (because you will otherwise be responsible under CRC for energy use beyond your control) – but this may limit bulk purchase discounting arrangements; and
  • considering if and where it may be appropriate to put in place a contribution mechanism within your group to ensure that the costs and benefits of CRC are appropriately distributed to where the risk lies.
     

The economic impact of CRC

As a CRC participant you will need to buy carbon allowances based on anticipated energy use. Initially, these will be sold at a rate of £12 per tonne. If you underestimate the carbon you require, you will have to acquire further allowances. However there is no cap on the total volume of allowances being issued in the initial phase. From 2013, though, the government will reduce available carbon volumes and therefore the price is likely to rise.
 

Set out below is an illustration of how the CRC might impact on a business using a number of energy sources for any given year of the scheme:

Click here to view table

Allowances will be sold by the government in April of each scheme year. In 2011, you will need to buy allowances both for the scheme year just ended and for the scheme year ahead. In October of each year, you will receive a recycling payment. The amount will depend on the proportion of total scheme emissions your organisation was responsible for in the first year, adjusted up or down based on your position in the performance league table.
 

Treatment of funds in CRC

A fund with no controlling investor will be treated as a holding company for the purposes of CRC; this means that, although the fund may hold a number of investments (possibly with different management structures and operations), it will be responsible for CRC compliance for each investment held on an aggregate basis, rather than each underlying investment taking responsibility for its own CRC compliance.

Particular sensitivities will arise regarding:

  • joint and several liability for CRC responsibilities between each member of a "CRC group" (which may have no operational relationship); and
  • league table performance and revenue recycling (as performance may be enhanced or dragged down by portfolio investments over which you have little or no control).
     

Fund managers will be required to co-ordinate CRC administration, reporting and compliance of the portfolio investments they manage. This will involve them undertaking individual energy performance of assets and such performance may have an impact on the value of property interests. Failure to undertake CRC co-ordination risks criminal prosecutions and hefty fines for the funds managed.

Joint ventures and minority investments

A 50/50 deadlocked joint venture will not form part of any other person's "CRC group" and therefore may be obliged to participate in the scheme in its own right. CRC largely ignores minority investments; therefore, if you hold, for example, a 51% interest in an investment you will bear 100% CRC responsibility and be imputed with 100% of the carbon performance of that entity.
 

Treatment of overseas parents

Whilst overseas energy consumption is excluded, CRC captures all relevant energy use in the UK by a CRC organisation and, therefore, applies to any overseas person:

  • carrying on business in the United Kingdom; or
  • which is the ultimate parent of a person subject to the CRC.
     

Nomination of the primary member

In a similar way to the operation of a VAT group, each parent of a "CRC group" must select a single entity as "primary member". The primary member is responsible for paying the total CRC commitment of the group and managing the provision of CRC data to the Environment Agency.

Regardless of nomination, each member of a CRC group bears joint and several liability for all CRC responsibilities.

Principal subsidiaries

Any subsidiary which, in its own right, or together with subsidiaries and qualifying investments is deemed to have consumed more than 6,000 MWh half hourly metered electricity, is a "principal subsidiary" and will be reported both as part of the wider CRC group and separately in the league tables.

Transactions

Transactional activity, including the acquisition or sale of a "principal subsidiary" or a significant asset, will impact on CRC performance and league tabling and will need to be carefully considered through due diligence and price negotiation.

If a subsidiary of a CRC group is sold at any point, that entity ceases to be part of the CRC group from the date of disposal. In the event that a principal subsidiary is sold out of a CRC group during a CRC phase, such a principal subsidiary will itself remain subject to CRC obligations, whether in its own right or as a member of another CRC group. If it is acquired by a non CRC group, the whole group then falls within the CRC from the date of acquisition although only having to report, for the remainder of the phase, in respect of the CRC group it acquired. As these changes are likely to be intra-year, data complications may arise. However, there is only a limited ability to have a backdated adjustment to the emissions data for league tabling purposes following group changes.

Timing

CRC qualification packs are expected to be issued in October 2009. It will then be necessary to complete qualification packs during the registration period from 1 April 2010 to 30 September 2010. All organisations that receive such packs must either register as a participant or disclose information to substantiate why they believe they are not participants.

The Environment Agency will need the co-operation of participant organisation in order to implement this innovative scheme. The Government acknowledges further guidance will be needed. Both updated guidance and a revised draft of the regulations are eagerly awaited.

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