The Department of Energy and Climate Change (DECC) has published five discussion papers setting out options to reform and simplify the CRC Energy Efficiency Scheme (CRC) in response to concerns over its complexity and the administrative burden on participants.
It appears that DECC is willing to consider revisions to some of the more controversial aspects of the CRC and possible adoption of changes for which many businesses have previously lobbied unsuccessfully. In particular, one option under consideration would reverse the rule by which landlords bear responsibility for energy consumed by tenants. Others would significantly simplify the complex rules which define a participating 'organisation'. There is, however, no suggestion that the trading element of the scheme will be dropped, despite recent speculation that it would be. Whilst DECC will not necessarily take any particular proposal forward, this may be one of the last opportunities for businesses to influence key aspects of the final form of the CRC. DECC has invited comments by 11 March 2011.
In November 2010, DECC issued a consultation on amendments to the CRC legislation, a key amendment being the delay of the commencement of Phase 2 of the CRC to allow DECC time to complete a wider-ranging review to simplify the CRC. Amendment legislation to effect these changes is expected shortly. The discussion papers now released by DECC are intended to help identify proposals for the wider-ranging simplification, which will be separately consulted upon later in 2011. The five discussion papers cover the following matters (with links to each paper):
Private sector organisation rules
The requirement to participate in the CRC is primarily imposed on organisations. The rules which define a participating organisation are complex and difficult to apply to many business structures, particularly private equity and other investment funds and trusts (see Herbert Smith e-bulletin here). The discussion paper accepts that these rules have led to unanticipated levels of administrative burden for some participants. The discussion paper proposes eight options for reform including:
- assessing qualification for the CRC at an individual undertaking level with the option to group undertakings together (although in this case the qualification threshold would be lowered);
- determining the organisation by applying existing accounting rules provided there is no double counting or emissions coverage lost from the scheme as a result;
- introducing new provisions on the treatment of assets held in trust to respect the 'separateness' of individual trusts; and
- allowing undertakings with a non-UK top parent to participate as individual undertakings (the current rule requiring a UK member of the organisation to act as an account holder on behalf of the entire organisation has caused difficulties for some organisations).
According to DECC, stakeholder feedback has indicated that the rules by which responsibility under the CRC for particular supplies of energy is determined between different parties have been one of the main complexities of the scheme and may also contribute to emissions coverage being lost from the scheme as participants struggle to identify the supplies for which they are responsible. The discussion paper proposes six options for reform including:
- determining responsibility solely by reference to the identity of the counterparty to an energy supply contract (the current additional requirements for payment to be made for the supply, and that supply to be measured by a meter would no longer apply);
- applying the CRC to electricity and gas only and excluding the other fuels listed in the current legislation (e.g. diesel, coal, petrol); and
- linking the definition of supply with that of supply to a site which would have the effect of excluding supplies made for the purpose of transport.
Landlord and tenant
One of the options contained in the supply rules discussion paper is potentially the most significant. This option would assign responsibility for energy on the basis of consumption rather than supply, and so landlords would no longer be responsible for energy supplied to them but consumed by their tenants, effectively passing responsibility to consuming tenants.
The apparent willingness of DECC to consider this option is somewhat surprising. Previous calls from the real estate sector to assign responsibility on the basis of consumption were consistently resisted. DECC now says that it "welcomes ideas on how such an approach could work across the CRC sectors, especially [with] reference [to] the data requirements on landlords to facilitate this option (where a tenant is unsighted as to their exact consumption through a fixed monthly charge)."
According to DECC, some organisations are delaying the installation of smart energy meters on the grounds that supplies through such meters would contribute to their CRC qualifying supplies. DECC therefore proposes amending the qualification criteria to apply to settled half hourly meters only which would exclude supplies through automatic meter reading meters (such as smart meters). If this option is taken forward, the discussion paper indicates that the current 6,000 MWh qualification threshold would be reduced in order to maintain existing levels of participation and emissions covered by the scheme.
Overlap with other regulation
The CRC places a number of requirements on organisations which are also subject to obligations under other carbon related measures, including the EU Emissions Trading Scheme (ETS) and Climate Change Agreements (CCA). The options contained in the discussion paper to reduce the administrative burden caused by these overlapping schemes include:
- a blanket exclusion from the CRC for organisations in the EU ETS or which have a CCA;
- removing the requirement under the CRC to report EU ETS and/or CCA emissions; or
- more fundamentally, merging the CRC with other measures such as the Climate Change Levy or any new wider carbon reporting obligation.
Allowance sales from 2012
Concerns have been raised by participants and the UK Climate Change Committee that the auctioning of allowances from the commencement of Phase 2 of the CRC in 2013 would add further complexity. The discussion paper indicates that DECC is open minded about the methods for sale in Phase 2 and subsequent phases, but sets out a number of options including various auctioning methods (including auctions with a minimum price), sales of unlimited allowances at a fixed price, use of a carbon exchange, and more fundamental reform of the scheme.
Whilst the discussion papers contain many proposals for reform and do not rule out further proposals being considered as part of the simplification review, for the time being all participants should continue to comply with the existing scheme as set out in the current legislation (see Herbert Smith e-bulletin here). Although uncertainty over the eventual form and operation of the scheme continues and may only serve to impede measures to address energy efficiency and emissions, DECC does now appear willing to properly consider the concerns and potential reforms that have been raised by businesses for some time.