UK businesses need to know their carbon footprint because in 2010 the Carbon Reduction Commitment Order will apply. Since our CRC posting in December 2008, draft regulations have been published and are now subject to public consultation. This remains a scheme where businesses using a substantial amount of energy will have to report on their energy consumption, buy carbon allowances based on projected carbon emissions for each scheme year then surrender them at the end of each year when energy use is known. A league table will be published by the Environment Agency (EA) who will administer the scheme showing the relative energy efficiency of all those in the program. The best performing businesses will receive a refund of some of the costs of the allowances plus a bonus but the worst performing businesses will pay a penalty.
Some industries are high intensity energy users and already have to comply with the EU’s Emissions Trading System. The CRC scheme will capture lower intensity energy users who used a significant amount of electricity in 2008 and may include large offices, chains of retail outlets, hotels, banks, chains of restaurants as well as industry.
This posting outlines the types of business that may need to comply with the CRC scheme, the basic requirements of the program, some cost issues, and next steps to consider.
Who will be in the CRC Scheme?
- Businesses that, in 2008, had at least one half hourly electricity meter and consumed over 6,000 MWh of electricity will initially be full participants in the scheme. It has been estimated that this would be equivalent to an electricity bill of £1,000,000.
- Businesses that, in 2008, had at least one half hourly meter but consumed less than 6,000 MWh of electricity will initially have reporting requirements only under the CRC.
- All businesses with half hourly meters will soon receive information packs from the EA which will start the compliance process.
Which companies need to comply?
- Companies in groups count as one undertaking for the CRC and the highest UK parent will have to comply. One or more UK subsidiaries of an overseas parent will generally be grouped as one undertaking for CRC compliance.
- Joint ventures and those with complex corporate structures need to work out now who will have what obligations under the CRC. Joint venture companies’ energy use will be aggregated with the majority shareholder’s own group’s figures.
- For the initial period of the scheme you need to consider the group structure as of 31 December 2008.
- Franchisors will be grouped with their franchisees for CRC purposes where the franchisor specifies how the franchisees’ premises are to be used and equipped. This will apply equally to other businesses running vertical distribution like motor manufacturers being responsible for their authorised dealers.
- Schools, universities and the public sector will fall into the scheme under specific rules.
- Subsequent blog postings will look at some of the complications for groups, joint ventures, franchisors and complex organisations in more detail.
What has to be measured and reported on?
Although the qualification for the initial phase of the CRC scheme is based on 2008 electricity consumption, organisations will need to report on 90% of all energy consumed (excluding transport fuel). Small energy sources can be ignored by complex businesses once they have covered 90% of their energy but once the scheme is running there will be compliance complications surrounding this 90% figure.
When does this start to cost money?
There may be immediate costs for businesses in the information gathering exercise for energy consumption, in monitoring, reporting and, shortly, registering under the scheme. However, the first time allowances have to be bought is 2011 but there is a double charge in 2011 where allowances are bought to cover 2010 and 2011. After that there is an annual process for buying and surrendering allowances and receiving refunds.
The initial cost of allowances will be fixed by the government but after the first three years of the scheme, allowances will be auctioned and traded. Costs will then vary in the market place.
What should businesses do now?
- Determine whether you need to report or buy allowances. Your electricity suppliers can tell you whether you have any half hourly meters if your records do not show that.
- Consider the implications of your UK group structure as on 31 December 2008.
- Set up an internal system to provide information to the highest UK parent company of your organisation or elect that one sister company will deal with compliance.
- Select a board director to take responsibility for CRC as reports will have to be signed at board level.
- Train and authorise staff to deal with CRC.
- Work out where all your fuel sources are and how you monitor them.
- Take early action to improve your energy efficiency. Not only will this cut your bills now but it will help you to improve your place on the league table of CRC businesses which increases the amount of your refund in due course.
- Take early advice if you have any uncertainties about your organisation and the scheme. Useful advice can be found on the Climate Change pages of the Department of the Environment Food and Rural Affairs website. We can provide advice on the draft Regulations.
- Remember to forecast and plan ahead for the double charge in 2011.
- Investors who have energy contracts for their let properties should review their leases to see if CRC costs can be recovered and new leases being granted should contain new wording so that there can be no doubt about cost recovery.