Key points

  • Several long-awaited simplifications were made to the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) last month.
  • Some changes took effect on 1 June 2013. These include changes to the emissions covered by the scheme and therefore affect the number of allowances some participants will need to buy in the government sale currently underway.
  • Other changes apply only to the next phase of CRC - beginning in April 2014 - and beyond. But businesses need to start preparing for them now because they alter the qualification criteria for future phases of the scheme, and allow private sector groups of undertakings and trusts greater flexibility as to how they participate in it.

Background

CRC is a mandatory emissions trading scheme for large and medium-sized non-energy intensive organisations in the UK. In operation since 1 April 2010, the scheme has been widely criticised for its complexity and the administrative burden it places on participants. The latest changes - made by The CRC Energy Efficiency Scheme Order 2013 (the 2013 Order) - are the culmination of a lengthy review process by the Government, including a formal consultation launched in March 2012, to which the Government published its response in December 2012.

Names and numbers

Confusingly, the 2013 Order renumbers the phases of CRC. The current phase, ending on 31 March 2014, becomes the first phase (rather than 'phase one' or 'the introductory phase') and the next phase, beginning on 1 April 2014, is called the initial phase (instead of 'phase two'). However, we suspect participants will continue to refer to the next phase as phase two - as does the most recent government guidance on the scheme - and we continue to call it that in this update.

Fuels covered by the scheme

The number of fuels covered by CRC has been reduced from 29 to 2 (electricity and gas). Gas is to be included only where it is used for heating. Also, it is subject to a new 2% de minimis rule, which means that certain participants might not need not to report on their gas consumption at all.

These changes took effect on 1 June 2013 but apply in relation to the final two years of the current phase (2012-13 and 2013-14). Consequently, participants may need to buy fewer allowances than would otherwise have been the case in the sale currently underway (having opened on 3 June 2013) to cover emissions for the year 2012-13.

In contrast, some participants will now need to buy allowances to cover a proportion of their emissions that might previously have been excluded. Until now, 90% of a participant organisation's overall energy consumption - and all of its consumption form 'core' fuel sources - had to be included in CRC. The reduction in fuels covered by the scheme means that the distinction between 'core' and 'residual' energy sources is removed. The effect of this is that the 90% rule disappears for 2012-13 emissions onwards. Therefore, although the new rules are simpler, 100% of participants' electricity and relevant gas supplies are now covered by CRC (subject to the 2% rule for gas mentioned above).

Also, for the remainder of the current phase, participants will not be able to claim electricity generating credits (EGCs) against CRC liability for renewable electricity, generated from gas or fuels no longer covered by the scheme. In phase two (and onwards), EGCs cannot be claimed at all.

Qualification criteria

In order to qualify for future phases of CRC, prospective participants will need to have consumed at least 6,000 MWh of electricity through settled half-hourly meters in the relevant qualification year (for phase two, this ran from 1 April 2012 to 31 March 2013). For the current phase, electricity consumed through all half-hourly meters (whether settled or not) counted towards the 6,000 MWh threshold. Some organisations that qualified for the current phase of CRC may therefore fall out of the scheme from April 2014 as a result of this change.

Groups of undertakings will continue to be treated as a single entity to determine whether or not they meet the threshold for participation in the scheme. However, once a group has qualified for participation, there will be far greater flexibility to decide exactly how undertakings within the group actually participate in the scheme - in terms of reporting their emissions, purchasing and surrendering allowances, etc.

Disaggregation of group participants

For the current phase, strict criteria had to be met before part of a group of undertakings could be 'disaggregated' in order to participate in CRC separately from the rest of the group. The part to be disaggregated had to be a 'Significant Group Undertaking' (SGU), meaning it would have met the CRC qualification criteria in its own right; and the rest of the group left behind also had to meet the qualification criteria without the disaggregated SGU. These restrictions have led to "cross-contamination" issues between economically unrelated businesses within CRC participant groups.

The SGU restrictions do not apply under the 2013 Order. From phase two of CRC onwards, any part of a group - other than the highest UK parent undertaking participant - can be disaggregated, provided the parent and the relevant subsidiaries agree. This change is designed to allow groups to split for CRC purposes from April 2014 in line with their natural business and management structures. It will be particularly welcomed by private equity firms - and their limited partnership funds - as it opens up the possibility of each portfolio company participating separately in CRC from the investor fund.

Disaggregation will result in increased registration and (annual) subsistence fees being paid across the group, but there are clearly a number of benefits. Compliance and administration can be dealt with at an individual business level and, significantly, the rest of the group is no longer jointly and severally liable for any disaggregated undertaking's CRC liabilities (or vice versa).

Trusts and other changes

Other changes to the scheme under the 2013 Order are broadly in line with the Government's December 2012 response to the March 2012 consultation. These include new rules enabling trusts, with no single controlling beneficial owner, to be 'disaggregated' and participate separately in CRC.

This will be particularly welcome news for professional trustees (those regulated under the Financial Services and Markets Act 2000) who hold properties for many different trusts as well as on their own account. It may be that other trustees, for example in certain property joint ventures, will also be able to benefit.

For more information on these changes, see our earlier alert: 'CRC - proposal for changed announced in the Autumn Statement and response to consultation published'.

Things to consider

  • Participants in CRC need to take into account the changes to the fuels covered by the scheme when preparing their annual CRC reports and buying emissions for the year 2012-13.
  • Those annual CRC reports must be submitted by 31 July 2013. Applications to buy allowances in the current government sale also need to be made by 31 July 2013, with payment due by 20 September 2013. Participants must then surrender sufficient allowances to cover their 2012-13 emissions by 31 October 2013.
  • Are you in or out of phase two? Businesses should reassess whether they will meet the qualification criteria to participate in phase two in view of the changes outlined above.
  • Remember that electricity consumption across the entire group of undertakings in the year to 31 March 2013 must be aggregated in order to determine whether the phase two threshold of 6,000 MWh through half hourly settled meters - roughly equivalent to an annual electricity bill of £500,000 - is met.
  • Those required to participate in phase two should consider strategies for taking advantage of the relaxed disaggregation rules, offering far greater scope for individual or sub-groups of undertakings to participate separately in CRC.
  • The wider organisation must apply for registration by 31 January 2014 (preferably sooner: applications can be made from 1 October 2013). Applications to disaggregate group undertakings can be made with or after that main application, but must be made by 30 April 2014. We understand that further opportunities to disaggregate during a phase may be introduced later this year.
  • CRC due diligence will continue to be important on acquisitions and disposals in view of the potential implications for an organisation's future CRC status and compliance obligations.

Government guidance

The revised government guidance notes for participants in phase one and/or phase two are available online.