The CRC Energy Efficiency Scheme (Revocation and Savings) Order 2018 came into force on 1 October 2018, abolishing the CRC Energy Efficiency Scheme (“CRC”) from the end of the 2018-19 compliance year. Current CRC participants are still obligated to report their CRC supplies to the administrator by 31 July 2019, and to purchase and surrender sufficient allowances for the final time by 31 October 2019. Participants who have surrendered surplus allowances will be able to apply for a refund until the end of March 2025.

Whilst the CRC is being abolished, current participants should take note of and prepare for the implementation of the two other measures that the government is introducing, which aim to recover the revenue lost from the CRC’s abolition; incentivise energy efficiency; and reduce emissions.

Climate Change Levy – Increased Rates

The Climate Change Levy (“CCL”) is a carbon tax, which is levied on businesses and public sector organisations in respect of certain energy supplies (such as electricity and gas). There are a number of exemptions to the CCL as well as excluded supplies, further discussion of which falls outside the scope of this article. In order to recover lost revenue from the abolition of the CRC, the main rates of the CCL will increase by 45% for electricity and 67% for gas from 1 April 2019 (as compared to the rates set on 1 April 2016). The CCL will continue to be charged on a pence per unit basis and applied directly to the energy bills of businesses and public sector organisations to incentivise the use of less energy and the use of energy from renewable sources.

Reductions on the main rates of CCL will remain available for those energy intensive businesses, which have entered into a climate change agreement (“CCA”) with the Environment Agency (which is the administrator throughout the UK). In fact, from 1 April 2019, there will be an increase in the CCL discount available for such organisations in order to compensate for the increase in the main rates of the CCL (the discount for electricity will increase from 90% to 93% and for gas it will increase from 65% to 78%). The government has also indicated that it will retain existing eligibility criteria for CCAs until at least 2023.

Those organisations which in principle could benefit from a CCA (say perhaps new data centres and other intensive energy industries), but have not yet applied for one, are unlikely now to be able to do so. This is because under the agreements for the scheme (not the legislation per se), from 31 October 2018, new entrants are barred to the remainder of the current scheme period to March 2023. Practically, due to the time needed to review applications, it is unlikely that an application could be processed by 31 October 2018.

Streamlined Energy and Carbon Reporting

The government is also introducing the Streamlined Energy and Carbon Reporting (“SECR”) regime, which will extend current requirements for reporting on energy efficiency, energy usage and greenhouse gas emissions (“GHG Emissions”) in company annual reports. It will apply to financial years beginning on or after 1 April 2019 (the government published draft regulations[1] in July 2018, which are due to come into force on or after 1 April 2019). Detailed guidance on the SECR is expected to be issued in January 2019.

The regime will be implemented through the Companies Act 2006[2]. Directors’ reports (produced as part of a company’s annual report) will be expanded to include the extended reporting requirements.

Application:

Subject to certain exemptions (explained below), the SECR regime applies to all UK incorporated quoted and large unquoted companies and limited liability partnerships (“LLPs”). The definition of a “large” company or LLP follows that which is set out in the Companies Act 2006, i.e. two or more of the following criteria apply to a company within a financial year:

  • more than 250 employees;
  • annual turnover greater than £36 million (net);
  • annual balance sheet total greater than £18 million (net).

Exemptions:

If the relevant company or LLP is included in the report produced by the parent company for its group, it will not be required to report separately but can do so on a voluntary basis.

Companies and LLPs which are not incorporated in the UK, will not be required to report under the SECR regime as they are not obliged to file annual reports at Companies House.

The SECR regime will not apply to public sector organisations.

Reporting requirements:

The reporting requirements under the SECR regime differ according to the category into which the relevant corporate entity falls:

  • UK incorporated quoted companies will be required to report on the annual quantity of GHG Emissions and energy consumed arising from the activities for which they are responsible; from their purchase of electricity, heat, steam or cooling for their own use; and state what proportion of such energy consumed relates to emissions in the UK and UK offshore area. Such companies must also describe the principal measures taken to increase their energy efficiency;
  • large UK incorporated unquoted companies will be required to report the annual quantity of GHG Emissions and energy consumed in the UK arising from their activities relating to the combustion of gas, or the combustion of fuel for the purposes of transport; from their purchase of electricity for their own use; and action taken to increase energy efficiency;
  • large UK incorporated LLPs will be required to prepare a report equivalent to the directors' report for each financial year. The content of the report is to reflect the reporting requirements applicable to large UK incorporated unquoted companies.

Reporting organisations will also be required to disclose an intensity metric showing their annual emissions in relation to a quantifiable factor associated with the organisation’s activities (for example tonnes of emissions per full time employee).

It is hoped that the forthcoming government guidance will shed better light on how the reporting requirements are to be implemented in practice, particularly in relation to the narrative to be provided on energy efficiency action taken by the organisation; appropriate intensity metrics and the format for presenting the data collated.

Qualifications:

There are a number of qualifications to the reporting requirements:

  1. if the disclosures would be (in the opinion of the directors), seriously prejudicial to the interests of the company or the LLP; or
  2. if the company or the LLP has used a small amount of energy (40,000 kilowatt hours or less) in the financial year to which the directors’ report relates; or
  3. the disclosure is only required to the extent that it is practical to obtain the information.

Where a company or LLP is seeking to rely upon the above qualifications, the directors’ report must state that the information is not disclosed for such reasons and explain why.

Future changes:

Electronic reporting for the SECR regime will be voluntary, although it would be prudent for businesses to collate and maintain accurate electronic records, as the government has confirmed that it will consider introducing mandatory electronic reporting in the future.

Similarly, whilst organisations will not currently be required to disclose the recommendations made in their energy saving assessments prepared for the purpose of complying with the Energy Savings Opportunity Scheme (“ESOS”) and any subsequent actions taken, the government has indicated that it will reconsider making such disclosures mandatory following its review of the effectiveness of ESOS.

The abolition of the CRC is much welcomed by many companies, who have found it to be onerous and complicated in application. The CCL should be more straightforward but there is a query whether it will be seen simply as an additional cost rather than raising the profile of emissions. The increase to the CCL comes at a time when some organisations want to enter into CCAs but are being prevented from doing so due to the administrative cut off dates - a position which does not seem to sit easily with the clean growth strategy.

Separately, the extended reporting requirements under the SECR regime will require consideration and management, not only to address the practicalities of the regime (such as data collation), but also the potential reputational impacts arising from the disclosure of energy information.