In our previous alert we reported on the government's latest proposals to simplify the Carbon Reduction Commitment Energy Efficiency Scheme (CRC), as they affect the property industry. In this update we examine some of the proposals in more detail.

Qualification and reporting

The government is proposing to simplify the qualification criteria for CRC. The current test for qualification has two strands. First, the participant has to have at least one half-hourly meter which is settled on the half-hourly market; and secondly the participant's consumption through all half-hourly meters (whether settled or not) must be above the qualification threshold of 6,000 MWh. This distinction between settled and non-settled half-hourly meters has not only resulted in confusion among participants, but has also provided a disincentive for businesses to install smart meters, which would count towards their consumption for CRC purposes.

Government therefore proposes to align the two qualification criteria so that only consumption through settled half-hourly meters would count. However, the qualification threshold would then need to be lowered to ensure that overall emissions coverage is not reduced. The exact level of the threshold will be proposed in light of analysis of the reporting data submitted by current participants this month. In this regard it should be noted that the qualification period for phase two of the scheme begins in April 2012. The government does not intend to consult formally on the proposals until February - April next year. This means that organisations will not know at the beginning of the qualification period what the qualification criteria are and therefore whether or not they might need to start collecting the necessary data.

At the moment, participating organisations have to prepare a "footprint report" at the start of each phase, showing energy used from all sources. At least 90% of this energy (and all energy from "core" sources) must be covered by the CRC. With the proposed reduction in fuels covered by the scheme from 29 to four, the government proposes to remove the requirement for the footprint report and the 90% threshold. Instead, participants would be required to report on 100% of their consumption of the four fuels.

Government also proposes that, in order to produce greater alignment with other "green" policies, the CRC will seek to adopt the emissions factors used for greenhouse gas reporting purposes, as opposed to fixing separate emissions factors for each phase. Emissions factors are used to convert units of energy use into how much CO2 is emitted, and therefore to work out how many allowances need to be purchased to cover that use.

Landlord and tenant rules

As noted in our previous alert, the government is not proposing to change the landlord and tenant rule (that a landlord which supplies energy to its tenants is liable to account for that energy under the CRC). There is one - slightly odd - provision in the simplification paper, which states that government is

"...considering the case for revisiting the landlord/tenant rules where the landlord owns only the land that the structures are built on by the tenant, the landlord supplies the energy but the tenant is the sole occupant of the building and is wholly responsible for its maintenance."

In the case of most building leases, it would be extremely unusual for the landlord to supply energy to the tenant. As is the case with most leases of the whole (as opposed to part) of a property, the energy supply would normally be procured by the tenant directly. This proposal would therefore seem to be of limited application.

There is no proposal to change the rules relating to franchises, and the franchisor will remain responsible for energy consumption by its franchisees.

More flexible ways to participate

The proposal to allow a group which qualifies for the CRC to participate through more flexible "disaggregated" sub-groupings will be welcome news for private equity funds, joint ventures and trust vehicles (although see further below in relation to trusts). This should help in resolving current issues of "cross-contamination" within participant groups but between economically unrelated organisations. Additional changes may need to be made to the scheme to ensure that there is no emissions loss when disaggregated undertakings are transferred outside of a group.

Trusts

A particular problem arises with trusts. At present, a trustee which is responsible for the energy supply to real property held on trust also has responsibility under the CRC for energy emissions from that property. Where the trustee is a trustee of more than one trust, this can mean that the trustee must, for the purposes of the CRC, aggregate energy supplies in relation to property assets which it holds for different trusts (and hence for different beneficiaries), as well as properties which the trustee owns on its own account. However, unlike its own properties, the trustee has no economic interest in the trust properties and will usually have no control over their energy efficiency.

The government therefore proposes to treat individual trusts as "undertakings" for the purposes of the CRC. This would keep the CRC responsibility of individual trusts separate from each other and from the trustees.

The exact position will depend on the type of trust. Where a trust has a controlling beneficial owner, CRC responsibility will lie with that owner. Where a trust has many beneficial owners and the trust is registered with and regulated by the Financial Services Authority, the CRC responsibility would lie with the operator of the trust. Each trust would however be treated as a separate entity for qualification and reporting purposes.

There are specific proposals to deal with which trustee should be responsible for CRC purposes where the trust assets are owned by more than one trustee. More details on the proposals in relation to trusts can be found in the simplification document.

Display Energy Certificates

On a related topic, indecision apparently still reigns in relation to proposals to extend Display Energy Certificates (DECs) to the commercial, as well as the public, sector. The recast European Directive, from which the UK legislation on energy performance of buildings is derived, requires the display of energy certificates in certain commercial properties from 2013, but does not distinguish between Energy Performance Certificates (EPCs) and DECs. The Labour government had proposed extending DECs to the private sector. The coalition initially seemed to be taking a more cautious approach, but then announced that DECs would apply to all commercial buildings from October next year.

The latest instalment is found in the CRC simplification document, which states: "Government has yet to decide on the future of DEC and any changes to policy on DEC would take time to roll out on a national basis". This appears to contain an implicit recognition that industry must be given sufficient time to adjust to a requirement for mandatory DECs, suggesting that October 2012 is not looking so likely.

Other changes

For details of other proposed changes to the CRC scheme, including the method and timing of the purchase of allowances, see our earlier alert: 'Carbon Reduction Commitment: more changes ahead'.

Comments

The proposals in the CRC simplification document will be analysed in the light of participant data collected this month as part of the annual reporting process before the draft legislation is prepared. This will enable government to ensure that the simplifications proposed do not undermine the environmental or fiscal effectiveness of the scheme. Government also states that it will make further changes to the drafting of the CRC legislation to clarify it. These will form part of the formal consultation next year. In the meantime, comments on the proposals in the CRC simplification document should be submitted to crc@decc.gsi.gov.uk by 2 September 2011.