What to do now?

The CRC Energy Efficiency Scheme (the "CRC Scheme") commenced on 1 April 2010. It is a mandatory carbon trading scheme for organisations operating in the UK. Organisations obliged to participate in the CRC Scheme will from 1 April 2011 have to buy carbon allowances in respect of emissions attributed to energy consumed by their operations. Qualifying corporates, public and third sector bodies, funds and fund managers will be obliged to participate in the scheme. The CRC Scheme operates in phases. The first phase commenced on 1 April 2010.

Key features of the CRC Scheme  

  • mandatory emissions trading scheme for the private and public sectors
  • purpose is to cut energy consumption
  • applies to those who, across an organisation, are billed for more than 6,000 mWh of electricity per year (circa £500,000 per annum) through half-hourly meters
  • participating organisations must account for all the energy they are billed for, not just half-hourly metered electricity and not just the electricity that is in fact consumed
  • qualification determined by electricity use in 2008
  • commencement date was 1 April 2010, registrations due to be complete by 30 September 2010  

Applications were due in by 30 September 2010

Participants (and those obliged to make information disclosures) were obliged to have submitted returns to the Environment Agency (or SEPA or NIEA in Scotland and Northern Ireland) by 30 September 2010[1]. However, the application process remains complex and confusing and the Environment Agency continues to issue guidance papers seeking to clarify the gaps in the law. These points really should have been addressed before the application process commenced and therefore it is welcome that the Environment Agency has stated that it will adopt a sensible stance in relation to penalties for those persons taking the CRC Scheme seriously and making genuine efforts to meet CRC Scheme obligations.

Despite the rise in applications as the deadline approached, it appears that a large number of organisations missed the registration deadline. The Environment Agency's website states that as at 1 October 2010 there were completed registrations in respect of 2,778 full participants and information disclosures in respect of 12,112 corporates and other persons.

Elevating energy issues to board level: where the CRC Scheme has succeeded

The CRC Scheme has been very effective in elevating energy considerations up the board agenda. This has largely come about because of:

  • the naming of a director/senior officer who exercises management control on the CRC Scheme application form and taking overall responsibility for managing the CRC Scheme relationship with the Environment Agency; and
  • the visibility of the league table and the public benchmarking that will come from that.

It is possible to overestimate the financial significance of the CRC Scheme. The cost of compliance with the CRC Scheme (both internal and external costs) will, in many cases, be more significant than the direct cost of the allowance purchase.

It is notable that the league table was a late addition to the proposals for the CRC Scheme but (despite its significant limitations and a wide misunderstanding of the revenue recycling process) the public nature of the league table does seem to have captured the notice of both public and private sector participants.

How to trade CRC Scheme allowances

During the first phase of the CRC Scheme allowances may be purchased from the Environment Auction between April-July in each of 2011 and 2012 at a fixed price of £12 per tonne. From 2013 there will be an auction and a reducing cap.

Participants are not obliged to purchase any allowances at the beginning of a CRC Scheme year, but all must surrender the relevant volume of allowances at the end of the year. At the current time, both the official "safety valve" of the EU- Emissions Trading Scheme and the option of purchasing allowances from conservative participants who may have over purchased remains attractive. However, it appears that the secondary market itself will be thin and be represented by matched bilateral buy/sell orders rather than traded on an open market. The risks of purchasing CRC Scheme allowances on a speculative basis will be high.

Particular issues for the real estate industry

Institutional landlords are effectively automatically penalised by the CRC Scheme rules because (in many cases) they are smacked with the energy consumption of their tenants. In many cases, landlords are not able to influence or control the energy use and behaviours of property occupiers.

There remains an urgent and pressing need to build some common ground between landlord and tenants in this area as initiatives to build carbon consensus on the CRC Scheme and sustainability more generally will become the sharp end of green leasing.

The BPF's four possible methods to incorporate CRC Scheme provisions into leases

The British Property Federation (the "BPF") has been considering the CRC Scheme a number of months and has issued a number of consultations on its impact on the real estate industry.

The BPF has been investigating ways in which landlords might seek to pass CRC Scheme costs down to tenants and has issued a guide to landlords and tenants on 3 September 2010[2] which sets out four potential ways in which CRC Scheme provisions might be reflected into new leases. As already noted above, the BPF guide is silent as to existing leases (which will represent the vast majority of leases). The options are as follows:

The BPF's options to reflect CRC Scheme provisions into new leases  

  • use normal service charge provisions
  • operate a separate CRC Scheme service charge
  • charge a levy on energy costs
  • leave the lease silent as to CRC Scheme  

The BPF usefully sets out advantages and disadvantages of each option but the BPF has concluded that significant disadvantages to each option exist. Unfortunately, there remains a lack of clarity as how green leases, let alone the CRC Scheme will impact on property valuations.

No contractual nexus exists for the pass through of CRC Scheme costs in most existing leases and, to the extent that it were permitted, it is difficult to run a CRC Scheme, allocation arrangement without significant complexity and risk.

What will impact on CRC Scheme performance?

Ongoing support on the CRC Scheme will be required by those participants:

  • engaged in ongoing M&A or asset trading activity; or
  • managing significant changes to the structure of their organisation or operations.

Changes of this nature will have a significant impact on both the allowances required and the amount which will be received back through the revenue recycling mechanism.

Participants are encouraged by the CRC Scheme to identify and make efficiencies in their organisation: this should remain the focus of the initiatives of the energy manager because energy efficiencies equate directly to cash savings. However, the upfront cash cost of certain efficiency measures remains a barrier, both for private and public sector participants operating in a constrained marketplace.

What are the next steps and what does the future hold?

Once the hurdle of CRC Scheme application has been crossed, you will need to start to operate within the scheme which means data will need to be collated and managed on a monthly basis and both allowance purchase and energy savings strategies pursued. Do not underestimate the amount of resource you will need to allocate to compliance.

The CRC Scheme remains complex and is a product of legislation rushed into force at the end of the last government. Little can be done to remove this in the short term, although Greg Barker's recent announcement that the coalition government will consider changes from 2013 is welcome. Participants and others affected by the CRC Scheme need to start working within the framework of CRC Scheme regulation and at the same time as meeting legal obligations, deliver constructive comments to the Department of Energy and Climate Change and the Environment Agency as to how the CRC Scheme might be improved.

It is an axiom to state that reducing carbon intensity will be good for the stability of the western World. The coalition government now needs to respond sensibly to ensure that the goodwill that measures such as the CRC Scheme should command is not eroded by the detail of the scheme itself.

CRC Scheme compliance: what needs to be done?

following registration

  • activate your compliance account (so you may buy, trade and surrender allowances)
  • collect and record information on all energy use and any structural changes over the period April 2010/2011
  • start building this information into your evidence pack, which should contain an up-to-date record of documents relating to the group's energy use, ready for any audit checks following submission of your footprint report in July 2011
  • start collating data for phase 2 qualification

from April 2011

  • forecast energy use for the group for the period April 2011/12
  • buy fixed price allowances to cover the forecast emissions or pursue an alternative trading strategy
  • submit a "footprint report" on consumption for the period 2010/2011 in July 2011
  • receive recycled revenue payment based on the group's performance in the year one league table in October 2011  

from July 2012

  • the above process repeats, but from July 2012, allowances will have to be surrendered in respect of the previous year's emissions  

from April 2013

  • report actual energy use each year and forecast energy use over the year ahead
  • annually surrender allowances in respect of reported emissions and buy allowances at auction, in the secondary market or through the safety valve to cover forecast emissions
  • the government will each October:
    • recycle revenue raised in the primary sale of allowances
    • publish a CRC Scheme performance league table