The Energy Efficiency Scheme - more costs for business?
As of April this year, a new statutory energy efficiency scheme is introduced with significant implications for commercial and public sector organisations. The Carbon Reduction Commitment Energy Efficiency Scheme (“CRC”) introduces charges for CO2 emissions based upon the electricity consumption of businesses. Groups of companies, joint ventures, landlords and private equity funds may need to be particularly mindful of the CRC’s legal and practical requirements.
The CRC is a mandatory emissions trading scheme, intended to improve energy efficiency both for reducing CO2 emissions under the Climate Change Act 2008, but also with a view to addressing security of supply issues. The scheme started on 1st April 2010.
Organisations will be required to join the CRC where, during the 2008 calendar year (and subsequent financial years) their UK operations (i) used over 6,000 MWh of electricity (equal to a £500,000 electricity bill) and (ii) had at least one half hourly meter (HHM) settled on the half hourly market (a common method of measuring supply for commercial users). Qualifying organisations must register with the government’s online CRC registry between 1st April and 30th September 2010 or face a fine of £5,000 plus £500 for each further working day until registration is made. CRC entrants must then calculate their total CO2 omissions for energy use (including gas, electricity and other fuels) and buy allowances for the total.
The total number of allowances after phase one will be subject to a cap to ensure that total CO2 emissions are reduced over time. The intention is that the CRC will contribute significantly to the UK’s mandatory target of 80% reduction in CO2 emissions by 2050.
Finally, all participants in the CRC will be ranked in a publicly available league table at the end of each phase. High ranking performance will not only have CSR benefits - high achievers in terms of emissions reductions will benefit from “recycled payments” (in effect, a rebate) from the scheme, expected to reach 150% of allowance purchasing costs by 2020.
Organisations with HHMs and using less than 6,000 MWh of electricity must still register and provide specific information on energy use to the CRC or face a penalty of £500 for each HHM not disclosed.
The scheme is not just a CSR issue but will have real bottom-line impacts. Allowances will initially be fixed at £12 per tonne of CO2 and then traded by auction from 2013 in progressively restricted quantities, which is likely to force allowance costs upwards. The CRC will reward businesses that reduce energy use year-on-year. However, for business that struggle to implement energy efficiency measures, the long-term cost implications could be significant.
The costs of the CRC may become a consideration in company valuations, and could be an important financial due diligence issue for company acquisitions. PricewaterhouseCoopers (PWC) has estimated that a typical company with a £1M annual energy bill could see a £40k increase in energy costs in the first year of the scheme, possibly rising to £129k in two years. According to PWC, poor performers may see increases in energy costs of up to £500k by 2015, but high achievers may see an 8% reduction on present energy costs over the same period.
Subject to certain exemptions, the energy consumption of groups of companies each using below 6000MWh must be aggregated, with the parent company registering for the whole group. Individual group companies that have energy consumption over the threshold can register separately - provided this does not cause the rest of the group to fall below the threshold. For large groups of companies, the structure of the aggregation must be carefully considered to create the most effective CRC scheme in terms of both cost and administration. This also has implications for joint ventures and private equity funds. For a JV, the partner with an interest of 50% or over must aggregate the JV with its own consumption. Private equity funds and their portfolio companies may also need to be aggregated. The disposal or purchase of companies into or out of a group must also be managed in terms of transferring CRC obligations. There are specific rules for transfers, which must be considered in M&A transactions and group restructuring.
The CRC scheme may also impact upon landlords with large commercial property portfolios. If a landlord is the primary bill payer for non-domestic premises, it may be responsible for registering with the CRC and, if necessary, buying allowances. Landlords may need to review their portfolios and lease agreements to see where responsibility for CRC arises. The CRC scheme may also impact upon the value of properties, particularly older properties that are less energy-efficient and where upgrade costs are substantial. The energy efficiency of commercial buildings is already laid bare through the requirement for production of Energy Performance Certificates. Requirements to now comply with the CRC Scheme could make low-rated buildings significantly less desirable.
The scheme also covers public sector organisations including schools, universities and hospitals. Government Departments must enter the CRC regardless of their energy usage.
The CRC Scheme is wide ranging and not without its complexities. What must be emphasised is the need for organisations of all sizes and energy uses to consider and obtain specialist advice on their obligations. Time to compile the necessary information and register, if need be, is relatively short. Looking further ahead, the real costs and implications of the scheme require detailed analysis to minimise impacts and realise the potential benefits.
For further information on issues raised in this article please contact Andrew Ryan, Head of Environment and Planning, Tel: +44 (0)28 9082 0527 or email, andrew.ryan@tughans.com