The Carbon Reduction Commitment Energy Efficiency Scheme (the CRC) is a cap and trade emissions trading scheme that commenced on 1 April 2010. The CRC will be mandatory for public and private organisations that consumed at least 6,000 MWh of electricity through a half-hourly meter during the 2008 calendar year (the qualification criteria).
Participants under the scheme will be required to:
- monitor their energy use;
- submit reports on that energy use; and
- purchase and surrender sufficient allowances to cover emissions created by specific supplies.
Participants will be judged against each other in a published league table. A participant’s position in this league table will help to determine the value of revenue recycling payments that they will receive at the end of each compliance year.
Although full participation in the scheme will be mandatory for those organisations that meet the qualification criteria, the CRC also requires any organisation that received a supply of electricity through a half-hourly meter during 2008 to make an information disclosure. This information disclosure will include details of the organisation, a list of the half-hourly meters that supply electricity to that organisation, and where supply during the qualification year equalled or exceeded 3,000 MWh, the amount of that supply.
The CRC is a complex scheme. This article seeks to highlight the broad principles that will be applicable across the whole spectrum of CRC participants. Organisations should review the detail of the scheme to assess how it will apply to their own particular arrangements.
Points of clarification
The CRC order was laid before parliament on 19 January 2010. Having previously undergone several rounds of government consultation, the publication of the order has enabled organisations to determine whether they are covered by the CRC, to what extent, and if so, what now needs to be done. Commencement of the CRC means that organisations should follow three steps to ensure compliance.
Step one: What is my organisation?
Any organisation that anticipates that it may qualify for participation under the CRC will first need to determine where the boundaries of its organisation are for CRC purposes.
Private sector organisations
Private sector organisations covered by the scheme will be those caught by the CRC’s definition of an undertaking, which is the Companies Act 2006 definition of the same term, slightly expanded to include organisations with charitable purposes.
The CRC takes a top-down approach to private sector participation under the CRC. Undertakings will be grouped for participation with any other undertaking in its group that carries out some form of activity within the UK. Liability for non-compliance with the scheme will be joint and several among all undertakings that form part of a group.
The order does allow for the disaggregation of some group members (significant group undertakings (SGUs)) from their parent groups in certain circumstances. SGUs are subsidiaries within groups that would meet the qualification criteria in their own right. Where an SGU is disaggregated, its performance under the scheme will be judged separately from its parent. Liability for a disaggregated SGU will be limited to that SGU alone.
Special purpose vehicles (SPVs) set up for private finance initiative (PFI) projects and joint ventures (JVs) are grouped under the CRC with their parent undertaking, as any other undertaking would be. Where a PFI SPV or JV has no parent undertaking (eg where it is owned 50:50 by two shareholders) and the qualification criteria are met, that undertaking will be required to participate in the scheme alone.
In addition to the grouping of undertakings, the CRC requires franchisors to be responsible for their franchisees’ energy use under the CRC. The CRC order sets out what will constitute a franchise agreement for the purposes of the CRC. The definition used may capture scenarios not normally understood to be a franchise and needs to be reviewed carefully.
Public bodies
Public bodies under the CRC are those defined as such by the Freedom of Information Act 2000 Order 2003. Public bodies will be required to participate where they fulfil the qualification criteria, with the exception of central government departments that must participate regardless of size. To further demonstrate public sector leadership, the government has retained the ability to mandate public bodies to participate in circumstances where the qualification criteria are not met.
Unlike private sector organisations, the grouping of public bodies will be limited and will only occur in certain circumstances. The head of a group of public bodies will generally be either a government department or a local authority (which will be grouped with the maintained schools, academies and city colleges in its area). This figurehead will be responsible for scheme compliance on behalf of its group and will be singularly liable for any civil penalties that either it or any member of its group incurs.
Where a PFI SPV’s controlling shareholder is a public body, that SPV will also be treated as a public body for the scheme. The SPV will be required to participate alone where it meets the qualification criteria and will not usually be grouped with another public body (other than schools, academies and any colleges as mentioned above).
Step two: Who has responsibility for supply?
Having defined the boundaries of an organisation, the next step will be to assess the energy for which that organisation is responsible under the CRC. An organisation will be accountable for energy use under the CRC where the following definition of supply is met:
- it has an agreement with a supplier to purchase either electricity, gas or another fuel source;
- it does in fact receive such a supply; and
- that supply (whether gas or electricity) is measured using a fiscal meter.
Organisations’ responsibility for supply will be qualified by the exclusions that apply to electricity supplied for electricity generation, transmission or distribution purposes, domestic energy use, or energy used for transport purposes. In addition, the CRC has been designed to sit alongside the existing EU Emission Trading System and Climate Change Agreement regimes. As such, there are provisions in the order dealing with the exclusion of such emissions from the CRC and exemptions from the CRC in particular circumstances.
Unconsumed supply
The rules of supply allow the recipient of a supply to be absolved of responsibility for that supply where they do not in fact consume some or all of that supply. However, this exclusion does not apply where that unconsumed supply is consumed by a third party who occupies premises with the permission of the recipient. This is the manner in which the order places obligations for a tenant’s use on its landlord, which has been an area of focus through several iterations of the scheme.
Step three: Registration
Registration for the CRC must be made by 30 September 2010. It should be noted that the Environment Agency (EA) (the scheme’s administrator) will only consider an application made on its issuing of a registration certificate and not on the submission of an application. Indications from the EA are that its verification process to issue a certificate of registration may take up to two months, meaning that it will be advisable for applications to be submitted no later than the end of July 2010.
Registration will require the submission of a list of all half-hourly electricity meters through which the organisation received a supply of electricity during the qualification year (2008) and the total amount of that electricity.
Step four: Footprinting and reporting
The CRC will be split into phases, with performance over the course of a phase assessed against a participant’s footprint at the outset of that phase. Each phase will require submission of a footprint report, containing a more detailed breakdown of an organisation’s energy use. The introductory phase’s footprint report must be submitted prior to 29 July 2011.
Participants will also have to produce and register annual reports, detailing energy use in compliance years to assess performance against their footprint benchmark. It should be noted that participants will have to submit both a footprint and an annual report for the first compliance year, running from April 2010 to March 2011.
Step five: Ongoing considerations
Indications are that, regardless of a possible change in government, the CRC is here to stay. Organisations will therefore need to comply with the registration and start-up provisions. In addition to the immediate requirements of compliance, the CRC will have far-reaching impacts on an organisation’s commercial arrangements and transactions, both existing and in the future.
By Lucie Drummond, solicitor,Ross Fairley, partner andMichael Barlow, partner, Burges Salmon LLP.
E-mail: lucie.drummond@burges-salmon.com;ross.fairley@burges-salmon.com;
