Legal Briefing

Energy efficiency in the UK: legal changes and commercial impact

The In-House Lawyer Logo

Projects, energy and natural resources | 09 December 2015

In recent years various UK governments have made commitments at international, European and national levels to reduce overall emissions of greenhouse gases including through the promotion of energy efficiency. These high-level commitments have impacted both commercial and domestic energy consumers through the introduction of regulation, taxation and incentives aimed at helping to meet these commitments.


Since the election of the current Conservative government in May 2015, implementation of these policies and schemes has been amended and future developments have come under consideration.

The current government’s commitment to policies introduced in the Energy Act 2011, including the Energy Companies Obligation (ECO) and the Green Deal, appears to be waning, while a significant consultation, launched in September 2015, proposes an extensive rationalisation of the existing collection of schemes and taxes that relate to commercial energy efficiency.

Taken together, these actions have created a great degree of uncertainty. The likelihood is of a change of policy towards energy efficiency and usage which will be relevant to all businesses, whether they consider themselves heavy users of electricity or not: in particular the questions of how energy efficiency will be reflected in regulatory obligations (through reporting) and financial obligations (through taxation) are of particular commercial relevance.

COMMERCIAL ENERGY EFFICIENCY: THE CURRENT REGIME

The current approach to emissions and energy efficiency in respect of business and industry is a blend of a number of reporting regimes and taxes, including the Climate Change Levy (CCL), the Carbon Reduction Commitment Energy Efficiency Scheme (CRC), Climate Change Agreements (CCA) and the Energy Savings Opportunities Scheme (ESOS). The result is a complex approach, with a degree of overlap in places, which arguably lacks clear direction and, ironically, efficiency.

In order to understand the changes that the government proposes, it is worth first establishing a picture of how these schemes function at present.

The Climate Change Levy

The CCL is effectively a tax on energy consumption, levied on non-domestic consumers of certain fuel supplies (eg electricity, gas and solid fuel) and applied at a specified rate per kilowatt hour. As well as the broad incentive to reduce energy consumption represented by a direct tax on usage, the CCL also incorporated a range of exemptions aimed at promoting use of energy from renewable sources. On this basis the CCL has represented not just an energy efficiency measure, but also – indirectly – a measure aimed at reducing emissions.

However, from 1 August 2015, the key provision in the CCL relating to renewable energy – the exemption from the CCL for electricity generated from qualifying renewable sources – was removed. Electricity generated after this date no longer qualifies for Levy Exemption Certificates (LECs) which had quantified the extent to which the consumer was exempted from the CCL. As a result, the CCL now operates primarily as a tax on energy consumption.

The CRC Energy Efficiency Scheme

The CRC performs the roles of both an emissions tax and an emissions reporting scheme. Participants in the CRC (participation being mandatory if the undertaking in question satisfies the threshold criteria) are obliged to report on supplies of electricity or gas (‘supplies’ being relevant energy that the participant receives) and purchase allowances to account for the emissions associated with those supplies.

As with the CCL, the primary incentivisation mechanism from an energy efficiency perspective is that undertakings can reduce the allowances that they will need to purchase to cover their emissions by reducing, through efficiency measures, the supplies of energy that they receive. While the original intent had been for the CRC to be revenue neutral, returning money received from the sale of allowances back to the best performing participants (and thereby providing an additional incentive for efficiency), in 2010 the decision was made to direct revenue to the Treasury, effectively turning the CRC into a tax.

In addition to the revenue-gathering element, the CRC also involves complex registration and reporting mechanisms which have been subject to a number of amendments in an attempt to simplify the scheme for participants. Most recently, in 2013, the number of eligible supplies was drastically reduced from 29 to 2 (electricity and gas used for heating), the scheme was restricted to energy supplied through settled half-hourly meters, and electricity and gas for the purpose of operating 
an installation under the EU Emissions Trading Scheme (EU ETS) or a CCA facility was excluded.

Climate Change Agreements

CCAs are contractual agreements by which operators put in place agreed measures or practices with a view to achieving targets for energy efficiency and emissions reduction.

CCAs are entered into on an industry-wide basis, and have been negotiated by the relevant trade associations for more than 50 energy-intensive industrial sectors, including aluminium, chemicals and food and drink.

CCAs have a two-tier structure: umbrella agreements and underlying agreements. The Department for Energy and Climate Change (DECC) and sector associations formulate umbrella agreements, together agreeing the relevant energy efficiency targets for the sector. The underlying agreement is held by a site, or group of sites, owned by an operator within a specific sector. This agreement contains carbon or energy efficiency targets appropriate for their type of operation.

The idea of the CCA is that particular sectors can reach agreement with the government as to measures that can be put in place across that sector to improve energy efficiency. As such, on a policy level, it has been recognised that CCA sites should be relieved of the reporting and taxation burdens imposed by other schemes in the name of energy efficiency. Therefore supplies to CCA facilities are no longer subject to CRC reporting requirements and no allowances need to be surrendered under the CRC in that respect. Furthermore, CCAs allow energy-intensive business users to obtain a discount from the main CCL rate of up to 90% on electricity bills and 65% on other fuels, in return for meeting their CCA emissions and efficiency targets.

The Energy Saving Opportunities Scheme

ESOS is mandatory for all large undertakings (ie those which employ at least 250 people or which have an annual turnover of more than €50m and an annual balance sheet total of more than €43m) and any other undertaking that is part of the same corporate group as a large undertaking.

ESOS requires undertakings in the UK that meet these qualification criteria to conduct energy saving assessments, including calculating their total energy consumption, carrying out energy audits and identifying where energy cost-cutting measures can be made. These assessments must be carried out every four years.

ESOS does not apply to the public sector, however, it does include not-for-profit bodies that are engaged in a trade or business (including, potentially, some charities) and some universities.

More than 9,000 of the UK’s biggest companies will be required to comply with ESOS, with the initial audits to be conducted by 5 December 2015.

Mandatory greenhouse gas reporting

The mandatory greenhouse gas reporting regime was introduced in 2013. Under the regime, all medium- or large-sized UK quoted companies must report on their greenhouse gas emissions as part of their annual directors’ report.

COMMERCIAL ENERGY 
EFFICIENCY: THE FUTURE?

In the 2012 Autumn statement the coalition government pledged to review the CRC Scheme in 2016 and consider alternative approaches to meeting its objectives. The CCA regime has also been subject to a number of consultations and discussions by both coalition, and previous Labour, governments. However, business users have been faced with the burden of having to adhere to a series of newly introduced policies, such as ESOS and mandatory GHG reporting, while the financial burden of the CRC has sat somewhat awkwardly with the more direct system of taxation under the CCL.

The 2015 Consultation

From 28 September to 9 November 2015 the Treasury and DECC ran a consultation on the business energy efficiency tax landscape. The consultation was broad in scope, and its repercussions are likely to be relevant to any organisation that is currently required to adhere to any of the CCL, CRC, ESOS or mandatory greenhouse gas reporting regimes: in practice this will encompass a large number of businesses across a diverse range of sectors.

One of the stated aims of the consultation was to reduce administrative burdens by simplifying both the reporting and taxation regimes. This is potentially good news for the many business groups who argue that the compliance obligations of the current policies are too burdensome, complex and expensive. In particular, the government proposes to bring forward the commitment to review the CRC.

The government has put across three specific proposals in the course of this consultation:

  1. A single reporting framework for energy use and emissions (taking the existing ESOS regime as a basis);
  2. A single business energy consumption tax based on the CCL (and, consequentially, abolition of the CRC); and
  3. The development of new measures to incentivise investment in energy efficiency and carbon reduction that aim for simplicity of comprehension and compliance and maximise impact – the consultation invites suggestions as to the best approaches to achieve this goal.

From the range of questions asked under the consultation, it appears that the government is considering a number of options as to the form of the new reporting/taxation regime. These questions include whether rates of any tax should vary (eg with smaller consumers paying lower rates), whether the CCA scheme (or any equivalent) should focus on those industries needing protection from competitive disadvantage and whether reporting should be mandatory and reports publicly available.

The consultation had a broad scope, but it is unclear what its ultimate effects will be. What is clear is the government’s intention to end the CRC (both its reporting requirements and with regard to what has become its status as an environmental tax). Otherwise it remains to be seen whether the new regime will reduce burdens on business simply by removing some existing obligations and retaining others (ie abolition of the CRC in favour of CCL (for tax) and ESOS (for reporting)) or whether there will be a real attempt to construct a new regime which consolidates the current disparate range of measures – potentially a challenging project and requiring co-operation between DECC and the Treasury.

The European dimension

One area perhaps notable by its absence is consideration of EU ETS – the Europe-wide market-based mechanism under which certain large emitters are required to purchase allowances to account for their emissions. The consultation does mention EU ETS, but only in noting both that EU ETS falls outside the consultation scope and also that businesses may be required to comply with it.

Therefore there is tacit admission that UK national attempts to rationalise the efficiency and emissions framework are limited and the government will need to be mindful of EU requirements both under EU ETS and in respect of other measures – for example, with regard to reporting the EU Non-Financial Reporting Directive 2014 is due for transposition into national law by the end of 2016 and includes reporting obligations on companies with regard to environmental matters.

ENERGY EFFICIENCY UNDER THE ENERGY ACT 2011: GREEN DEAL, ECO AND MEES

The above measures apply only to commercial undertakings, however the significant housing stock in the UK represents a vast opportunity for energy efficiency savings and the Energy Act 2011 introduced two key measures – 
ECO and the Green Deal – extending to domestic properties.

The Green Deal

The Green Deal was introduced in 2012-13 
as the then government’s flagship 
scheme to encourage uptake of energy efficiency measures for both domestic 
and non-domestic properties. Under the Green Deal these improvements are paid for by loans which are in turn repaid through the property’s electricity bill. The key to the Green Deal is the ‘golden rule’: that additional charges on the property’s electricity bill to cover repayment of these loans will not exceed the savings on electricity and gas charges attributable to the energy saving measures put in place.

In practice the Green Deal has been complex to implement, and one significant issue has been the arrangement of financing. The not-for-profit Green Deal Finance Company (GDFC) was formed to tackle this issue, bundling individual loans in order to access capital and bond markets and thereby reduce rates of interest.

Technically the Green Deal continues to exist. However, on 23 July 2015, DECC announced that it would cease financing the GDFC. DECC cited a number of reasons for this withdrawal of support, including concerns about the industry standards applied in the field, low levels of interest in the scheme and the government’s new spending priorities, such as tackling fuel poverty.

The practical effect has been to leave Green Deal Providers (ie those co-ordinating agreement of plans to install measures under the Green Deal) without a viable source of funding. Furthermore, this step, taken in the context of the above overarching review of policy on energy efficiency, could be interpreted as lack of government confidence in the Green Deal as a whole, leaving it questionable whether any alternative financial provider will fill the gap left by the GDFC.

At this stage it is difficult to avoid the conclusion that the Green Deal is being 
left to die on the vine, with completed projects continuing as before and with the legislation to permit further projects along these lines, but without the necessary financial support in place.

Energy Companies Obligation

ECO was introduced by the Energy Act 2011 as a replacement measure for the Carbon Emissions Reductions Target (CERT) and the Community Energy Saving Programme (CESP), previous government measures also aimed at improving domestic energy efficiency. ECO works alongside the Green Deal, providing support for vulnerable or low-income households unable to participate in the Green Deal and for efficiency measures unlikely to be repayable within a reasonable timescale under the ‘golden rule’. This is achieved by placing obligations on energy suppliers to make targeted emissions reductions by funding these types of improvements, ie reflecting areas where the Green Deal is unlikely to be effective.

The first phase of ECO ran to March 2015 and the second is due to run until March 2017. In the 2015 Autumn Statement, 
plans were announced to replace ECO from April 2017 with a new supplier-side obligation to reduce carbon emissions.

Minimum Energy Efficiency Standards: the Future of Energy Efficiency under the Energy Act 2011?

One measure provided for under the Energy Act 2011 which has yet to come into full effect is Minimum Energy Efficiency Standards (MEES). MEES tie in with the existing Energy Performance Certificate (EPC) regime and prevent the rental of properties that fail to meet specified 
EPC standards.

The Energy Act 2011 envisaged MEES working in conjunction with ECO and the Green Deal. In the absence of the continuation of or replacements for these regimes it is more difficult to see how MEES will develop. However, the signs are that MEES are to be put in place by April 2018 (as required by the Energy Act 2011) and guidance is expected from DECC early next year to give a better idea of how this is to happen in practice. We shall keep developments under close review.

DEVELOPMENTS IN ENERGY 
EFFICIENCY POLICY

The current government appears broadly to have rejected the detailed, and in places overly complex, attempts to legislate for improved energy efficiency in the domestic and commercial sectors brought in by previous governments. The treatment of the Green Deal and of ECO, certainly indicates as much as does the proposal 
to abolish the CRC.

Going forwards, it appears that the preference is for regimes that are simpler 
to implement and to administer, though 
the question of what form these new regimes will take is presently unanswered. 
It is also worth noting the third proposal in the consultation – improved incentives. While this proposal is short on detail, and while it is made clear that such incentives will need to maximise cost efficiency for 
the government, there is the suggestion of a policy built on positive incentivisation rather than just regulation or conditional 
tax rebates (such as CCA).

The government’s formal response to this consultation is likely to be included in the 2016 Budget and is likely to make interesting reading, giving a clearer picture on how energy efficiency measures will be implemented over this parliament (as will guidance on the implementation of MEES). The most important question, however, and one which is left unaddressed in this consultation, is how and whether the new regime will contribute to the UK meeting its emission reduction targets.

By Michael Barlow, partner, and 
Stephen Lavington, solicitor, 
Burges Salmon LLP.