Opening the Consultation
The Department for Energy and Climate Change (DECC) published its latest consultation on the Carbon Reduction Commitment Energy Efficiency Scheme on 27th March 2012. The proposal document is accompanied by an impact assessment and a report from KPMG on the costs incurred by participants in setting up and managing compliance with the scheme.
There are 46 proposals, many of which have already been put forward. Some will simplify the process by reducing the scope of the scheme. Others attempt to simplify it by changing parts of the scheme which have proved difficult to interpret and have led to confusion.
We thought that the proposals would relate only to Phase II, but tucked away at the end of the document is the question (paraphrased) “Do you agree with bringing in the simplifications at the beginning of Phase II, or would you like to see them in place for the final years of Phase I?” As you will remember, Phase II starts in 2013/14 for new participants, but 2013/14 is the last year of Phase I for existing participants. (Simples!)
Closing the Scheme?
In his budget statement George Osborne said that the CRC scheme might be closed “should very significant administrative savings not be deliverable”. The KPMG report on costs concluded that the principal costs were incurred in setting the scheme up and that they would be significantly reduced in subsequent years. They calculated that for every tonne of CO2 reported, the administration cost in the first year averaged £1.36 but only £0.11 per tonne for each of the remaining years of Phase 1. On this basis it could be argued that significant administrative savings are on the way, so there’s no need to close the scheme. On the other hand, many people are already arguing that it should be closed and replaced by changes to CCL and CCA, but that’s another debate. (See question 37)
Here is a summary of the proposals. The proposal number is indicated at the end of each paragraph. Some are quite complex, especially the ones about simplification. Some will lead to debate and need further clarification. If in doubt, refer to the full text at http://www.decc.gov.uk/en/content/cms/consultations/crc_simp_cons/crc_simp_cons.aspx
Things we expected
- The list of fuels to be reported on is cut from 29 to 4: electricity and gas, and gas oil and kerosene used for heating.
- Bottled gas and gas used directly for electricity generation will be excluded.
- Self-supplied gas will be included only when it is natural gas.
- Bio-methane and other gases will be excluded.
- The 90% rule is abolished
- There will be no residual measurement list and no distinction between core and residual energy
- No footprint reports in future
Things to make life simpler
- Qualification will be based on supplies through settled half-hourly meters only. (1)
- Automatic registration. Most participants in Phase I will also participate in Phase II and will have to register in 2013. If there is no change, details will not need to be re-entered but will be carried across automatically from the original registration. (3)
- Class 01 and class 02 electricity meters to be excluded, since these are almost always for domestic supplies. For the same reason gas meters registering less than 73,200kWh per annum will also be excluded. (7)
- Gas, gas oil or kerosene used to power CHP will be excluded. However, the Electricity Generation Credit (EGC) will be removed from such plants.
- CRC emission factors to be aligned with DEFRA’s Greenhouse Gas Reporting Guidelines. As we move towards mandatory GHG reporting it make sense to have universal values.
- CCA facilities and EU ETS installations to be removed from the scope of CRC. The intention has always been to avoid double taxation of emissions but participants have found the existing rules very complex. This proposal appears to be for the blanket exclusion of CCA facilities and EU ETS installations from the scheme, but those units will be tightly defined. Exemption will only apply to those parts of an SGU or site which are directly affected by CCA or EU ETS. The rest of the activity will be covered as before.
- Increased flexibility to disaggregate. SGUs will be able to disaggregate regardless of size, allowing groups to participate more in line with their financial reporting structures and corporate GHG reporting requirements. If a parent’s consumption falls below the qualifying level following the disaggregation of a subsidiary, that parent still has to participate. Disaggregation will require the mutual consent of the units involved. Disaggregation will be permitted on an annual basis. (19/20/21/22)
- Allowance Sales will be carried out after the end of each compliance year for the rest of Phase I. The government has confirmed the price of £12/tCO2 for 2011/12 and the same price was confirmed in the Budget for 2012/13. For Phase II there will no longer be a cap on allowances and there will be no safety valve. Instead there will be two fixed price sales; one before the end of the compliance year and one after the year-end at a higher price. Participants who have surplus allowances will be able to trade them on a secondary market. (It’s difficult to see how this would arise, unless they bought too many at the first sale before the year-end.) It will be possible to bank allowances and to sell them to other participants or to keep them for a later year. It will still not be permissible to bank allowances from one phase to another. At the end of Phase I any surplus allowances held will simply expire. (34/35/36/37/38)
- Surrender Deadline. This will be deferred to the end of September from 2013. Allowances for 2011/12 still have to be surrendered by the last working day of July 2012. (39)
- 2013/14 – only one Annual Report. As noted above, 2013/14 is both the last year of Phase I and the first year of Phase II. The government will accept a single annual report for both purposes. (40)
- Retaining Records. This is generally reduced to 6 years. Previously some records had to be held for as much as 12 years. (41)
- Timing of Changes. Do you want to wait for Phase II, or would you like to see some changes introduced earlier? An example which DECC suggests is bringing in the reduced fuel list.
Things we’ll need to think about
The rest of the document deals with particularly complex issues and special situations. In several cases the proposals are not specific; rather a request for participants to submit their own ideas. Here is a summary of the main points. Again, the proposal number is given after each paragraph. (Note that proposal numbers are not the same as question numbers.)
- Supply at the direction of another party. This covers the situation where a third party is involved in procuring the energy. That company would be liable under CRC, but might claim relief in respect of ‘unconsumed supply’. Is this an attempt to clarify the PFI situation? In some circumstances a PFI operator purchases the energy and provides it to the building user as part of the package without separate itemisation. (4)
- Payment requirement. At present payment must pass to confirm a supply relationship, but this will not be required in future. Again, this may be intended to clarify the PFI situation if building users are not specifically charged for energy. (5)
- Unmetered supplies. The proposed changes will mainly affect local authorities and their use of energy for street lighting. Certain types of unmetered supply currently fall outside the scope of CRC. The proposal is intended to close this loophole. (6)
- Unconsumed supply. Proposal 8 does not apply in a landlord/tenant situation. Where an organisation procures energy and supplies all or part of it to a third party it can only claim that that energy is unconsumed if it has a supplier relationship, including metering, with that third party. There are scenarios and diagrams in the consultation document to explain what is intended. Going back to the PFI situation: if a PFI operator is supplying energy to a building there will be a meter which shows how much energy is being supplied to that building. The operator can claim that there is a supplier relationship even if there is no specific charge for energy because proposal 5 removes the payment requirement for defining supply. The PFI operator will claim unconsumed supply and the energy will be the responsibility of the operator of the building for CRC. (8)
- Ground lease – landlord/tenant. The government does not propose any radical change to the landlord/tenant rules which have given rise to much disagreement and confusion, but the consultation does ask for suggestions. They claim that no clear consensus has so far come from stakeholders. The one change they do propose is that where the lease is for the land only, and the building and all related services are solely the responsibility of the tenant, then the landlord will not be responsible under CRC. The ground lease must be for a minimum of 40 years. (9)
- Modification to self-supply exclusions and cross-licensed activities. Broadens the exclusion of energy used for the transmission of energy. (10)
- Revised emissions factor for self-supplied electricity. Corrects for the fact that there are no transmission losses for electricity consumed at the point of generation. (11)
- Energy Suppliers’ Statements. The government will work with energy suppliers to ensure that their statements are more in line with CRC requirements. In some cases the information has been incomplete so that participants have suffered the 10% penalty for estimating. From Phase II the requirements for the timing of readings will be more flexible. Suppliers of gas oil and kerosene will also be required to provide statements. (15/16)
- Electricity Generating Credits (EGCs). These credits are awarded to very small generators and offset the emissions from the fuel to the generating process. Under proposal 10 this fuel will be excluded, so the EGCs will be withdrawn. The net effect should be negligible. (18)
The remaining proposals are quite specific, relating to Academies, to designated changes and post-qualification organisational changes. Organisations which are directly affected by these issues should review proposals 23, 24, 25 and 26 and take professional advice as appropriate.
There are general questions on whether the parameters of the Performance League Table should be moved from law into guidance, whether independent third parties should be appointed to hear appeals and whether Scottish ministers should continue to hear Scottish appeals.
Finally, participants are asked if they could report emissions by geographic region, and are invited to provide details of their administrative costs broken down by one-off, registration, annual report and external costs.
Wouldn’t it just be simpler to load it all on to the Climate Change Levy?