A stealth tax on energy
Far from the CRC Energy Efficiency Scheme being in limbo, there is much to be done before the first CO2 allowances are purchased — explain Andy Dewis and Scott Cunliffe.
The introduction of the CRC Energy Efficiency Scheme has not been smooth. Criticism on its complexity and registrations well below expectations have dogged the Government’s ‘progressive’ approach to cutting carbon.
During the recent comprehensive spending review, CRC was dealt another blow with the announcement that revenue generated by the scheme would now be ploughed back into the Government’s coffers, not to the organisations topping the league table.
CRC places a focus on cutting carbon and reducing consumption. Its aim is to give organisations the impetus to re-evaluate the case for introducing energy-efficiency measures and investing in capital projects to help manage the risk associated with fluctuating energy prices.
However, the financial carrot has been removed, and the changes to CRC will add approximately 10% on to business energy bills in 2012 — significant irrespective of size of the organisation.
There is no requirement to buy allowances in April 2011, so no budgetary provision needs to be made for this spend. Based on current information, organisations will have to allow for spend in 2012, based on their 2011/12 allowances.
This changes the forecasting process, as organisations will broadly know what their emissions were for the year 2011/12 by April 2012 and can purchase the correct quantity accordingly. However, the budgetary forecast will still need to be applied in the same way.
This will simplify accounting for allowances, as organisations will not have the recycling payment to factor in, and the revenue from the sale of allowances will be retained for public spending.
The assumption for now is that the league table will be retained without any financial implications directly relating to the CRC scheme. The only costs that will need to be factored in are indirect and associated with an organisation’s reputation.
Early Action Metric cost justifications will weaken specifically for the Carbon Trust Standard or equivalent justifications. For AMR there will maybe be a lack of urgency, but there will still be a case based on maximising the value in AMR data to make sure organisations are getting the return on the investment and to reduce exposure to the CRC tax.
What is clear is that as a result of recent changes, the scheme will no longer be revenue neutral as originally promised.
Most of the medium to large organisations in the UK are affected by these changes, and M&C Energy Group is working with clients to understand what they mean in actual terms.
For starters, compliance will still need to be taken seriously. The fines are still there, and an automatic bottom place in the league table still stands for non-compliance. An effective reporting structure, audit trail and approval process still need to be established and followed.
When looking at performance, organisations will need to work smarter to minimise the impact from the CRC changes. This includes developing robust business cases for projects to reduce emissions, which for most organisations will mean more efficient use of energy. Such projects will need to be properly scoped and costed and reviewed on an ongoing basis taking into account numerous internal and macro factors such as the price of energy. The price of energy going forward will seriously impact the yield from a renewable or energy efficiency project for example.
The league table for the additional year should also not be ignored. Prior to the spending review, the recycling of revenue was the core driver for competitive edge, with the secondary benefit of positive PR. With the financial benefits now removed, positive PR is the only benefit. However a poor placement could result in more than red faces.
Effective carbon management is becoming more and more relevant when looking at elements of the business such as supply chain. Four of the largest most recognised retailers in the UK are footprinting their supply chain and, hence, encouraging their suppliers to reduce the footprint in those areas.
A business ranked below its competitors on the CRC league table could expose weaknesses — resulting in public and competitive ridicule or, worse still, lost contracts.
There are more changes on the horizon. The Department of Environment & Climate Change (DECC) recently conducted a month-long consultation period on the amendments to the CRC EES.
The consultation will focus on the postponement of the second phase to allow adequate time to incorporate significant changes to the scheme.
While many see CRC as a stealth tax on energy, this consultation provides businesses with opportunity to shape it for the future. M&C is currently collating a detailed response, which will include feedback from clients, in advance of the wider consultation. We will be happy to share our thoughts with readers over the coming months.
Andy Dewis and Scott Cunliffe are with the carbon-services division of M&C Energy Group.
