While the CRC EES goes on hold...
The CRC Energy Efficiency Scheme has gone on hold, but should that mean that organisations and businesses should put their energy-efficiency agenda on hold too?
Ever since it was first announced, it was clear that the Carbon Reduction Commitment was, despite its simple motivation, a complicated beast. And then it was quickly decided that the best way to stimulate a reduction in carbon emissions was not to focus on reducing carbon emissions per se but to reduce actual energy consumption. Try to imagine how much effort was required from Government, the Civil Service and truly informed people in the industry to get that idea accepted!
So now we have the clumsily named CRC Energy Efficiency Scheme, which applies to large users and slightly smaller users with half-hourly metered electricity. Companies are intended to buy their carbon permits, and those higher up a league table were originally to get money back, so that the scheme would be ‘revenue neutral’.
Now it has all been put on hold for a year. And even when the scheme does get under way, companies will have to buy their carbon permits, but not get anything back. The takings will go into the Government’s coffers.
High-level industry conferences aired all sorts of problems, not least of which was that it appeared that landlords would be responsible for buying the permits but would not be able to pass on the cost to the tenants who, in many cases, control or don’t control how energy is used.
Just as the more conscientious people in the industry believed that reducing energy consumption was a better goal, so there were sharp-witted people who realised that simply being an energy-efficient organisation would not guarantee a high place in the league table, with its associated financial benefits. Quite the contrary, in fact. The quick thinkers soon realised that an organisation could be extremely energy efficient but be near the bottom of the league table after three or four years because the energy savings were made before the scheme came into operation.
Those thinking people suggested pacing energy-saving improvements over five years or more to help them achieve a better performance in the league tables.
Are they right?
Consider how much it costs to buy the electricity to generate a tonne of carbon dioxide for which the permit initially costs £12. A kWh of electricity is associated with about half a kilogram of CO2, so 2000 kWh of electricity is responsible for a tonne of CO2. The cost of that electricity might be about £200, depending on your tariff. So does it make economic sense to stage energy-saving measures to ensure a place in the league table, or is this a sop to a company’s corporate social responsibility vanity?
Now that the first sales of carbon permits have been put off for a year, and the income will not be returned to participants in the form of recycling payments, the CRC EES has gained a different perspective. The official Government statement is: ‘The CRC Energy Efficiency Scheme will be simplified to reduce the burden on business, with the first allowance sales for 2011-12 emissions now taking place in 2012 rather than 2012.’
The income, which is expected to be about £1 billion a year by 2014-15 will be ‘used to support public finances, including spending on the environment’.
The thinking behind the delay was presented by Chris Huhne, Secretary of State for Energy & Climate Change, to a conference of the Confederation of British Industry last month (November). He said, ‘The principle is sound — saving energy, reducing emissions and improving competitiveness through a clear and transparent nationwide programme, but the implementation fell short of the ideal.
‘We share many of your concerns about the CRC. That is why we have made a commitment to simplify it.’
The first stage of revising the scheme is a UK-wide consultation on delaying the start of phase II of the CRC. Participants will not need to register for phase II until 2013, creating time for a proper dialogue with participants about what needs to be done to improve it.
The administrative burden is also being reduced, with a proposal to exempt over 12 000 information declarers from the scheme. He explained, ‘We now have enough feedback from the first stage of the CRC to remove obligations in information declarers without compromising the scheme’s environmental aims.
‘The Government believes the CRC can be a valuable tool for businesses to cut carbon and boost efficiency.’
One reaction to the announcement of the delay puts a perspective on the potential of the scheme to reduce the UK’s energy consumption and carbon emissions. David Bilclough, regional councillor for the CBI in the north east of England and chair of John N. Dunn Group, explains, ‘The CRC is a mandatory scheme aimed at improving energy efficiency and cutting emissions in large public and private-sector organisation. These organisations are responsible for around 10% of the UK’s emissions.’
He continues, ‘From the UK renewable industry’s point of view, it is disappointing that the Government has announced it is going to delay by a year the implementation of the CRC Energy Efficiency Scheme to encourage businesses and organisations to save energy. However, many companies are taking their carbon-reduction commitment seriously and should not delay efforts to do so after this announcement.’
Describing the delay as a ‘shame’, David Bilclough says, ‘We would still encourage and believe that businesses will continue to commit themselves to this innovative scheme. Businesses and organisations have another year to prepare for the introduction of the CRC, and in this post-credit-crunch world, where everyone is tightening belts, perhaps it is not a bad thing.’
One impact of the revised scheme, as Alan O’Brien, chief executive of Sabien Technology, explains, is that the CRC is now a tax burden. He says, ‘Many of the participants will need to revisit their cash-flow forecasts, budgets and timelines to deliver the energy-efficiency initiative. Minimising these unexpected financial impacts is a priority. Many of the UK providers of energy-efficiency technology, us included, will benefit from the changes as participants require proven technology and services to reduce these unbudgeted costs.’
Rachel Cooper, energy consultant for global energy-management specialist Schneider Electric, also sees the CRC Energy Efficiency Scheme as now being a carbon tax on larger companies and public-sector organisations. She believes that the best way for businesses to prepare for the scheme is to accurately monitor and manage energy usage.
She comments, ‘The good news is that organisations will not need to purchase allowances for 2011-12 until 2012. This allows organisations to prepare for the start of the scheme by ensuring that they understand their emissions usage and are taking action to monitor and reduce. Furthermore, if they monitor and manage their usage effectively, they will know what the financial implications will be, assuming that the cost of allowances remains the same for 2012.’
There are over 3000 participants in the scheme, and its cost has suddenly escalated. Alan O’Brien says, ‘One of the UK’s largest retailers is claiming the CRC cost for their organisation has now increased from £10 million to £20 million a year. Some of the early action metrics organisations have invested in become less important as participants accelerate the implementation of energy-efficiency technology.’
Although the future mechanics of the scheme are unknown Rachel Cooper points out that organisations will need to report on and pay for their energy usage. She stresses, ‘Organisations should therefore act now to ensure that their data management is efficient and effective. They should also review energy-saving projects in light of this change, as this may make projects more attractive with improved return on investment. If organisations act quickly, they will reduce their risk in relation to the scheme and benefit from lower fuel bills.’
Alan O’Brien concurs: ‘The need to reduce energy consumption will now be firmly in the sight of finance directors, with increasing pressure and demand being placed on the energy managers to deliver cost-effective initiatives to reduce carbon emissions.’
‘Organisations will now need to re-budget in light of the CRC changes and begin to source proven technologies that deliver the greatest level of savings with the quickest paybacks.’
Taxes are something that finance directors well understand, even if they do not directly appreciate the benefits of improving energy efficiency. At one stroke, the CRC ‘stealth tax’ makes energy efficiency and tax avoidance the same thing. Could anyone really criticise this kind of tax avoidance?