Simplifying the energy burden

The first reporting year for the CRC Energy Efficiency Scheme has just finished and all organisations included in the programme should have completed their returns. The early evidence suggests that the issue of collecting the hard data needed for the annual return has been anything but easy. The government seems to have come to the same conclusion, judging from its latest proposals regarding the scheme.

‘Simplification’ is the stated aim of the proposals launched in July by the Department for Energy and Climate Change (DECC). According to the climate minister Greg Barker, more radical options were considered, including even scrapping both this and the Climate Change Agreements for energy-intensive sectors. The proposals in the latest consultation will form the basis of legislation early next year and will take effect in time for the start of Phase II of the scheme in 2013.

Given that the multi-layered, incentive-driven approach of the original CRC has now been abandoned, it would seem to make sense to trim away some of the detail. In fact, the latest proposals will help both participants and administrators to reduce the time and complexity associated with the scheme.

However, the scheme is now well underway, with the first league table of performance due to be published in October this year and the first sales of emissions allowances (a retrospective sale for emissions already made) due for next year.

Entry requirements
Currently, there are two requirements for entry into the scheme: possession of a ‘settled’ half-hourly electricity meter (i.e. one used by the utility in connection with the settlement system in the UK electricity market) and an annual supply through all half-hourly meters, whether settled or not, of at least 6,000MWh. Only those organisations satisfying both criteria are required to take part.

The government plans to reduce this two-stage qualification to one which will depend on the amount of electricity as measured by just the settled meters. As this only considers consumption through one type of meter, it could actually reduce participation in the scheme. The government is therefore considering lowering the threshold figure, but the proposals do not give any indication what such a figure might be. Also, there is to be a clearer distinction between different schemes: organisations involved in Climate Change Agreements (CCAs) or the EU Emissions Trading Scheme (ETS) will not have to take part in the CRC as well.

Data collection
One of the major complaints about the CRC has been the number of different fuels, whose emissions must be considered. As currently structured, some 29 different fuels are included. Yet according to the government, over 95 per cent of the emissions captured by the CRC come from just two sources – electricity and gas. So the government was to cut the list to just four – electricity, gas, kerosene and diesel used for heating (i.e. not transport fuel). That should reduce the reporting burden considerably. The reason for including kerosene and diesel is their use in areas off the natural gas supply grid, mainly Northern Ireland and rural areas of the UK.   

As a consequence of the clear separation of the CRC compared with the CCAs and EU ETS, together with the move to just four reported fuels, then the 90 per cent rule would also be abolished. This can be achieved by requiring participants to report on 100 per cent of emissions arising from non-CCA and non-ETS use of the four nominated fuels.

Allowances
A fundamental change to the philosophy behind the scheme is the proposed abolition of the cap on total allowances. The idea behind a cap-and-trade scheme (the original design of the CRC) is that the government sets an upper limit or cap on the total emissions from those in the scheme. That in turn limits the total number of allowances available so participants have to trade amongst themselves for any top-up allowances needed to ‘balance the books.’ As the cap is steadily reduced over time, the ‘scarcity’ of allowances drives up the price. This makes it more cost-effective to implement efficiency measures in order to avoid the penalty of higher expenditure on allowances. This is also the model behind the EU Emissions Trading Scheme.

This may now be replaced with two fixed price sales a year – one an advance sale of allowances for the coming year and the other a retrospective ‘top-up’ sale at the end. As there would be no cap, there is no limit on the number of allowances available. There would, however, be a price differential – allowances in the advance sale will be the cheaper – otherwise people would only buy later when they know exactly how many are required, avoiding any up-front outlay. The government also believes that this differential will ‘create the conditions for a secondary market,’ so there could still be trading in allowances but always at a price below that of the second sale at the end of the year.

For the rest of Phase I, i.e. up till 2013, there would be only retrospective sales with allowance prices fixed at £12 per tonne – in other words the sales will form a ‘buy-to-comply’ mechanism.

Aggregation and disaggregation
Under the existing scheme, the ‘participant’ in a multi-site organisation, or a multi-subsidiary group, is defined as the highest level unit within the UK. That does not always provide the most effective way of managing the scheme within individual organisations. Under the proposed changes, a group would have the option to disaggregate more flexibly to allow the monitoring, management and reporting of energy use for CRC compliance purposes to proceed for ‘natural business units’ as the government describes them, instead of for large groups which seldom/never act together for energy management purposes. The government notes that this would provide flexibility for participation in the scheme where genuinely different groups are, under the current CRC rules, amalgamated only by virtue of a common parent.

Saving energy and money
While it is in the process of significant change, the CRC remains with us and it makes significant demands on the energy management staff, especially in terms of data capture and reporting. It does, however, need to be set in the context of overall potential energy savings. The CRC was set up to encourage a much higher focus on energy efficiency. That focus is clearly right, both in terms of the national interest (for energy security and carbon reduction reasons) but also for the individual participants in terms of reduced expenditure and resource efficiency.

Yet it should be remembered that the savings purely from reduced consumption far outweigh any from avoided compliance costs. Energy efficiency has significant value in its own right, with or without the added imposition of the CRC requirements.

Written by Alan Aldridge, Executive Director, Energy Services and Technology Association (ESTA)

Further reading:
www.esta.org.uk