RSS feedsQ: The Carbon Reduction Committment (CRC) will come into effect in October 2009. What are the requirements of the scheme and what does it mean in practice?
A: Participants need to record all of their UK energy consumption from fixed point sources (e.g. electricity, gas, on-site diesel generators but not vehicle fuel). They will use this information to calculate CO2 emissions and report annually to the government.
For every tonne of CO2 emitted, an organisation will need to purchase an allowance from the government at a fixed price of £12 per tonne in the first three years. After three years they need to be purchased at auction. Any shortfall or excess can be traded on an open market after the initial auction period is over.
Q: That seems like a lot of effort. What benefits are there for my
business?
A: The government plans to repay all the money raised. A league table
of energy saving will weight the level of rebate based on performance.
For those that perform well in the league table there is a triple benefit: reduced energy bills, enhanced reputation and higher rebates. Of course, those at the other end of the league will find the CRC an expensive surcharge on already spiralling energy costs.
Q: Will all businesses be affected or will some companies be eligible for exclusion from the scheme?
A: The government estimates 5,000 organisations will participate, based on their suggested indicator of an annual group electricity bill of £500,000 or more. It is mandatory and many more companies may need to prove exclusion. It is possible that costs for allowances may be, in part, passed to other business
One important feature of the scheme is that all companies under the same control are treated as part of the same organisation. This will have major consequences for companies owned by private equity, for example, or by an overseas parent.
Q: If the scheme doesn’t come into force until Autumn 2009, why do I need to take action now?
A: Electricity use in 2008 determines participation in the scheme so organisations need to start tracking electricity usage now.
We are also advising clients to start tracking their total energy usage from January 2009. This should provide a full year of energy statistics and facilitate accurate forecasting.
We recommend early action as even establishing if an organisation qualifies can be difficult. It takes time to identify energy sources, and developing a system for measurement and reporting will also take time. Many companies need to bridge a skills gap over the next year and to do that they need to begin planning now.
Q: Will my business end up paying more or less than it is now for its energy use?
A: There will be a cashflow impact as allowances are purchased in April and repayments are received in October. This could place a burden on many - including smaller energy-intensive participants and those already suffering liquidity issues, particularly in the current economic climate.
The scheme is designed to incentivise reduced energy consumption. Successful companies will have to pay for fewer emissions allowances, enjoy larger rebates from the government and of course spend less on energy. For these businesses there will be a long-term gain. Some companies will rank low in the league table. The costs are unpredictable as every company’s consumption varies.
During the fixed price phase, minimal electricity use of around £500,000 (6,000 MWh) requires roughly £38,000 worth of emissions allowances.
That’s an increase of 8% on electricity bills. Of course some of this will be given back in the rebate but consider also that the price of allowances on the open market could increase as the scheme continues and the cap on allowances is tightened.
Fines for non-compliance of £25 per tonne of CO2 in the first three years, rising to £75 thereafter, expose business to significant penalties.
Q: We’re doing as much as we can to reduce our energy consumption and to source alternative fuels. Will we get any credit for that?
A: In the first three years of the scheme, the league table will recognise energy savings during the scheme but also energy saving measures taken now.
Purchase of so called green electricity won’t be rewarded. Unless you actually generate renewable energy on site and that energy is not covered by a renewables obligation certificate then you’ll pay for emissions at the grid average rate. Carbon offsetting also has no bearing on the CRC.
Q: If I need more information, where are the best places I can go to get help?
A: The Defra, which will be administering the scheme, has already begun communicating with all businesses that may be affected.
Many trade and professional associations have also been involved in
consultations.
Richard Sharman is head of the carbon advisory group at KPMG
www.kpmg.co.uk/advisory/cag
