Will CRC scheme deliver what is promised?

Callum F. Stuart, international project development manager for the energy and environmental services division of McKinnon & Clarke examines what we should expect from the soon-to-be-introduced scheme:

London – In April, we will see the long awaited advent of the CRC Energy Efficiency Scheme within the UK, however questions remain over whether the new CRC legislation will make any real impact on the Government’s aggressive targets for carbon reduction set for the year 2020?

The objective of the scheme is to achieve an annual reduction of 3.2 million tonnes of carbon dioxide per annum by the year 2020.  Put into perspective, the scheme will deliver only 1.4% of the total reduction target set by the Government.

In the early drafts of the legislation, emphasis had been placed on keeping the scheme simple in terms of its administration. In reality, this will not be the case.

A recent survey undertaken by our company, McKinnon & Clarke, identified that 54% of participants were unsure whether or not they fall into the 6,000 MWh qualifying criteria, and three in five of them had not factored in the financial implications of having to participate. At the lowest qualifying level, a typical organisation will pay £45,000 a year to advance purchase allowances at a rate of £12 per tonne of carbon dioxide.

As our research shows, many organisations have yet to consider the significant financial implications of this legislation, let alone the steps required to ensure their business complies. 

Of the 20,000 organisations to be impacted by the legislation, only 5,000 will meet the full criteria and, as a result, be required to become full participants.  This leaves 15,000 organisations with the burden of providing ’information disclosure’ without having to participate fully in the scheme.  These organisations will receive no incentive or otherwise to improve their performance.

Another of the scheme’s stated objectives is to provide the necessary incentive for organisations to invest in energy efficiency improvements and thus reduce annual energy costs by £1 billion pounds by the year 2020.  It is estimated that the initial purchase of carbon allowances will cost the 5,000 or so UK organisations involved in the scheme, £640 million.  With this amount of capital being locked away, is it realistic to think that these same companies will have further capital available to invest in energy efficiency improvements?

 At the end of the first year, the spoils of the scheme are shared out amongst all participating organisations.  The businesses at the top of the league table will benefit by 10% in year one, escalating to 50% in year five.  Organisations at the bottom of the table will be in deficit by the same percentages.  Due to the complex nature of the scheme, an organisation cannot foresee or indeed predict with any accuracy where they will land in the league table.  This unknown makes the decision of how much to invest in energy efficiency improvements extremely difficult.

We should be mindful of the experience of the Climate Change Levy (CCL) in the UK over the last eight years, which arguably has encouraged few companies to put processes in place to improve energy efficiency as a direct result of this tax.  Instead, many have benefited from a mechanism by which rebates are achieved and administered through the various trade associations.

Under the current CCL legislation, electricity attracts a charge of 0.47p/KWh, which on current prices adds approximately 5.8% to the price of electricity.  In the initial years of the CRC Energy Efficiency Scheme, carbon will be charged at £12/tonne - a premium of 0.64p/KWh or an increase of 8%.  At this level, it is not expected that the additional cost, whilst presenting a huge burden on UK business and public organisations, will provide the necessary incentive for major investment decisions to be made.

Studies have shown that the price of carbon will need to escalate to between £40 and £50/tonne before organisations will sit up and take serious action.  It may of course be that the escalating penalty/reward mechanism under the CRC provides this necessary incentive, but with the main unknown being the price of carbon, this will further complicate the debate on whether capital investment in energy efficiency measures are worthwhile.

With the CRC Energy Efficiency scheme designed to reward organisations that cut their carbon emissions, the odds are stacked against some businesses that have already made significant strides to reduce energy consumption.  Unfairly, past performance is not given consideration under the new scheme and many of these proactive businesses have little additional scope to reduce consumption further. 

Additionally, it may work in the company’s best interest to have a high consumption for the base year, April 2010 to March 2011, as this benchmark is what the individual business is measured against in assessing carbon reduction performance under the scheme. As a result, many organisations will defer taking any action to improve their efficiency until April 2011.

Many public sector organisations such as hospitals and local authorities have already implemented robust energy-reducing measures, and little more can be achieved without impacting on performance or incurring prohibitive capital overheads.  Unfortunately, the weighting mechanism used to take account of past performance may put less flexible public organisations at a disadvantage.  Private organisations will typically have more flexibility to rationalise their use of energy through consolidation and restructuring.

The reality is big organisations with a lot to gain will streak ahead and we fear that public-funded organisations may end up paying huge penalties as a result.
Whilst actively encouraging energy efficiency, McKinnon & Clarke is concerned that under the CRC scheme, public-funded organisations will end up meeting the lion’s share of the costs with knock-on implications for public services. 

Having seen the inequitable nature of the CCL rebate mechanism, it is feared that this new CRC legislation will benefit those organisations by virtue of circumstance and their ability to ’play the game’ - rather than rewarding organisations which have put genuine efforts into improving their energy efficiency and significantly reduce their emissions of greenhouse gases.