CRC: detailed analysis of DECC consultation on proposals to simplify the scheme

Practical Law UK Legal Update 0-518-6842 (Approx. 10 pages)

CRC: detailed analysis of DECC consultation on proposals to simplify the scheme

by PLC Environment

Terms used in this update

Terms that appear in capital letters in this update are defined in Practice note, CRC Energy Efficiency Scheme: PLC glossary and abbreviations.

Background: consultation on how to simplify the CRC

The CRC Energy Efficiency Scheme (CRC) is a mandatory emissions trading scheme for large non-energy intensive organisations in the private and public sectors in the UK. The CRC was introduced by the CRC Energy Efficiency Scheme Order 2010 (SI 2010/768) (CRC Order) and came into operation in April 2010.

The CRC is divided into several Phases. Phase 1 (also known as the Introductory Phase) runs from 1 April 2010 until 31 March 2014. Phase 2 is due to start on 1 April 2013 and will run until 31 March 2019. The two Phases overlap.

Participants and industry and trade associations have criticised the complexity and the administrative burden that the CRC placed on Participants. As a result, the Department of Energy and Climate Change (DECC) published five discussion papers in January 2011, which sought views on how the scheme could be simplified (see Legal update, CRC: DECC publishes five discussion papers on simplifying the scheme).

In June 2011, DECC published detailed proposals for simplifying the CRC and a summary of the responses to the five discussion papers published in January 2011 (see Legal update, CRC: government outlines detailed proposals to simplify the scheme).

The government said in the March 2012 Budget that:

It would consult in 2012 on how to simplify the CRC.
If it is not possible to achieve very significant cuts in the administrative burdens, it would bring forward proposals in autumn 2012 to replace the CRC with an alternative environmental tax.

(See Legal update, 2012 Budget: environmental announcements: CRC Energy Efficiency Scheme.)

For more information on the CRC in general, see:

Practice note, CRC Energy Efficiency Scheme: overview.
CRC Survival Kit.

Consultation on proposals for simplifying the CRC

On 27 March 2012, DECC, together with the devolved administrations, published:

A consultation paper containing 46 proposals to simplify the CRC in order to reduce the administrative and regulatory burden on Participants in the scheme. The Consultation also includes a summary of responses to the proposals set out in the document containing proposals to simplify the CRC published in June 2011. Broadly, the proposals set out in the Consultation confirm those published in June 2011.
An impact assessment.
A report by KPMG on the administrative cost of the CRC.

The consultation closes on 18 June 2012.

The government is aiming for amending legislation to be in force by April 2013 when Phase 2 begins. However, the consultation asks respondents if they think any of the changes to the scheme should be made before Phase 2 starts.

The CRC will not be scrapped

The government has decided that a simplified CRC will provide the most effective way of incentivising organisations to implement energy efficiency measures. It thinks that the tailored combination of reputational, financial and standardised energy measurement and monitoring drivers remain the most effective way to tackle the wide range of barriers to the uptake of energy efficiency that exist in the sectors covered by the CRC.

The consultation only focuses on the simplification of the CRC. In the March 2012 Budget, the government said that if it is not possible to achieve very significant cuts in the administrative burdens, it would bring forward proposals in autumn 2012 to replace the CRC with an alternative environmental tax. If it decides to replace the CRC, it will engage with businesses before the autumn to identify potential alternatives to the CRC.

Qualification criteria

Three changes are proposed in relation to qualification under the CRC:

From Phase 2 onwards, qualification under the CRC will be based on electricity supplied only through Settled Half Hourly Meters (HHMs).
The Qualification Amount (also known as the qualification threshold) of 6,000 MWh will not be lowered.
The government will introduce an automatic population mechanism for Participants whose details do not change from the previous Phase. However, new entrants, those Participants whose corporate structures have changed or those wishing to disaggregate Undertakings will still have to undergo the full registration process. It is not clear if this mechanism will be introduced in time for registration for Phase 2, which will take place in Compliance Year 2013/14.

(Chapter 1.1, pages 14-15.)

Supply rules

Fifteen changes are proposed to the existing supply rules. Some of the changes are made to "iron out" some of the difficulties that have come to light as Participants have tried to work out what supplies they were responsible for under the CRC in order to register and to produce their Footprint Reports, rather than to simplify the scheme. Although some of the changes are significant (for example, the reduction in the number of fuels that the scheme covers), the concept and structure of the supply rules are preserved. Consequently, this aspect of the CRC is unlikely to be simplified by the proposed changes.

The key changes are as follows:

The supply rules will be tightened so that an organisation will be responsible under the CRC for energy supplies that it receives or energy supplies "made at its direction".
The requirement in the definition of "supply" for a transfer of payment will be removed.
The CRC will be extended to cover passive pseudo and pseudo non-half hourly so that Participants will have to report on and surrender Allowances for such supplies. These supplies would not count towards qualification, owing to the change to the qualification criteria.
The ability to claim that a supply is an Unconsumed Supply will be limited. A Participant will only be able to claim a supply is an Unconsumed Supply where the relationship with the third party that is actually consuming the supply falls within the definition of "supply" (including the metering provision).
Landlords will remain responsible for supplies of energy to their tenants, except where:
- the landlord owns only the land and the tenant builds on the land (a groundlease);
- the landlord supplies the energy to the tenant; and
- the tenant is the sole occupant of the building and is wholly responsible for its maintenance, and hence can control its energy performance.
The number of fuels covered by the CRC will be reduced from 29 to 4 so that Participants will only need to report on electricity, gas, kerosene and diesel (gas oil) (but only if the latter two are used for heating).
Emission factors (which are used to calculate the CO2 emission associated with different fuels) will now be the same as those used for greenhouse gas (GHG) reporting and will therefore be updated annually rather than for each Phase.
The Residual Percentage rule (also known as the 90% rule) will be removed so that Participants will have to report on 100% of their supplies of the four fuels covered by the CRC. This will enable the requirement to produce a Footprint Report and a Residual Measurement List at the beginning of each Phase to be removed as well. The government is also consulting on introducing a de minimis threshold for diesel, kerosene and gas.
Diesel and kerosene suppliers will be required to supply an annual statement of use to Participants in the same way as electricity and gas suppliers do.
In connection with Climate Change Agreement (CCA) Facilities and EU ETS Installations:
- the supply rules will be amended so that facilities covered by a CCA and installations covered by the Emissions Trading Scheme (EU ETS) will not need to surrender Allowances under the CRC for electricity supplied to those facilities and installations;
- electricity supplies to CCA Facilities and EU ETS Installations will not need to be considered when assessing whether an organisation qualifies under the CRC. This will allow the three CCA Exemptions to be removed from Phase 2; and
- the CCA Exemption for the remainder of Phase 1 will be amended to that organisations that were re-certified under the 2009/11 CCA scheme will not lose their exemption for the 2012/13 and 2013/14 Compliance Years as was due to happen owing to the end date of the CCA target period.
Electricity Generating Credits (EGCs) will be scrapped.

(Chapter 1.2, pages 16-42.)

Organisational rules: disaggregation

There are five proposals setting out changes to the existing rules on disaggregation in the consultation.

The key changes are as follows:

The rules on organisational structures will be made more flexible to allow organisations to participate in the CRC in their "natural business units".
The Highest Parent Undertaking (HPU) of a Group will still have to register for the Group at the beginning of a Phase but the rules on disaggregation will be extended so that any Undertaking in the Group can participate separately (not just Significant Group Undertakings (SGUs)).
There will not be a minimum threshold for disaggregation, so any subsidiary will be able to disaggregate. The remainder of the Group will not have to exceed the qualification threshold. Even if the remainder of the Group has a very low energy consumption, it will still have to participate after its subsidiaries have been disaggregated.
Any subsidiary at any level will be able to disaggregate. A subsidiary which itself has subsidiaries can disaggregate either with its subsidiaries or without them. If it disaggregates without its subsidiaries, those subsidiaries will either have to be absorbed into the HPU's Group or have to register separately.
The concept of Significant Group Undertakings (SGUs) will be removed, so the requirements to disclose all SGUs at registration and in Annual Reports will also be removed.
At the start of the next Phase, the Group will re-aggregate under the HPU for the purposes of qualification, although the subsidiaries can be disaggregated again for the next Phase.
Both the HPU and the subsidiary that is to be disaggregated will have to consent to the disaggregation. The subsidiary's consent will be inferred when it completes an application for registration within the necessary timeframe.
The timing for disaggregation will be extended. A Group will be able to request that a subsidiary is disaggregated at any point during the first year of a Phase. Also, Participants will have the opportunity to disaggregate on an annual basis.

The consultation sets out four options for the treatment of academies, which are set out on page 49 of the consultation.

(Chapter 1.3, pages 44-48.)

Organisational rules: Designated Changes

There are nine proposals setting out changes to the existing rules on Designated Changes in the consultation.

The key changes are as follows:

The concept of an SGU will be replaced with a definition that only covers large single Undertakings. Going forward, Designated Changes will only cover Participants and single Undertaking members of a Participant that were large enough to qualify for the CRC in their own right. These entities will be known as Participant Equivalents (PEs).
Participants will be required to report on PEs at registration and in their Annual Reports.
An organisation that is not a Participant and that acquires a Participant or a PE will have the option of registering for the Participant or PE (as relevant) on its behalf.

(Chapter 1.4, pages 50-56.)

Organisational rules: trusts

The rules on how the CRC applies to trusts will be amended to allocate responsibility for CRC compliance to the entity that has the greatest influence over the energy efficiency opportunities.

So trusts with one controlling beneficial owner or trusts where there is an investor (beneficiary) with a share of over 50%, will have their energy supplies grouped with the beneficial owner/investors for the purposes of qualification and participation in the CRC.

The following trusts will be treated as Undertakings for CRC purposes:

Trusts that carry out activities under the Financial Services and Market Act 2000 (FSMA 2000) (for example, private equity funds or collective investments). CRC responsibility will rest with the operator of the trust/private equity fund.
All other trusts not falling into the categories already specified (for example, discretionary trusts, or unincorporated property joint ventures). CRC responsibility will rest with the trustee.

Crucially, trusts that are treated as Undertakings will be kept separate so that they are not grouped together for CRC purposes just because they have the same organisation acting as trustee.

This change is one that the private equity industry have been calling for and which will make compliance with the CRC for organisations offering professional trustee services much simpler.

(Chapter 1.5, pages 56-60.)

Sales of Allowances

Six changes are proposed to the existing rules regarding the sale of Allowances by the Consultation.

The key changes are as follows:

Two fixed price sales per year in Phase 2 will replace the auctioning of a limited/capped number of allowances in Phase 2. The first sale will be a cheaper forecast/forward sale at the beginning of an Annual Reporting Year. The second sale will be a more expensive "buy-to-comply" sale after the end of an Annual Reporting Year.
The Safety Valve will be removed, since it will not be needed when two sales of Allowances take place each year and the scheme is not capped.
Banking Allowances for use in a future Phase will not be allowed.
For the last two years of Phase 1 and beyond, the deadline for surrendering Allowances annually to the Administrator will be moved from July to September.

By having two sales of Allowances for each Annual Reporting Year with different prices, an element of trading is retained in the CRC. Although simpler than an auctioning system, Participants will still need to decide how many Allowances to buy at the beginning of an Annual Reporting Year, so they will still have to carry out emissions forecasting. This aspect of the scheme is still complex.

(Chapter 1.6, pages 60-62.)

Reporting and record keeping

The key three changes to the reporting and record keeping rules are as follows:

The requirement to produce two Annual Reports (one for Phase 1 and one for Phase 2) in Annual Reporting Year 2013/14 (due to overlap between the two Phases) will be removed. It is not clear if the requirement to produce two Annual Reports at the end of each future Phase will also be removed.
Most records will only have to be kept for six years after the end of the compliance year that they relate to.
Information about the Participant's position in the first Performance League Table (PLT) should be held for at least six years after the end of the Compliance Year in which the first PLT was published.

(Chapter 1.7, pages 63-65.)

No decision on Performance League Tables

The first Performance League Table (PLT) was published in November 2011 (see Legal update, CRC: Environment Agency publishes first Performance League Table).

The government has said in the consultation that it will retain a reputational driver for the scheme and that it is important to see what impact the first couple of PLTs have in creating reputational drivers for energy efficiency. Therefore, it is not possible to make a decision on the reputational elements of the CRC at present.

The rules about the PLT and the metrics used to calculate a Participant's ranking in the PLT will be moved from the CRC Order into the CRC guidance, so that a decision about the type of reputational driver the CRC should have for Phase 2 can be taken later.

(Chapter 1.8, pages 66-67.)

Scheme fees

The consultation says that the level of CRC fees will be reviewed for future Phases but the type of charges levied will remain the same.

(Chapter 1.9, page 67.)

Appeals to be delegated to the First-tier Tribunal

From Phase 2 onwards, appeals under the CRC in England and Wales will be made to the General Regulatory Chamber of the First-tier Tribunal. This means that the length of time for lodging an appeal will change from 40 working days to 28 calendar days.

The exception will be appeals against a decision taken by Ministers under the scheme. In these cases, an independent person will be appointed to hear the appeal.

(Chapter 1.10, page 67.)

CRC guidance

The Administrators are reviewing the CRC guidance and have recommended that the existing guidance should be consolidated into three documents covering:

Qualification.
Compliance.
Use of the CRC Registry.

The Administrators anticipate publishing the consolidated guidance on compliance and the use of the registry in 2012. Consolidated guidance for future Phases will be updated to reflect the outcome of the simplification review.

(Chapter 1.11, page 68.)

Comment

A large number of changes are being proposed and some will undoubtedly reduce the CRC administrative burden for Participants (for example, the changes to the rules on disaggregation, scrapping Footprint Reports and the treatment of trusts). However, the changes are not the wholesale revision, or scrapping, of the CRC that Participants were hoping for, or that the Chancellor, George Osborne, suggested in his 2012 Budget announcement.

David Symons of WSP said:

"The changes announced today (27th March 2012) are far from the bonfire of administration heralded in last week's budget. Instead of tinkering with CRC rules and heralding these as significant changes, the government would do better to really focus on how it can help and encourage businesses to reduce their energy bills."

(WSP: Soundbites - Government announcements and the UK budget, 27 March 2012.)

The impact assessment published by DECC alongside the consultation, says that if the government's preferred package of amendments is made to the CRC, £130 million of costs will be saved over 20 years. It remains to be seen if these cost savings are significant enough for the government to decide not to bring forward proposals in autumn 2012 to replace the CRC with an alternative environmental tax.

The CBI has suggested that the CRC should be scrapped and replaced by a combination of an increase to the Climate Change Levy (CCL) and introduction of mandatory GHG reporting to ensure companies continue to monitor and reduce their GHG emissions.

Rhian Kelly, CBI Director for Business Environment policy, said:

"It would be difficult to bring in mandatory reporting while the unworkable CRC stays in place. We urge the Government to scrap the CRC and replace the reporting elements of it with mandatory carbon reporting. This should prove a key driver in reducing GHG emissions and provide a less complex, costly and bureaucratic process for businesses."

(CBI: Delay on emissions reporting frustrating, 27 March 2012.)

Under section 85 of the Climate Change Act 2008, the Secretary of State is required either to make regulations requiring a company directors' report to contain specified information about GHG emissions from activities for which the company is responsible, or to report to Parliament explaining why such regulations have not been made. On 27 March 2012, Defra published a report setting out why no regulations have been made (see Legal update, Directors' report: greenhouse gas emissions). It appears that the government has decided to hold off introducing GHG reporting at least until it has decided if the CRC will be retained. However, as there are just over 2,000 Participants in the CRC, that leaves a large part of UK businesses without obligations to monitor and measure their GHG emissions.

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