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CRC: EA publishes guidance on qualification for Phase 2
Practical Law UK Legal Update 3-523-3644 (Approx. 8 pages)
CRC: EA publishes guidance on qualification for Phase 2
by PLC Environment
| Published on 08 Jan 2013 • UK |
On 20 December 2012, the Environment Agency (EA), along with the Scottish Environment Protection Agency (SEPA) and the Northern Ireland Environment Agency (NIEA), published guidance on assessing qualification for Phase 2 of the CRC Energy Efficiency Scheme (CRC).
Speedread
On 20 December 2012, the Environment Agency (EA), along with the Scottish Environment Protection Agency (SEPA) and the Northern Ireland Environment Agency (NIEA), published guidance on assessing qualification for Phase 2 of the CRC Energy Efficiency Scheme.
Changes to the rules on qualification and the supply rules may mean that:
- Existing participants will not need to participate in Phase 2.
- Organisations that did not need to participate in the Introductory Phase will have to participate in Phase 2.
Guidance on how to register for Phase 2 will be published in early 2013.
Terms used in this note
Terms that appear with capital letters in this note are defined in Practice note, CRC Energy Efficiency Scheme: PLC glossary and abbreviations.
Background: simplifying 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 to 31 March 2014.
- The registration period for Phase 2 is due to start on 1 April 2013 and the compliance years for Phase 2 will start on 1 April 2014. Phase 2 will then run until 31 March 2019. Phase 1 and Phase 2 therefore overlap.
A number of participants, and industry and trade associations criticised the complexity and the administrative burden that the CRC places on participants. As a result, during 2011 and 2012, the Department of Energy and Climate Change (DECC) consulted on proposals to simplify the scheme. In December 2012, DECC published a response to the March 2012 consultation on proposals to simplify the scheme confirming what changes will be made (see Legal update, CRC: DECC response to March 2012 consultation on proposals to simplify the scheme).
In the response to the March 2012 consultation on proposals to simplify the scheme, the government said that:
- The Qualification Criteria that will apply from Phase 2 onwards will be simplified so that qualification will be assessed only on electricity supplies through Settled Half Hourly Meters (sHHMs). Organisations will not have to consider supplies through other types of Half Hourly Meters (HHMs) when deciding if they qualify for Phase 2 (or subsequent Phases).
- The Qualifying Amount (also known as the qualification threshold) would remain at 6,000 MWh.
- The Environment Agency (EA) would publish updated guidance on the qualification process for Phase 2 in November/December 2012.
For more information on:
- How the CRC is changing, see Practice note, CRC Energy Efficiency Scheme: what changes have been made to the scheme since it was launched?
- The CRC in general, see:
- CRC Survival Kit.
Phase 2 guidance on assessing qualification for Phase 2
On 20 December 2012, the EA, together with the Scottish Environment Protection Agency (SEPA) and the Northern Ireland Environment Agency (NIEA), published CRC Energy Efficiency Scheme: Assessing qualification for Phase 2 (December 2012) (Phase 2 guidance). (Note that, from 1 April 2013, Natural Resources Wales (NRW) will replace the EA Wales as the body responsible for enforcing the CRC in Wales (see Legal update, New Welsh environmental regulator to be called Natural Resources Wales).)
The Phase 2 guidance does not say that it supersedes the existing guidance on qualification (EA guidance: CRC Energy Efficiency Scheme: Am I in?) but as the earlier guidance relates to the Introductory Phase, it is assumed that this is the case.
Changes to Qualification Criteria
The government is going to change the second limb of the Qualification Criteria so that organisations will only have to consider electricity supplies to sHHMs rather than all HHMs. This will mean that some organisations that were required to participate in the Introductory Phase of the CRC will not need to participate in Phase 2.
Treatment of trusts for qualification purposes
In the response to the March 2012 consultation on proposals to simplify the scheme, the government said that changes will be made to the treatment of trusts so that 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.
- That carry out activities under the Financial Services and Market Act 2000 (for example, private equity funds or collective investments) will be the responsibility of the operator of the trust/private equity fund. All the trusts that the operator is responsible for will have to be aggregated together to determine qualification but can then be disaggregated and participate independently in the CRC if desired.
- Not falling into one of the categories specified in the two bullet points above (for example, discretionary trusts, or unincorporated property joint ventures) will be the responsibility of the trustee. All the trusts that the trustee is responsible for will have to be aggregated together to determine qualification but can then be disaggregated and participate independently in the CRC if desired.
The Phase 2 guidance includes a flowchart on page 12 to help organisations decide which entity will have responsibility under the CRC for assets that are held by more than one trust.
Guidance on treatment of private equity funds, PFIs and franchises has not changed
In the response to the March 2012 consultation on proposals to simplify the scheme, the government said that it will not amend the rules on private equity funds that are structured as limited partnerships.
The March 2012 consultation did not propose any changes to how the scheme applies to private finance initiatives (PFI) or to the rules on franchises.
The Phase 2 guidance appears to restate the guidance for these entities in the CRC Energy Efficiency Scheme Guidance for participants in Phase 1 (2010/11–2013/14) (Version 1.2) (July 2012).
Changes to supply rules
In the response to the March 2012 consultation on proposals to simplify the scheme, the government confirmed that 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.
Both of these changes are intended to ensure that complex supply arrangements do not fall outside the scope the scheme, rather than being simplifications of the scheme. Arguably, paragraph 1 of Schedule 1 to the CRC Order does not actually require a transfer of payment in order to establish that there is a supply. The wording in that paragraph appears to be designed to establish that there is a contract for supply in place. However, the Administrator has interpreted this part of the CRC Order as requiring an actual transfer of payment so this change clarifies that, from Phase 2 onwards, payment is not needed to establish that a supply exists.
These changes will mean that some supply arrangements that were excluded from the CRC in the Introductory Phase will be covered in Phase 2. Existing Participants will need to assess their supply arrangements carefully to see if they will be covered in Phase 2. Supplies that are covered and that are made through an sHHM will count towards qualification.
Changes to rules on self-supply
In the response to the March 2012 consultation on proposals to simplify the scheme, the government said that the exclusions for Self-supplied electricity and gas will be extended so that electricity or gas used for a licensed activity (the generation, transmission or distribution of electricity and the transport, supply or shipping of gas) will be exempt.
From Phase 2 onwards, the exclusion will cover:
- Supplies from third parties. (This change will remove the anomaly of internally supplied electricity or gas that is used for licensed activities being exempt but gas or electricity supplied by a third party and used for licensed activities being caught by the CRC.)
- Cross-licensed activities (that is, where electricity is used to transport, supply or ship gas and where gas is used for the generation, transmission or distribution of electricity).
The Phase 2 guidance states that any Self-supplied electricity used for:
- the generation, transmission or distribution of electricity; and
- transporting, supplying or shipping of gas (this is an example of a cross-licensed activity),
will not count when assessing qualification (section 4.2).
The Phase 2 guidance does not say whether supplies by third parties that are used for licensed activities will count towards qualification, but presumably they will not.
The Phase 2 guidance does not say whether Self-supplies that are not used for licensed activities will count towards qualification. Presumably, where these are metered by sHHMs, they will have to be considered when assessing qualification.
Supplies to CCA facilities and EU ETS installations excluded when considering qualification
In the response to the March 2012 consultation on proposals to simplify the scheme, the government confirmed that, from Phase 2 onwards, it will disapply the supply rules to Climate Change Agreement (CCA) facilities and EU Emissions Trading Scheme (EU ETS) installations so that electricity supplies to these facilities/installations will no longer need to be taken into account when assessing qualification.
Section 4.2.5 of the Phase 2 guidance states that, although electricity supplies consumed by CCA facilities and EU ETS installations do not need to be considered when assessing qualification, an organisation will have to define the boundaries of such facilities/installations so that it is clear what supplies are excluded on this basis. Presumably, information on the excluded supplies to these facilities/installations will have to be specified in the organisation's Evidence Pack as a minimum.
Unconsumed Supplies that are not metered will remain the responsibility of the supplier
In the response to the March 2012 consultation on proposals to simplify the scheme, the government said that the rule on Unconsumed Supplies will be tightened.
From Phase 2 onwards, an organisation supplying electricity to another organisation can only avoid being responsible for that supply using the Unconsumed Supply rule where the downstream situation meets the definition of supply including the metering provision. The Phase 2 guidance states that if an organisation passing on an Unconsumed Supply does so on an unmetered basis, that organisation will remain responsible for the supply (section 4.2.2). If the original supply is made via a sHHM, the organisation passing on the supply will need to include the supply when considering if it is required to participate in Phase 2.
Supplies to premises subject to construction leases not landlord's responsibility
In the response to the March 2012 consultation on proposals to simplify the scheme, the government said that changes will be made to the "landlord and tenant rule" so that tenants will be responsible for supplies to premises that are subject to a building lease (see Legal update, CRC: DECC response to March 2012 consultation on proposals to simplify the scheme: Landlord and tenant rule (building leases): changes to proposal 9). (The Phase 2 Guidance refers to these arrangements as construction leases.)
This change is unlikely to have a significant impact on landlords participating in the CRC. However, if a lease meets the criteria specified in the response to the March 2012 consultation the tenant will become responsible for the supplies in Phase 2. If such supplies are made through sHHMs, the tenant will have to consider if it is required to participate in Phase 2 of the CRC.
Section 4.2.4 of the Phase 2 guidance gives further detail on the requirements that a building lease must make before a tenant will be responsible under the revised rule.
Impact of changes to unmetered supplies and state funded schools on local authorities
Passive supplies to be covered by the CRC. In the response to the March 2012 consultation on proposals to simplify the scheme, the government confirmed that it will expand the scope of unmetered electricity supplies covered by the CRC to include Passive Supplies.
In the Introductory Phase, unmetered supplies (UMS) that were:
- Calculated on a dynamic basis were covered by the CRC and counted towards qualification. (Dynamic Supply is defined in paragraph 5 in Schedule 2 to the CRC Order.) It covers situations where one element of a set of equipment (for example, a lamp post) uses a device to record whether or not electricity is supplied. The data from this device is used as a benchmark to determine the overall supply to the entire set of equipment in a given period.
- Calculated on a passive basis were excluded from the CRC. Passive Supplies are defined in the Phase 2 guidance as situations were the UMS is divided across half-hourly periods through a mathematical relationship.
This distinction in the different types of UMS caused a perverse incentive for organisations, such as local authorities (LAs) who had street lighting that was billed on a passive basis, not to upgrade these supplies to being billed on a dynamic basis as this could cause them to come within the scope of the CRC.
Page 18 in the March 2012 consultation document states that there are two types of Passive Supplies:
- Passive pseudo half hourly supplies.
- Pseudo non-half hourly supplies.
In the response to the March 2012 consultation, the government confirmed that both types of Passive Supply will be covered by the CRC. Section 4.2.11 of the Phase 2 guidance states that UMS will not count when assessing qualification regardless of whether they are settled on the half hourly market or not. UMS billed on a Dynamic basis are no longer relevant to qualification, but all UMS will be relevant for compliance purposes.
Street lighting (which is often billed on a passive basis) can be a significant proportion of a LA's electricity supplies. As UMS are not relevant to assessing qualification, this change will not affect the number of LAs that qualify for Phase 2. However, for LAs that have to participate in Phase 2, the addition of Passive Supplies to the supplies that they report on and surrender Allowances for will increase their compliance burden.
State funded schools in England to be excluded from CRC. In the response to the March 2012 consultation on proposals to simplify the scheme, the government said that the CRC will not apply to state funded schools (including academies) in England, due to LAs' limited abilities to influence these establishments. The devolved administrations will decide separately on how the CRC should apply to schools and academies in their jurisdictions (see Legal update, CRC: DECC response to March 2012 consultation on proposals to simplify the scheme: Academies and state funded schools: changes to proposal 23). The Phase 2 guidance states that supplies to state funded schools will not need to be considered for qualification or compliance purposes (section 3.2.4).
As schools can account for a sizeable proportion of a LA's electricity supplies, the exclusion of state funded schools in England from the CRC may mean that some LAs that participated in the Introductory Phase may now fall outside of the scheme.
Next steps
CRC Amending Order
The government has said it will lay an Order (a revised version of the CRC (Amendment) Order 2013 which it consulted on) before Parliament, the Scottish Parliament, National Assembly for Wales and the Northern Ireland Assembly, with a view to the Order coming into force on 1 June 2013.
The Order will be subject to the affirmative resolution procedure, which means it will need the approval of both Houses of Parliament before it can be adopted in final form. For an explanation of how the affirmative resolution procedure works, see Practice note, The legislative process in the UK and how Bills become law: Statutory instruments.
However, note that the CRC Order will require separate approval in Wales and Northern Ireland.