CRC: draft of CRC Order 2013 published: detailed analysis

Practical Law UK Legal Update 5-524-8183 (Approx. 18 pages)

CRC: draft of CRC Order 2013 published: detailed analysis

by PLC Environment

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 2010) and came into operation in April 2010. The CRC Order 2010 was amended by the CRC Energy Efficiency Scheme (Amendment) Order 2011 (SI 2011/234) (CRC Order 2011).

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, as well as industry and trade associations, have criticised the complexity and the administrative burden that the CRC places on participants. As a result, the Department of Energy and Climate Change (DECC) started a review of the scheme in 2011. The review included a consultation in March 2012 on proposals to simplify the scheme. DECC, together with the devolved administrations, published their response to the consultation in December 2012, setting out the changes they planned to make to the scheme (see Legal update, CRC: DECC response to March 2012 consultation on proposals to simplify the scheme).

For more information on the:

Review of the CRC, see Practice note, CRC Energy Efficiency Scheme: what changes have been made to the scheme since it was launched?.
CRC in general, see:
- Practice note, CRC Energy Efficiency Scheme: overview.
- CRC Survival Kit.

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.

CRC Survival Kit and Table of Destinations

We will update our CRC Survival Kit, including the CRC timeline, once the CRC Energy Efficiency Scheme Order 2013 has been made.

In addition to the analysis of the draft CRC Order set out below, we have also produced a Table of Destinations to help subscribers navigate the new legislation.

Draft CRC Order 2013: key changes

On 4 March 2013, a draft of the CRC Energy Efficiency Scheme Order 2013 (CRC Order 2013) was laid before Parliament and the devolved administrations. It is accompanied by a draft explanatory memorandum.

The CRC Order 2013 is subject to the affirmative resolution procedure, which means it will need the approval of both Houses of Parliament before it can be in final form (see Next steps below).

The CRC Order 2013, which implements the changes announced in December 2012, will replace the CRC Order 2010, except in respect of certain provisions which are necessary for completion of Phase 1 of the scheme (see Changes to the CRC Order 2010 below).

Broadly, the CRC Order 2013 preserves the structure of the CRC Order 2010. However, some sections have been deleted and some new sections have been added. PLC has produced a Table of Destinations, to help subscribers navigate the CRC Order 2013. The table highlights where the CRC Order 2013 is different from the CRC Order 2010.

The sections below explain how the policy changes to the CRC announced in December 2012 are implemented by the CRC Order 2013. This update follows the same order as the PLC update on the December 2012 response to the consultation (see Legal update, CRC: DECC response to March 2012 consultation on proposals to simplify the scheme). Subscribers may find it helpful to refer to that update when reading this one, so that they can read about the policy decisions that were taken, alongside the provisions in the CRC Order 2013 that give effect to them.

PLC Environment would welcome any comments subscribers may have on the draft CRC Order 2013. We can be contacted at [email protected].

Changes to the CRC Order 2010

In its December 2012 response to the March 2012 consultation, the government said that a number of changes would take effect from 1 June 2013 rather than at the start of Phase 2 (that is, the changes would apply to the last two years of the introductory phase (2012-13 and 2013-14)).

These changes were set out in:

Proposal 11: reduction of fuels covered by the CRC from 29 to 2.
Proposal 14: 2% de minimis threshold for reporting of gas supplies.
Proposal 18: limits on when Electricity Generating Credits (EGCs) can be used.
Proposal 39: extension of the deadline by which CRC allowances must be surrendered.
Proposal 43: abolition of the Performance League Tables (PLTs).

To ensure that the simplified CRC starts from 1 June 2013:

The CRC Order 2010 and the CRC Order 2011 are retained in relation to Phase 1 (article 96, Part 15 (revocations, continuing effect and amendments), CRC Order 2013).
A number of amendments are made to the CRC Order 2010 by Schedule 9 to the CRC Order 2013.

Phases renumbered and commencement dates changed

Although neither the March 2012 consultation nor the December 2012 response mention any changes to the remaining six phases of the CRC, the commencement dates of the phases set out in article 2(1) of the CRC Order 2013 are different to those specified in the CRC Order 2010. (The commencement dates in the CRC Order 2010 had previously been amended by the CRC Order 2011.)

This change (together with the provision in article 12 of the CRC Order 2013 that applications for registration must be made two months before the beginning of a phase) has the effect of removing the registration period from the operational part of the phase that it relates to. It is assumed that this has been done because the first year of each phase used to be the Footprint Year and also the year in which Participants had to register under the scheme. Now that Footprint Reports no longer need to be submitted, a Footprint Year is no longer needed. Registration is the only activity that will take place in the first year of each Phase.

Somewhat confusingly, the phases have been renumbered so that the phase that was meant to run from April 2013 until March 2019, which used to be called Phase 2, is now called the "initial phase". And what is currently called Phase 1 is referred to in the CRC Order 2013 as the "first phase" (article 3).

The Qualification Years for each Phase have not been changed and neither has the end date of each Phase.

The following table sets out the name changes and key dates for each of the Phases:

Phase number/name in the CRC Order 2013	Qualification Year under both CRC Orders	Start date of Phase in CRC Order 2010	Start date of Phase in CRC Order 2013	End date of Phase under both CRC Orders	Length of Phase under CRC Order 2010 (years)	Length of Phase under CRC Order 2013 (years)
first phase	calendar year 2008	1 April 2010	N/A but definition in article 3	31 March 2014	4	N/A
initial phase (previously Phase 2)	1 April 2012 to 31 March 2013	1 April 2013	1 April 2014	31 March 2019	6	5
second phase (previously Phase 3)	1 April 2017 to 31 March 2018	1 April 2018	1 April 2019	31 March 2024	6	5
third phase (previously Phase 4)	1 April 2022 to 31 March 2023	1 April 2023	1 April 2024	31 March 2029	6	5
fourth phase (previously Phase 5)	1 April 2027 to 31 March 2028	1 April 2028	1 April 2029	31 March 2034	6	5
fifth phase (previously Phase 6)	1 April 2032 to 31 March 2033	1 April 2033	1 April 2034	31 March 2039	6	5
sixth phase (previously Phase 7)	1 April 2037 to 31 March 2038	1 April 2038	1 April 2039	31 March 2043	5	4

PLC will update its CRC timeline to reflect these changes once the CRC Order 2013 has been made.

Qualification Criteria

The definitions of Qualification Criteria and Qualifying Electricity in the CRC Order 2013 have been amended to provide that, from the initial phase onwards, qualification under the CRC will be based on electricity supplied only through Settled Half Hourly Meters (SHHMs) rather than through other types of Half Hourly Meters and Dynamic Supply, as was previously the case.

The definition of Qualification Amount (also known as the qualification threshold) has not changed in the CRC Order 2013. It remains 6,000 MWh.

Registration deadline changed

Article 12 of the CRC Order 2013 provides that the deadline for registration is two months before the beginning of a phase. For the initial phase, this means that the deadline will be 31 January 2014. Under the CRC Order 2010, the registration deadline is six months after the start of a Phase. For Phase 2 this would have meant the registration deadline was 30 September 2013.

Supply rules

The need for payment to establish a supply under the CRC

Paragraph 1(1)(a)(i) in Schedule 1 to the CRC Order 2013 does not make any reference to payment as the equivalent provision in paragraph 1(1)(a) in Schedule 1 to the CRC Order 2010 did.

The Environment Agency (EA) had previously interpreted the wording in the CRC Order 2010 as meaning that a payment needed to be made in order to establish a supply for the purposes of the CRC. The wording in Schedule 1 to the CRC Order 2013 makes it clear that this will not be a requirement from the initial phase onwards.

This means that some supply arrangements that did not amount to a supply under the first phase may amount to a supply from the initial phase onwards. Participants will need to check their supply arrangements carefully.

Supply at the direction of another party

As a result of the wording added in paragraphs 1(1)(b) and 2(1)(b) in Schedule 1 to the CRC Order 2013, Participants will be responsible for energy supplies that they receive or that are made at their direction.

This contrasts with the situation under the CRC Order 2010 where, as a result of paragraphs 1 and 2 in Schedule 1, some energy supply arrangements have been excluded from the scheme because the person contracting for the supply is not the person who received it.

Unmetered supplies

Paragraph 1(1)(a)(i) in section 1 of Schedule 1 to the CRC Order 2013 covers passive pseudo and pseudo non-half hourly supplies. Participants will have to report on, and surrender Allowances for, such supplies. However, these supplies will not count towards qualification, owing to the change to the Qualification Criteria.

Paragraph 17 in Schedule 9 to the CRC Order 2013 removes dynamic supplies from paragraph 1 in Schedule 1 to the CRC Order 2010. It also substitutes a new definition of metering device. The new definition does not appear to cover unmetered supplies, which seems to imply that for the remainder of the first phase, both dynamic and other forms of unmetered supply are not covered by the scheme. PLC has raised a query with the Department of Energy and Climate Change (DECC) about this and will let subscribers know if we receive a response from DECC on this point.

Unconsumed supply

Paragraphs 14 to 16 of Schedule 1 to the CRC Order 2013 expand the unconsumed supply rules.

Participants that wish to claim that a supply of electricity or gas is an unconsumed supply will have to provide evidence of the amount of the supply that is not consumed by them, as it will need to be metered or measured by some other device (paragraphs 14(3) and 15(3), Schedule 1, CRC Order 2013).

In the December 2012 response to the March 2012 consultation, DECC said that the ability to claim an unconsumed supply would be limited to situations where the relationship with the party that is actually consuming the supply falls within the definition of supply. It is not clear if the wording in paragraphs 14 to 16 achieves this. PLC has raised a query with DECC about this and will let subscribers know if we receive a response from DECC on this point.

Paragraphs 16(3)(b) and 16(4) in Schedule 1 to the CRC Order 2013 insert the carve out from the "landlord and tenant rule" for construction (building) leases that was announced in December 2012.

Reduction in the number of fuels from 29 to 2

The government has reduced the number of fuels covered by the CRC from 29 to 2. Participants will only need to report on electricity and gas (and only where the latter is used for heating).

As a result, the CRC Order 2013 does not contain equivalent provisions to paragraphs 3 and 4 in Schedule 1 to the CRC Order 2010 about energy supplies other than gas and electricity. New paragraphs 25 and 26 of section 5 of Schedule 1 to the CRC Order 2013 provide that gas used for purposes other than heating will not be counted as a supply under the CRC.

Paragraph 17(2)(d) in Schedule 9 to the CRC Order 2013 removes paragraphs 3 and 4 in Schedule 1 to the CRC Order 2010 so that participants will only need to report on two fuels in their Annual Reports in the last two years of the first phase. Paragraph 2(n) in Schedule 9 removes the definition of fuel in the CRC Order 2010.

Aligning emission factors

Paragraph 34 in Schedule 1 to the CRC Order 2013 does not appear to be any different to the provisions in the CRC Order 2010. It appears that the government's decision to align the emission factors used by CRC participants with those that are produced for other greenhouse gas reporting purposes and that are updated annually, has not been implemented. The CRC Order 2013 refers to version 2 of the same document that the CRC Order 2010 referred to and the procedure for amending these factors has been removed. PLC has asked DECC to confirm if this means that the changes announced by DECC in December 2012 have not been made. We will let subscribers know if we receive a response from DECC on this point.

Footprint Reports, 90% rule and Residual Measurement Lists scrapped

The CRC Order 2013 does not contain equivalent provisions to:

Part 4 (Footprint Reports and Residual Measurement Lists).
Schedule 2 (core supplies), which defines the electricity and gas supplies that amount to core supplies.
The definitions of Core Supplies, Core Emissions, Residual Measurement List and Residual Supplies.

These changes remove the residual percentage rule (also known as the 90% rule) and the distinction between Core Supplies and Residual Supplies from the scheme and mean that the obligation to produce a Footprint Report and a Residual Measurement List at the start of each phase will not apply from the initial phase onwards.

New paragraph 27 in Schedule 1 to the CRC Order 2013 introduces a new de minimis rule for gas supplies that will allow a Participant to exclude gas supplies (even where the supply is used for heating) if it amounts to less than 2% of the electricity supplied to the Participant in the first Annual Reporting Year of a phase. A decision to exclude de minimis supplies has to be taken by a Participant before it submits its first Annual Report for a phase and cannot then be altered during the phase.

Paragraph 9 in Schedule 9 to the CRC Order 2013 removes Part 4 (Footprint Reports and Residual Measurement Lists) from the CRC Order 2010.

Paragraph 17 in Schedule 9 to the CRC Order 2013 makes a number of changes to Schedule 1 to the CRC Order 2010 including the insertion of paragraphs 22A-C, which provide that only gas used for heating will amount to a supply under the CRC and introduce the 2% de minimis provision so small gas supplies can be excluded under the remaining years of the first phase.

Paragraph 18 in Schedule 9 to the CRC Order 2013 removes Schedule 2 (Core supplies) from the CRC Order 2010.

Paragraphs 2(c), 2(k) 2(l) and 2(n) amend or remove (as appropriate) the definitions of Core Supply, Residual Measurement List, Residual Supplies and Core Emissions from the CRC Order 2010.

A number of Participants in sectors where there is a high turnover of property portfolios (for example, retail and industrial sectors) have commented that the decision to extend 100% reporting of business electricity and gas supplies (subject to a 2% de minimis for gas supplies) to the remaining Annual Reporting Years of the first phase, will increase rather than reduce their administrative burden. This is because they will now need to collect data on all electricity and gas supplies, including:

Supplies that were originally excluded using the 90% rule from their reporting requirements for the first phase when the Footprint Reports for that phase were prepared.
Supplies to premises that the Participant has become responsible for as a result of changes to the Participant's property portfolio over the course of the first phase (for example, units in shopping centres and at industrial parks that have reverted to a landlord) that would have been Residual Supplies. For some Participants these are likely to be numerous.

As this decision was only taken in December 2012, the affected Participants have only until the middle of July 2013 to collect the necessary data on electricity and gas supplies before it must be submitted in their Annual Report for the 2012-13 Annual Reporting Year, and before they need to buy Allowances.

Overlap with CCAs and EU ETS

To determine if an organisation needed to participate in the CRC, the CRC Order 2010 required that all Qualifying Electricity supplied to that organisation in the Qualification Year was considered to see if the 6,000 MWh qualification threshold was met. This included electricity supplies to Climate Change Agreement (CCA) Facilities and EU Emissions Trading Scheme (EU ETS) Installations (definitions of qualification criteria, qualifying electricity and sections 1-5 of Schedule 1, CRC Order 2010).

The definition of Qualifying Electricity in the CRC Order 2013 still refers to sections 1 to 5 in Schedule 1. Paragraphs 28 and 29 in section 1 of Schedule 1 provide that electricity (and gas) consumed by an organisation for the purpose of operating an EU ETS Installation or a CCA Facility will not amount to a supply under the CRC. If the organisation is not responsible for any other supplies that exceed the Qualification Amount then the organisation will not need to participate in the relevant phase of the CRC. A CCA Facility is defined as a facility that is subject to a CCA target during a year of a phase.

Participants that operate EU ETS Installations and CCA Facilities (but have to participate in the CRC because they also have other energy supplies that met the Qualification Criteria in the relevant Qualification Year) will not have to include information about the electricity or gas supplies consumed by their EU ETS Installations and CCA Facilities (article 33(2) and paragraphs 28 and 29 in section 1 of Schedule 1, CRC Order 2013). Paragraphs 28 and 29 in Schedule 1 specify that decisions as to whether electricity and gas supplies are consumed for the purposes of operating an EU ETS Installation or a CCA Facility (and can therefore be excluded from Annual Reports) have to be taken by a Participant before the first Annual Report for a phase is submitted and cannot be changed during that phase.

The CRC Order 2013 does not contain equivalent provisions to Part 3 of the CRC Order 2010, which set out all the CCA exemptions.

Paragraph 8 in Schedule 9 to the CRC Order 2013 inserts a new article 34A (first phase participant exemptions), which provides that where a Participant in the first phase has either a member CCA exemption or a general CCA exemption but does not have energy use or carbon emissions that are subject to a CCA target, the relevant exemption will still apply in a year of the first phase where the Group member or the Participant (as relevant) operate a facility that is set out in a specified facility certificate. A definition of specified facility certificate is inserted by paragraph 2(o) of Schedule 9.

New article 34A has been inserted to prevent organisations that benefitted from an exemption from losing it for the 2012-13 and 2013-14 compliance years as a result of their recertification under the 2009-11 CCA scheme.

ECGs scrapped

The CRC Order 2013 does not contain an equivalent provision to article 31 (Electricity Generating Credits (EGCs)). From the initial phase onwards, no credits will be given under CRC for electricity generated by renewable sources.

Paragraph 8 in Schedule 9 to the CRC Order 2013 substitutes a new article 31 in the CRC Order 2010, which limits when EGCs can be used for the remainder of the first phase to situations where electricity is generated without using any fuel that:

Has or should have been reported in the applicant's Annual Report.
Was included in the applicant's Residual Measurement List.

This change is intended to address the situation where input fuels are used to generate renewable electricity. As energy supplies (other than gas and electricity) will not have to be included in Annual Reports for the remaining years of the first phase (see Reduction in the number of fuels from 29 to 2 above), if this change were not made, Participants could claim EGCs for the electricity generated from such fuel. This would have been the case even though the input fuel would not have been reported and no Allowances would have been surrendered for such input fuel to offset the EGCs claimed.

For more information on EGCs, see Practice note, CRC Energy Efficiency Scheme: how is electricity generation treated under the CRC: Summary of how electricity generation is treated under the CRC.

Organisational rules: disaggregation

The CRC Order 2013 makes a number of changes in order to make the rules on organisational structures more flexible and to allow organisations to participate in the CRC in their "natural business units".

The CRC Order 2013 does not contain an equivalent provision to article 25 in the CRC Order 2010, which permitted Significant Group Undertakings (SGUs) to be disaggregated three months before the deadline for registration.

The disaggregation provisions are now contained in article 26, which provides that any subsidiaries or a group of subsidiaries (B) of a group (A) (which is not, or does not include, the highest UK parent undertaking of A) can apply for a separate registration. An application to participate separately in the CRC must be made by B by the last working day of April in the year following that in which A applied for registration. (A is required by article 12 of the CRC Order 2013 to register two months before the relevant phase starts.)

Article 26 seems to indicate that, for example, in the initial phase, A would need to apply for registration by 1 February 2014 and B would need to apply for registration as a separate participant by the end of April 2014. It is hoped that the guidance that the EA is due to issue will clarify this (see Next steps below).

No minimum threshold for disaggregation

Under the CRC Order 2010, a SGU had to meet the Qualification Criteria in its own right in order to be able to disaggregate from the rest of its parent Group. The minimum threshold for disaggregation is inferred from the combination of article 25 and paragraph 2(3) in Schedule 4 to the CRC Order 2010.

This requirement has been removed from the initial phase onwards because article 26 of the CRC Order 2013 applies to any subsidiary or group of subsidiaries.

Disaggregation by a subsidiary at any level with or without its own subsidiaries

The rule that subsidiaries of a SGU had either to participate in the SGU's parent Group or independently of that Group with the SGU, is inferred from paragraph 2(3) in Schedule 4 to the CRC Order 2010, which specifically mentions subsidiaries of a SGU.

In contrast, article 26 in the CRC Order 2013 refers to "an undertaking or a group of undertakings". This wording is wide enough to cover the disaggregation of:

A single subsidiary of a Group. This could be a subsidiary (A) that either has its own subsidiaries or that does not have subsidiaries.
A subsidiary together with its own subsidiaries.
Two or more sister subsidiaries of a Group that wish to participate together.

The CRC Order 2013 does not specify any requirements for subsidiaries of A to participate with A or with A's parent Group. As nothing is specified in the CRC Order 2013, it is inferred that Groups can choose how such subsidiaries participate in CRC.

The default position in the CRC Order 2013 is for a Group to participate as a single entity with all its subsidiaries unless any subsidiaries are disaggregated under article 26. This can be inferred from the requirement in article 24(2) for Groups that meet the Qualification Criteria during the Qualification Year to register. From the combination of articles 24(2) and 26, it is clear that in each phase a Group will re-aggregate and will have to register where it meets the Qualification Criteria. The Group will then have to decide how it wants to participate in the CRC for the new phase and will have to make the relevant application(s) to register as a Participant.

Disaggregation possible even where remainder of Group falls below Qualifying Amount

The rule that required the remainder of a Group to exceed the qualification threshold before a SGU could disaggregate was contained in article 25(1)(a) in the CRC Order 2010. There is no equivalent requirement in article 26 of the CRC Order 2013.

When disaggregation can be requested

The rules on the timing of disaggregation were meant to have been extended so that B would be able to request disaggregation:

At any point during the first year of a phase.
On an annual basis.

PLC has raised a query with DECC as to whether the CRC Order 2013 includes these changes and will let subscribers know if we receive a response from DECC on this point.

Organisational rules: Designated Changes

The definition of SGU has been replaced with one for participant equivalent (PE) (article 3 and paragraph 2 of Schedule 3, CRC Order 2013). In contrast to an SGU, which could comprise a number of subsidiaries, a PE is a single Undertaking that meets the Qualification Criteria. From the initial phase onwards, the Designated Change rules in articles 27 and 34 and in Part 3 of Schedule 6 to the CRC Order 2013 only apply to Participants and PEs.

Changes in a Post-qualification Period

Where a PE is leaving a Group and not joining another, the old parent Group will not have to provide information about the electricity supplies of the PE at registration, as paragraph 2 of section 1 of Part 3 of Schedule 5 to the CRC Order 2013 does not require this information.

Where a Participant or a PE is joining a non-Participant, it will be optional rather than mandatory for the non-Participant owner to register on behalf of the Participant or PE (as relevant) (paragraph 3(2)(a), section 1 of Part 3 of Schedule 5, CRC Order 2013). The wording in paragraph 3(2)(b) of section 1 of Part 3 of Schedule 5 to the CRC Order 2013 means that the non-Participant that is acquiring the Participant or PE can avoid becoming a Participant itself for the phase in which the change occurs, if it requires the Participant or PE (as relevant) that is joining its Group to register for the relevant phase.

Paragraph 5(4) of section 1 of Part 3 of Schedule 5 to the CRC Order 2013 requires the acquiring Group rather than the selling Group, to include the information about the PE's electricity supplies in the Qualification Year in its application for registration. Under the CRC Order 2010, the selling Group had to include this information.

Changes in Annual Reporting Years and post-application periods

The wording in section 2 of Part 3 of Schedule 5 to the CRC Order 2013 reflects the various policy changes that have been made to scrap CCA exemptions, Footprint Reports and Residual Measurement Lists. A new definition of post-application period has been included in article 3 of the CRC Order 2013 so that Designated Change rules can be applied to the period after an application for registration has been made, but before the first Annual Report for a phase has been submitted.

The period for completing a registration that is required as a result of a Designated Change in an Annual Reporting Year, or the post-application period, has been extended from three months to the last working day of April of the year following the year in which the change occurred (paragraph 7, section 2 of Part 3, Schedule 5, CRC Order 2013).

Changes in the last Annual Reporting Years of the first phase

Paragraph 21 of Schedule 9 to the CRC Order 2013 makes changes to the Designated Changes rules that apply where a change happens in the remaining Annual Reporting Years of the first phase. These changes are mostly as a result of the removal of the need to compile a Residual Measurement List (see Residual percentage rule and residual measurement lists scrapped above).

Organisational rules: schools

Paragraph 8 of Schedule 2 to the CRC Order 2013 does not refer to schools in England as the corresponding provision in the CRC Order 2010 did. This change gives effect to the decision taken by the government in December 2012 to withdraw state-funded schools in England from the scheme.

The explanatory memorandum to the CRC Order 2013 says that, in February 2013, all the devolved administrations confirmed that schools in their jurisdictions would continue to participate in the scheme with the relevant funding body. Paragraphs 8 and 9 of Schedule 2 to the CRC Order 2013 give effect to those decisions for Wales and Northern Ireland.

The December 2012 response to the March 2012 consultation said (at paragraphs 107-112) that the CRC would not apply to any state-funded schools in England. The explanatory memorandum to the CRC Order 2013 clarifies that this policy decision included academies. However, paragraph 4 of Schedule 2 to the CRC Order 2013 contains identical provisions to the CRC Order 2010. PLC has raised a query with DECC as to why this provision is included in the CRC Order 2013 and what it is intended to cover and will let subscribers know if we receive a response from DECC on this point.

Organisational rules: trusts and private equity funds

Article 30 of the CRC Order 2013 specifies that the operator of a trust may apply for registration as a separate Participant in relation to any trust for which it carries on a regulated activity. A new definition of regulated activity is included in article 3. This is any activity specified in article 51(1)(a) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544). Where an operator applies for separate participation for any relevant trust (as defined in article 30), the operator will not be grouped with its Parent Undertaking for the purposes of the CRC.

The aim of article 30 is to allow professional trustees to register the trusts that they operate as separate participants. The wording in article 30 appears to cover the operator being able to register separately for a number of trusts although the article does not specify if the operator itself will participate with one or more of the trusts that it has applied to register separately. So, for example, if an operator manages 10 trusts, it could make separate applications for each trust so that each trust participates separately in the CRC. It is not clear if the operator will participate in CRC with each of these 10 trusts, with just one or on its own.

Article 29 of the CRC Order 2013 includes a corresponding provision for trustees of any other type of trust (for example, discretionary trusts and unincorporated property joint ventures) to apply for registration as a separate Participant. Where a trustee applies for separate participation for any relevant trust (as defined in article 29), the trustee will not be grouped with its Parent Undertaking for the purposes of the CRC. The wording in article 29 appears to cover the trustee being able to register separately for a number of trusts. The same questions arise with this article as with article 30 on the precise way in which the trustee itself will participate in the CRC.

Articles 29 and 30 are both subject to the provision that the trust to be disaggregated is not one where a beneficiary is entitled to half or more of the assets of the trust. In those circumstances, the trust would be grouped with the beneficiary for the purposes of participating in the CRC. Articles 29 and 30 do not appear to achieve more than the disaggregation provisions in article 26. However it is assumed that provisions to deal expressly with the participation of trusts in the CRC have been added to the CRC Order 2013 in order to address the concerns of professional trustees and real-estate trusts.

The December 2012 response to the March 2012 consultation said that for qualification purposes all the trusts that trustees or operators are responsible for (that is, those that cannot be grouped with a controlling beneficial owner) would be grouped with the relevant trustee or operator and then allowed to disaggregate. This decision was taken to prevent emissions being lost from the CRC as some of the trusts may not have qualified for the CRC if assessed separately from their trustee or operator. This decision means that following the disaggregation of all the individual trusts, the Parent Undertakings of such trustees and operators who may only have very small emissions (perhaps a single office) will have to continue to participate in the CRC.

Paragraphs 10 to 12 of Section 4 (Trusts of Land) of Schedule 1 to the CRC Order 2013, contain provisions that align responsibility for supplies of electricity and gas under the CRC with the ownership of trust premises and with the parties that are required to participate in the CRC as a result of articles 29 and 30 (that is, trustees, beneficiaries or operators as relevant).

Paragraph 13 of section 2 of Part 3 of Schedule 5 to the CRC Order 2013 provides for trustees to be able to register as a separate Participant from its Group for the scheme activities of the relevant trust. This paragraph is not specifically related to Designated Changes despite being housed in Schedule 5 to the CRC Order 2013.

Private equity funds

Neither articles 29 nor 30 seem to apply to private equity funds. A private equity firm would generally qualify as an operator as defined in article 30, so would fall outside article 29 (which does not apply to operators). However, article 30 applies where the assets of the operator's trust include premises to which a supply is made. Aside the fact that a typical private equity fund is not structured as a trust, private equity firms do not usually own property directly.

The CRC Order 2013 appears to draw a distinction between professional trust managers (that are more likely to meet the requirements of article 30) and the managers of private equity funds.

Article 30 would allow a professional trustee of a fund that directly holds property to register as a Participant in respect of each trust it manages, whereas the manager of a private equity firm, not being an operator, could not separately register in respect of each of its managed funds.

However, the disaggregation provisions in article 26 should allow private equity firms to require that each portfolio company within a private equity firm’s registered group disaggregates from the fund that has invested in it.

Effectively then a private equity firm (as general partner of the limited partnership funds) could entirely separate its responsibilities under CRC from those of the companies it invests in.

Assuming that a private equity firm would not meet the qualification criteria on its own, disaggregation of all the portfolio companies of a firm’s funds will leave a small fund manager as a Participant where all non-financial companies of similar size (not within a larger participating Group) would fall completely outside the CRC. However, even taking account of this anomaly, the situation under the CRC Order 2013 is an improvement on the existing situation for private equity funds under the CRC Order 2010.

Sales and surrender of Allowances

Extension of the deadline for surrender of Allowances

Article 36(3)(a) of the CRC Order 2013 extends the deadline for surrender of Allowances from the last working day of July of the relevant year to the last working day of October. This avoids the problem that Participants might not have had sufficient Allowances in their registry account to surrender by the deadline because the Allocation Periods under the CRC Energy Efficiency Scheme (Allocation of Allowances for Payment) Regulations 2012 (SI 2012/1386) (Allocation Regulations) coincide with the July deadline for surrender.

Paragraph 11 of Schedule 9 to the CRC Order 2013 makes a number of amendments to Part 6 of the CRC Order 2010, including an extension of the deadline for surrender of Allowances until the last working day of October.

Banking allowances between phases not permitted

Article 35 of the CRC Order 2013 makes it clear that banking Allowances between phases is not permitted.

Article 52 of the CRC Order 2010 only prohibits banking between the first phase and subsequent phases.

Safety Valve

The CRC Order 2013 does not contain an equivalent provision to article 56 in the CRC Order 2010 as the government has decided to scrap the Safety Valve. As a result, the definition of Community Tradeable Emissions Allowance has also been omitted from article 3 in the CRC Order 2013.

Two Fixed Price Sales

The timing of the Fixed Price Sales that will be held for each year of future phases will be the subject of future regulations as the current Allocation Regulations only cover the first phase (see Legal update, CRC: regulations on sale of allowances come into force).

Reporting and record keeping

Records to be kept for six years

Article 39(2) of the CRC Order 2013 provides that records under the CRC must be kept for at least six years after the end of the scheme year that they relate to.

Article 57(2) of the CRC Order 2010 requires records to be kept for at least seven years after the end of the phase that they relate to. Article 57(3) requires records that relate to the baseline emissions of a Participant to be kept for the entire time that the participant is part of the scheme.

Article 39 of the CRC Order 2013 does not draw any distinction between different types of records, as this information is no longer required now that the PLTs have been scrapped (see Performance League Tables scrapped below).

Requirement to produce two Annual Reports in 2013-14

The overlap between CRC phases results in a requirement under the CRC Order 2010 to submit two Annual Reports in respect of Annual Reporting Year 2013-14. This can most easily be seen by referring to the timeline on the CRC that PLC published (see CRC Energy Efficiency Scheme: PLC Timeline (Jan 2011 version)).

Schedule 9 of the CRC Order 2013 does not appear to amend article 47, which provides that an Annual Report should be submitted after the end of every Annual Reporting Year of a phase. However, the change to the commencement dates for the phases in article 2(1) of the CRC Order 2013 will push back the commencement of the initial phase to 1 April 2014, so that the first Annual Report in the initial phase will not be due until July 2015 which should remove the duplication. PLC has asked DECC to confirm if this is what it intended and will let subscribers know if we receive a response from DECC on this point.

Information to be published now Performance League Tables scrapped

Part 10 of the CRC Order 2010 will be replaced by Part 8 of the CRC Order 2013 to give effect to the government's decision to scrap the PLTs.

Article 58 of the CRC Order 2013 provides that the Administrator can publish information about a Participant's energy efficiency performance for each Annual Reporting Year. The information published will be based on the Participant's Annual Report or information provided at registration. Article 58 contrasts with the provisions on publication in article 78 of Part 10 of the CRC Order 2010 which make the publication of most of the information specified mandatory.

Article 59 allows the Administrator to publish the following additional information:

A list of Participants that have appealed against a penalty.
Where an appeal results in information published under article 58 being changed, the amended information.

Paragraph 15 of Schedule 9 to the CRC Order 2013 substitutes the same provisions in Part 10 of the CRC Order 2010 so that PLTs are not required for the remainder of the first phase. This means that the PLT that was published in February 2013 will have been last PLT (see Legal update, CRC: Environment Agency publishes second Performance League Table).

The format of what the EA will publish for the 2012-13 Annual Reporting Year and beyond is not yet clear.

Draft CRC Order 2013: other changes

Article 9: Administrator

Article 9(1)(b)(ii) in the CRC Order 2013 specifies that the Natural Resources Body for Wales (NRW) will replace the EA as the Administrator for those parts of the CRC that relate to Wales.

The NRW will be the new unified environmental regulator for Wales from 1 April 2013 (see Legal update, New Welsh environmental regulator to be called Natural Resources Wales).

Provisions to deal with insolvency of an applicant for registration

Articles 24 (Undertakings: applications by groups) and 25 (Undertakings: applications other than by groups) in the CRC Order 2013 specify that Undertakings that meet the Qualification Criteria in a Qualification Year must still apply for registration even if they are subject to an insolvency procedure during the Qualification Year or the Post-qualification Period. However, where the Undertaking has permanently ceased carrying on Scheme Activities in the UK, then it will not need to register. This wording clarifies one of the grey areas under the CRC Order 2010.

The CRC Order 2013 also contains a new article 49 which requires an insolvency practitioner to supply an applicant with information and assistance to allow it to make an application for registration and comply with its obligations as a Participant.

For more information on how the CRC applies to insolvency situations, see Practice note, CRC Energy Efficiency Scheme: restructuring and insolvency issues.

Part 12: civil penalties

Broadly, this Part of the CRC Order 2013 is the same as Part 14 of the CRC Order 2010.

However, Part 12 of the CRC Order 2013 includes the following changes:

Article 72 does not specify what a Participant facing a penalty will have to prove in order for the Administrator to decide to use its power to waive or modify a penalty. This seems to imply that the Administrator will now have more discretion to decide whether to exercise these powers.
Article 72(2) inserts new provisions that clarify that the Administrator can withdraw a financial penalty or substitute a lower financial penalty.
Article 81(3) will permit the publication of the amount of a penalty that is imposed, as well as the fact that the penalty has been imposed.

Part 13: Criminal offences and penalties

Broadly, this Part of the CRC Order 2013 is the same as Part 15 of the CRC Order 2010.

However, article 82 of the CRC Order 2013 includes fewer offences than article 106 of the CRC Order 2010. In particular, it is no longer an offence to:

Obstruct an authorised person exercising the powers or duties under Schedule 9 relating to entry or inspection.
Fail or refuse to provide facilities or assistance or to permit an inspection when reasonably required by an authorised person.
Prevent another person from appearing before an authorised person or answering the questions of an authorised person.

The CRC Order 2013 does not contain any equivalent provisions to those in Schedule 9 to the CRC Order 2010, which dealt with powers of entry and inspection.

Part 14: Appeals, service of notices and national security

Article 89(1) of the CRC Order 2013 provides that the appeal body for determinations, notices or penalties made or given by the Secretary of State, the EA or the NRW will be the First-tier tribunal.

Some of the detail about the appeal body, the effect of the appeal and what the appeal body may determine that is contained in Schedule 10 of the CRC Order 2010 has been moved to Part 14 of the CRC Order 2013.

There are also new provisions about the grounds of appeal and the standard of proof required.

Schedule 7 to the CRC Order 2013 sets out the procedures to be applied in appeals to be heard by appeal bodies other than the First-tier tribunal (that is, appeal bodies that are appointed under article 89).

EA guidance for Participants in Phase 1

The EA has published CRC Energy Efficiency Scheme guidance for participants in Phase 1 (2010-2011 to 2013-2014) (Version 2) (February 2013).

The guidance, which supersedes version 1.2 published in July 2012, says that it has been updated to take account of the government's simplification measures for the remainder of Phase 1 (2012-13 and 2013-14).

Next steps

Adoption of the CRC Order 2013

The CRC Order 2013 is subject to the affirmative procedure, which means that it has to be debated and approved by both Houses of Parliament before it can become law in England. Different legislative procedures apply in the devolved administrations.

In England, the next step is for the draft Order to be considered by the House of Commons' Delegated Legislation Committee. This will then be followed by a debate on the floor of the House of Commons. To find out when the Delegated Legislation Committee is due to consider the draft Order, see UK Parliament: Delegated Legislation Committee debates.

Assuming that the Order is passed by the House of Commons, it will then proceed to the House of Lords.

For more information about the affirmative procedure, see Practice note, The legislative process in the UK and how Bills become law: Statutory instruments.

CRC guidance

The explanatory memorandum to the CRC Order 2013 says that the EA will publish further guidance and case studies in 2013.

Review of CRC in 2016

In the December 2012 response to the March 2012 consultation, the government said that it will review the effectiveness of the CRC in 2016 and consider whether the same policy objectives could be achieved in a better way. The government also said that "the tax element of the CRC introduced at Spending Review 2010 will be a high priority for removal when the public finances allow".

For more information, see Legal update, CRC: DECC response to March 2012 consultation on proposals to simplify the scheme: Review of CRC in 2016.

CRC: draft of CRC Order 2013 published: detailed analysis | Practical Law