CRC: DECC consults on amendments to the CRC Order 2010

Practical Law UK Legal Update 8-503-9526 (Approx. 7 pages)

CRC: DECC consults on amendments to the CRC Order 2010

by PLC Environment

Background: the CRC

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

The CRC Energy Efficiency Scheme (CRC) is a new emissions trading scheme for non-energy intensive private and public sector organisations in the UK. The CRC was introduced by the CRC Energy Efficiency Scheme Order 2010 (SI 2010/768) (the CRC Order).

Participants are required to surrender Allowances to cover every tonne of carbon dioxide (CO2) emissions associated with their energy consumption in the buildings that they own and occupy.

The CRC will run until 31 March 2043 and is divided into seven Phases. With the exception of the Introductory Phase, each Phase comprises seven Compliance Years and the first two years of each Phase overlap with the last two years of the preceding Phase. The Introductory Phase of the CRC currently runs from 1 April 2010 until 31 March 2013. Phase 2 (currently proposed to be the first capped Phase) is due to start on 1 April 2011 and will run until 31 March 2018. For more information about the Phases, see CRC Energy Efficiency Scheme: PLC timeline.

Since taking power in May 2010, the coalition government has indicated on a number of occasions that it thought the CRC was unnecessarily complicated and that it would review the design of the scheme to simplify it. In September 2010, the Committee on Climate Change (CCC) published a report suggesting changes that could be made to Phase 2 of the CRC. In October 2010, the government announced in its Spending Review (SR 2010) that:

The first Fixed Price Sale of Allowances in the Introductory Phase would be delayed until 2012.
Revenues raised from the sale of Allowances under the scheme would no longer be recycled back to Participants but instead would be used to support public finances.

For more information on:

The current design of the CRC, see Practice note, CRC Energy Efficiency Scheme: overview.
The CCC's recommendations for Phase 2, see Legal update, CRC: Committee on Climate Change advises government on significant changes to the scheme.
The changes announced in the SR 2010, see Legal update, CRC: Government scraps recycling of revenue from the sale of allowances.
The CRC in general, see the CRC Survival Kit.

The consultation

On 17 November 2010, the Department for Energy and Climate Change (DECC) and the devolved administrations issued a consultation on amendments to the CRC Order. The consultation document is accompanied by a Draft CRC Energy Efficiency Scheme (Amendment) Order 2011.

The government said that the consultation has been prepared as a result of the recent stakeholders' feedback on the complexity of the CRC. The majority of issues that have been raised, and which are currently under review, are likely to take effect in relation to Phase 2. These issues will require more parliamentary time than would be possible given that organisations have to register for Phase 2 between April and September 2011. Therefore, the government will be consulting in two stages. The first consultation relates to a number of limited changes to the scheme to push back some of the deadlines relating to Phase 2 and that can be made before April 2011. The second consultation, which will deal with the wider changes to the scheme, is expected to take place in 2011.

The current consultation sets out five proposals (which are all discussed in more detail below):

Changes to the timing of the CRC.
Removal of the requirement to make Information Disclosures.
Amending the division of responsibilities between the three Administrators.
Amending the provision regarding landlords to recognise the way that departments are accommodated in Northern Ireland Civil Service Buildings.
Technical corrections to the CRC Order.

Only four weeks is being given for comment so responses to the consultation must be received by 17 December 2010. The reason for the shortened consultation period is so that the changes to the CRC Order can come into force on 1 April 2011.

Changes to the timing of the CRC

The government is proposing to extend the Introductory Phase by one year so that it would end on 31 March 2014, rather than 31 March 2013.

The consultation says that the fourth year of the Introductory Phase would operate in the same way as the other Compliance Years in the Introductory Phase. We assume that this means that Compliance Year 2013/14 would operate in the same way as Compliance Year 2012/13 because Compliance Year 2010/11 is a reporting-only year and as a result of the changes announced in the SR 2010, Allowances for Compliance Year 2011/12 will be bought in 2012 rather than in April 2011 as had been proposed in the Draft CRC Energy Efficiency Scheme (Allocation of Allowances for Payment) Regulations 2010 (the draft Allocation Regulations). It is still not clear if sales of Allowances will be made at the start of each Compliance Year (with 2011/12 being an exception where a double sale takes place for 2011/12 and 2012/13) or whether this will take place retrospectively at the end of each Compliance Year. Until a revised draft of the Allocation Regulations is available, it seems this question will remain unanswered.

The consultation says that no changes have been made to the existing assumptions about the prices and revenues from the CRC and that any further decisions are a matter for the Budget processes.

It is proposed that the performance assessment in respect of Compliance Year 2013/14 (that is, the ranking in the League Table that will be published in October 2014) will be calculated on the basis of the current policy that relates to Phase 2 and subsequent Phases. Therefore, the Absolute Metric will have a 75% weighting and the Growth Metric will have a 25% weighting. This means there is no change, even though that Compliance Year will fall into the Introductory Phase rather than Phase 2. This also means the Early Action Metric is not being extended.

It is proposed that the various milestones for Phase 2 and subsequent Phases will be realigned as follows:

The first surrender of Allowances in Phase 2 will be for Compliance Year 2014/15. (Allowances will still have to be surrendered for Compliance Year 2013/14 but this will now be a Compliance Year in the Introductory Phase.)
The Qualification Year for Phase 2 and subsequent Phases will be postponed by two years. This means that the Qualification Year for Phase 2 would be 2012/13 rather than 2010/11.
The requirement to register for Phase 2 will be postponed for two years, so that registration will now take place in April-September 2013, rather than April-September 2011 as is currently the case. It is proposed that similar changes will be made to subsequent Phases. The first year of Phase 2 and subsequent Phases will be for registration and for submitting a Footprint Report and the first Annual Report for the relevant Phase. This means that the overlap between Phases is reduced from two Compliance Years to one. The government says this has the benefit of reducing the volume of organisational changes that Participants would need to account for between the Qualification Year and the Footprint Year. Of course, as Designated Changes need to be notified to the Administrator and detailed in a Participant's Evidence Pack, it is not clear if this really will reduce the administrative burden on Participants. These changes will also mean that Phases 2-6 will be comprised of six Compliance Years, rather than seven as is currently the case. Phase 7 will be comprised of five Compliance Years. This means that the overall length of the CRC is not being changed.

Page 11 of the consultation document includes a diagram showing the proposed changes against the current structure of the scheme.

Removal of the requirement to make Information Disclosures

The CRC Order currently requires organisations that have at least one Settled Half Hourly Meter (Settled HHM) but have Qualifying Electricity supplies of less than 6,000 MWh in the relevant Qualification Year to make an Information Disclosure. The reason for this requirement was to:

Ensure that all the Settled HHMs had been accounted for and that all those who should register for the CRC had done so.
Collect data that would allow the government to review the qualification threshold of 6,000 MWh.

The government has decided that the Information Disclosures made in the Introductory Phase have achieved those purposes and that making further Information Disclosures would not significantly improve this data. The government is therefore proposing to remove the requirement to make an Information Disclosure. This will reduce the administrative burden on the 12,559 organisations that had made an Information Disclosure for the Introductory Phase as at 19 November 2010.

Amending the division of responsibilities between the three Administrators

The Administrator's role is shared between the Environment Agency (EA), the Scottish Environmental Protection Agency (SEPA) and the chief Inspector Northern Ireland depending on a Participant's location. The relevant provisions are contained in article 9 of the CRC Order.

The government is proposing to make the following changes to the distribution of responsibilities:

The ability to inspect records (under article 57(4) of the CRC Order) will be moved to the relevant Administrator.
The notification of Residual Measurement Lists (RMLs) and the disclosure of the voluntary "tick box" questions relating to emissions reductions that can be made so that this information appears in the Performance League Table (article 59 of the CRC Order) will move to the EA.
The ability to prevent or suspend the operation of a Compliance Account or refuse to open such an account (under article 70 of the CRC Order) will move to the EA.
The ability to cancel a Participant's registration (under article 72 of the CRC Order) will move to the EA.

Amending the provision regarding landlords to recognise the way that departments are accommodated in Northern Ireland Civil Service Buildings

All government departments are Mandated Participants, which means they have to participate in the CRC regardless of whether they met the Qualification Criteria in the Qualification Year of the relevant Phase.

The way that the Northern Ireland departments occupy their accommodation results in a single department being considered responsible for the energy supplies of all the other Northern Ireland departments as their landlord. It is proposed to disapply the "landlord and tenant rule" (set out in paragraph 14 of Schedule 1 to the CRC Order) in these circumstances so that the occupying department (which is the department in a position to influence the energy usage in relation to the relevant buildings) would be responsible for the energy supply to its buildings. The department that supplies accommodation to the occupying departments would, therefore, be able to claim that the energy supplies to these buildings were Unconsumed Supplies.

The government has specified that it does not propose to amend the landlord and tenant rule in respect of other situations as it is still of the view that the landlord has a greater ability than tenants, in most cases, to influence a building's energy consumption. Private landlords that let and procure energy supplies for premises to Northern Ireland departments will, therefore, remain responsible for those supplies and will not be able to take advantage of the rule regarding Unconsumed Supplies.

Technical corrections to the CRC Order

The Draft CRC Energy Efficiency Scheme (Amendment) Order 2011 that accompanies the consultation document contains a number of provisions designed to fix various technical errors and to amend some of the definitions in the CRC Order. None of these appear significant, save for:

The one relating to Climate Change Agreement (CCA) exemptions; and
The one relating to Electricity Generating Credits (EGCs).

The consultation document explains that the policy intention is that a Participant claiming a CCA exemption, either during registration or through its Footprint Report, can do so using either:

The emissions data reported under the CCA regime; or
By recalculating using the relevant CRC emissions factors.

The provisions in the CRC Order (paragraph 12 in Schedule 5) do not currently allow Participants claiming the exemption during the registration period to have this choice. Instead, they are required to recalculate emissions using the CRC emissions factors. The CRC Order will, therefore, be amended to ensure that Participants claiming a CCA exemption at registration can choose how they report on their CCA Emissions.

The effect of article 29(3) (which says that the exemption to the CRC contained in Part 3 do not apply to Mandated Participants) means that Mandated Participants cannot claim EGCs. It is proposed that article 29(3) will be amended so that the provisions relating to EGCs in article 31 apply to Mandated Participants.

Compliance with the CRC

The government has reminded Participants that they should continue to comply with the existing CRC scheme in full as set out in the existing CRC Order and that organisations that fail to do so will be subject to enforcement action.

For more information on enforcement, see Practice note, CRC Energy Efficiency Scheme: enforcement and penalties.

Comment

Chris Huhne, the Secretary of State for Energy and Climate Change, announced the consultation at a speech he gave at the CBI Conference on Tackling Climate Change in the New Economy on 17 November 2010. Richard Lambert, the CBI Director-General said that:

"We are relieved that the Government has listened to our concerns about changes to the CRC. The announcement that there will be a consultation and that phase two will be delayed mark[s] the start of winning back those businesses angered by the decision to remove the cash-back incentive. However, much more needs to be done. It is critical that the CRC becomes an effective tool for encouraging energy efficiency, and not just another tax."

For more information, see CBI press release, CBI comments on government’s changes to carbon reduction scheme 17 November 2010.

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