Ask the team: CRC Energy Efficiency Scheme: How should participants account for electricity generated from an EU ETS installation which is used on-site?

Practical Law UK Legal Update 9-502-5821 (Approx. 5 pages)

Ask the team: CRC Energy Efficiency Scheme: How should participants account for electricity generated from an EU ETS installation which is used on-site?

by PLC Environment

Question

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

I work for a company that has a combined heat and power (CHP) plant that is covered by the EU Emissions Trading Scheme (EU ETS). The CHP is supplied by natural gas and a small amount of electricity to support the electricity generation. The CHP produces electricity and heat. Of the electricity that we produce, some we use ourselves on-site, some is exported to the grid and some is supplied to a tenant.

I thought that, as the electricity generated by the CHP plant comes from the combustion of natural gas, and the natural gas is already covered by the EU ETS, that the electricity generated by the CHP was not included in the CRC. However, the Environment Agency (EA) guidance says that electricity generated by an EU ETS CHP installation which is consumed on-site is covered by the CRC and that we will therefore need to report on, and surrender Allowances for, that electricity.

I am confused as this seems to be double counting the emissions from the CHP as the input fuel is covered by the EU ETS and the output electricity generated by burning the fuel is covered by the CRC using the grid emissions factor. How should Participants in the CRC account for electricity generated by an EU ETS installation which they use on-site?

Answer

The short answer to your question is that, under the CRC, you will have to:

Report the natural gas and electricity inputs to the CHP but you will not need to buy Allowances for the emissions relating to these inputs because the CHP plant you refer to is an EU ETS Installation.
Report on, and buy Allowances for, electricity output from the CHP plant that your company consumes.
Report on, and buy Allowances for, electricity output from the CHP plant that you supply to your tenant.

You will not need to report on, or buy Allowances for, the electricity that is exported to the grid.

Further details on the treatment of the natural gas and electricity inputs and the electricity and heat outputs are set out below.

The treatment of natural gas and electricity inputs to a CHP plant

The natural gas and electricity inputs to a CHP plant will need to be reported in the CHP plant operator's Footprint Report (assuming that the CHP plant operator is a Participant in the CRC). This is set out in article 41 of the CRC Energy Efficiency Scheme Order 2010 (SI 2010/768) (the CRC Order).

EU ETS emissions (which are defined in paragraph 12 of Schedule 5 to the CRC Order) will be reported as a separate item in a Participant's Footprint Report. If the CHP plant is an EU ETS Installation, then the CHP plant operator will exclude from its CRC Emissions the emissions associated with the natural gas input into the CHP plant (calculated in accordance with article 50 of the CRC Order). The CHP plant operator will not, therefore, be required (under article 53 of the CRC Order) to buy Allowances in the CRC to cover these emissions.

The CRC Order does not specify that the electricity input to a CHP plant will be deducted from CRC Emissions. The Environment Agency's Guidance on the CRC Energy Efficiency Scheme: Electricity generation does not specifically mention electricity inputs to the CHP plant, but the summary at section 5 of the guidance says that input fuel is "reported in footprint report (subject to fuel type/energy source)" and that it is "not covered by CRC allowances".

The Environment Agency's Guidance on the CRC Energy Efficiency Scheme: Supply rules says on page 13 that "electricity supplied to, or generated by, a site included in the EU ETS... is included in CRC". This indicates that unless the electricity input is not a supply (because it is used for the purposes of generation or it is a Residual Supply that is not included in an RML), it will be included in the CHP plant operator's CRC Emissions.

PLC raised a query regarding electricity input to CHP plant with the EA's CRC Helpdesk and they confirmed that the electricity input to a CHP plant will be included in the operator's CRC Emissions unless:

It is a Self-supply and is used for the purposes of generation, transmission or distribution of electricity so that it does not qualify as a supply for the purposes of the CRC; or
It is classified as a Residual Supply and it is not included within a Residual Measurement List (RML) so that it is excluded from the CHP plant operator's CRC Emissions.

The treatment of the heat output from the CHP plant

The heat generated by a CHP plant does not need to be reported under the CRC by anyone regardless of who consumes it (that is, neither the Participant operating the plant nor a third party that actually consumes the heat will have to report it). Heat is not mentioned in the CRC Order and this is confirmed on page 10 of the EA's Guidance on electricity generation.

The treatment of the electricity output from the CHP plant

The question of how the electricity output from a CHP plant is treated under the CRC will depend on who consumes it.

Where the electricity output is consumed by a third party

Electricity output from a CHP plant that is consumed by a third party (other than a tenant) is the responsibility under the CRC of the third party, not the CHP plant operator. The EA's guidance on electricity generation talks about a third party organisation that is legally separate (which, we think means an organisation that is not part of the CHP plant operator's Group). It does not matter if the electricity is supplied directly to the third party or received by the third party through the grid. Assuming that the third party receiving the supply is a Participant, it would be responsible for the electricity under paragraph 1 of Schedule 1 to the CRC Order and would have to report on the emissions associated with the electricity supply that it receives in its Footprint and Annual Reports and buy Allowances under the CRC to cover these emissions.

The CHP plant operator would not have to report the electricity output that it supplied to the third party or to the grid as, in relation to the CHP plant operator, that supply would qualify as an Unconsumed Supply under paragraph 13 of Schedule 1 to the CRC Order.

If the CHP plant is not an EU ETS Installation, the CHP plant operator will be able to claim Electricity Generating Credits (EGCs) (defined in article 31 of the CRC Order), which it will deduct when calculating its CRC Emissions. However, the CHP plant in the question above is covered by the EU ETS, so EGCs will not be available.

Where the electricity output is consumed by a tenant

If the CHP plant operator is also a landlord and it supplies electricity generated by the CHP plant to its tenants, the landlord and tenant rule will apply. This means that the CHP plant operator will have to report on the emissions associated with the electricity that it supplies to its tenant in its Footprint and Annual Reports and buy Allowances under the CRC to cover these emissions.

For more information on the landlord and tenant rule, see Practice note, CRC Energy Efficiency Scheme: overview: Landlords and tenants.

Where the electricity output is consumed by the CHP plant operator

Electricity output from the CHP plant that is consumed by the operator of the CHP plant (or a member of its Group) will be treated under the CRC a self-supply by the CHP plant operator, which the operator will have to include in its CRC Emissions (see paragraph 6 of Schedule 1 to the CRC Order) and buy Allowances for.

The exception to this is electricity that is used by the CHP plant operator for generation, transmission or distribution purposes, which does not have to be reported by the CHP plant operator as it is not a "supply" under Schedule 1 to the CRC Order.

Does this treatment amount to double counting?

The short answer is yes. In some circumstances, the CRC will regulate emissions that are also covered by the EU ETS.

In the scenario you mention, emissions relating to a CHP plant will be regulated by both the EU ETS (in relation to the input fuel) and the CRC (in relation to the electricity that is produced by the CHP plant).

When the Department of Energy and Climate Change (DECC) in their various consultation papers talked about ensuring that the CRC and the EU ETS did not overlap, they were trying to ensure that the same organisation was not regulated in relation to specific emissions by both schemes. They were not saying that the regulation of emissions in the UK would only ever cover a specific tonne of carbon dioxide once.

The consumption of energy that is indirect (that is, electricity) will be influenced at different points in the distribution chain (when the primary fuel is consumed and also when the resulting electricity is consumed). We think that, in order to "weed out" inefficiencies that occur at each stage of the production and consumption of energy, DECC have decided it may be necessary to regulate the energy at different points in the distribution chain – which may result in the actual emissions associated with that energy being regulated more than once.

DECC and the EA often say that the CRC is about energy efficiency and that the aim of the scheme is to ensure that those consuming energy in the UK do so as efficiently as possible. The CRC has a much wider ambit than the EU ETS, which is aimed only at energy efficiency in large energy-intensive installations. The EU ETS incentivises CHP plants to be energy efficient with the gas and electricity that is input into the process. It does not incentivise those that consume the electricity resulting from that process to be energy efficient. The CRC is designed to incentivise energy efficiency of the output electricity from a CHP plant.

Given the need to influence energy efficiency at different stages in the distribution chain, we think DECC consider the emissions relating to input fuel for electricity generation and emissions relating to the resulting electricity to be different. Where the organisations affected by the EU ETS and the CRC are different, this does not seem to be unreasonable. However, in the case of a CHP plant that is an EU ETS Installation, the overlap of the schemes has the effect of making the CHP plant operator purchase and surrender allowances for both the input fuel (in the EU ETS) and the resulting electricity (in the CRC).

In the current phase of the EU ETS, most electricity generators receive EU ETS allowances for free, so the burden is really an administrative one, rather than a financial one. In future phases of the EU ETS when EU ETS allowances will be auctioned (rather than allocated for free), this will become a financial burden as well. Ultimately, this is a policy decision that DECC has taken in order to incentivise energy efficiency and we think they would argue that organisations will benefit under the CRC as they will save more (through reduced energy bills) than the costs of complying with the scheme.

Further information

For more information on:

How emissions covered by the EU ETS are treated under the CRC, see Practice note, CRC Energy Efficiency Scheme: exclusions and exemptions: Emissions covered by the EU Emissions Trading Scheme.
The basics of the CRC, see PLC's training webcast.
The CRC in general, see CRC Survival Kit.
CHP plants in general, see Practice note, CHP and EfW: combined heat and power, and energy from waste.
The EU ETS in general, see Practice note, EU Emissions Trading Scheme.

Comments

If you have any comments on this, or any other, Ask the team, please mail the PLC Environment team at [email protected].

Ask the team: CRC Energy Efficiency Scheme: How should participants account for electricity generated from an EU ETS installation which is used on-site? | Practical Law