Low carb diet

On April 1st 2010, the Carbon Reduction Commitment Energy Efficient Scheme (CRC) went live in the UK amid not a little confusion as to how the scheme works, who can benefit and how. EU Infrastructure spoke with Npower’s Head of Business Energy Services, Dave Lewis, to explain more.

EU Infrastructure. The CRC is a recent scheme that is highly incentivised, so could you tell us how businesses are responding to it so far?

Dave Lewis. Well I have to say it is difficult to assess at this early stage, although we do know that only quite a low proportion of companies have registered so far. Registration opened on April 1^st and will run up until the end of September, but the registration level is currently running at between five to 10 percent, which is approximately 5000 companies that are impacted by the scheme, a figure that is surprisingly low. I must admit, some of the more high-profile names I thought would have pushed for a fast registration have failed to do so, so it does seem that there is still quite a bit of work left to do for a lot of companies.

It also suggests that there is maybe still some concern about what is required of these companies, such as how to gather and manage all the information that is required because it is a very bureaucratic process. In summary then, I think that companies are struggling a little bit with the new legislation - we have had conversations with companies that initially thought they had it all under control, only to then turn to us to do it for them because they realised that it was far more complicated than they maybe appreciated. It is a challenging scheme; the data management along cannot be underestimated because unless a company has an ongoing process for managing its carbon footprint they are having to start from scratch in order to fully understand their carbon emissions from all of their fuel sources on all of their sites.

EU. If a lot of companies have to start from scratch, are they daunted by the prospect of adapting to the scheme, or are the low registration rates down to a lack of inclination to adapt?

DL. I think the main issue is understanding where to start. Npower has been affected by this just as much as any other business: the task of just writing down the list of properties that fall under this jurisdiction was far from straightforward in itself. We had to conduct several iterations just to understand all the sites that were impacted. Once the scope had been grasped, the next stage was the data management, which means going back two years because the scheme requires you to capture your carbon footprint from 2008.

EU. If a company has not registered in time for the September cut off point, are they then penalised?

DL. Absolutely. The environment agency has a very clear view of whom they expect to be impacted by this, so they have a good idea of all the sites that should be registered, which is any company that has a half-hourly electricity meter. At best guess this is about 20,000 organisations. The benchmark is as follows: if a company, through their half-hourly electricity meters, consumed more than 6GW hours of electricity in 2008, then they are a full participant of the scheme and therefore have to register and manage their carbon under the CRC process.

EU. How are these 20,000 companies being contacted to ensure they are aware of their obligations?

DL. They have been contacted by us. Npower has been asked by the environment agency to mail out to all of the sites that have these half-hourly electricity meters to inform them that they are impacted. But, with all the best will in the world, this has proven a sizeable task. Our information is sent to billing addresses, so the guidelines are often reaching no farther than the accounts team, not energy managers or finance directors - the guys who are really impacted by all this. Our requirement from the government has been to get these declarations signed off by a board member of a sufficient level that the environment agency is satisfied with. There are thousands of companies out there that are in the sights of the environment agency, and they need to know it.

EU. In response to the introduction of the scheme, you set up a CRC Assist programme. How can this scheme help businesses to get on board and better manage their carbon output and energy use?

 DL. CRC Assist is a very specific product. We are agents under CRC, so we can represent organisations as part of the CRC scheme, and we are also registered agents with the environment agency, so we can effectively manage the whole process for an organisation. In this instance, we will tell them what to do, we will source the data for them; we will run the data management process for them. So, everything that they need to do to comply can be done via our CRC Assist scheme, which covers the basic steps.

There are other things that we can assist with in order to make a company's registration process successful. In the early days of the scheme, having smart metering installed in your portfolio earns you extra credit as an early action, which then builds to extra, subsequent credit depending on how much smart metering you have in your portfolio. Also, being accredited to the Carbon Trust Standard shows that your company has an energy management scheme in place, which can also earn more credit.

There are many equivalents to the Carbon Trust Standard too, so we can work toward getting companies accredited under those standards as well. Our aim is to ensure companies understand how to run their energy management programmes and reduce their energy consumption because, ultimately, CRC was started as simply the Carbon Reduction Commitment, and I think companies have become confused, asking 'is it carbon trading?' or 'Is it the EU Emissions Trading System?' It is neither. This is about energy reduction, using less energy.

EU. The scheme does support, however, a Carbon Allowance Purchasing Scheme. How does this work and how have companies responded to it so far?

DL. In the early part of the scheme, which is called the introductory phase and is three years long, a company can buy allowances for whatever is required; it is at a fixed price, so a company has to calculate its carbon allowances and its carbon footprint, purchasing allowances for what it thinks its footprint will be in the following year. So a company covers its future year's allowances. For example, in April a company can buy allowances to cover its future year consumption and, at the end of the year, it can surrender them. The idea is to buy enough to cover allowances, which means a company has to understand exactly what its footprint is and also anticipate any changes to its footprint throughout the year. So it might be that a company is expanding and acquiring sites and so has to buy more carbon, or a company might need less carbon allowance because, fundamentally, it is becoming more efficient.

Therefore, a complete understanding of a company's carbon footprint is important because allowances are purchased for a full footprint, irrespective of what gets recycled back to the company. This is quite a large cash flow requirement, particularly if a company purchases every ton of CO2 in its portfolio - carbon is priced at £12 per ton (€16) which, if you are dealing in electricity only, will add £6 (€8) a megawatt hour to a company's electricity bill.

EU. Despite the cost, is it easier for companies to simply buy more carbon allowances rather than follow the course of long-term investments in energy-efficient techniques to ultimately lower their carbon footprint?

DL. Well this is why the scheme is structured in the way that it is because, ultimately, a company gets a recycle payment, and in the first year they get a minimum of 90 percent of that cost back because the penalty band is plus or minus 10 percent. However, in order to purchase a full allowance, there is quite a big cost involved, which is what will discourage companies from significantly overburdening just to be safe because too much carbon allowance purchases becomes quite a burden in itself. Companies could play it safe, sure, but then they would have to manage the cost impact of that on their business.

EU. So the government's aim is to instigate a change from the bottom up - do companies grasp this?

DL. They do, yes. In addition to the Carbon Allowance Purchasing Scheme, the environment agency is also publishing a lead table. At the end of every year of the scheme, each of the registered organisations will be ranked according to their performance under CRC. How it gets measured will change a little bit throughout the scheme, and that bit is quite complicated, which is why we have products to help organisations perform better in terms of their energy management and so rank higher up on the lead table. This has two impacts: reputation and financial - the better you do, the more industry respect and money back you receive.

EU. The money that the scheme raises is recycled fully back into it, but how do the companies benefit from this?

DL. There are no stipulations attached to the money that gets recycled back: a company pays it in and, six months later it all comes back out again to the participant. Ultimately, though, the ones that really benefit are those at the top of the lead table - leaders are rewarded with a bonus, while those at the bottom get a penalty. Over time, this risk band increases. In the first year it is plus or minus ten percent, rising to 20 percent next year and so on, up to 50 percent after five years.

EU. Will the CRC scheme be adopted elsewhere in Europe or do other European nations have their own methods for restricting carbon consumption?

DL. I have not come across anything quite like it in Europe yet so I think it is quite unique. Germany is obviously very strong on renewables, targeting their carbon emissions through renewables and incentivising companies to take part. I think CRC is a little bit of the UK playing catch-up. The government has already tackled the energy-intensive part of the market, and the CRC is aimed at non energy-intensive organisations, such as retailers, multi-site organisations, landlords, property owners and those other companies that traditionally have not been managing their energy and carbon quite so closely as the energy-intensive sector because, until now, there has been little cost incentive to do so.

EU. In the economic downturn, companies will obviously focus on cutting costs rather than carbon, so what would you say to the decision makers of companies who are reluctant to cut carbon right now?

DL. I think you do both. Energy is no longer a cheap commodity. It varies in price, quite significantly, and the market has moved a lot in the last couple of years. By banking carbon savings you are banking the value of that carbon, and so you are banking good energy savings. This potentially incentivises a company to do more rather than less because it makes the paybacks more attractive. Hence, I would suggest that those issues that were borderline before are now more attractive because there is that potential of financial gain, coupled with mitigating risk under the lead table and moving up it.

EU. How far are we from seeing wholesale changes in attitudes and behaviours throughout Europe, and will the CRC be a catalyst for change?

DL. I can see it already. It is happening in every organisation I have spoken to; they all recognise that they have to do something about their carbon footprint, so there has been a definite change in the consciousness of most organisations. There is an understanding that success as a company depends on good energy management not just as part of the CRC but on all levels, such as supply chain, where all companies need to be demonstrating good performance and good corporate social responsibility.

Thought-processes are really beginning to change and the whole industry is becoming much more strategic; energy and environmental concerns are reaching the decision makers in pretty much every business, which can only be seen as a good thing.

 

What is the CRC?

The CRC Energy Efficiency Scheme is a mandatory climate change and energy saving scheme for the UK, aimed at cutting emissions and improving energy efficiency in large private and public sector organisations.

There is a financial incentive for these organisations to reduce energy - carbon emissions are priced, with the organisations purchasing Carbon Allowances that are equal to their annual emissions. There is an emissions 'cap' for total allowances available to the CRC participants, who are encouraged to determine the most cost-effective way to lower their emissions, either by purchasing more Carbon Allowances or investing in ways to reduce their emissions and thus restrict the number of allowances they have to buy.

An organisation is eligible for CRC if they possess at least one half-hourly meter (HHM) that is settled on the half-hourly market and consumed more than 6000-megawatt hours of electricity per year of HHM during 2008.