Planning for the Carbon Reduction Commitment
With the Carbon Reduction Commitment (CRC), a new emissions trading scheme for large non- energy intensive organisations, starting in April next year Tom Fidell discusses the need to develop a 5-year strategic plan — now.
The Carbon Reduction Commitment (CRC) is a mandatory emission trading scheme that aims to improve energy efficiency and reduce UK emissions of carbon dioxide to help achieve the overall target of reducing greenhouse gas emissions by 2050 by at least 80% compared to 1990.
CRC will affect large organisations in both the public and private sectors. Organisations that consumed more than 6000 MWh of half-hour metered electricity in 2008 will be required to participate in the scheme. They will have to monitor their emissions and purchase allowances, sold by Government, for the CO2 they emit.
The more CO2 an organisation emits, the more allowances it has to purchase — so there is a direct incentive for these organisations to reduce their emissions.
The scheme will also help organisations save money by reducing their energy bills.
In addition, the better an organisation performs in terms of reducing its emissions, the higher it will appear in the annual performance league table that the Government will publish, showing the comparative performance of all participants. This, in turn, provides a further benefit as all the revenue raised from selling allowances is ‘recycled’ back to participants, and the league table position affects how much each organisation receives
It is estimated that 4000 to 5000 organisations will be required to participate fully. Each one will be required to monitor its CO2 emissions and purchase allowances to cover them each year. Where organisations are subsidiaries or part of a group it is generally the highest parent organisation that will participate on behalf of all the organisations in the group.
In addition to organisations that are full participants, another group of around 15 000 will be required to make an information disclosure to enable them to opt out of the scheme. This will cover organisations with half hour meters but coming in below the 6000 MWh limit.
The CRC scheme starts in April 2010 with a 3-year introductory phase where allowances will be sold at a fixed price of £12 per tonne. After the introductory phase the scheme moves into the capped phase where the Government puts a cap on the number of allowances available and then sells these at auction. This is expected to see a significant increase in the cost of allowances.
An organisation’s performance in reducing CO2 emissions will determine its place in the league table. Emissions during the year will be compared to a 5-year rolling average, with an allowance for a growth metric for organisations which are growing or declining. Until the scheme has been in operation for five years the comparison will be made with the number of years for which data is available. In the early years an early action metric has a small weighting on the league position, although in the first year with no data to compare with, this metric forms 100% of the league table position.
The amount of money an organisation gets back is determined by its position in the league table in the form of a bonus or penalty. This starts at a low level of only 10% in the first year but increases substantially in later years to reach 50% in the fifth year.
It can be seen that an organisation’s success or failure in the league table is determined by its ability to reduce CO2 emissions year on year and not necessarily being the most energy-efficient operator in the country. An organisation can be one of the most energy-efficient operators in the industry, but end up near the bottom of the league table after three or four years because the energy savings were made before the CRC came into operation.
The league table is publicly available and therefore has reputational issues. Customers may not want to work with an organisation which is near the bottom of the league table each year.
A strategy is required to ensure that an organisation stays near the top of the league table each year. Energy-saving initiatives therefore need to be identified which can be introduced each year in stages over a period of five years or more.
The first thing to look at is behavioural changes such as turning off equipment and lighting when it is not required and controlling temperature to the optimum level. Staff training and motivation to reduce energy would also come under this heading, together with the formation of energy committees and the appointment of energy champions. This work could be done even before the CRC comes into operation, as the financial savings in energy will outweigh the savings to be made in the league table.
However, when it comes to savings which require capital expenditure, a more strategic approach is required. It may not be the best policy to install all new energy-saving plant and equipment in the first couple of years, as this could lead to a low position in the league table from the third year onwards, when the bonus and penalty percentage has increased and the cost for allowances may be much higher after the third year.
What is required is a strategy to identify energy-saving opportunities that can be installed each year over a period of five years or more. For example, if an organisation needs to install new lighting, a new boiler plant and a new chiller, it may pay to install the new lighting in the first year one, the new boiler plant in the second year two and the new chiller in the third year. However, under the CRC it may also pay to investigate the economics of combined heat and power before new boiler plant is installed.
The time to undertake this strategy is now. Over the next year all opportunities to save energy should be identified and the cost of implementation then established, together with the financial saving in energy and the saving in CO2. With this information the strategy can be developed, which may, for example, entail all energy-saving opportunities with a one-year pay-back being undertaken in the first year, those with a 2-year pay back being undertaken in the second year, a 3-year pay back in the third year etc. It will not be as simple as this of course, and every organisation will have different requirements, but the key aspect is that a strategy should be developed.
Tom Fidell is with energyTeam www.energyteam.co.uk
