CRC simplification – Local Energy briefing

Overview

DECC has now published the Government’s response to the consultation on simplifying the CRC Energy Efficiency Scheme. This sets out in detail the changes that will be made to the Scheme from Phase 2, but there are also an unexpectedly large number of changes coming into force immediately. Changes to the scope of the CRC mean that Phase 1 participants must identify which supplies should be included in 2012-13 consumption data according to the new rules, prior to compiling and submitting the next annual report by the end of July 2013.

Many of the changes remain as originally proposed in the consultation, but some go further than initially suggested. Only two fuels (electricity and gas) remain in the Scheme, whilst schools are to be excluded entirely from Phase 2. Together with changes to the qualification criteria, it is likely that some local authorities currently participating will not qualify for Phase 2, each saving £350,000 or more on annual allowance costs alone.

Key simplifications affecting the public sector:

To be introduced immediately

  • Reduce the number of fuels from 29 to 2 
    • Electricity
    • Gas, only when used for heating purposes
  • Remove the 90% rule and associated compliance activities (footprint report, core vs non-core fuels, residual measurement list (RML))
  • Abolish the performance league table (PLT)

Taking effect in Phase 2

  • Restrict qualification criteria to supplies through settled half hourly meters only
  • Withdraw state funded schools from CRC participation
  • Expand the scope of unmetered supplies captured by the CRC (bringing all streetlighting into scope)

 

Phase 1 participants 

Reporting

For current (Phase 1) CRC participants using a wide range of fuels, there are some immediate benefits. You will not be required to report any supplies other than electricity and gas (when used for heating) in the remaining two years of the Phase (2012-13 and 2013-14 annual reports), so any other fuels that appear on your RML need not be included. All gas meters consuming 73,200kWh or less annually are excluded.

Many public sector participants will see little change, however, as electricity and gas make up the majority of CRC supplies under the current rules. Participants with CHP plant may benefit, though.

As the definition of gas used for heating does not include gas-fired CHP, this will become simpler to report. The input gas is no longer in scope, so only the electricity generated should be reported (according to the existing rules governing self-supply and/or unconsumed supply). There are, however, some potential complications associated with this change: Self-supplied electricity may not be metered and will therefore be more difficult to report accurately; and it may increase the carbon emissions reportable under CRC because participants must purchase allowances against a fuel with a higher carbon factor (output of self-supplied electricity) than previously (input gas).  In mitigation, the emission factor applied to self-supplied electricity will be revised, to recognise the greater efficiency of onsite generation (no transmission loss) compared to grid supplies.

Purchase and surrender of allowances

The single, retrospective sale of allowances will continue for the remainder of Phase 1. The deadline for the surrender of allowances is extended to the end of October; this allows for an extension to the deadlines for request, payment and allocation of allowances, but full details of this extension have not yet been made available. The price of allowances remains £12/tCO2 for 2012-13 and 2013-14 emissions.

Recommendations

  • For the remaining two reporting years of Phase 1 (2012-13 and 2013-14), some participants may see a significant reduction in reported consumption and therefore also in the total cost of allowances. Participants should carry out a forecast of revised CRC liabilities and communicate any significant differences to your CRC finance representative.

 

Phase 2

Qualification

As we are currently in the qualification year for Phase 2, many of these changes are immediately relevant even though the first Phase 2 annual report is not due until 2014-15.

The qualification threshold has been maintained at 6,000MWh, so changes to the qualifying supplies mean that some current participants will drop out of the Scheme at the end of Phase 1. Only supplies through settled half hourly meters will contribute towards qualification; this means that streetlighting, whether on passive or dynamic unmetered supply, is not included in the qualifying total.

The withdrawal of schools from the CRC means that their energy consumption should also be excluded for qualification purposes.

Without the energy consumption from the schools estate and streetlighting, it is likely that some local authorities who are Phase 1 participants will fail to qualify for participation in Phase 2.

Reporting

Only two fuels should be reported in Phase 2:

  • Electricity supplies, excluding meter profile class 01 and 02
  • Gas when used for heating purposes only
    • Excludes supplies through meters that consume an annual quantity of 73,200kWh or less
    • Although it is unlikely to be relevant to public sector participants, there is an organisation-wide 2% de minimis threshold for gas consumption (i.e. if gas consumption for heating purposes is equal to or more than 2% of overall electricity consumption in the first reporting year, then gas must be included for the whole of the Phase)
    • Participants may make an assumption that all gas used is for heating purposes. This reduces the administrative burden, although participants may choose to demonstrate that some gas is used for other purposes, and therefore excluded, if they wish

Purchase and surrender of allowances

There will be no cap on the number of allowances available and no auctioning will take place. Fixed price allowance sales will take place twice a year: one forecast sale at the start of the year and one buy-to-comply sale after the end of the reporting period. The price of allowances at the forecast sale will be lower to encourage emissions forecasting, but there is no confirmation of the price differential as yet.

Allowances may be carried over (‘banked’) between years within a Phase, but not between Phases. As announced in the Autumn Statement, the price of allowances in the first compliance year of Phase 2 (2014-15) will be £16/tCO2, with prices rising thereafter in line with inflation (RPI).

Recommendations

  • All current or prospective participants should forecast their energy consumption for the qualifying year (2012-13) according to the new rules, to determine their qualification for Phase 2. Those that expect to qualify should also forecast carbon emissions for the first compliance year (2014-15) to identify the potential cost implications (using the new, higher cost of allowances at £16/tCO2)
  • The combination of annual price rises and the price differential between the forecast and buy-to-comply sales mean it is likely that some allowance trading will take place. Phase 2 participants should consider a buying and trading strategy across the entire Phase to determine the most cost-effective method of compliance
  • Plan to upgrade (or return) streetlighting to dynamic supply from 2014-15 to improve monitoring and controls
  • Consider (additional) investment in CHP. There may be increased cost benefits associated with the reporting of generated electricity only, as the heat element is effectively ‘free’ in terms of CRC carbon allowances.

 

Future Phases

There is a commitment to review the effectiveness of the CRC in 2016, with the tax element introduced at Spending Review 2010 described as ‘a high priority for removal when public finances allow’. Therefore, any consideration of the Scheme beyond 2016 is somewhat speculative.

It is worth noting, however, that the simplified qualification criteria, whilst expected to exclude some current participants from Phase 2, is likely to result in increased participation from Phase 3 onwards.

Due to the current advanced meter rollout, and the proposal for advanced or Smart meters to be settled on a half-hourly basis from 2014 onwards, many more supplies would thereafter contribute towards qualification as settled HHMs.

 

Important note:

This briefing does not cover all of the simplification points. Current and potential CRC participants should familiarise themselves with all planned changes and evaluate any possible impacts on their own compliance and liability.

The Government response to the consultation on simplifying the CRC Energy Efficiency Scheme can be found on the DECC website, alongside the Impact Assessment and the original consultation documents.