Are you committed to carbon reduction?

The CRC Energy Efficiency Scheme came into effect on 1 April and has the potential to pose significant challenges to many organisations. For most participants, this will be the first experience of being subject to a complex carbon-trading scheme. Yet, unlike many other forms of regulation, the CRC Energy Efficiency Scheme is a profit opportunity for the best performers. This is in addition to the value of energy savings and the growing commercial benefits from integrating sustainability into the business model.

Why launching the CRC?
The CRC has been launched because of the failure of British organisations to invest in energy efficiency, despite the estimated 15 per cent return on such investments and the £1 billion in energy savings that could be achieved. A report in 2005 by the Carbon Trust revealed three main reasons why such investments are not taking place:

1. Information gap – There is a lack of accurate data on energy use, the costs and returns of investment options and a lack of trained personnel.

2. Misalignment of incentives – Energy price signals are not reaching the right people. For example, landlords pass on energy costs to tenants and so have no incentive to reduce emissions, while the tenant has no incentive to invest in the fabric of the landlord’s building.

3. Organisational issues – Energy managers cannot get management to pay attention to energy efficiency. Energy costs are a small issue for most organisations and companies prefer to invest in growing their businesses.

The CRC has been explicitly designed to remedy each of these failures. An organisation will have a successful CRC strategy if it can answer the following questions:

  • Do we know where and how our organisation uses energy and what opportunities there are for cost-effective reductions in energy use?
  • Have we put in place the right incentives to drive carbon reduction through the organisation?
  • Has the organisation’s board created a comprehensive carbon reduction investment plan?

What are my obligations?
Organisations qualify to participate in the CRC if during calendar year 2008, they consumed more than 6,000 MWh through half-hourly meters. The government estimates that there are 4-6,000 organisations in this category including local authorities, large NHS Trusts, central government departments, retailers, financial institutions and commercial property owners. Those subject to the CRC have three primary obligations:

1. report their total carbon footprint (electricity, gas and other fossil fuels) to the Environment Agency

2. compile an auditable evidence pack signed by a Board director substantiating that report

3. buy and surrender one allowance per tonne of emissions (£12 per tonne from April 2011)

The CRC will be implemented on a phase-by-phase basis. The first phase runs from April 2010 to March 2013. Future phases will last for five years.

Why should I care?
Financial – Unlike most government regulations, the CRC represents a profit opportunity. The top 50 per cent of CRC performers can expect to make a profit from the scheme (before internal costs, fees and energy cost savings). Poor performers face higher costs. There are significant cash-flow implications for all participants.
Legal – Directors of the highest parent company are required to sign off on the evidence packs and there are fines and other civil and criminal penalties for failure to register, missing deadlines and inaccurate reporting.
Reputation – Your organisation’s performance will be published by the government in a single public league table, which will rank every participant from top to bottom. A low ranking may create questions about cost controls and commitment to sustainability.

What do I do next?
BRE, together with commercial real estate brokers and consultants Cushman & Wakefield, have devised a simple model for organisations that wish to set up a CRC compliance strategy. The first step in every case relates to operational readiness.
Liability mapping involves identifying every electricity and gas meter (and other emission sources) for which the organisation is a counter-party to the energy supply contract. Mapping out the organisational structure can be quite complex for certain commercial organisations. Local authorities have the added complication that they must include emissions from their schools even though they have no direct operational control over their energy use. Without a liability map, an organisation cannot understand their “value at risk” – the financial benefit/cost of reaching the top/bottom of the league table.
An effective response to the CRC cannot be left to energy managers alone. Capacity building needs to involve facility managers, finance directors, communications experts and the legal department. Even a basic liability mapping exercise requires information from various departments who each need to understand what to contribute and why. Decisions on early action (see below) cannot be taken without consideration of issues related to communications and reputation.
Organisations need to put in place procedures to ensure that they are collecting high quality information for the evidence pack that they need to compile each year. Estimated data must be inflated by 10 per cent, increasing the costs of compliance, and 20 per cent of evidence packs will be audited each year with escalating fines for inaccuracies.
In the first three years of the CRC, league table positions (which determine whether an organisation profits from the scheme) are dependent on early action measures; voluntary installation of automatic meters and Carbon Trust Standard accreditation. Participants need to make decisions quickly on the cost-effectiveness of these actions because delays result in a lower score and hence a worse financial result.
Once organisations have addressed these issues and registered for the CRC, they can move on to address longer-term strategic issues such as how to optimise their portfolios from a CRC perspective, how to fund carbon reductions and how to use carbon trading to generate the best financial returns.

CRC readiness
BRE and Cushman & Wakefield recently undertook a survey of CRC participants to assess their readiness for the regulations. It found that while there was fairly good general awareness of the CRC among likely participants, many organisations did not realise the detailed preparation that is required. A majority of organisations had not calculated the financial impacts of the scheme and were not undertaking early action measures and only 20 per cent had appointed a multi-disciplinary team to manage compliance.
This low level of readiness actually provides an opportunity to shine for those organisations that take an effective approach to their preparation. While the CRC clock is already ticking, it is not too late enhance your organisation’s reputation and to profit financially from participation.

For more information

For CRC advice, please contact Robert Rabinowitz
Tel: 01923 664857
For Energy Management training details, please contact BRE Training
Tel: 01923 664829

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