Launched by the previous Labour Government, the CRC (Carbon Reduction Commitment) Energy Efficiency Scheme came into effect in April with the aim of improving the UK’s energy efficiency and reducing carbon dioxide emissions. It targets the largest UK organisations, which generate around a tenth of the UK’s CO2 emissions.

Some 20,000 public and private sector organisations will fall under the scheme, but around 15,000 of these will only need to disclose their electricity usage “once every few years”. That leaves just 5,000 of the UK’s largest organisations – including supermarkets, water companies, banks, local authorities and all central government departments – that will have to participate fully. They will do that by monitoring and recording their CO2 emissions, and purchasing
“allowances” (initially sold by government) for each ton of CO2 they emit.

The scheme is, however, revenue neutral, with all the cash raised from selling allowances being “recycled” back to participants according to their position in an annual league table. The previous government said that this “cap and trade” scheme is needed to meet CO2 reduction commitments. However, it was heavily criticised when details were announced a year ago, and even now many UK companies are not yet ready to implement it.

CRC – what it means

The introductory first phase will run for three years, with later overlapping phases (qualification, registration, participation and compliance) lasting seven years each. Organisations initially base their calculations on 2008 energy levels. They qualify for the full scheme if they made at least one purchase on the half-hourly electricity market, and if they had 6,000MWh/year of half-hourly metered electricity use –corresponding to an electricity bill of about £500,000.

Footprint emissions cover electricity, gas, coal, liquefied petroleum gas, diesel and other fuels. Not all emissions are covered, so organisations don’t, for example, have to buy allowances for activities covered by other government policies. Domestic accommodation, transport emissions and EU Emissions Trading System emissions are also excluded, and there are special rules for CHP (combined heat and power), renewable supplies and energy from waste.

“The scheme sets an overall emissions reduction target by capping the total allowances available.”

Organisations buy allowances equal to their annual emissions. These initially cost £12 a ton of CO2, but will later be traded on a secondary market. The scheme sets an overall emissions reduction target by ‘capping’ the total allowances available.

Participants who cut their energy consumption below the target will be able to sell allowances to those who are above target at an annual auction, and extra allowances can be issued as a safety mechanism to prevent the price of allowances becoming too high.

The league table is calculated using three figures: an “early action metric”, which will be measured in for the first year only, allowing for energy saving measures in place before the start of CRC; an “absolute metric” reflecting the relative change in an organisation’s CRC emissions; and a “growth metric” which allows for any expansion in the organisation. Participants will be ranked for each metric, so with 5,000 participants the top performer will receive 5,000 points, while the worst will only get one point. The three metrics will be weighted and then calculated to give the overall league table score. From 2011, organisations will receive a bonus or pay a penalty at the end of each year.

There is a considerable amount of administration involved, along with a registration fee of £950 and yearly fee of £1,290. Organisations also need to build up an extensive “evidence pack”, which will need to include relevant company information, footprint reports, energy invoices, special event records, and emissions figures. The pack has to be available to auditors on demand, and it is expected that about 1,000 organisations (20%) will be audited each year. There will be severe penalties, including some criminal offences, for incorrect reporting or inadequate record keeping.

The initial scheme was simpler, but had severe drawbacks – for a start it made no allowance for energy improvements organisations had previously made, and so actually penalised those that were already energy efficient. The baseline year was 2010, so it would have been counterproductive for organisations to make any improvements this year – they would have been better off postponing action. The scheme was adjusted after widespread industry criticism, and now makes some allowances for improvements that organisations have already made, and allows for growth. That, however, has made the rules even more complex.

How will electricity prices be affected?

Jo Butlin, vice-president for retail of SmartestEnergy (the UK’s largest purchaser and supplier of independently generated electricity) was an early critic of the proposals. She warned that electricity costs will rise dramatically because of CRC and other measures being introduced. SmartestEnergy estimates that up to half of electricity costs for British firms will soon go to pay for the transition to the low carbon economy that the CRC aims to encourage. According to Butlin, the price rises will seriously affect the competitiveness of British businesses. She stresses that businesses will have to work closely with their suppliers to meet emission reduction targets without increasing costs. SmartestEnergy is, for example, recommending customers to switch to renewable electricity and on-site generation.

Energy consultants McKinnon & Clarke have also criticised the scheme because of its costs. The UK’s existing Climate Change Levy (CCL) adds nearly 0.5 pence/kWh or 6% to today’s electricity prices. McKinnon & Clarke calculate that the CRC will add another 8%. This, they say, will be a large burden on UK companies, but not high enough to provide an incentive to improve energy efficiency. That would need CO2 prices to be set at £40 or £50 a ton.

Also, since the 15,000 smallest organisations only have to disclose information, they have no incentive to save energy. McKinnon & Clarke calculate that, at £12 a ton, the 5,000 largest organisations will typically pay £45,000 a year to buy CO2 allowances in advance. That will only reduce the money they spend on energy efficiency improvements. They cannot know where they will end up in the league table, and so cannot plan energy investments properly. They don’t even have to spend the money they won on the league table lottery on energy improvements.

“The scheme will only add to the bureaucratic nightmare of running a company. It will be expensive to run, and is unlikely to make a difference.”

CRC – is it energy efficient?

The privatisation of the UK energy industry in the 1990s – a model which was adopted throughout the world – completely ignored energy efficiency. There were no incentives for energy generators to help their customers save energy, and companies mainly cut their energy bills by aggressive purchasing deals. That is a major reason why our present problems are as bad as they are, and the CRC seems likely to make things even worse.

Meanwhile, organisations are making the same mistakes they have always made. Energy improvements need some up-front investments. These soon start to pay for themselves, but top management has to make the decision to approve the extra budgets for (particularly) maintenance and purchasing. They usually don’t.

The scheme will only add to the bureaucratic nightmare of running a company. It will be expensive to run, and is unlikely to make a large difference to energy efficiency – at best it will meet less than 2% of the total reduction target set by the Labour Government.

The best way to approach energy saving is to first prevent the “avoidable waste” – energy waste that can be addressed by improved motivation, awareness and training, refinements to maintenance procedures and simple monitoring schemes that can detect unexpected deviations from expected consumption. Then, when processes and buildings are later upgraded or refurbished for another reason, they should incorporate energy efficient design and equipment. That is a basic rule of energy and environmental management, yet the government even now doesn’t seem aware of it.

Many UK hospitals, local authorities and other public sector organisations have already invested in energy-saving measures. More savings will have much longer payback times, and will either cost large amounts or affect performance. The most responsible energy users will, therefore, likely end up near the bottom of the league table, and pay large penalties to private companies who have not yet bothered with energy improvements but who can play the system. The CRC’s league table is largely arbitrary and so will only be demotivating.

The cost conundrum

Energy consultant Vilnis Vesma, author of the introductory textbook Energy management principles and practice (and a vocal critic of the government’s “well-meaning stupidity” in the energy arena) is at a loss to see how participants could conceivably work out the cost-effectiveness of anything they might do to improve their league table positions.

“Upstream limits will be not only far simpler than the present regime but, by definition, guaranteed to succeed.”

According to Vesma, nothing will happen until, firstly, the focus is moved back to energy saving (rather than climate change which is “too big, too abstract and too contentious to motivate people”) and, secondly, a way is found of making energy saving mission-critical.

“What we need is something like an annual tapering cap on fossil fuel supplies to the whole UK economy,” he says. “Upstream limits will be not only far simpler than the present regime of partially rationing the corresponding emissions but – crucially – also by definition guaranteed to succeed”. He is not optimistic, though, with the government preferring to focus on energy users “that don’t have the vote”.

As demonstrated by Labour, something does need to be done about energy efficiency in the UK. Like most of the western world, the country is not ready for the coming energy price rises, nor the energy shortages. The CRC, however, looks like it will siphon resources away from the energy efficiency improvements companies should be making, while adding to the ever growing list of criminal offences in the UK. We need to do something – but not this.

The recently formed Conservative and Liberal Democrat coalition government has not yet laid out policy plans for CRC. A spokesperson for the Department of Energy and Climate Change said all plans to carry out CRC legislation as detailed above remain in place for the immediate future, but remain subject to possible change by the new coalition government.