The drive to improve energy efficiency

Alan Aldridge, Executive Director of the Energy Services and Technology Association, explains the CRC Energy Efficiency scheme.

Final details of the scheme were published by the Government on 7 October. It aims to drive down energy consumption by improving energy efficiency and will affect virtually all large consumers of energy not already in either the Emissions Trading Scheme (ETS) or Climate Change Agreements (CCA). Like the European Union’s ETS it will involve the trading of carbon emission allowances.

However, in the first three years, trading will only be needed for ‘topping up’ allowances purchased at fixed price sales. Participating organisations will thus have a three year period to get used to the operation of the scheme before full scale emissions trading begins.

For those of you that are surprised not to have heard of the scheme before, the initials ‘CRC’ may provide a clue. The CRC Energy Efficiency Scheme used to be known as the Carbon Reduction Commitment. It has been re-titled “given the primary focus on achieving emissions reductions by increasing energy efficiency,” as the Government explains. However, the driver for this will still be, in the long term, a cap-and-trade carbon scheme where participants will have to make more and more efficiency savings as the total number of allowances is progressively reduced.

The essence of carbon trading is that participants either invest in energy efficiency to reduce the number of emissions allowances required, or they buy allowances to cover emissions if these are cheaper than the efficiency investment. For the first three years, allowances in the CRC Energy Efficiency Scheme will be freely available for advance purchase at a fixed price of £12 per tonne of CO2.

Who is included?
The Government has simplified the definition of what constitutes a public sector organisation for the purposes of the scheme. In general, organisations designated as a ‘public authority’ in the Freedom of Information (FOI) Act 2000 and the Freedom of Information (FOI(S)) Act (Scotland) 2002 will participate in CRC on the basis of their individual FOI/FOI(S) listing, or the listing of their organisational type – unless they are legally part of another body, in which case they would participate as part of that parent body.

Under this approach, Police and Fire Authorities would participate on an individual basis, unless legally part of another body. For example, Local Authorities designated as County Fire Authorities would normally be responsible for Fire Authority-related CRC emissions.

All state-funded schools are included, not individually but as part of their Local Authority. The Government requires schools to provide ‘reasonable assistance’ to their local authority where so requested. Schools will be able to request an annual statement from energy suppliers to facilitate their reporting responsibilities.

The Government is encouraging local authorities and schools to engage in a dialogue on effective reporting processes. It has also acknowledged the need for additional guidance and will be working with partners to produce appropriate material.

The operation of the scheme One of the main changes in the operation of the scheme is the decision that 2010- 11, the first year of the scheme will be a ‘reporting year’ and participants will not have to purchase emissions allowances to cover their energy consumption in this year. Following the economic difficulties faced by everyone over the last 12 months that will be welcome news. In addition, the money spent on forward emissions allowances at the annual sale each April will now be recycled in October, just six months later.

However, that does not mean the first year is purely an academic exercise without any financial impact. Performance in this year will act as a baseline for the compilation of the league table in future years – and the league table determines how much of the cost of emissions allowances is recycled to each organisation. For the first round of reimbursement in October 2011, this can amount to a reward or a penalty (depending on position in the table) of up to 10 per cent of the monies paid, the exact amount being determined by the 2010-11 league table.

The league table is constructed from three elements or metrics: absolute reductions in energy consumption; early action; and growth. So what will determine the league table position at the end of this first ‘reporting’ year? Well, it cannot be absolute reductions in energy/carbon – this year is in fact the baseline year. The growth metric takes account of increases/decreases in overall year-on-year service provision (at least as far as local authorities are concerned) so once again, that will have no impact on the October 2011 payout. So position in the league table must be determined by ‘early action’. The only items which count towards this are:

Installation of automatic • meter reading systems (AMR)
• Membership of the Carbon Trust Standard (formerly the Energy Efficiency Accreditation Scheme) or equivalent

The Carbon Trust Standard is a scheme where there is third party verification of ongoing energy efficiency improvements. The Government has now announced that ‘equivalent’ schemes, i.e. those that result in similar levels of savings and have similarly robust verification procedures, will also be acceptable. ESTA welcomes this as it should allow participating organisations to pick a scheme that matches their own needs and requirements. The recent launch by BSI of a Kitemark scheme based on its new BS EN 16001 Energy Management standard is an example of the kind of option that is expected to be accepted. Indeed, BSI is hopeful that several schemes will be developed based on the standard.

The relative contribution of each metric to the overall league table in the first three years of the scheme is given in Table 1. The early action metric impacts on the league table for all three years of Phase One of the scheme, so serious consideration should now be given to adoption of qualifying measures in order to take advantage of them. It should be added that AMR (and its more comprehensive form, automatic Monitoring & Targeting – or aM&T) and membership of schemes such as the Carbon Trust Standard, are normally cost-effective in their own right. The CRC Energy Efficiency Scheme league table is yet one more incentive to implement these strategies.

From 2013, the scheme is due to change into a full emissions trading scheme. Allowances will not be sold at a fixed price – instead they will be auctioned. The total number available (the ‘cap’) will be steadily reduced so that the scheme can play a full part in reaching the Government’s carbon reduction targets – the Committee on Climate Change will recommend appropriate levels.

The impact of the Scheme Although this scheme uses emissions allowances as its reporting base, ESTA believes that the impact of carbon price will be very limited for the first three years. In fact, the ability to buy the bulk of an organisation’s needs at a fixed price regardless of the market price for carbon will allow those taking part to accustom themselves to the accounting processes involved.

However, many organisations will be very interested in reputation value of league table position. No-one will want to be near the bottom of the table and it may be that local authorities will want to be seen to be higher than others nearby or of comparable size. They are therefore likely to adopt strategies to progress within the table. The programme focuses on energy efficiency and we feel rightly.

The value of energy cost savings far outweighs the financial impact of carbon, at least in terms of both the fixed price offered by the Government and also the current open market price.