What should you be doing about the Carbon Reduction Commitment?

With important new environmental legislation about to come into force, what should you be doing about the Carbon Reduction Commitment?

"Up to two-thirds of affected businesses claim to be unaware of the full implications of the scheme, how well prepared is the retail and consumer sector?"

The Carbon Reduction Commitment (CRC) is about to hit around 5,000 businesses and public sector organisations in the UK, including all the major High Street retailers and the big consumer goods companies. Energy-intensive industries like power and heavy manufacturing have been part of the EU Emissions Trading Scheme for some time, but from April this year a much wider group of companies will have to start accounting for their energy use and carbon emissions, and purchasing carbon credits.

But with up to two-thirds of affected businesses claiming to be unaware of the full implications of the scheme, how well prepared is the retail and consumer sector? And what’s the real cost of participating in the CRC, both in terms of time and money? The man with the answers is David Walters, a partner in the PwC Sustainability team, and an expert on this whole area:

How do you know if you’re affected by the CRC?

As so often with legislation like this, the answer is rather complicated. The first thing to check is whether any of your sites have a ‘half hour meter’. These are installed by the power companies for customers with reasonably high levels of energy use. If the answer’s yes, then you have to register with the Environment Agency before September 30th this year, or face a fine of £5,000 plus £500 per day you’re late. You then need to go through the - sometimes burdensome - process of calculating your total energy consumption for the calendar year 2008. Around 20,000 businesses are likely to be affected by this aspect of the CRC. However, even if you have to register, that doesn’t necessarily mean you’ll be caught by the rest of the CRC requirements. The scheme only applies if you used more than 6000 MWh of electricity in 2008, which is roughly equivalent to a £500,000 electricity bill.

So if you do turn out to be caught by the scheme, what happens next?

You have to start capturing all your energy use data - not just your electricity. The period in question is April 1st 2010 to March 31st 2011, and the information needs to be submitted to the Environment Agency in a ‘Footprint Report’ by the end of July next year.

You will also have to buy carbon allowances from the Agency in April 2011, based on the energy you expect to consume in the year to 31st March 2012, and at a cost of £12 per tonne of CO2. Tesco has already gone on the record to say that this will probably equate to a payment of around £40million for them next year. By October 2011 the Agency will have drawn up a ‘league table’ of companies according to their relative levels of energy efficiency, and depending on how well you rank, you’ll either get back the cost of your allowances plus a bonus, or - at worst - receive the cost of the allowances back, but minus a penalty.

As this suggests, all participants in the scheme will face a cashflow impact, and some could face an actual cost as well. From a planning point of view, the key is to get as clear an idea as you can of where you’re likely to end up in the league table, so you know what the cashflow impact is likely to be. PwC can definitely help you there, based on the knowledge we have of what other businesses are doing. Unfortunately the rankings are not being done by sector, which seems to mix apples and pears according to some, but we can still help you with advice about how to improve your energy efficiency on the one hand, and lift your league table ranking on the other. For example, getting accredited by the Carbon Trust will put a tick in one of the Agency’s boxes, and installing automated meter reading is also very helpful.

But cashflow isn’t the whole story is it?

By no means. From our discussions with clients, the main issue is the ‘hidden’ costs of the scheme - the time and resources they’re having to devote to gearing up for the scheme, which in some cases means completely new processes or IT systems. One large retailer has told us this sort of preparation will cost them up to £500,000. Then there’s the reputational impact.  Companies whose brands reflect good environmental practices will not want to perform badly in the league table and see shareholder value hit.

Are there any specific issues for the retail sector?

The most obvious one relates to leasehold properties.  Retailers need to look closely at their lease documentation to check who’s responsible for the energy bills at each of their sites. In shopping malls, for example, it’s often the landlord who manages the energy supply for the whole complex. In these cases it will also be the landlord who has to comply with the CRC. It’s possible, on that basis, that some retailers will have no direct involvement with the CRC at all, but they should still check their lease agreements to see what scope there is for their landlords to pass on the costs of the CRC, or change the terms and conditions of the lease. Conversely, department stores will almost always be responsible for the energy supplied to their in-store concessions, so they need to check their documentation too.

What about franchises?

It’s the franchisor who’s responsible in that case, which effectively means the CRC will need to be managed centrally for the whole network. Once again, businesses like this need to look at their franchise agreements to see what scope there is to put pressure on their franchisees to reduce their energy consumption, and become more efficient. There may also be issues here about how easy it is to gather all the data the CRC requires, both for the calendar year 2008 and for 2010/11, so that aspect of the scheme needs looking at with some urgency. Remember, there are significant penalties for disclosing late, or disclosing inaccurate information.

What about the long term - what’s the likely impact on energy costs?

The CRC is all about reducing the UK’s carbon emissions, but even if it turns out to be an effective way of doing that, it’ll almost certainly mean significantly higher energy costs for the businesses involved. We estimate that by 2015 many companies could be facing a 20% hike in their bills. It’s also important to remember that when the second phase of the CRC starts in 2013, the participants in the scheme will have to bid for their allowances at auction, which will almost certainly push the price above £12.  The other thing that a lot of companies find disappointing is that the CRC offers no incentive for them to buy renewables - as far as the scheme is concerned energy is energy, wherever it comes from. That’s understandably frustrating for businesses that have invested a lot in more sustainable forms of energy, like combined heat and power or biomass.

So if you had one piece of advice, what would it be?

I’d offer two suggestions, actually. One is that if you haven’t started preparing for the CRC, you need to start now, and we can help you if it all seems rather daunting. The second is to repeat what I said earlier and look at your documentation. Retailers, in particular, could be facing some tricky issues with particular leases or tenancies, so you need to start working on that now.