CARBON REDUCTION COMMITMENT

Stamford Bridge played host to the latest Sustainable Business Round Table Debate, where an interested gathering of business leaders joined together to discuss the implications of one of the biggest pieces of environmental regulation to hit the UK in years: the Carbon Reduction Commitment. Tom Idle reports on what happened

It is now referred to as the CRC Energy Efficiency Scheme (previously Carbon
Reduction Commitment, or CRC) and from April 2010, businesses that have at least one half-hourly electricity meter settled on the half-hourly market and during 2008 consumed more than 6,000 megawatt-hours of electricity, will be affected. Formulating the policy has been no easy task, not least because the legislation is organisation-based, not facility-based (like the European Union emissions trading scheme (EU ETS)) and it has caused the UK's energy managers plenty of sleepless nights.

The scheme has been designed to tackle emissions not already covered by Climate Change Agreements or the EU ETS and is estimated to affect about 20,000 organisations. The idea of the system is to improve energy efficiency in business. It will operate as a 'cap and trade' mechanism, providing a financial incentive to reduce energy use by putting a price on carbon emissions generated by energy use. Companies and public sector organisations can buy allowances equal to their annual emissions and the overall emissions reduction target is achieved by placing a cap on the total allowances available to each group of participants in the scheme.

Within that overall limit, it is up to individual firms to work out the best way of being compliant - either by buying extra allowances or investing in greater energy efficiency measures. But with so many different types of organisation involved in the scheme, the consultation process has been fascinating.

This latest in a series of round table discussion sessions, organised by Sustainable Business, succeeded in bringing together a group of affected businesses to thrash out some of their issues and concerns. We invited a select group of firms - both large, small, public and private - and Department of Energy and Climate Change (DECC) policymaker, Niall Mackenzie. Industry experts, Lynne Ceeney from Parsons Brinckerhoff and Laurent Mineau from EDF Energy were also on hand to listen and offer their advice on the risks and opportunities thrown up by the CRC Energy Efficiency Scheme.

Introducing proceedings, Professor Martin Fry, chairman of the Energy Services and Technology Association, called on Mackenzie to explain what problems DECC had encountered while formulating the scheme's framework.

"It is quite a complicated system," he said. "Because it is an organisation-based scheme, there are a lot of issues about brand awareness and the performance league table."

Since the meeting, the Government has confirmed that the rules have been changed from the original draft legislation, so that subsidiaries of large companies can qualify for the scheme in their own right if they so wish. "A good example," said Mackenzie, "is a big retail chain like the Arcadia Group, which owns Top Shop and River Island. It can have Top Shop [participate in the scheme] in its own right. [But] once you have nominated how you want to configure your organisation you have to stick with that for the phase - we will not allow people to play games and shift a badly-performing part of the operation round the organisation to massage the table," he stressed, adding that he hopes the decision "will help some of the branding issues that people have raised with us".

For a run-down of the latest amendments made to the Carbon Reduction Commitment Energy Efficiency Scheme, visit www.decc.gov.uk. Mackenzie added "the treatment of renewables" and "early action opportunities" to his list of issues that have arisen. But he confirmed that the scheme will be monitored closely to observe what impact it has on commercial growth. "If your business grows dramatically and you have been maintaining the same energy consumption, you are obviously becoming more efficient," he said. "There has been quite a lot of debate in the previous consultations about what the right metrics are for growth.

We are sticking with turnover, because that is the lowest common denominator for the public sector and business. "For later stages that is something that we
would need to keep an eye on. We do not want to penalise you for growth if you are managing your energy as part of that."

Listening intently to Mackenzie, Transport for London's (TfL) environment and climate change coordinator, Helen Woolston explained to the round table her predicament. "A number of the different parts of TfL are contracted-out or franchised," she said. "For example, the Docklands Light Railway is run for us by Serco." Woolston was unclear about whether the operations of its contractors ought to be taken into account in calculating TfL's CRC commitment. What followed was an interesting exchange between business leader and policymaker.

Mackenzie: "It doesnot sound to me that Serco is legally part of TfL?" Woolston: "No, they are not. It is a legal kind of franchise." "Do you pay all the electricity bills that they run up?" "No, they pay them." "Then if they pay them it is a matter of whether they qualify in their own right in terms of usage."

TfL's mapping exercise to determine what is and isn't covered by the CRC is an interesting issue. But it is an exercise that needs to start right away, according to EDF Energy's head of energy services, Laurent Mineau. "April 2010 will come around very soon," he said. "They have to start now, both collecting the data and starting to implement an energy efficiency strategy."

According to Mackenzie, it's a common problem. "In one shopping centre, there could be two or three different retail outlets which are exactly the same size, where half of them will be in the CRC and half of them will not," he said. It is one of the things Mackenzie promises will be looked at before the cap phase of the scheme begins.

For Southend Borough Council's head of sustainability, Roger Parker, it is the awareness of the CRC that is of most concern. "Seventy per cent of top management are not aware of the CRC, and 87% of employees are unaware," he argued. Mackenzie agreed: "The feedback we are consistently receiving is that energy managers and sustainability managers are very focused on this, but the board is not.

"The idea of the CRC is to bring energy to the board's attention, so hopefully when you pitch to your finance director and say 'I want this bit of kit which will have this impact on our energy consumption,' you will get a straight 'yes'."
The CRC is something the finance director or company secretary will have to be on top of. As Parsons Brinckerhoff's head of sustainability, Lynne Ceeney, said: "Some businesses we have spoken to do not realise they have to prove they are not in the CRC. They assume it is simply a 'yes/no' question, and there is a lot of work to be done on that aspect, helping people to sit down and do the calculations."

Ceeney feels the pain of medium-sized businesses. "They are hit every day with
material on new legislation - and dealing with carbon isn't at the top of every business owner's agenda. It will be interesting to see how the Environment Agency deals with those that are caught out."

For EDF Energy though, more and more of its customers are aware of the scheme. "Most know it will happen," said Mineau. "But not all are fully aligned to cope very efficiently with it." The company has been proactive these past 18 months, devising an extensive customer education programme. It has also developed an online tool called Energy Zone, where customers can log on and order a CRC report for their 2008 energy consumption.

Of course, there are companies that fear the introduction of the CRC will undermine and fail to recognise the energy efficiency work they have carried out in years gone by. Ricoh Europe is one such company and the firm's manager of environmental management, Tom Wagland was keen to explain to his counterparts his frustration. "The whole Ricoh Group globally has been operating a carbon accounting system since 2002, and in our Telford factory we have made significant reductions - 40% energy reduction, 70% carbon reduction - and it is now run on 100% renewable energy.

"But we feel we will be disadvantaged by this scheme because a lot of the investment that has been made at the site to implement energy savings strategies, will now be diverted into paying for carbon credits." Chelsea Football Club's head of CSR, Simon Taylor, was similarly concerned about what the league table might say about a company. "The nature of our business is about league tables," he said. "We are likely to look good in the first year, but as the longterm strategy comes down in the league table, so might our position - and that has a direct effect on our business. Another football club could just copy what we have been doing for the last five to ten years and shoot to the head of the table."

BAA's head of climate change, Dr Graham Earl, was more interested in where his business will be positioned in the table on day one. "It is a very important question, because it will be an important reputational piece for us. It is a risk and at the moment I am struggling to define a way of managing that risk."

But Mineau argued that the league table debate is "never-ending". "Companies should focus more on their own energy, rather than comparing themselves to other companies," he said. Ceeney said she had sympathy for the likes of Ricoh - and the Government. "The Government clearly has to deal with those that have done nothing. But it is hard on those that have already done a lot." However, she added that those that have done energy-saving work before "should set it out in their CSR report".

To appease the likes of Wagland, Taylor and Earl, Mackenzie said DECC might include a "free-flowing text box" as part of the published league table so that participants can explain their final league table position. For example, 'our figures have changed because...', 'we have had a lot of acquisitions', etc.

Thames Water's climate change strategy manager, Dr Keith Colquhoun, voiced his concerns about the league table being based on a percentage change. "For large organisations that can go the extra mile, the percentage change for large amounts of emissions may be lost in the noise," he said. Instead, Colquhoun proposed a combination metric of percentage and an absolute to capture the amount of reduction being created by organisations.

"The league table is the area where there is the biggest concern, and that is quite understandable," was Mackenzie's response. It is something DECC will continue to look at. Along with the free-flowing text box, Mackenzie revealed that there might even be a separate league table for companies that are using renewable energy, "so that you can rank businesses either purely on energy efficiency, or overall carbon".

Front of mind for Alex Pitman, group energy efficiency manager for the Co-Operative Estates, is budgeting for the scheme. He asked whether the Government had done any modelling of the likely payback periods for those engaged in the CRC. "In our model, when we reach 2012, our energy efficiency savings are declining, and the CRC savings do become significant in relation to energy efficiency.

After that, it becomes more uncertain because who knows what price carbon will be." Currently, Pitman is making efficiency savings of about 6% or 7% a year, "but we will not keep that up for very long". "Once we get down to 2% or 3%, say by the fifth year of the scheme, then CRCs in my model will become the same magnitude as the energy efficiency savings," he said.

DECC has not done any modelling yet, because it has no data to work with. But
Mackenzie argued that the payback in energy efficiency savings will "far outweigh any savings that you get from the CRC," based on the fact that the average electricity bill is 1% of a firm's turnover, and the most organisations can get out of the CRC will be 10% of that - 0.1% of a company's turnover. "The gain you will make from the energy efficiency savings will be ten, 100, or 1,000 times greater," he added. "I cannot believe that the CRC will be the driver that makes your investment decision or not."

EDF Energy's Mineau added: "According to our own experience, you can achieve a huge amount of savings with a payback of less than three years. If you consider that threshold, you can definitely do something." But what about companies that refuse to play the carbon trading game. Parker raised an interesting point when he described his employer as an organisation "prepared to take the monetary hit". "We fill in all the right forms, we report, we buy our allowances, but as an organisation we are prepared to take the monetary hit - so even though we might be towards the bottom of the league table and suffering penalties, we will just write the cheque. Is there any driver to change that position, to change the mindset or the hearts and minds?" he asked.

"If you just want to manage the risk and hand the money to someone else, fine. That is legitimate business," replied Mackenzie. Fry said that he thought the approach Parker described would be rare. "Most people see this as a business opportunity to raise their profile," he said. But Wagland disagreed, describing the league table as "the carrot" and the CRC regulations as "a sledgehammer to
crack a nut".

"You have to work harder for your plaudits, don't you?" offered Simon Harris,
manager of the environment and sustainability team at the Royal Bank of Scotland. "There is more chance of your reputation being damaged if you do not join to the fullest extent."

Ceeney added that it doesn't matter how or why firms engage in the CRC, as long as they do so. "Plus, it is fairer than just whacking another tax on energy. This way, firms have a choice about how they approach it."

Before the session wound up, Hilton Hotels' director of property and utilities,
Andrew Forte, was keen to get back to metrics. "We have different types of hotels. We have the owned and leased, we have the managed and we have the franchises. "In the hotel industry, a franchise property will generate one tenth in terms of revenues for the franchisor, compared with a managed property. So, every year we add on ten franchised properties, and each one is adding to the whole group the same energy consumption as a fully-managed property would. In terms of energy versus revenue, that has a big impact."

It is a big issue for a number of organisations, but Mackenzie responded by saying: "If we pinned this on the franchisee, an awful lot of them would not qualify, and there would be a significant amount of buildings in the non-domestic sector who would not be covered." By pinning the responsibility on the landlord there is now a "commercial incentive to sort out your franchisees' energy use", he added. "I am not saying it is easy." And that last comment reflects the complexity
of the CRC Energy Efficiency Scheme. But its complexity is matched by its potential for affecting real change in UK business and by next April the wheels will be set in motion as the scheme helps to abate more than four million tonnes of carbon dioxide emissions every year.

This Round Table Debate was supported by engineering and environmental consultancy, Parsons Brinckerhoff (pbworld.com/ea) and energy services business, EDF Energy (edfenergy.com/largebusiness)

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