Finding and funding low carbon innovation

Ofwat's deliberations over water company submissions for the 2009 price review and AMP5 will take more consideration of carbon footprint. Dean Stiles reports.

Whatever the doubts about climate change, government has embraced the arguments and the Climate Change Bill that became law last year has set legally binding targets for greenhouse gas emission reductions of at least 80% by 2050, and reductions in CO2 emissions of at least 20% by 2020, measured against a 1990 baseline.

From April 2010 water companies, along with some 20,000 other large public and private sector organisations and all central government departments, will be subject to the Carbon Reduction Commitment, a UK-wide mandatory scheme to promote energy efficiency.

It is a central plank of the UK government's strategy for controlling carbon dioxide emissions and will tackle those CO2 emissions not already covered by Climate Change Agreements and the EU Emissions Trading System.

Greenhouse gases
The water industry is the fourth most energy intensive sector in the UK accounting for 3% of the total UK electricity demand with about 10% of energy used coming from renewable sources. The water industry used 7,700GWh of energy in its total operations during 2005/06, emitted more than four million tonnes of greenhouse gases and contributed almost one percent of total UK greenhouse gas emissions.

Ofwat's climate change policy statement emphasises the need for companies to adapt to climate change requirements in the 2009 price review and recognises the tensions between mitigating carbon consumption and improving local water quality, the primary objective of the regulator and of water companies. An added tension is the need to reduce water consumption identified by the Environment Agency's (EA) Water Resources Strategy for England and Wales, just published this month, which sets out measures to reduce consumption and help protect future water resources.

The government's Carbon Reduction Commitment should not be seen as an overhead, but an opportunity to sharpen competitive edge in the face of the current recession, says Liam McDonagh, head of consultancy services at sustainable power company Ener-G. He believes the CRC can be used as "a springboard to boost bottom-line performance by reducing energy costs, while enhancing corporate social responsibility programmes".

Paul Goddard, commercial manager, purchasing and supply chain management at Severn Trent Water, makes a similar link. "We at Severn Trent are obviously very committed to carbon reduction. What we will be doing in our process is measuring the carbon footprint of our solutions but I see this as a parallel with our financial assessments.

*You've got construction costs, operating costs, and whole life costs measured from a financial point of view: the same applies for carbon. The decisions on which options to take will be influenced not just by financial but by carbon impacts as well."

Government figures suggesting the CRC could help businesses save £1b by 2020 underscore this approach.

Some 20,000 organisations must register for the CRC programme. Of these, an estimated 5,000 will become full participants and have to pay for their carbon emissions when the CRC gets under way with its first trading year from April 2010 to March 2011. "Although the CRC is still in its draft format, acting now can quickly create major cost savings and prevent the reputation damage of being named and shamed in a published league table of energy performance," McDonagh says.

The business and public sectors generate over one third of UK CO2 emissions and the CRC scheme aims to cut emissions among those consuming more than 6,000,000kWh of half-hourly metered electricity (an approximate annual energy spend of £500,000).

The most energy intensive organisations are already subject to the EU Emissions Trading Scheme or Climate Change Agreements. Performance will be measured and published in a league table, with positions determining how much of the carbon tax is recycled back to each organisation. "Because the scheme is revenue neutral to the government, there will always be winners and losers, which means corporate reputation as well as finance will be at stake," McDonagh says.

"Many organisations affected by the scheme have not yet started to plan for the various phases, because they have gone into survival mode and are battening down the hatches against the recession," he says.

In response, Ener-G is holding a series of pathfinder seminars across the UK to assist businesses in understanding their CRC obligations and support available from the Ener-G group. The CRC is an important catalyst for cost reduction and must rise up the boardroom agenda, says McDonagh. "It also takes time to prepare and businesses mustn't get caught short. If embraced properly, in addition to reducing costs, the CRC can also enhance both environmental and CSR programmes," he says.

The CRC rules underpin the Climate Change Act 2008 that sets legally binding targets to reduce greenhouse gas emissions by 80% by 2050, based on 1990 levels, with at least 26% CO2 emission reductions by 2020 measured against the same baseline.

Under the CRC, organisations will have to report on core emissions, derived from gas and electricity consumption, but some may also have to report on residual emissions including diesel, coal, and LPG. Performance in the first year of the scheme - April 2010 to March 2011 - will be evaluated by two early action measurements. "The first metric evaluates the extent of voluntary automatic metering in place which means organisations should be reviewing how energy use in their properties is measured; deciding if this is suitable for achieving a high rating and obtaining costs for upgrade as appropriate," McDonagh says.

"The second early action metric is involvement in an energy efficiency accreditation scheme, such as the Carbon Trust Standard, and organisations should obtain details of schemes, along with costs and timescales for accreditation," he says. "The two early action metrics will provide a foundation for energy management, but to convert this into carbon reduction requires focused reviews of policies, procedures and behaviour, as well as detailed technical surveys of property," McDonagh says.

Behavioural changes
The findings of reviews and surveys will constitute recommendations for improvement, which can be prioritised and implemented to complement CRC strategic requirements and develop capital and revenue cost schedules for annual business planning. "Reviews and surveys will also produce a number of no cost or low cost quick wins, in particular behavioural changes like switching off equipment and lighting when not required, and introducing temperature policies to prevent over heating or cooling. In our experience, no-cost or low-cost measures can typically achieve energy savings of five to 10%," McDonagh says.

"Older buildings are generally less efficient, but lighting, plant, equipment and controls upgrades and improvements to building fabric can still have attractive returns on investment with typical payback periods of under five years. In addition, these types of initiatives usually improve the internal environment."

The CRC means organisations must purchase allowances to cover CO2 emissions in April each year for the following 12-month period. In the first three years of the scheme - April 2010 to March 2013 - allowances will be traded at £12 per tonne of CO2.

The first sale takes place in April 2011, covering actual emissions for 2010/11, and projected emissions for 2011/12 - a double accounting year. Subsequent sales will be just for the projected following year.

For an organisation using 6,000,000kWh of electricity a year, the first sale will cost £77,328.

With this example, the at risk penalty or bonus amount in October 2011 will be 10% of traded value of the 2010/11 allowances, or £3,866: at best the recycling payment will be £42,530, at worst £34,798). 2011/12 allowances will be recycled in October 2012. In the third year of the scheme, the penalty or bonus will rise to 30%, but because the calculation includes baseline emissions of the footprint year, energy consumption in 2010/11, organisations at the top and bottom of the table could stand to gain or lose far more than 30% of that year's allocation value, McDonagh says.

From April 2013, the cost of carbon allowances will be determined by sealed bid auction and the total number of allowances will be capped. It is expected that by the fifth year of the scheme, the recycling penalty/bonus will increase to plus or minus 50%.

If the water sector is to contribute to meeting the UK's carbon reduction targets it is unlikely to do so based on existing technologies, and spending on research and development investment in low carbon technologies will need to rise, according to a report published last month by the Council for Science & Technology.

The report says the water industry needs to identify alternative, sustainable, methods of providing power - like wind energy - and pump optimisation techniques to reduce energy demand. Stakeholders within the water industry welcome this approach but at least one water company questioned whether Ofwat would look favourably on wind turbines being part of the regulatory asset base.

Although the water companies see pump optimisation as desirable, they view it as a medium- to long-term goal. However, the water industry is potentially advantaged to make use of intermittent sources of renewable energy such as wind and solar for non-time-sensitive uses such as pump storage, the report states. "There is a need for R&D in the areas of optimising energy use in treatment technologies, developments in low-energy use pumping, increasing the availability of renewable / recovered energy use, increasing biogas recovery and the development of carbon footprinting methodology to aid the move to the delivery of a carbon-neutral / carbon negative service," it says.

The next asset management period has the makings of being as challenging for water companies and contactors as previous ones.

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