Companies who consumed more than 6,000 MWh (electricity bill of approximately £500,000) between 1 January 2008 & 31 December 2008 will have to sign up to the CRC (Carbon Reduction Commitment) Energy Efficiency Scheme aimed at reducing carbon emissions. It is estimated that 5,000 companies will be impacted by CRC. Each year from 2011 the organisation will have to report emissions and purchase carbon allowances to cover those emissions. They will be included in a league table based on emission reductions and will receive a financial reward or penalty dependent on performance in that table.
The scheme will impact across a number of industries including property, hotels, retail and local education – this is not aimed at energy intensive industries which are already covered under the EU ETS (Energy Trading Scheme) and other legislation. There are also specialist rules for governmental departments, universities, joint ventures, franchisees and franchisors.
Registration is open from 1 April 2010 until 30 September 2010 yet research performed by SAP at the end of November 2009 indicated that only 50% of companies that will be affected have started budgeting for carbon allowances and 20% have not even started planning for CRC. Non-compliance or failure to register will result in penalties yet many companies are still not fully prepared and have not identified how their emissions will be measured. The Private Equity (PE) community has also remained relatively silent on the issue even though many may be caught by the CRC if their portfolios meet the CRC criteria – the typically complex structure of PE groups will not make registration an easy task.
The penalty of £5,000 plus £500 per day for failure to register by September 2010 may not be sufficient to deter larger groups but the “naming and shaming” by publication of those not registering should incentivise most to register in time.
Systems to reliably capture and measure carbon emissions are essential to avoid inaccurate calculations and fines of £40 per tonne of carbon misreported could be enforced. The Government intends to audit 20 per cent of organisations annually yet many companies are underestimating the time and resources required to ensure emissions can be accurately recorded.
CRC has a real impact on cash flows and companies must start factoring this cost in to forecasts to avoid nasty surprises for their interested parties in the future. CRC is now a board level discussion for many companies as a result.
There is no doubt that compliance with CRC will be costly and this has not come at the best time for many companies who are still facing pressure on cash flows. However, the reality is that CRC is not going away and it could lead to cost savings in the future; companies are being forced to review the emissions arising from operations and have a cash and reputational incentive to reduce those emissions due to the league table and opportunity to reduce the burden from other costs such as electricity.
Consumers in the UK are becoming increasingly energy conscious and companies should not underestimate the potential brand damage (as well as the cash flow implications) of poor performance in the league table of improvement in carbon emissions.
As consumer behaviour continues to change, companies are having to respond to this to remain competitive e.g. by incentivising the recycling of plastic bags and advertising a reduction in packaging on own brand items.
Future contract negotiations will have to consider the role of CRC, particularly for landlords who must clearly define what “energy responsibilities” their tenants will have. Many companies are building carbon emission implications into the costing of contracts – this is not a cost that can be easily absorbed. There is a risk that this will make companies less price competitive against international competitors.
I suspect that few companies impacted would consider and take responsibility for their carbon emissions without CRC. We therefore need such schemes to move the UK towards meeting its emission reduction targets.
CRC is just around the corner and as the world looks to the UK to determine the success of one of the first schemes aimed at non-energy intensive industries, companies will not be able to hide away from their responsibilities – they are in the middle of the spotlight, centre stage.
For further information on the CRC efficiency scheme, please download BDOs publication ‘What is the CRC Energy Efficiency Scheme’ (.PDF <466KB) or contact Liz Wood, Audit Manager.