Government Business

With the printer ink hardly dry on the new Display Energy Certificates (DECs), many organisations in the public sector find they must immediately prepare for a new government initiative, the Carbon Reduction Commitment (CRC).
    
Essentially, all organisations in both public and private sectors that meet a certain threshold of energy demand will be included in a mandatory emissions trading scheme. That threshold is “annual electricity consumption from all installed half-hourly [both mandatory and voluntary] meters in excess of 6,000MWh” – an annual electricity bill of around £500,000 or more. However, once ‘captured’ by the scheme, all sources of carbon (not just electricity) will have to be accounted for.
    
‘Cap and trade’ schemes are not new. The USA has been operating one for years that has dramatically reduced CO2 emissions from power stations. That was the model for the EU Emissions Trading Scheme (ETS) which applies to large, energy-intensive industrial plants across Europe. The UK government believes that the same approach can produce savings in large organisations that are not energy-intensive – those with a large energy bill but where energy is still only a small proportion of overall operating costs.

Emissions trading
Emissions trading is based on a simple theory: if a total limit is set on emissions it does not matter where the savings are achieved, and the lower the overall cost the better. So, a limit is set on overall emissions from a sector – in this case all those included within the CRC.             

Participants are allowed to buy allowances to cover their current emissions. If they exceed this once the scheme has started, they will have to buy additional allowances from other participants. Alternatively, if they can cut emissions, they will have spare allowances to sell. A market is then established.
    
Why is this the most cost-effective method? Well, organisations will only buy from someone else if it is cheaper than cutting emissions themselves. Therefore, the question is purely which is cheaper – make efficiency investments or buy allowances. However, the overall emissions target is achieved, and ultimately at lowest cost to all the participants.
    
How does this cut emissions overall? The government sets an overall limit to total emissions – and they reduce this total progressively over time. Those that can still make efficiency savings relatively easily do so and sell surplus allowances while those that cannot buy. The overall total comes down, with least economic cost to participants.

Timeframe
Energy demand varies from year to year, so to determine who is included in the initial stages of the CRC, the government has said that the calendar year 2008 will be the formal qualification period. If an organisation crosses the threshold in its overall electricity demand for 2008, then it has to participate. Every organisation with a half hourly meter will be required to disclose to the government their electricity usage.
    
For local authorities, though, there are some extra considerations. In particular, the government announced in July that all state-funded schools, including Academies, would be included in the overall energy demand of local authorities. LAs will have responsibility for calculating schools’ emissions and for buying allowances.
    
Participants will need to buy allowances. These will be for sale annually, initially at a fixed price of £12 per tonne of CO2. While the qualifying period is the calendar year of 2008, the scheme will actually function over financial years, i.e. from April to March. So the period from April 2009 to March 2010 will provide the basis for calculation of allowances. So participants need to monitor their energy use (and calculated emissions) over the preceding year in order to calculate their likely purchasing requirements.
    
This will be the procedure from 2010 to 2013. The government believes that after this point, those involved will have enough experience for the allocation of emissions to take place entirely through auctioning of allowances. This is likely to impose significant financial risk on organisations: the price of allowances is not fixed but will be determined by the market.
    
There will be a spot market and a futures/forward market. Should allowances be bought in advance in case of a shortfall? But what if consumption is less than forecast and the carbon price falls in the meantime, resulting in a loss when the excess is sold? On the other hand, what would happen if the purchased allowances are not sufficient to cover emissions and further allowances have to be bought at short notice on the spot market?
    
Although this may seem like uncharted territory, emissions allowances can be considered a commodity just like energy purchases. And they can be treated in a similar way. What are the historic emissions? What is the forecast for the next year or more? Using the same estimation methods for forward purchasing, reasoned assessments can be made of likely carbon allowance requirements. After all, emissions are closely linked to energy consumption – the same techniques can be used for both.
    
The key to both, though, is accurate knowledge of consumption patterns and likely additional demand. The energy manager’s skills are equally useful for emissions estimating as they are for energy forecasting.
    
Clearly, though, the accuracy of this information depends upon the data gathering facilities available to him/her. Adequate metering and effective Monitoring & Targeting will enable accurate measurement of usage, effective control over consumption and accurate forecasting. Indeed, the increasingly common automatic Monitoring & Targeting (aM&T) systems can simplify and streamline these processes, optimising efficiency and reducing the amount of manual data processing on the part of the energy manager.

Recycling funds
The Carbon Reduction Commitment is designed to be ‘revenue neutral’, i.e. all the money received by the government from the sale of allowances will be recycled back to participants. However, if this was on a strictly one-to-one basis, it would merely be an academic exercise with little incentive to change behaviour. In fact, the funds will be recycled depending upon an individual participant’s position in a league table of all participants. The position will be based on absolute emissions reductions combined with a growth metric related to the organisation’s expansion or contraction over the period. For the public sector, this ‘growth metric’ will be based on the organisation’s total income.
    
In addition, there will be two other factors that will influence the size of the refund and these will be particularly important in the early years. They are essentially designed to reward early action to improve efficiency. Specific added priority will be given to those who: (a) have installed automatic Monitoring & Targeting (aM&T) systems and/or: (b) are members of the Carbon Trust Standard scheme, which involves an audited commitment to continuous improvement in energy efficiency.
    
The benefits of aM&T in terms of controlling consumption have already been mentioned. The fact that its implementation qualifies for a larger refund in the CRC should give energy managers a further incentive for choosing it. The Carbon Reduction Commitment rewards good energy management – it should be seen as an opportunity.

The Energy Services and Technology Association (ESTA) represents over 100 major providers of energy management equipment and services across the UK.

ESTA conference 
More detailed information about the Carbon Reduction Commitment and how it will affect individual organisations can be obtained by attending a free one-day ESTA conference in November. Four of these events are being held at different venues around the country. To register, visit the ESTA website at: www.esta.org.uk

For more information
Web: www.esta.org.uk