Opportunities to cut energy and carbon costs

The public sector has to “lead by example” in reducing carbon emissions. But in these difficult times, how can that be achieved?

Since the present government took power there have been several announcements about key energy initiatives. While these may change the route taken by energy policy, the overall goals and drivers remain the same. The UK still has legal obligations to cut carbon emissions (both under EU Treaty and UK Statute) and we face an increasingly volatile fuel import situation that is unlikely to ease in the foreseeable future. So security of supply and climate change will continue to provide the context within which energy policy is framed.

Existing regulations, notably some derived from EU Directives, give the public sector a leading role in improving the energy performance of buildings. The government estate has been subject to internal improvement targets over recent years as well. Yet over the coming months and years substantial savings will have to be made from departmental budgets following the comprehensive spending review (CSR). At the same time, the cost of energy is due to rise – indeed, widely quoted figures suggest an increase of up to 40 per cent over the next decade. In such circumstances, with less resources but greater costs, how can the circle be squared. And how do the decisions of the CSR alter the opportunities and risks associated with energy?

The context
The Climate Change Act requires the UK to cut carbon emissions by at least 80 per cent by 2050. The Committee on Climate Change has been tasked with recommending the level of cuts to be made in specified periods. Their recommendation for 2020, accepted by the government, is to reduce our emissions by 34 per cent by that date. That target remains in place.

Now we are well within the target savings we need to achieve under our obligations with respect to the Kyoto Protocol – a reduction of 12.5 per cent on 1990 carbon emissions. Yet it is significant that in 2009, for the first time, UK industry started buying carbon allowances to meet its obligations under the EU Emissions Trading Scheme (ETS). This suggests that industry is finding it more expensive to achieve savings than to buy carbon allowances. The consequence is that in order to drive low carbon investments, the carbon price needs to be higher. The government is currently consulting on the idea of a carbon floor price or minimum price for carbon allowances within the UK in order to encourage investment (not least in new nuclear power stations). The Energy Services and Technology Association (ESTA) believes that this will need to be at least £40 per tonne of CO2 to stimulate those capital investments. However, that will drive up fossil fuel prices quite steeply which will impact on all consumers.

The CRC Energy Efficiency Scheme
The CRC EES (still widely known as the Carbon Reduction Commitment) was designed to encourage large (but non-energy-intensive) organisations – including all government departments – to take a relatively low risk approach to saving energy and trading in carbon. All the funds raised through buying carbon allowances were to be recycled to participants, thereby minimising the impact on profitability and service levels. However, the scheme has now been radically altered. First, the funds will now go to the Treasury so it has now become effectively a carbon tax.

As originally envisaged, the CRC EES incentivised action to reduce emissions. All participants were ranked in a league table by the improvements in energy performance they made during the year. The position in the table determined how much money was recycled to them, with those performing best receiving more money back than they had spent on allowances (and those doing worse getting less). In other words, good behaviour was incentivised. Early action, such as the installation of automatic Monitoring & Targeting (aM&T) systems or participation in third party accreditation schemes such as the Carbon Trust Standard of the BSI’s Kitemark, enhanced league table positions.

The league table will remain but as a reputational driver rather than one that rewards participants financially. And those that did invest in early action may justly feel aggrieved that the government has moved the goalposts so late in the day.

A further change to the scheme is the deferral, from 2011 to 2012, of the date at which participants start buying allowances. Also, the arrangements for Phase 2 – when full carbon trading was due to begin – are now to be reviewed in order to simplify the scheme. The timetable for the scheme is therefore beginning to slip when actually, we desperately need to start making emissions reductions now if we are to have any chance of hitting our 2020 targets.

That having been said, ESTA believes that the fixed price of carbon allowances in the first phase – £12 per tonne – is unlikely to sufficiently incentivise action. Instead, building operators should look at the amounts to be made from savings to consumption. To purchase the energy associated with one tonne of emissions would cost around £170. So although energy represents a small fraction of a typical participant’s operating costs, carbon – at £12 per tonne – is very much smaller from savings on consumption – which are, according to the Carbon Trust and European Commission, typically between 15-20 per cent.

Another energy tax, the Climate Change Levy (CCL), which adds a very small amount to all energy bills, is also to be reviewed as it is not having any significant effect on public attitudes to energy saving and carbon reduction.

The Green Deal and the Green Investment Bank
The details are now becoming clearer on how the Green Deal and the Green Investment Bank will operate. These will be the two main routes for channelling government funds for stimulating a low carbon economy. It has become evident that the GIB will be focused on large projects, mainly to do with the supply side (new infrastructure, generation technologies, etc) although larger demand-side projects may also be considered. For most consumers though it is the Green Deal that will offer most opportunities.

When first proposed the Green Deal was aimed at the domestic consumer but the government has now accepted the argument put forward by ESTA and others that there are large, fairly easy to achieve, carbon savings to be made within the non-domestic sector.

The idea is that consumers will be able to invest in a range of energy saving technologies and have them installed without having to spend the money on them upfront. The outlay is recouped over time through the energy bill. Yet because of the impact of the energy saving measures there is an immediate drop in bills anyway – the Golden Rule.

The first installations under the Green Deal will probably be seen towards the end of 2012, however, there is no need to wait till then. Energy investments typically have quite short payback periods and a relatively high Internal Rate of Return (IRR) and Net Present Value (NPV). As such they make attractive investments for third party finance. The government estate is very low risk for such investments as well. A number of ESTA members specialise in this type of financing so this is an area worth considering in the period before the Green Deal comes into being.

Measuring the change
The key to any energy/carbon saving is working out where the energy is being used and tracking improvements – in other words monitoring and targeting consumption. Nowadays, automatic Monitoring & Targeting (aM&T) systems can do this effectively without taking up a great deal of managers’ time. A number of these systems can also produce the annual Display Energy Certificates (DECs) which are currently required for large buildings within the government estate. Due to recent EU legislation, DECs will soon be required on virtually all non-domestic buildings, so their employment makes even more sense now.

In addition, ESTA has proposed that government considers using DECs as the vehicle for rating buildings within the CRC EES. This would make DECs even more important – in fact a cornerstone of non-domestic energy policy and would simplify policy by integrating differing aspects.

While the CSR may have changed some of the instruments of government policy, the goals remain the same: combat climate change and achieve security of supply. The two are being tackled together through the transition to a low carbon economy. There are opportunities as well as risks for government organisations. The key is to seize the opportunities.

One-day conference
To find out more about the opportunities afforded by automatic Monitoring & Targeting (aM&T) systems, you can participate in ESTA’s free one-day conference. The ninth annual aM&T conference will be held on Thursday 3 March 2011 at the Ricoh Arena, Coventry. Register today at www.esta.org.uk or by telephone at 01268 569010.

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

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