The latest CRC consultation: a glimmer of hope for data centre operators?

22.05.12

 

Key points:

  • Government has published consolidated guidance for participants in phase one of the CRC Energy Efficiency Scheme
  • The guidance includes details on the process for the allocation of allowances
  • Government is also consulting on proposals which would affect phase two of the scheme
  • The scheme may however be replaced by an alternative environmental tax

Background

In June last year, the Department for Energy and Climate Change (DECC) announced proposals to simplify the CRC Energy Efficiency Scheme (CRC). At the time of that announcement the Government stated that a formal consultation on the proposals would be launched in February 2012. That consultation has now been issued (albeit a bit later than planned).

The majority of the proposals in the consultation would take effect from the beginning of the second phase of the scheme, which begins in 2013 (for new participants) and 2014 (for existing participants). However, in the Budget on 21 March 2012, the Chancellor stated that:

"The Carbon Reduction Commitment was established by the previous Government. It is cumbersome, bureaucratic and imposes unnecessary cost on business.

So we will seek major savings in the administrative cost of the Commitment for business.

If those cannot be found, I will bring forward proposals this autumn to replace the revenues with an alternative environmental tax."

It is therefore unclear whether any of the proposals in the latest consultation will come to fruition. However, for the time being, both the Environment Agency (which administers the scheme) and DECC appear to be operating 'business as usual'. Current participants - as well as participants who may qualify for later phases, if there are any - have the opportunity to comment on the future shape of the scheme.

Shortly after the consultation was released, the Environment Agency also published its new guidance for participants in the scheme.

Government's proposals for simplifying CRC

The consultation explains in more detail the proposals that were announced last summer. These are outlined below.

What is proposed in relation to allowance sales for both the current phase and phase two?

Phase one

In this phase the current deadline for surrendering allowances is the end of July following a scheme year. But if allowances are purchased at the last minute, the Government may not be able to complete the allocation process by this date. As explained in our January 2012 alert there will therefore be a secondary allocation period during which allowances paid for before the July deadline can be allocated to participants' online accounts.

In that alert, we commented that the mechanism for the surrender of allowances would need to be adjusted as a result. Government has now confirmed that it proposes to amend the date for surrender of allowances to the end of September.

Although there has not been time to incorporate this change into the legislation ready for this summer's allowance allocation, the Government's guidance confirms participants will be treated as having complied with their 2011-12 obligations provided enough allowances are ordered and paid for (in cleared funds) by 31 July 2012, and surrendered by 28 September 2012 (see below).

The Government proposes to bring the date for the secondary allocation period forward to the end of the first week in September. This will allow participants time to surrender their allowances before the deadline.

Phase two

Originally, allowance sales from phase two onwards were to be by way of a Government 'auction'. This would have seen the total available allowances capped, with participants having to bid for them.

The Government now proposes to drop the auction mechanism for phase two. Instead there would be two allowance sales per year - one forecast and one retrospective. Unlike the uncertainty of a price set by auction, these allowance sales would be at a fixed price. The price at the forecast sale would be lower than the price in the second sale, so facilitating the trading of allowances between participants.

How do the proposals simplify the qualification criteria?

The existing test has two strands. Firstly, the organisation has to have at least one half-hourly meter which is settled on the half-hourly market. Secondly, the organisation's consumption through all half-hourly meters (whether settled or not) must be above the qualification threshold of 6,000 MWh. This distinction between settled and non-settled half-hourly meters has not only resulted in confusion among participants, but has also provided a disincentive for businesses to install smart meters (which would count towards their consumption for CRC purposes).

The Government proposes to simplify the qualification criteria so that the test would only have one limb. For phase two onwards, the prospective participant would have to have consumed 6,000 MWh of electricity through settled half-hourly meters. The Government had initially suggested that it would need to lower the qualification threshold to avoid losing emissions coverage from the scheme. It now believes that although the number of qualifying organisations would be reduced, the current threshold can be retained without losing emissions coverage.

The qualification period for phase two of the scheme began on 1 April 2012. It seems somewhat unsatisfactory that the qualification criteria are not yet settled. Even so, businesses which believe they may meet the proposed criteria would be best advised to begin collecting data now.

How will the reporting burden be reduced?

Although qualification for the scheme is based on electricity supplies alone, participants currently need to report on emissions from 29 different fuels. Participating organisations have to prepare a 'footprint report' at the start of each phase, showing energy used from all these sources. At least 90% of this energy (and all energy from 'core' sources) is then caught by the CRC.

The Government proposes to reduce the number of fuels covered by the scheme to just four. Participants would be required to report on 100% of their electricity and gas supplies, along with all gas oil and kerosene used for the purposes of heating. This reduction will remove the 90% threshold and dispense with the need the footprint report, which will simplify the scheme. This proposal could be introduced during what is left of the introductory phase.

Government is also exploring the possibility of introducing a minimum threshold before participants are required to report on gas oil and kerosene, and possibly also gas itself.

What about supply rules?

The rules governing when a party is 'supplied' with energy are important in the CRC because they define whether that party must report on, and purchase allowances for, that energy.

There are various proposals to amend the current supply rules, including:

  • Removing the requirement that payment must be made for a supply in order for it to count.
  • Expanding the scope of unmetered energy supplies that would be captured by the CRC.
  • Amending the circumstances in which an organisation can claim an exemption for energy which it receives but passes on to a third party (known as the rule on 'unconsumed supplies').

There is however no proposal to change the landlord and tenant rule, which means that energy procured by a landlord (or the operator, in the context of a data centre, where that operator is effectively 'reselling' electricity to its customers) is treated as the landlord's supply for the purposes of the CRC. This applies even if that energy is in fact consumed (and paid for) by its tenants or occupiers. The Government does propose to introduce an exemption for certain building leases, but in this situation the energy supply will usually be received by the tenant or occupier directly, as noted in our earlier Alert.

Will groups of organisations still need to participate as one entity?

Currently, groups of organisations have to participate as one entity. This can be particularly ill-suited to a data centre business that owns or operates a number of data centres.

It is possible under the current rules to 'disaggregate' what are known as 'Significant Group Undertakings', or SGUs. An SGU is a subsidiary undertaking (or group of undertakings) that, were it not owned by another organisation, would meet the qualification criteria in its own right. But, disaggregation of an SGU is not permitted if the remainder of the group would not meet the qualification criteria after disaggregation.

The Government proposes to provide greater flexibility as to how groups of undertakings should participate in the scheme. This would allow groups to be split for CRC purposes in line with their natural business and management structures.

The existing rules on qualification (which consider electricity use by the whole group) would remain. However, any undertaking would be allowed to participate on its own account, provided that the relevant parties in the group agreed. This would increase the fees payable by the group, but would be beneficial because the disaggregated undertaking would no longer be jointly and severally liable for CRC liabilities incurred in other parts of the group. Disaggregated undertakings would also appear separately in the performance league table.

Will the overlap with other schemes be reduced?

CRC was designed to target emissions which are not regulated under a Climate Change Agreement (CCA) or the EU Emissions Trading System (EU ETS). But, the rules which attempt to avoid double-regulation are overly complex.

The Government proposes that organisations covered entirely by CCAs will not need to register for the CRC. Allowances would also no longer need to be purchased to cover energy supplies to CCA facilities and EU ETS installations. Participants who may be affected by these proposals should read them carefully, as one consequence is that the current CCA exemptions would be removed.

Many readers will be aware that Intellect, the trade association that represents its members in the UK technology industry is also in discussions with DECC regarding the possibilities for a CCA for the UK data centre sector.

Other suggested proposals would affect participants' ability to reduce emissions by relying on electricity generating credits, and change the treatment of input fuels to combined heat and power (CHP) plants.

Is there still going to be a performance league table?

The performance league table originally had two functions: to act as a reputational driver of behaviour, and to determine the proportion of the recycling payment a participant would receive. Following the abolition of the recycling payment, the table was retained for its reputational effect.

The consultation states that the Government proposes to maintain a reputational driver for the scheme in phase two. However, the detailed rules on the nature of this driver, and the metrics used, will be removed from the legislation and placed in guidance. This will allow a decision to be deferred on the reputational element of the scheme until the first few league tables have been published.

Will the level of fees and charges remain the same?

Originally it was estimated that there would be around 5,000 participants in the scheme. This figure has proven somewhat over-optimistic, with the actual number of active participants being only around 2,100. This means that the share of the costs of the scheme per participant is greater than originally forecast. In future phases, Government will review the level of charges 'to reflect future compliance activities'.

What happens next?

Responses to the consultation should be submitted by 18 June 2012. It is intended that the proposals will be enacted by way of secondary legislation. This is expected to come into force on 1 April 2013 and would revoke the current CRC Order. The existing Order would however (subject to minor tweaks) continue to apply to the remainder of the first phase.

Guidance

The Environment Agency has published guidance for participants in phase one of the scheme. This consolidates 31 original guidance documents that were issued around the time of the scheme's introduction. The new guidance states that there are no substantive changes, but certain areas have been clarified. The guidance also sets out the process for the allocation of allowances as explained in our earlier alert.

One notable point is the statement that the allowance price will remain at £12 per tonne for the current (2012-13) scheme year. This was expected because the Budget was silent on allowance prices, but participants will welcome this confirmation. It does mean that there would not appear to be any advantage for participants in purchasing additional allowances in this summer's sale, an idea that we put forward in our earlier alert on the CRC.

According to the guidance, allowances bought in the Government sale will not attract VAT, unlike allowances purchased on the secondary market (the mechanism by which participants may trade allowances) which will be liable to VAT. The Environment Agency may however decide to charge an administration fee for allocating allowances purchased in the Government sale (although this will not be levied this year).

The guidance applies to phase one only. It states that "Details relating to future phases will be given in revised guidance which will be issued following the outcome of the Government's Simplification Review". We will have to wait to see the final outcome of that review, but it may be that phase two of the CRC scheme is never, in fact, implemented.

 

Key Contact

Mark Chester, partner, +44 (0)870 733 0603, mark_chester@wragge.com

This analysis may contain information of general interest about current legal issues, but does not give legal advice.