WG9 Sub-committee. Remaining CRC issues (excluding PLT)

Transcription

1 WG9 Sub-committee Remaining CRC issues (excluding PLT) This paper sets out views on the remaining CRC issues following the issuance of DECC s 30 June 2011 Next Steps Paper. These remaining issues principally revolve around Qualification and in particular: (i) landlord and tenant matters; (ii) removal of CCA exemption for Qualification; and (iii) lowering the qualification threshold to compensate for those sites now excluded from CRC. The Performance League Table is being dealt with separately. This submission has been shared with ETG WG9 members and as such is intended to represent a broad consensus of the WG9 membership. This does not imply that each individual WG9 member (or the companies by whom they are employed) subscribes to every element of the text. David Leedham, Partner, Speechly Bircham Chair 2 September 2011 Speechly Bircham LLP

2 Contents Page 1. Landlord and tenant issues DECC s position ETG s perception Suggested solutions Qualification Replacing CCA Exemption Rules with exclusions for EU ETS and CCA installations Lowering the qualification threshold to compensate for those sites now excluded from CRC Using only Settled Half Hourly Electricity Meters ( SHHMs ) for Qualification Fuels limited to Allowances sales Reporting: Avoiding reporting overlap between CRC and Carbon Reporting Renewables: Treatment of dedicated off-site renewables Alternatives to crc UK Major Ports Group view Replace with a tax Speechly Bircham LLP

3 WG9 Sub-committee 1. LANDLORD AND TENANT ISSUES 1.1 DECC s position CRC responsibility is still to fall to Landlords as in DECC s view they are the best placed to roll out energy efficiency measures as it is easier and more cost effective for a them. 1.2 ETG s perception CRC will have significant implications for the landlord-tenant relationship. DECC s approach does not tackle the split incentive between landlords and tenants in buildings where the Landlord has the energy contracts (these are usually multi-let buildings). In reality Landlords will look to pass CRC allowance costs (the tax) onto their tenants (whether small or large or CRC participants or not) and not undertake works to reduce costs 1 - there is very little incentive for them to improve the energy performance of their building and drive down carbon costs. This may lead to disagreements between landlord and tenants. There could be complications/impediment for some landlords passing on CRC costs to tenants, such as where it is the landlord s group company that incurs the allowance costs. Landlords and tenants should be encouraged to work together more actively to drive improvements to the energy efficiency of their estate. There is ample evidence that working together achieves much greater energy reductions than either party can achieve. In multi-let buildings, the Landlord has the energy contracts and retains control of the structure and procures the repair, maintenance of the building as well as maintaining operation of the building s plant. The costs of keeping the building in repair and the plant operating will be passed on to tenants via the service charge. Service charges normally do not permit the landlord to make improvements or additions and re-charge the cost to the tenants. The tenant will have leases of internal space in which their ability to make alterations is limited. The energy costs of tenant s consumption for their own space will be recharged to the tenant under the lease terms. Within a typical lease of a multi-let building there is pass through of costs to the tenant and no ability for the landlord to make improvements or additions at the tenants expense. Hence, to implement efficiency measures beyond no cost or lost cost adaptations of a building, the landlord has to pro-actively agree the works with the tenants and agree separate terms for recovering all or a proportion 1 Some landlords may not pass the cost on as it may prove not to be cost effective from an administration perspective. Speechly Bircham LLP

4 of the costs from the tenants. There is nothing to compel the tenants to agree to the landlord s proposals. Nor is there anything to compel landlords or tenants to look at their behaviour within a building to the extent modification of it will reduce consumption and waste. Currently tenants and landlords are wary of capital expenditure. The only force that CRC and eventually carbon reporting may bring to bear is market pressures where values, rents and reputation become affected because either a building is overtly inefficient and/or a landlord and/or tenant is not seeking to reduce its energy requirements. Evolution of such a force is likely to be slow. The current approach also leaves simple issues outstanding but which are important to resolve, such as: (i) a lack of metering for determining energy costs between landlords and tenants and determining who bears the cost of installing proper metering remain; and (ii) landlords/tenants not being obliged to give one another data/information to enable informed decisions to be made (and for existing/future reporting requirements). Some have expressed a concern under the current rules/proposals, industrial tenants who may be significant energy users are not exposed to the burdens of CRC, or the reputational risk, all of this risk rests with the landlord. Other sectors such as those in the data centre sector will have similar issues. 1.3 Suggested solutions Replace CRC with a tax See paragraph 7 below New obligations between landlords and tenants and pragmatic guidance from DECC (from the Chair) The following legislative changes ensure that the beneficial user of the energy is responsible for the CRC allowances ie the polluter pays, but gives those with interests in the building, ability to require energy reduction measures to be taken. The following proposals also address the issues highlighted previously such as metering and information issues. In addition, it overcomes the impediments of current lease provisions so side-stepping the waiting for the development of green lease terms and more importantly retrospective structures to address CRC and sustainability in the millions of existing leases. Speechly Bircham LLP

5 The following should be introduced via legislation: (a) (b) a self help option/obligation (akin to the Disability Discrimination legislation) so that landlords/tenant have ability, where reasonable to make greening improvements. reasonable endeavour obligations on landlords and tenants to: (i) (ii) reduce the fossil fuel consumption of premises and the building (but not so as to materially prejudice the landlord s or any occupants business or interest in or use and occupation of the whole or any part of the building) (a more comprehensive approach would be to reduce the detrimental effect of the Building, its occupation and use on the environment); and provide such information as the other reasonably requires to enable the requesting party comply with CRC and other reporting obligations. (c) (d) Provisions specifying that landlords can pass on to their tenants cost of CRC allowance (bought in respect of the building by the landlord or a member of its CRC grouping) in respect of: (i) the cost of allowances due to the tenant s space consumption; and (ii) a fair proportion of allowances for energy consumption in common parts and provision of services. But, landlords should only be allowed to recover their CRC costs from their tenants where there is sufficient sub-metering in place that facilities accurate allocation of the energy usage. So, if a landlord allocates energy usage to tenants on an area or similar basis rather than metering, then the CRC allowance costs cannot be passed on (so incentivising landlords to install more sub-metering). The Landlord should be required to use reasonable endeavours to procure allowances at the lowest price that is reasonably practicable. For smaller premises having an alternative option because of administration costs outweighing benefits of recovering allowance cost would be to allow an arrangement where no allowance costs are passed on to tenants but that this can be taken into account at rent review. DECC should then research and provide guidance as to best practice adaptations to a range of typical buildings so overcoming one of the biggest hurdles identifying what can be done to a building. This will facilitate development of Speechly Bircham LLP

6 2. QUALIFICATION accepted market practices. However, the comments in section 2.1 should also be noted as regards the landlord and tenant issues affecting energy intensive businesses unless the qualification rules are altered. 2.1 Replacing CCA Exemption Rules with exclusions for EU ETS and CCA installations There are supporters and objectors to the proposed change, However, the views can be reconciled by adopting a hybrid solution namely, by retaining the existing CCA exemption rules alongside the CCA/EU ETS site exclusions; there is strong support for this approach. The principle driver for the hybrid solution is that it will exclude energy intensive business (already caught by multiple energy legislation) from CRC and so leave CRC (and complexities such as around the landlord and tenant issues) to tackle energy inefficiencies in the non-energy intensive businesses and the public sector. The objections to just adopting DECC s proposed change are: those applying the CCA exemption rule have already addressed the challenge of defining coverage and so there are no simplification benefits. Instead, the proposed changed brings the likelihood of extensive CRC costs (eg SMotorMT believe that this change could create additional CRC costs for SMotorMT members which could be millions of pounds per manufacturer) and significant complexity from having to monitor and then for reporting split out the CRC data from CCA/ETS; the CCA exemption rule was originally intended to take account of the fact that legal entities with CCAs already had a high level of board level engagement in carbon reduction and carbon management processes in place throughout the legal entity. This situation has not changed. Instead, the change would bring large energy intensive businesses (already caught by other energy legislation) back into CRC. Also, it is questionable if CRC will deliver further energy efficiency/raising awareness given that sites are already covered by CCA/EU ETS and are large energy users anyway; the change will add complexity to the league table, which will need to be re-based to take account of the change in coverage for those organisations employing the CCA exemption during Phase I; and Speechly Bircham LLP

7 2.1.4 Whilst, introducing CCA/EU ETS site exclusions receives support, there are issues with this that will need addressing: just having an exclusion for EU ETS/CCA installations may leave messy CCA and EU ETS fragments (in respect of offshore oil and gas, there will be a few, smaller installations that are under the EU ETS threshold coming under the CRC where the owning organisation has qualified as a result of his onshore operations 2 ). There will be difficulties with monitoring, and then splitting out the CRC data from CCA/EU ETS sites for reporting purposes. For some this will not be a significant issue but for other such as The Society of Motor Manufacturers and Traders Limited ( SMotorMT ); offshore operators suggest (for simplicity and given that CRC has been confirmed by DECC as intended to tackle non-energy intensive business and the public sector) that the CRC be clarified as non-applicable offshore there is likely to be complexity around the definition of a site and a CCA facility ; and with the CCA/EU ETS site exclusions introduced, in order to avoid ambiguity, a reconfirmation is needed of the treatment of electricity supplied for the purpose of electricity generation. An example of this is where electricity is imported to a wind farm where this electricity is used directly to rotate the wind turbines. WG9 understands that electricity generators will be responding directly on this issue Lowering the qualification threshold to compensate for those sites now excluded from CRC Use data to evaluate if this is needed DECC have suggested that emissions coverage may be smaller under the new rules and therefore the threshold might be lowered; this seems to be principally driven by the proposed exclusion of EU ETS and CCA installations. But, if DECC s proposed replacement of the CCA exemption is adopted, it is unclear whether there will in fact be any reduction since organisations that had up to 75% emissions exempt due to CCA membership could be included. 2 Oil and Gas UK 3 RWE npower Ltd Speechly Bircham LLP

8 An upfront calculation should be carried out to see how emission coverage would alter under the proposed changes to CRC (the EA will have the relevant data for this). This will enable any threshold change to be determined by facts instead of assumptions. The contents of section 2.3 should also be noted. That said, if business does begin to grow and increase its energy consumption from qualifying CRC energy sources there could be more CRC qualifying entities and emissions so there may need to be assumptions overlaid as to UK growth expectations? Actions if the threshold is lowered If the threshold is lowered it should be done gradually with advance visibility given so that organisations can plan ahead. The first stage of understanding whether an entity qualifies for participation in CRC and if so what the obligations are, is one of the most complex aspects of CRC this complexity of this task needs simplification for future new participants. In addition, this will impact on the number of annual statements suppliers need to produce; there may be a need to extend the timeframe for producing statements if the thresholds are changed. So, Energy Suppliers may need forewarning of a reduction in the threshold as it may trigger the need to make system upgrades to address energy statement requests. 2.3 Using only Settled Half Hourly Electricity Meters ( SHHMs ) for Qualification In making this change, DECC will need to ensure that: (i) it is clear as to which meters would be included; and (ii) CRC does not develop without taking into account changes to the electricity trading arrangements, specifically where Suppliers must replace non-half Hourly meters in PC 5 8 with AMR meters by Q The electricity industry is considering a BSC Modification which proposes half hourly settlement for all half hourly capable meters in Profile Class 5-8 which would include AMR meters. These changes, along with the likely drop in the qualification threshold for the CRC, would increase complexity. Also, it may create incentives for organisations to reject AMR meters, which would make it difficult for Suppliers to meet their licence obligations. A solution would be to base qualification on electricity measured by HH settled meters at >100kW sites, namely: "The existence of one or more metering systems registered for use in the > 100KW market* (as denoted by the measurement class "C" **), and a threshold of electricity consumption > [6000] MWh" Speechly Bircham LLP

9 3. FUELS LIMITED TO 4 * A 100KW metering system is defined in the Balancing and Settlement Code (BSC) Section L, paragraph ** Measurement class C is as defined in Annex X-2 of the BSC. There seems to be general support for this simplification. But the following points highlight areas where further thinking/clarity is needed. 3.1 Northern Ireland - The gas supply network is not extensive and so it may be necessary to include fuel oil there. 3.2 Defining diesel and kerosene - Further clarity is needed. "diesel" needs a specific definition; would it take into account, for example, heavy fuel oil, treatment of bio diesel etc.? What, and how, would DECC expect reporting on use for heating only, to be managed, given a single delivery of fuel can have more than one use? Fuel suppliers are not able to quantify qualifying supply under CRC as there is no distinction between supply of red diesel, gas oil or kerosene for electricity generation, heating or off-road transport application Renewables By limiting the fuels caught by CRC, there will be differences in encouragement of certain renewables eg if an entity switches from gas to bio-fuel the entity will enjoy the renewable heat incentive and be outside CRC. 3.4 Site specific exclusions - Clarity is requested as to the intimation that there could be a site based de minimus rule to allow organisations to remove small kerosene and diesel consumers that are difficult to capture. 3.5 Special treatment of ports UK Major Ports Group propose an exclusion from CRC for energy used in Port transport. The premises for this are: (i) a port operation is a form of transport; and (ii) energy used in all other forms of transport are excluded from the CRC. So, energy used for equipment such as lifts, electric forklift trucks, conveyor belts cranes and other onsite mechanisms will be included in CRC but such equipment is regularly used in ports, but is intrinsically part of the transport process, rather than as a part of a 4 These products are all covered by the Hydrocarbon Oil Duties Act 1979 and carry duty at different rates depending on their intended application, although it is permissible to use products carrying higher duty rates in other applications which would normally be subject to lower duty rates - although there is clearly a financial disincentive to do so. Speechly Bircham LLP

10 manufacturing process. Further justification for this port specific treatment is that it would treat the port industry fairly in the context of other modes of transport, at a time when the government is trying to encourage modal shift from land to sea as part of its decarbonisation aims. 3.6 an additional point for clarification is simply that gas itself could helpfully be defined. It is assumed, we believe, by all concerned, that gas under the CRC means grid gas (i.e. 95%+ methane). However there is no definition of gas in the CRC legislation itself, and broader definitions of gas do exist elsewhere in UK legislation, e.g. that under section 48 of the Gas Act ALLOWANCES SALES A variety of points have been raised and these are set out below: 4.1 Allowance pricing - Business needs certainty on the cost of allowances to facilitate long term planning, particularly as regards investment in energy efficiency measures. The sale price of allowances is yet to be defined. Within the HM Budget statement it was seen that the CRC income to the Treasury increases by around 35% in 2013 indicating that the sale price will increase in line with the carbon floor price, although no statement has been issued about this. Government needs to provide clear statements in advance as to: the level of carbon savings CRC is to deliver and the linkage to the allowances price(s); the allowances price(s); how the allowances price(s) will be set and reviewed looking ahead; and the timing and price differentials between the proposed two sale points (this might influence the need to retain the safety valve DECC now proposing to remove). These points need to be considered in conjunction with section 4.2 below. 4.2 Bankability of allowances - If there is no banking it could end up with the situation where an organisation has over-bought allowances and will have spare units. If there is no demand for the allowances on the secondary market then these units would be worthless. Conversely, if there is banking an organisation could purchase many more allowances than needed in the first (cheaper sale) and bank these for future years or indeed sell them on the secondary market in later years at a higher price. Clarity is needed on the bankability Speechly Bircham LLP

11 of allowances including the arrangements for the transition to another Phase (will allowances have a vintage and will there need to be restrictions on what vintage of allowances can be traded or surrendered for compliance). 4.3 Emission Factors Adoption of emission factors published for GHG reporting purposes rather than fixed factors for a Phase is welcomed as it will create consistency with GHG reporting and provide and facilitate comparison between data under different schemes. But, GHG factors will have to be published in good time for reporting years to facilitate participants emissions predictions (and so CRC allowances to purchase/trade). If the Performance League Table is retained, then the implications of changing conversion factors will need to be considered in light of comparable performances to previous years. 5. REPORTING: Avoiding reporting overlap between CRC and Carbon Reporting The CRC simplifications do not diminish the burden of annual reporting and league tables which are still to be produced at the same time government are considering mandatory greenhouse gas reporting. CRC reports should be structured so that they form an element of any future carbon reporting requirements/policy. 6. RENEWABLES: Treatment of dedicated off-site renewables 5 It is proposed that an exemption from the scope of CRC is introduced for electricity supplied to a property from a dedicated off-site renewables installation, where such installation is a new installation provided by the developer/owner to serve one or more named projects. The treatment of standard green electricity via the grid is within the scope of the CRC and the justification for this is understood. However, there is an opportunity to help promote renewables, stimulate investment and create jobs by treating dedicated off-site renewables differently. It is not feasible, technically or economically, for individual buildings to meet their electrical energy needs through on-site renewables. However, large off-site schemes could make a significant contribution to reducing UK emissions. For example, if energy from a new, dedicated wind-farm could be ring-fenced for one or more properties and qualify for CRC exemption it would tip the economic balance 5 Note paragraph 3.3. Speechly Bircham LLP

12 in favour of its development. However, currently this energy would still be within the scope of CRC and therefore does not encourage developers to take what might otherwise be very sensible and sustainable decisions. 7. ALTERNATIVES TO CRC There are still criticisms of retaining CRC as well as requests that there should be a cost effectiveness test applied to justify retention of any aspect of CRC. Paragraph 7.1 set out the UK Major Ports Group s perspective of the burden to UK productivity created by imposing CRC on ports. CRC is to tackle non-energy intensive businesses and the public sector (as confirmed by DECC) and seems designed largely for buildings, not for industry as it sits uncomfortably in businesses where the other types of regulation (safety and environmental) concern industrial installations, e.g. COMAH, Safety Cases, EU ETS, CCAs and IPPC. Also, there is concern that it does not incentivise the tenant other than through financial penalty the tenant is sheltered from the reputational element the Performance League Table. In addition, the removal of the recycling payment is considered to convert CRC into a tax. So, some members propose that CRC be replaced with a fit for purpose energy tax and paragraph 7.2 sets out a specific proposal. 7.1 UK Major Ports Group view Ports are a critical part of the low carbon supply chain. Modal shift from land based freight transport to sea and inland waterway based transport is a critical part of the process of de-carbonising freight transport. Treating ports in the same fashion as a manufacturer or as an office block owner (as the current form of CRC does) penalises ports and makes the required modal shift more financially challenging 6. Ports are unfairly disadvantaged compared with other transport mechanisms which qualify for the transport exemption. If we agree that climate change is the biggest issue facing the country, then facilitating modal shift is considerably more valuable than the revenue from CRC. 6 When ports invest capital in infrastructure, that infrastructure is designed to last for periods often well in excess of 30 years. There are rare opportunities to alter or replace such equipment and there is no economic justification for replacement until the equipment has paid off its capital cost and begun making a return. Speechly Bircham LLP

13 CRC, as it stands and even following the proposed simplification remains a significant administrative and cost burden that is a significant barrier to investment. This sits alongside other significant administrative and cost burdens (so raising export costs) that are acting as barriers to investment: constant changes and increases in planning red tape and decision delay, marine planning, conservation legislation and other environmental protection legislation. Taken together the impact upon port activities as a critical sector delivering low carbon logistics acts to impede their ability to grow and assist the government in achieving their decarbonisation aims. Cumulatively, they are a barrier to private investment, which is essential if the UK is to grow its way out of the current economic climate, predominantly through an export led recovery. 7.2 Replace with a tax The proposed CRC simplifications will not provide the fundamental reform of the CRC that is required to produce an effective scheme which delivers the transition to sustainable energy practices in the UK (i.e. affordable, efficient, secure and low carbon). CRC will remain a bureaucratic carbon tax and meaningless reporting process that has irreversibly lost the confidence and support of participants and the media. Therefore, we feel that more fundamental reform is needed, rather than a list of amendments. The solution is to: (a) bring CRC within the Climate Change Levy ( CCL ) to create one carbon price mechanism that would be a proportion of gas and electricity bills; and (b) introduce a practical framework which enables the production of a single, holistic footprint reporting (this can be addressed through Defra's current review of GHG reporting). The benefits are: it provides a simple but effective incentive mechanism for all energy users that is wider in scope than the relatively small remit of CRC. CRC in the landlord and tenant relationship impacts non-crc participants in an ad hoc fashion and so creates buildings that have and don t have CRC costs, the proposed solution would be across the board and not create a two tier market; it incentivises both energy efficiency and renewables; it removes the need for administration of allowances as tax revenue would be collected through energy bills, as is currently the case for the CCL and so provides a clear, substantial, direct and fairly distributed incentive mechanism; it signals the ETG s support for the need for organisations to monitor and publish their footprints as part of effective management activities to reduce emissions; Speechly Bircham LLP

14 7.2.5 it removes the multiple regulatory footprint reports (including the CRC reports and others, such as the water industry reports to Ofwat) and it could be a requirement of the Defra methodology to include Board level sign-off, thereby ensuring continuing visibility of these matters; and it removes the issues around the landlord/tenant issue as leases enable taxes to be passed on by landlords to tenants. Speechly Bircham LLP