Government moves to address CRC cashflow concerns

The government will today announce a number of changes to its Carbon Reduction Commitment (CRC) scheme, designed to address concerns that the new emissions cap-and-trade scheme will have a detrimental effect on organisations' cashflow and undermine investments in renewable energy.

The CRC is to come into effect from next April and will require public and private sector organisations with energy bills of more than £500,000 a year to adhere to emission caps.

Under the legislation, organisations such as supermarkets, hotels and hospitals will be required to purchase tradeable carbon allowances to cover their annual energy use. At the end of each year they will have to surrender their allowances to the Environment Agency or buy extra allowances to cover any energy they use over and above their cap.

The revenue raised by the government from the sale of allowances will be returned to the participating firms, based on their performance in an annual league table detailing which firms have delivered the best improvements in energy efficiency.

"The aim is to use both financial and reputational factors to ensure that energy efficiency gets board attention," said a DECC official. "Typically, energy costs are just one per cent of turnover for these organisations so even though energy efficiency measures make sense, they do not get board attention – the prospect of increased financial costs and featuring in a league table each year will help change that."

She added that for the first year of the scheme, the best-performing organisations will receive back all the money they spent on allowances plus an additional 10 per cent bonus, while the worst-performing organisations will receive their money back less a 10 per cent penalty charge. The bonuses and penalties will then increase each year until by the fifth year of the scheme they stand at 50 per cent of the original outlay.

However, despite the "revenue-neutral" nature of the scheme, there have been protests from some firms that it could prompt a cashflow crisis by forcing them to spend money on allowances during the first year of the scheme that would not be returned for 18 months.

The government will today attempt to alleviate those concerns by announcing that organisations will have to report their emissions only during the first year of the scheme starting in April 2010 and will not have to buy any allowances until the following year.

Acknowledging that the previous proposals could have affected firms' cashflow, a DECC official said the new timeline meant that organisations would begin collecting data on energy use in April 2010, before undertaking their first purchase of carbon allowances from April 2011. The government will publish its first league table for 2010/2011 in October 2011, at which point the organisations will have the money they spent on allowances returned with bonus and penalty adjustments made based on their performance. As a result, participating organisations will be out of pocket for less than six months, rather than the original 12 months.

The first set of league table rankings will be determined on whether or not the organisation has qualified for the Carbon Trust Standard and whether it has put in place automated systems for measuring energy use. For each year thereafter, rankings will be primarily determined based on reductions in overall energy use and improvements in energy efficiency.

The changes to the legislation were welcomed by David Symons, director at consultancy WSP Environment and Energy, who said that changes to the timeline should reduce the cashflow pressure on many organisations.

"Our view is that compliance is a simple case of getting organised," he said. "It might seem complex, but if you have the right processes in place and an overview of your energy use, you can comply more easily and also start to reduce your energy use… it is just best practice in many respects."

In addition to addressing concerns over cashflow, DECC has also rebranded the CRC as the CRC Energy Efficiency scheme in an apparent attempt to answer critics who have claimed that the initiative will undermine investment in renewable energy technologies.

Under the CRC scheme, organisations are required to assume all the electricity they use results in carbon emissions in line with the grid average, even if the power is generated using renewable energy technologies. The decision has prompted protests from the Renewable Energy Association, as well as warnings from BT that the refusal to recognise zero-carbon energy means it may have to shelve its high-profile plans for a £200m wind farm.

A spokeswoman for DECC said the failure to account for energy from renewable sources was justified on the grounds that existing and planned incentives such as the Renewables Obligation and the Clean Energy Cash Back scheme were intended to promote the rollout of renewable energy while the goal of the CRC had always been to improve energy efficiency.

However, the government has offered a small concession to those organisations investing in onsite renewable energy technologies with the announcement that it will produce a separate report alongside the league table detailing how much carbon organisations have saved through such measures.

"Organisations were concerned that they would not get the publicity credit for having onsite renewables so we will produce a separate report to cover that area alongside the league table," said the DECC official. "But if you do not improve your energy efficiency as well, you could still come bottom of the league table."

Leonnie Greene of the Renewable Energy Association welcomed the fact the government had accepted there were legitimate concerns over the failure to provide credit to businesses that had invested in onsite renewables. But she said that the industry was still worried that the failure to account for energy that is generated from renewable sources within the league tables could undermine investment in rthe sector.

"There is still a problem that the failure to recognise renewable energy will be a barrier for investment, particularly when there are concerns that the proposed feed in tariff will not be high enough to stimulate commercial investment in onsite renewables," she said.

The announcements come just days after a survey from energy management consultancy RSA warned that about half of firms remain unaware of the CRC, while three quarters are unsure when it comes into effect.