UK Real Estate Alert
10 March 2010
Authors:
Kevin Greene
kevin.greene@klgates.com
+44.(0)20.7360.8188
Sophie Charveron
sophie.charveron@klgates.com
The Carbon Reduction Commitment (CRC)
Regulations
What is CRC?
•
The Carbon Reduction Commitment (CRC) is a mandatory auction-based
emissions trading scheme for energy users which applies to both public
authorities and private sector companies. It forms part of the Climate Change
Act 2008, which comes into force in April 2010.
•
It is not a new building regulation as such as it targets energy use in buildings,
rather than their construction. The CRC incorporates incentives and challenges
to encourage business and the public sector to reduce energy use by taking
steps to become more energy efficient.
•
According to Nicholas Stern's report on climate change, 50% of the total CO2
emissions in the UK come from its existing buildings. This percentage is
likely to increase by 140% by 2050 if nothing is done to curb the CO2
emissions by buildings by improving their energy efficiency.
•
The CRC focuses on businesses that have not previously been directly targeted
by climate change legislation such as the European Emissions Trading Scheme
(EU ETS) and a Climate Change Agreement.
•
The CRC scheme is revenue neutral to the Government. Revenue raised from
the auctioning of allowances will be "recycled" to the entities responsible for
compliance with the scheme in proportion to their average annual emissions
(i.e. their "performance") since the start of the scheme. CRC Organisations will
receive a bonus or penalty depending on the their position in the league table
published by the Government each year.
+44.(0)20.7360.8154
Bonny Hedderly
bonny.hedderly@klgates.com
+44.(0)20.7360.8192
K&L Gates includes lawyers practicing
out of 35 offices located in North
America, Europe, Asia and the Middle
East, and represents numerous
GLOBAL 500, FORTUNE 100, and
FTSE 100 corporations, in addition to
growth and middle market companies,
entrepreneurs, capital market
participants and public sector entities.
For more information, visit
www.klgates.com.
When does it come into force?
•
From April 2010 the CRC Organisations have to disclose their total electricity
consumption per half hour to the Government.
•
From April 2011, those of the CRC Organisations that meet the conditions (see
"Who is concerned?" below) will have to purchase allowances to emit CO2
every scheme year (April to March of every year).
What is the threshold?
•
The technical threshold for inclusion within the scheme is a half-hourly
electricity meter and annual electricity use in excess of 6,000 MWh. At current
energy prices, this means that the CRC will impact businesses with electricity
bills of approximately £500,000 per annum. The Government estimates that
the disclosure obligations in the CRC scheme will apply to 20,000
organisations and that approx. 5,000 organisations only at first will be obliged
to purchase CO2 allowances.
Real Estate Alert
•
It is likely that the threshold of 6,000 MWh
will be lowered when the first introductory
phase has expired (from 2014 onwards), so
that the CRC scheme captures all CO2
emissions from buildings. More stringent
obligations may also be imposed at a later
stage.
•
Electricity use is the threshold, but once a
CRC Organisation crosses that threshold all
non-transport energy use within the UK such
as natural gas, fuel, oil, will be caught by the
CRC.
•
Parent outside the UK: In cases where a
parent company of a UK business is outside
the UK, any UK subsidiaries over the 6,000
MWh per year threshold will be covered by
the CRC at the level of the highest UK
organisation in its own right. For example, a
US firm with 10 UK subsidiaries, each using
601 MWh per year of half hourly metered
electricity would when combined exceed the
6,000 MWh threshold.
•
The UK electricity supplies of a group,
where the highest Parent Undertaking is
based outside of the UK, must be aggregated
together to determine if the group is required
to participate in the CRC. If it does meet the
criteria it then participates as a single
participant. The overseas highest Parent
Undertaking must nominate one of its group
members with a Principal Place of Authority
in the UK (or a third party agent based in the
UK where there is no such UK group
member to act as a Primary Member).
•
Although CRC only covers energy supplies
consumed in the UK, undertakings
established outside of the UK can still be
covered by the scheme. They are covered
if:-
•
They have a UK subsidiary that meets the
“Qualification Criteria”; or
•
Some other form of activity or presence in
the UK that meets the Qualification Criteria
(for example, a franchise or if an overseas
company has offices in the UK and “is
responsible” for the energy supplies to those
offices for the purposes of the CRC).
•
A group based entirely overseas which does
not consume electricity in the UK will not be
subject to the CRC Order.
Who is responsible?
•
The customer of the electricity supplier is the
person or entity who has to comply with the
CRC obligations.
What does it mean for parent and
subsidiaries?
•
•
Parent and subsidiaries: parent and
subsidiaries are treated as one single entity.
The parent company acts as the primary
responsible entity under the CRC scheme.
The Government has identified a “CRC
Organisation” as the highest UK parent
organisation within a group of companies.
The parent organisation will have legal
responsibilities under the scheme, although it
may not itself use enough energy to be
captured by the scheme. Consequently, if
the total annual electricity use of all
subsidiaries within a group having half
hourly meters exceeds 6,000 MWh, the group
will be caught by the scheme. In addition a
subsidiary can opt to report on its own
account provided the remainder of the group
still qualifies.
The reason for this is because the scheme is
designed to cover CO2 emissions from large
non-energy intensive organisations that
consume overall large amounts of energy
when aggregated, but which consume this
energy over a large number of small sites.
An example may be a chain of supermarkets
or hotels. The position in respect of one
single company is easier as if it meets the
criteria it must register and participate in the
CRC. To identify the “parent undertaking”
and “subsidiary undertaking” the provisions
in the Companies Act 2006 are applied.
Does CRC apply to PFI companies?
•
There is no special rule for PFI special
vehicle and joint ventures in the CRC
regulations. The CRC scheme defines the
entity who has to comply with the CRC
obligations as the customer of electricity
supply. This means that:
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Real Estate Alert
•
If the PFI company is the counterparty to the
energy supply contract, it is responsible
under CRC for the energy use of the public
infrastructure, say a hospital or school
(assuming that the 6,000 MW/hh threshold is
met).
•
If it is the local authority (or the
hospital/school) who is the counterparty to
the supply contract, it will be the local
authority. The energy use of the
hospital/school will then be included in the
total energy use of the local authority.
administer and deal with. Questions which
have been posed across the industry include
queries as to whether tenants of an office
building have to pay towards allowances that
are being charged because of the industrial
use of other tenants in their landlord's
portfolio for example?
•
Landlords will have to decide whether they
wish to charge the cost of the allowances to
their tenants and, if so, how best to apportion
the cost between them. Practically, landlords
will have to work out the best way of
measuring each tenant's energy use to help
them with the apportionment process.
Landlords may also seek to pass the costs of
administering CRC to their tenants.
•
The British Property Federation (BPF) has
produced a guide to assist landlords and
tenants in this process. This includes advice
on what should happen when a building is
bought or sold to/from a party outside the
CRC, how costs should be apportioned
between landlords and tenants, and how
landlords can use the CRC recycling
payments to make their whole portfolios
more energy efficient, for everyone's benefit.
The length of the guide itself highlights the
uncertainties and potential problems
involved with operating CRC in the landlord
and tenant context. Unfortunately this isn't
an area where there is an easy
solution/precedent to neatly slot into lease
documents that covers all scenarios.
However as most existing leases will not
adequately deal with CRC right now, it is
something which will need to be addressed.
•
An Industry Working Party Consultation
was issued on 17 December 2009 on the
treatment of CRC in the context of landlord
and tenant relationships with a view to
addressing the issues and standardising
drafting in lease documents. The purpose of
the consultation is to explore whether a
cross-industry consensus can be reached on
how CRC costs should be apportioned
between landlords and tenants in new leases.
A response is currently awaited so not much
time before the April deadline. However the
consultation document itself, and BPF guide
for landlords and tenants are useful in
determining how the parties should consider
What about landlords and tenants?
•
•
•
Landlords and tenants: Landlords who are
CRC participants will be responsible under
the CRC for energy consumed in relation to
both the buildings they themselves occupy
and their tenanted buildings where they
procure the energy their tenants consume.
Where a tenant itself procures the energy it
consumes, it will be responsible for that
energy consumption and the resulting
emissions (where it is large enough to be a
CRC participant in its own right).
The property industry are particularly
interested in how CRC impacts on the
landlord and tenant relationship. This is
especially the case where there is a multi-let
building where the landlord is responsible for
the supply of energy for the building and,
therefore, the landlord's energy performance
will be affected by the activities of its
tenants. The way tenants use and occupy
buildings could have a very real financial
implications for the landlord. Landlords may
well wish to receive and expect a financial
contribution from their tenants towards the
cost of any allowances that landlords have to
purchase under CRC. Conversely, tenants
may expect and ask to obtain the benefit of
any recycling payments received by the
landlord.
All of this could be very difficult to
administer, particularly in view of what we
have discussed above and the fact that the
energy emissions of an entire group of
companies may need to be taken into
account. For businesses with a diverse
property portfolio comprising both energy
efficient office use and energy inefficient
heavy industrial use, this could be complex to
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Real Estate Alert
and address such issues practically and from
a compliance and operational standpoint.
purchase EU ETS allowances at the higher
rate of the prevailing EU ETS price or a
minimum CRC floor price. This safety valve
has been introduced to avoid spikes in the
price of allowances. The sale price of
allowances will be fixed at £12 per tonne of
CO2.
What obligations are imposed on
CRC Organisations?
•
•
•
•
•
•
The CRC scheme imposes an obligation to
disclose electricity consumption in the first
year, followed by the obligation to purchase
allowances to emit CO2 in the following
years.
Introductory phase: to allow CRC
Organisations to become familiar with the
CRC and to establish accurate data on
emissions, the CRC will commence with a 3
year introductory phase (until 2013) which
will be based on a fixed-price sale of
allowances rather than an auction. The price
has been set at £12 per tonne of CO2.
The introductory phase will not include a cap
so CRC Organisations will be allowed to
purchase as many allowances as they need to
offset their total emissions. The introductory
phase is designed to allow CRC
Organisations to develop their energy
efficiency strategies and to become familiar
with the scheme without being constrained
by a cap. During the introductory phase, one
sale of allowances will be completed in
January of each year.
•
Each emissions year will be followed by a
reconciliation period of three months.
During this time CRC Organisations will
collate their emissions data, buy or sell
allowances on the secondary market, report
their emissions figures to the Government
and surrender emissions allowances. The
Government will then publish the results and
calculate the revenue recycling payments.
•
CRC Organisations will be required to selfcertify their own energy use based on meter
readings or with reference to annual energy
bills.
•
Purchase of allowances by auction:
following the introductory phase, allowances
will be auctioned and the number of
allowances auctioned each year will
decrease in line with the Government's target
to reduce CO2 emissions, thus providing
incentives to decrease energy usage and
increase the energy efficiency of the CRC
Organisations’ operation.
At the end of the introductory phase, the
number of allowances will be capped. CRC
Participants will purchase allowances by way
of an online auction run by the Government.
There will not be any fixed price from 2013
onwards, rather the price will be set by the
market. If they miscalculate their
requirements and do not buy enough
allowances, CRC Organisations will have to
purchase additional allowances by trading on
the secondary market or through the use of
the safety valve.
How much will it cost to participate
in CRC?
•
Purchase of allowances: the CRC
Organisation needs to monitor its electricity
consumption in order to evaluate the number
of allowances it will need to purchase every
year. During the first 3 years, the price is
fixed (£12/t of CO2) but in the subsequent
years, the price will not be fixed and
therefore can be expected to be more
expensive.
Secondary market: once the introductory
phase is over, CRC organisations will be free
to trade their allowances between themselves
and to new participants. This means that the
CRC Organisations who manage to run their
buildings efficiently may need fewer
allowances and trade the excess on the
secondary market.
•
Participants' fees and administration costs.
CRC Organisations will have to pay a oneoff registration charge of £950, and an
annual charge of £1,290 (fee) and
participation fee in the fixed price sale
(£310).
•
The CRC Order provides for both criminal
and civil penalties.
•
The key criminal offences are as follows
(article 106):
Safety valve: The safety valve is a
mechanism allowing CRC Organisations to
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Real Estate Alert
•
Failing to comply with an Enforcement
Notice.
•
Knowingly or recklessly making false or
misleading statements on material matters.
•
The key criminal offences are punishable
(article 107):
•
On summary conviction in a magistrates’
court, by up to three months’ imprisonment
and/or a fine of £50,000.
•
On indictment in the Crown Court, by up to
two years’ imprisonment and/or an unlimited
fine.
receive back a proportion of the total
revenue from the fixed price sale, based on
their emissions in Year 1 of the scheme
(with a bonus or penalty of +/- 10% based on
their league table position). For instance if a
CRC Organisation has emissions of 100
tonnes of CO2 and the total emissions of all
CRC Organisations in one year is 10,000
tonnes of CO2, then that CRC Organisation's
share is 1% of the total and it is entitled to
1% of the total revenue recycled that year.
What about Green Electricity?
•
The use of electricity generated by on-site
renewables that is not subject to any other
incentive under other climate change laws
will be subtracted from the CRC
Organisation's CO2 emissions. This means
the CRC Organisation will need to purchase
fewer CO2 allowances. This decision has
been made to create incentives to use on-site
renewables. Green tariff electricity supplied
by the National Grid will not be treated
differently from standard tariffs.
•
Note that green electricity does not count as
"zero-carbon" under the CRC. The
government chose to do so as upstream
green electricity purchase is already
incentivised (see the Renewable Obligation
Certificates "ROCs" which are subsidies
funded by UK energy users).
Enforcement: criminal offences and
civil penalties
Where an office is committed with the consent or
connivance of a company officer, or as a result of
that officer’s neglect, both the officer and the
body corporate are guilty of the offence (article
108).
The key civil penalties are as follows:
•
Failure to register (article 95).
•
Failure to make an Information Disclosure
(article 103).
•
Failure to provide a Footprint Report or
providing an inaccurate Footprint Report
(articles 96 and 99 respectively).
•
Failure to provide an Annual Report or
providing an inaccurate Annual Report
(articles 97 and 99 respectively).
•
Failure to surrender Allowances (article 100).
•
Failure to maintain records (article 102).
•
The civil penalties for these failures involve a
combination of fines, having the failure
publicised, bottom ranking in the League
Table and blocking a Participant from trading
allowances in its account in the Registry.
•
The Government will publish the
performance league table and rank CRC
Organisations based on their respective
performance within the scheme. The
Government will then award bonuses or
penalties when recycling auction revenues
based on a CRC Organisation's position
within the league table.
•
The revenues from auctioning will be
recycled to CRC Organisations. They will
Conclusion
CRC is not a building regulation as such but its
aim is ultimately to enhance the efficiency for
existing and future buildings in the UK. The
decrease of number of available allowances and
the increase of the carbon price over time will
incentivise construction companies and building
owners/developers to improve the energy
efficiency of buildings in the UK. It should also
encourage landlords and tenants to work together
to improve overall energy efficiency.
CRC has been designed as a cap-and-trade
scheme, and not a carbon tax (which may not be
set at an appropriate level), to incentivise
businesses to accept the price of carbon
emissions and reduce their energy consumption.
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Real Estate Alert
Key dates
•
2008 - qualification year for electricity
consumption
•
April 2010 - introductory phase - disclosure
of information only "footprint year"
•
September 2010 - deadline for registration
•
April 2011 to April 2013 - first sales of
allowances at fixed price of £12 per tonne of
CO2
•
July 2011 - report on footprint
•
April 2013 to April 2020 - phase 2: online
auction of allowances and open market for
trade of allowances between CRC
organisations
•
April 2020 to April 2027 - phase 3
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10 March 2010
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