Planning and Partnership Panel

HERTFORDSHIRE COUNTY COUNCIL

PLANNING AND PARTNERSHIP PANEL

MONDAY 4 OCTOBER 2007 AT 10.00 AM

DEFRA Consultation on Implementation proposals for the Carbon Reduction Commitment (formerly the Energy Performance Commitment)

Contact: John Rumble Tel: 01992 556296

Bethan Clemence Tel: 01992 556295

Executive Member: David Beatty

1. Purpose of report

1.1 This report aims to set out to Members the current consultation on the Carbon Reduction Commitment (CRC) which, when enacted, will likely hold significant implications for the County Council.

1.2 The report will provide the necessary background to the CRC and highlight the key issues for Members to consider in relation to the proposed response to the consultation document.

2. Summary

2.1 The Carbon Reduction Commitment (CRC) was announced in the 2007 Energy White Paper as a mandatory ‘cap and trade’ emissions trading scheme. In simple terms this means that a ‘cap’ will be set for levels of energy use, and organisations which exceed their allowance will need to buy credits from those organisations with spare allowances as a result of good energy management.

2.2 Currently under consultation, the intention of the CRC is to help organisations save money through improved energy efficiency and covers sectors which are not currently covered by existing emissions trading schemes. Dependant on organisation size, the CRC will apply to a range of sectors including large local authorities.

2.3 The scheme is due to be introduced in January 2010, with the intention that it will be revenue neutral. This means that any revenues raised will be recycled to participants in proportion to their average annual emissions, with a suggested ± 10% bonus/penalty depending on their ‘league table’ position. Bearing in mind that HCC’s energy bill for 2005/06 is estimated to be around £15.1 million, the potential for financial penalties will be a significant corporate issue.

2.4 Participants will be required to monitor fuel and energy use throughout the year (starting January). Reporting of emissions will occur at the end of the year, collating and retaining an ‘evidence pack’ to demonstrate reported energy use across the CRC organisation. An indication of the scale of the administrative capacity needed to report and monitor energy use is the plan to allow a 3-month reconciliation period at the beginning of each year to collate data and evidence packs and buy allowances.

2.5 With respect to local authorities, all measured energy consumption would be included in the CRC. However, this is complicated by other sources of unmeasured energy consumption within a local authorities’ remit, in particular through street lighting and other street furniture.

2.6 Currently, the Government’s preference is that unmeasured consumption should be included. If it is, then HCC will also need to consider:

· How it will account for unmeasured energy consumption from, for example, street lighting and any consequential administrative or capital expenditure requirements;

· How it can reduce energy consumption from, for example, street lighting;

· That green tariff electricity supplied by the national grid (used for street lighting in Hertfordshire) will not be treated any differently from standard tariffs (whereas the use of electricity generation by onsite renewables will be ‘zero rated’, therefore placing no obligation upon an organisation to surrender its carbon allowances).

2.7 The role of schools is one of the biggest complexities that local authorities might face. The consultation document currently states that individual schools will not qualify as an organisation in their own right. However, a significant number of stakeholders have argued that schools should be included within local authorities’ portfolios on a mandatory basis, since there are substantial cost-effective energy efficiency opportunities available within schools. This could potentially place a requirement upon HCC to not only account for energy consumption, but to implement energy efficiency measures across 537 schools.

2.8 It is more than likely that HCC will be obliged to participate in the CRC scheme. Whilst its’ intricacies are yet to be resolved, a number of very important issues need to be considered by the Council now:

· The financial implications of a ±10% bonus/penalty given that current energy bills amount to around £15.1 million.

· The resource/capacity implications for administering the scheme.

· The likely administrative burden, and implementing an effective administrative process in light of the potential for hefty financial penalties.

· How the Authority will work with schools if Government decides mandatory inclusion.

· If, and how the Authority should include unmeasured consumption within its CRC portfolio.

· Looking now at better ways to tackle energy consumption and efficiency in anticipation of the onset of the CRC (e.g. onsite renewables, CHP/district heating schemes).

3. Conclusion

3.1 The introduction of the CRC scheme will have a significant impact upon the County Council and its emissions reduction programme. The Authority has already commenced work on emissions reduction through its involvement with the Carbon trust “Local Authority Carbon Management Programme”,which offers the opportunity to focus attention on emissions reduction and carbon management in a focused and structured way.

3.2 LACM5 will, however, require inter-departmental working, with each department having to consider how they can contribute to addressing emission reductions and the implications of taking action upon departmental budgets, staff resources and standard operating procedures.

3.3 The significance of the LACM5 programme in contributing to the Authority’s response to the CRC cannot be underestimated, and is being lead by the Leader of the Council. However, the CRC scheme when introduced will have both a financial and administrative burden upon the Authority. It should, however, further strengthen the incentives to invest in emissions reduction so may well proved beneficial in the long term. The proposed response to the consultation highlights some key areas of concern for the authority but is overall supportive of the concept and sees it as a positive contribution to the objective of tackling climate change.

4. Background

4.1 The UK Government has four long-term goals for energy policy:

· To put the UK on the path to reducing carbon dioxide emissions by 60% by 2050;

· To maintain reliable energy supplies;

· To promote competitive markets in the UK and beyond; and

· To ensure that every home is adequately and affordably heated.

4.2 As a consequence of the government’s commitment to reducing CO2, it is expected that to meet this target will require contributions from all sectors of the economy. Recent updated long-term energy projections indicate that without further measures, emissions by end-use from large non-energy intensive organisations (such as large local authorities) will increase by approximately 11% by 2030 compared to 2010 levels.

4.3 In the 2006 Energy Review, the government committed to deliver carbon savings of 1.2 million tonnes of carbon - equivalent to 4.4.million tonnes of CO2 per year by 2020 from large non-energy intensive business and public sector organisations. The government consulted in November 2006 on a range of potential measures for reducing emissions by this amount from the target sector organisations. Two measures given detailed consideration in the consultation were:

· The Carbon Reduction Commitment (CRC) – a mandatory ‘cap and trade’ scheme covering energy use emissions from large business and public sector organisations;

· A system of voluntary benchmarking and reporting of energy use covering large business and public sector organisations.

4.4 The results of this consultation indicated strong support for a mandatory approach, with the majority of respondents considering that a voluntary measure would not deliver the required target reductions. In light of these results and additional analysis undertaken, the government announced in its 2007 Energy White Paper its intention to implement the Carbon Reduction Commitment. Of all the measures announced in the Energy White Paper, this is the most significant measure to directly affect local authorities.

4.5 The current consultation, therefore, is not concerned with whether or not the CRC should go ahead as this has already been agreed. This consultation is concerned with the specific implementation, financial and administrative details and asks 50 questions on how this should be approached (the proposed consultation response is included as Appendix 1 of this report). Therefore, it is important that HCC recognises that it will have to factor in the CRC into its future financial and administrative processes, and the following sections highlight key areas for consideration. The closing date for consultation responses is 9 October 2007.

5. Summary of the CRC

5.1 The CRC was announced in the 2007 Energy White Paper as a mandatory ‘cap and trade’ emissions trading scheme. In simple terms this means that a ‘cap’ will be set for levels of energy use, and organisations which exceed their allowance will need to buy credits from those organisations with spare allowances as a result of good energy management.

5.2 Currently under consultation, the intention of the CRC is to help organisations save money through improved energy efficiency and covers sectors which are not currently covered by existing emissions trading schemes. Dependant on organisation size, the CRC will apply to a range of sectors including large local authorities.

5.3 Participating organisations will be required to purchase allowances corresponding to their energy use (of the first three years at a fixed price, and then either through auctions or from each other). If an organisation’s emissions rise, then it would have to buy allowances; if emissions fall, then any surplus allowances could be sold. The total energy use emissions would be capped through government deciding on how many allowances are available to auctions

5.4 The scheme is due to be introduced in January 2010 (although administrative actions would need to begin in 2009), with the intention that it will be revenue neutral. This means that any revenues raised will be recycled to participants in proportion to their average annual emissions, with a suggested ± 10% bonus/penalty depending on their ‘league table’ position. Bearing in mind that HCC’s energy bill for 2005/06 is estimated to be around £15.1 million, the potential for financial penalties will be a significant corporate issue.

5.5 Participants will be required to monitor fuel and energy use throughout the year (starting January). Reporting of emissions will occur at the end of the year and participants will be required to collate and retain an ‘evidence pack’ to demonstrate reported energy use across the CRC organisation. An indication of the scale of the administrative capacity needed to report and monitor energy use is the plan to allow a 3-month reconciliation period at the beginning of each year to collate data and evidence packs and buy allowances.

5.6 Organisations will have flexibility in how they comply; this can be achieved by either reducing their own emissions or by purchasing more allowances, so giving them the right to emit. Because allowances are tradable, it is possible for emissions reductions to take place where they will cost the least.

5.7 The purchasing of allowances however is one component of the CRC which is still up for consultation and could potentially hold significant financial implications for participating organisations. DEFRA is consulting on whether or not payment for CO2 emissions allowances should be at the time of auction or deferred until six months before the payment recycling phase is undertaken. The latter would save interest costs for local authorities, by avoiding the need for this funding to be locked away for a longer period.

5.8 With respect to local authorities, all measured energy consumption would be included in the CRC. However, this is complicated by other sources of unmeasured energy consumption within a local authorities’ remit, in particular through street lighting and other street furniture.

5.9 Currently, the Government’s preference is that unmeasured consumption should be included. If it is, then HCC will also need to consider:

· How it will account for unmeasured energy consumption from, for example, street lighting and any consequential administrative or capital expenditure requirements;

· How it can reduce energy consumption from, for example, street lighting;

5.10 The role of schools is one of the biggest complexities that local authorities might face. The consultation document currently states that individual schools will not qualify as an organisation in their own right. However, a significant number of stakeholders have argued that schools should be included within local authorities’ portfolios on a mandatory basis, since there are substantial cost-effective energy efficiency opportunities available within schools. This could potentially place a requirement upon the Authority to not only account for energy consumption, but to implement energy efficiency measures across all of its schools.

5.11 The programme and timetable for the CRC Implementation process is as follows:

3-yr introductory phase starting in 2010:

· Carbon allowance prices fixed (between £8 and £16 per tonne CO2)

· One-off sale of carbon emissions allowances at beginning of year

· No limit on total allowances for each organisation

5-yr capped phase beginning in 2013:

· Limits to be placed on the number of CO2 emissions allowances per organisation

· Number of CO2 emissions allowances to be sold within the scheme will decrease each year

· CO2 emissions allowances to be sold through auction

· Secondary market for CO2 emissions allowance trading to be allowed to form

· Banking and borrowing of CO2 emissions allowances to be permitted

· A ‘Safety valve’ to be introduced to prevent CO2 emissions allowance prices rising too high.

· Revenue recycling with % bonus or penalty based on a scheme league table. It is envisaged that there will be a maximum net financial incentives bonus/penalty set at ±10% (equivalent to around ± 2% impact on the organisations energy bill). This 10% bonus/penalty is specifically subject to consultation as there is some suggestion that it will not have enough of an impact to ensure delivery of CO2 emissions reductions within the scheme.

6. Operation of the CRC Scheme