The UK's CRC Energy Efficiency Regulation: Risks and Opportunities

Organisations with systematic plans to lower greenhouse gases can profit from the U.K.'s CRC Energy Efficiency Scheme.

The CRC Energy Efficiency Scheme (formerly known as the Carbon Reduction Commitment) is the UK's programme to cut greenhouse gas emissions by 80% (over 1990 levels) by 2050. It requires organisations with estimated annual electricity bills of more than £500,000 to calculate their emissions and buy carbon allowances based on forecasts of the coming year. Allowances will be surrendered each year to cover the amount of CO2 the organisation emitted, with the government recycling the revenue raised from the sale of allowances to participants after six months.

Programme Requirements

During the first year (April 2010 – April 2011) organisations were only required to report emissions, and purchase carbon allowances based on their energy consumption. Eventually, the CRC will become a “cap–and–trade” system in which allowances fall each year and organisations will earn bonuses or penalties based on their reduction in carbon emissions. Participants can buy or sell allowances in the secondary market.

Information about each organisation's performance will be publicised, with all organisations ranked using a weighted average of:

An absolute metric, which compares emissions over the last year to the rolling average of the previous five years,

An early–action metric (EAM) based on the percentage of emissions covered by Automated Meter Read (AMR) and the Carbon Trust Standard (CTS) or a recognized equivalent, and a

Growth metric that compares emissions relative to turnover (revenue) as a percentage change in emissions intensity for the current year compared to a rolling average of the previous five years.

Risks and Implications

The major risks of non–compliance include loss of reputation, civil/criminal penalties for the organisation and (in some cases) directors and senior managers, and unpredictable cash flow. While the cost of allowances is likely to be relatively low during the fixed–price introductory phase, in auction phases the cap may drive up both demand and price.

The public disclosure of the organisation's performance is a significant public relations risk, with the reputational consequences more significant than the recycled payment, at least in the introductory phase.

As the CRC relies heavily on self–certification, compliance will present a significant administrative and compliance burden, especially for unregulated organisations and those that lack the personnel or experience to deal with it. Organisations with complicated customer or third–party relationships will encounter difficulties in structuring their businesses to accommodate the CRC.

To comply with the CRC, organisations should:

• Define an internal compliance organisation.
• Identify and develop a management plan by establishing an accurate emissions inventory.
• Calculate potential benefits and risks, both financial and reputational.
• Evaluate the costs and benefits of early action.
• Understand their potential to reduce emissions, including in power-hungry data centers.
• Develop a compliance and carbon reduction strategy.
• Ensure proper systems and procedures are in place to meet reporting and auditing requirements, and to assure information quality and availability.

Critical Requirements

To succeed, organisations must move from manual and undefined processes to an integrated management information system. They must develop, internally or with outside service providers, a range of compliance–related capabilities. These include preparing and submitting all CRC–related data, finding opportunities and developing business cases for prioritizing energy reduction initiatives, and implementing an AMI (Advanced Metering Infrastructure) and energy efficiency strategy.

Organisations must also provide end–user training on energy awareness and the implications of CRC and analyse the potential financial and reputation impacts under different CRC scenarios. Finally, they must develop detailed roadmaps for reaching important business and regulatory goals in the most effective and efficient manner.

Cognizant believes organisations can benefit from CRC in a variety of areas. These include lowering energy and other costs through the virtualization of IT services that reduces the number of physical servers the organisation must maintain. CRC compliance can also lead to the elimination of old and inefficient processes, and spur innovation by transforming energy consumption behaviors while increasing customer satisfaction and the organisation's reputation.

Looking Ahead

By the end of the first phase of CRC compliance, organisations should begin thinking about making more fundamental changes to maintain their performance. Later phases may require more organisations to join, or introduce similar trading schemes for emissions not covered by the CRC. Hence, organisations should not take a lenient approach toward CRC compliance, even if they are not required to comply in the current year.

For more information, read our white papers on The UK's CRC Energy Efficiency Regulation: Risks and Opportunities (PDF), on Creating a Green Supply Chain (PDF) and about Cognizant's Energy and Utilities solutions.