AEA knowledge leader and CRC expert Mark Johnson discusses the need for thinking ahead if organisations are to meet their CRC requirements

The Carbon Reduction Commitment Energy Efficiency scheme (CRC) begins this April. In the first year, participants will only need to report emissions, but each year thereafter, every one of the estimated 5,000 organisations participating fully in the scheme will be required to purchase carbon credit allowances equal to their annual emissions. The time for purchasing carbon credits may seem a long way off, but forward planning will be key to success in the scheme.

Within the CRC there will be three ways to get hold of allowances: purchase them from the government directly in April at £12 per tonne of CO₂ (/tCO₂); buy them on the secondary market during the year at the prevailing price; or buy them through the safety valve that takes the EU emissions trading scheme price, or £12/tCO₂, whichever is higher. Every CRC participant will need to forecast its emissions during the year and have an allowance-purchasing strategy that minimises its risks in these markets.

Planning will need to go far beyond those departments initially tasked with responding to CRC requirements. It will require regional, departmental, group and even subsidiary company coordination. You may even have two very separate organisations that are owned by one entity that will have to come together and manage their emissions collectively and work as one for the first time. This will require a lot of work and management that can’t necessarily be undertaken very quickly and therefore requires forward planning.

Many organisations have already established steering groups to help their approach. By having this foresight, significant planning and forecasting can be done across a organisation to best meet CRC requirements. The remit of these groups should include energy management and forecasting, CRC reporting, financial planning and allowance purchasing, external communications, legal advice etc.

Take the simple task of identifying the actual size of an organisation and its current and future energy consumption – critical for CRC reporting and allowance purchasing. With numerous regional offices and departments, many parts of large organisations are ignorant of each other. Significant forward planning will be needed just to map organisations and identify how and who should record energy consumption. This is before even considering how to reduce your carbon footprint.

Data for energy consumption needs to be recorded precisely and then analysed. Those with foresight will set up systems and agreements for data management and will benefit most in the long term. Information really is power, and we see this when carrying out energy audits. Our experience has shown that just by recording and showing clients their energy consumption they can easily reduce energy use by an average of 5%. By planning and investing in data management, companies will also be placed in a better position to understand how many carbon credits they will need to purchase in the CRC scheme.

The impact of buying CRC credits also needs to be planned, as it will inevitably disrupt business cash flows. Many organisations may not have recognised the need to plan and allocate costs for the collation of energy data, energy-saving technology and internal communications.  The impact of significant sums of money tied into carbon credits also needs to be planned for.

For energy-intensive organisations, the costs of purchasing allowances could potentially be very large; for smaller establishments the need to tie up thousands of pounds in the scheme could cause financial difficulty. If we look at the cost of allowances during the introductory phase we can see that significant sums will be tied up in the revenues held by government. Some organisations are estimating an initial outlay of about £10 million plus.

After the first year of reporting, each participant will have to purchase carbon allowances from the government to cover their forecasted emissions for 2011–12, and then in April 2012 purchase credits for the trading year ending April 2013. Initially, carbon credits will be at a fixed price of £12 per tonne.

While the majority of the cash will be returned, a percentage will always be at risk, with a potential loss of 10% in the first trading year and 20% in the second and so on. Even if the full sum is returned, organisations will have lost the benefits of having it in their own accounts gaining interest, being invested in the operation, or as a cash reserve. They may also need to consider how they will explain this “tied-up cash” to investors and show they are doing all they can to ensure a 100% return.

In the first trading year, participants will be able to carry over excess carbon credits to the next (to April 2012–March 2013). This should mean that the price of carbon credits does not fall below £12 on the open market, and is likely to be higher. No one will sell for less if they have to pay the same price next year for carbon credits from government. So an organisation that buys fewer allowances than it needs in the first trading year, either deliberately or through poor forecasting, would be taking a risk. However, in the second trading year (April 2012 to 2013) credits cannot be carried over, so the price of credits could go up or down depending on whether too few or too many were purchased in the start-of-year sale. As well as price uncertainty, organisations will need to manage the risk of having excess credits that would be valueless after the March 2013 deadline.

Participants will need to predict energy use from previous years’ data, and take into account new reduction measures and potential growth to know how many credits to purchase. Without careful planning and forecasting they could either end up with too many credits, or too few.

If short in the final year of the first phase, there are a couple of potential outcomes. You may be lucky and there may be an influx on the open market of cheap carbon credits. There could also be a shortage in credits, causing prices to increase drastically.

So why then bother buying any additional credits at all? Currently, the penalty for not having enough credits is set at £40 per tonne; the credit shortfall must be bought in the new trading year, making it a costly way to fail to meet your CRC obligations. Long term, if an organisation can plan an effective trading strategy in carbon credits they may reap the rewards – as with any other commodity, if bought and sold in a timely way, there are profits to be made. However, this could also be a risky strategy given the time expiration in the first phase of the scheme and the unknown nature of what will happen to the price of carbon.

And so we return to the need for accurate forecasts of an organisation’s carbon credit needs. Meticulous data measurement is the cornerstone of being able to understand energy consumption. Until you have a firm hold on this you cannot begin to estimate future use, plan for reductions, understand financial commitments, and avoid penalties.

Mark Johnson is a principal consultant with AEA. He manages AEA’s support to Defra on the Carbon Reduction Commitment and also leads carbon-management projects as part of the Carbon Trust programme, with a focus on the IT sector. Prior to joining AEA, he worked for a large UK power utility for 10 years, where his work included energy and environmental policy analysis.

For advice on how to prepare for the CRC, visit www.aeat.co.uk/crc