Commitment issues

The Carbon Reduction Commitment (CRC) scheme, the UK-wide emissions trading scheme, comes into force today. Recently the Environment Agency has indicated that the CRC may apply to as many as 30,000 organisations (six times more than first thought). So will you be caught?

Organisations that qualify include those that use more than 6,000MWh of half-hourly metered electricity during the 2008 qualifying period including, controlling shareholders of PFI companies and joint ventures, and groups in which one firm in the corporate structure qualifies. The new rules mean they will have to:

• Monitor and report their UK energy use
• Disclose energy information and register by September 2010
• Purchase carbon allowances for future energy use from April 2011 (the initial cost is £12/ tonne of CO2)
• Declare CRC emissions in annual reports by the end of July 2011

The sum paid will be recycled, with a sum paid back based on energy saved year-on-year and by performance relative to others in an annual league table. There will be a bonus or penalty of as much as 50%.

Companies must account for energy use in their premises and construction activities, and estimate future energy use to budget for carbon allowances. Although there is an exemption for fuel used in transport, consumption by construction plant such as cranes, crushers and hoists may be included.

The uncertainty of whether a penalty or bonus will apply, will necessitate cost planning to avoid cash flow difficulties. Qualifying employers may look to incentivise or penalise contractors in relation to energy efficiency. New mechanisms in building contracts and more detailed enquiries in tender documents (including requests for carbon management credentials and CRC league table rankings) and pricing to address this are likely. In the short term, aspirational targets for energy consumption during construction as well as later operation may be set. In the longer term, as the cost of carbon increases, targets may be specified. The JCT revision 2 supplemental provisions provide for sustainable considerations so may be used to achieve this. High energy building methods may be prohibited.

Other considerations include the question of who is responsible for temporary site power. This may fall to either a contractor or an employer that qualifies for the CRC. It may be easier to address on large scale and new-build projects, where the contractor commonly connects to utilities during the construction phase. However, the position may be more complex for refurbishment or fit-out projects where the employer is paying the energy bill and permits the contractor to use existing utilities. The free issue of energy in this way is likely to stop when employers seek to predict and manage energy use and the long-term cost of carbon. How will energy use by fit-out contractors with early access be addressed? This will be a particular concern if works occur regularly for multi-tenanted premises such as shopping centres.

Another question is how the contractor will address CRC with its supply chain. Subcontractor selection may be influenced by CRC credentials. To begin with, CRC costs may be treated as overheads, but as the cost of allowances rises, contractors may seek to identify energy used by subcontractors and pass the cost on. Measurement and information disclosure is likely to be requested.

As for projects already under way, the assessment of CRC implications may be needed. For long-term joint venture or PFI projects, participants may wish to consider where responsibility for energy use lies. Is it with the project vehicle, the controlling shareholder organisation or the council? Government guidance in this context would be welcome.

In future, occupiers may look for warranties for energy efficiency of buildings. The form they take will need careful consideration. What limitations should they have? Should maintenance processes be specified? How long should they last? Will new insurance products be needed?

The CRC presents new challenges. For those who are prepared, there may be competitive advantage to gain. For the unprepared, it may mean managing the cost of more than just carbon allowances.