CRC Energy Efficiency Scheme Order 2013
Baroness Verma
That the Grand Committee do report to the House that it has considered the CRC Energy Efficiency Scheme Order 2013.
Relevant document: 22nd Report from the Joint Committee on Statutory Instruments.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, the coalition Government are committed to improving the take-up of energy efficiency measures across the economy. It is a truism that the cheapest energy is the energy that we do not need to use. Energy efficiency improves our energy security, reduces carbon emissions and improves UK competitiveness.
The CRC energy efficiency scheme, formerly known as the carbon reduction commitment, was one of the few energy efficiency policies put in place by the previous Administration. The aspiration of incentivising large users of energy across the public and private sectors to be more energy-efficient is one that we share, but we inherited an overly complex regulatory system.
The regulations before the Committee today are the product of an extensive dialogue with CRC participants on how best to retain the key drivers of the scheme while making it less of a bureaucratic burden. I am pleased that we have managed to more than halve the bureaucracy in the scheme. The CRC is a mandatory UK-wide trading scheme introduced in April 2010. The 2,700 large businesses and public sector organisations in the scheme represent around 10% of the UK’s total greenhouse emissions and typically spend more than £500,000 a year on electricity.
We listened to the concerns set out for us by CRC participants. Those concerns fell into three broad categories: that the rules of the CRC were too complex, difficult to understand and costly for participants to administer; that the CRC overlapped with other policies and, in particular, with the EU emissions trading system and climate change agreements; and that the CRC forced organisations to participate in ways which did not accommodate their natural business energy management structures and processes.
Having listened to those representations, we acted, and in July 2010 committed to simplify the scheme. We swiftly introduced a first round of legislative simplification, which came into force in April 2011, and committed to consult thoroughly on how to improve the scheme. The extensive formal and informal consultation by Ministers and officials has led to the order before your Lordships today. The Government set out their policy conclusions, which will be enacted by this order, in their response to the consultation published on 10 December 2012.
Our changes to the CRC address concerns about complexity and associated administrative costs, enable greater business planning by introducing two fixed-price sales of allowances each year, one forecast and one retrospective, and allow greater flexibility for organisations to participate in natural business units—that is, to reflect the way they choose to organise themselves. They also reduce the reporting burden by reducing the number of fuels reported, using only electricity measured by settled half-hourly meters for qualification purposes, and ending the requirement for footprint reports. They reduce scheme complexity by removing the residual percentage rule and climate change agreement exemption rules, and they reduce the overlap with other schemes so that input fuels to CCA facilities and EU emissions trading system installations are outside the scope of the CRC.
It is also important to note that maintaining the qualification threshold at 6,000 megawatt hours of settled half-hourly metered electricity only, instead of all half-hourly meters under the current scheme, will see the number of participants reduce by around 1,000 to 1,700. However, the overall impact of the simplification changes is only a small decrease—less than 5% of emissions coverage within the CRC scheme.
The majority of our changes will be introduced at the start of phase 2 of the CRC in April 2014. However, the Government are keen to maximise the potential benefit to participants and have concluded that it would be desirable to bring forward certain simplifications in advance of the beginning of phase 2, where the benefits of early introduction for participants will outweigh any difficulty in adapting to the new rules.
The Government have therefore decided that a number of simplifications will have effect from May 2013 and will apply for the last two years of the first phase of the CRC—that is, 2012-13 and 2013-14. These include a reduction in fuels from 29 to two. The CRC will now cover only emissions generated from the consumption of electricity and gas, the latter only when used for heating purposes. They also include the introduction of an organisation-wide 2% de mimimis, or minimum reportable percentage, threshold for gas. Therefore, if from 2012-13 a participant’s gas consumption is below 2% of their overall electricity consumption figure, that participant will no longer have to report on that gas or purchase allowances to cover its use. Also included is a meter-based exclusion for domestic gas supplies which have an annual quantity of 73,200 kilowatt hours or less, and an extension of the CRC allowance surrender deadline from the end of July to the end of October. The changes also include the abolition of the performance league table with the CRC administrator, the Environment Agency, and publishing participants’ aggregated energy use and emissions data instead.
Our assessment is that all these simplifications will radically reduce the administrative costs of participants by more than half, which equates to savings of around £272 million for CRC participants up to 2030. The Government are therefore satisfied that this order meets our objectives for simplification—namely, to optimise the projected energy efficiency improvements delivered by the CRC and to reduce its overall complexity. The simplified CRC will continue to deliver energy efficiency and carbon savings but at a significantly reduced administrative cost.
The Government have already committed to keep a close eye on the operation of the CRC and will review it in 2016. We will continue to monitor both its impact and the compliance costs of CRC participants so that our 2016 review is fully informed on both its impact and costs.
As the CRC is a UK-wide energy efficiency scheme, in addition to this order being laid before the UK Parliament it is also being laid and debated in the Scottish Parliament, the National Assembly for Wales and the Northern Ireland Assembly. If the order is approved by your Lordships’ House and the other place, the Scottish Parliament, the National Assembly for Wales and the Northern Ireland Assembly, a recommendation will be made to Her Majesty in Council to make the order in a subsequent meeting of the Privy Council. We envisage this being completed before the summer. I commend the order to the Committee.
Lord Grantchester
My Lords, I thank the Minister for her introduction to the order. I am glad that I am speaking to the simplified order in contrast to the prior order, and I hope that the Committee will not be detained very long.
The order coincides with the retirement of the government Chief Scientific Adviser, Professor Beddington. He argues that the evidence for climate change is unequivocal. The order implements the regulations to improve energy efficiency in organisations that are consumers of large amounts of electricity and, by improving energy efficiency, to reduce carbon emissions. The carbon reduction commitment scheme is the key driver for the UK to meet its domestic and international greenhouse emissions reduction targets. The climate change levy part of the policy instrument is levied on nearly all businesses that use electricity and gas.
The Minister has explained the over-burdensome nature of the original CRC order.
Lord Grantchester
The Minister explained the over-burdensome nature of the original CRC order and we agree with her. This simplified scheme is to be applauded, although there are a few concerns about the reduction of benefits as a consequence. Nevertheless, it is right that the Government proceed with the scheme. Despite cost-effective energy efficiency savings being available, the Carbon Trust reported as far back as 2005 that organisations’ emissions were not being reduced. Indeed, they have remained constant for the past 20 years, due to a lack of awareness at board and senior management level, a lack of financial incentives to reduce emissions and a lack of prestige associated with efficiency activity.
Generally, energy costs tend to be only 1% or 2% of operating costs for business. While I can confirm acceptance of the order today, I want to ask the Minister about one or two concerns arising from this simplified scheme. Since the scheme began in 2010, it has drawn considerable criticism for being too complex, burdensome, difficult to understand and costly to administer. It is good that the Government are bringing in a more practical scheme, but has something been lost in the translation?
While the memorandum explains that considerable savings will be made—a 55% reduction in overall administrative costs—it does not explain what percentage reduction in efficiency improvements and carbon emission reductions may result from the simplification. For example, it says that there is a reduction in fuels from 29 to two and that the scheme will cover only emissions generated from the consumption of electricity and gas. This is still important, but will the Minister confirm that the scheme will still capture a major percentage of the efficiency improvements targeted by the original scheme?
On this benefits side of the equation, there is a loss from the original scope of the order. The impact assessment puts this at around £183 million. The Secondary Legislation Scrutiny Committee also commented on this in its 33rd report. It is not clear from the Minister’s department’s reply to the questioning on the validity of the order, when set against such loss of benefits, whether this is due to double counting of benefits as a result of reducing the overlaps between CCL, CCA and EU ETS instruments. Will the noble Baroness explain whether this loss of benefit is per phase or a loss for the total scheme to 2039?
Lord Deben
My Lords, I declare an interest as chairman of the Climate Change Committee. I am pleased that we are looking to make such arrangements as simple as they can be. One of the most important things that we have to do is ensure that this very important business of making Britain able to meet the statutory target of an 80% reduction in emissions by 2050 is accomplished with as little harassment and difficulty as possible. When the original scheme was introduced, I criticised it because of its complication. We now all agree that it would have been better to make it less complex, but it was an important step that I am not undermining in any way.
I have a particular question for the Minister, the answer to which I found hard to discover in the documentation. It is about the half-hour meter. This is a boring technicality but it is very important. For reasons that no one has ever understood, the original system depended not just on the amount of energy used but also on whether one had a half-hour meter. The difficulty is that many firms with a half-hour meter use less energy than firms without a half-hour meter. More importantly, there is a competitive problem. Some companies that have them—restaurants, for example—are competing with other companies that do not. One is paying and the other is not. It may be my own ignorance and inability, but I have been unable to discover whether the new CRC Energy Efficiency Scheme Order will overcome this problem. I was promised by the then Minister in the House of Commons that this would be put right “when the opportunity arose”, which I think was the phrase used. I should very much like to understand whether that comes into the purview of this order, and if not, why not. Will we now put this right? With a Government who are very committed to competitiveness, it would be sad if this quirk in the system should continue to make things difficult.
Let me explain why I feel strongly about this. There are many organisations which, in the aggregate, meet the requirements of the CRC. It was very important to have an aggregated system, because, if we had not, we would not have reached out. I congratulate the former Government on recognising that, for example, franchisees had to be part of the system, otherwise there would have been a major disadvantage for other companies which were not so organised. However, the difficulty is that some franchised organisations have a clear advantage over others because of the half-hourly meter arrangement. I shall say something that I hope the Minister will not be upset about. When I inquired into this matter previously, it became quite clear that the only reason for it was none of the reasons which Ministers of both sides have proposed; it was just administrative convenience. It happens to be true that people think that this is a convenient way of doing it rather than the right way of doing it. I do not want to make it more complicated—nor do I want to get into names of particular companies—but I can think of two restaurant chains, one of which pays the CRC and the other does not, yet their customers and turnover in many of their individual restaurants are very similar. That does not seem to me something that we should allow in this structure. Therefore, I hope that the Minister will be able to reassure me that, under these arrangements, the half-hourly meter element will be removed and that we will go to a much more sensible system, which is a proper, basic amount of energy used on this narrower basis of gas and electricity. It would be de minimis arrangement, but one which did not discriminate between organisations.
Baroness Verma
My Lords, I welcome noble Lords’ support for the order. Whereas the previous order was very complex, I am pleased to say that I am bringing balance to the debate by trying to make this measure simpler. We have tried, through engagement with stakeholders, to ensure that we have much better informed and not excessively burdensome regulation for industry. We are trying to make sure that there is a reason to use CRC as a means of reducing carbon emissions.
The noble Lord, Lord Grantchester, asked a couple of very poignant questions, so I shall respond first to those and then go to those of my noble friend. The noble Lord asked why schools in England had been removed from the CRC. Due to the continued growth of academies and their independence from local government, the CRC is not the best mechanism to achieve energy efficiency across the English schools estate. The Government therefore decided to withdraw all state-funded schools in England from CRC participation and implement alternative measures to incentivise and support those schools in obtaining both energy cost and emission savings. However, that does not mean that schools will not partake; it just means that they will take a different route.
The noble Lord asked whether the benefits of the scheme would be reduced. The loss of emissions coverage is very small, being less than 5%. The key drivers—awareness, publication of data and the financial incentives arising from needing to buy allowances—will still be part of the scheme. As I said in the previous debate, we want continually to review what we are doing so that we get the best outcomes from these measures.
My noble friend Lord Deben asked about half-hourly metering. I welcome his support for the order and thank him for it. If the Committee will allow me, I shall take away my noble friend’s question and perhaps give him a much more detailed response—I shall ensure that the opposition Benches also have a copy. If I was to give him a half-hearted response now, it would not satisfy the Committee and certainly not my noble friend.
Overall, I am pleased that noble Lords have seen the benefits of simplification and the fact that it will reduce administrative costs to industry by quite a large sum. It also allows greater flexibility for industry to organise its own businesses as it sees fit. I welcome the support of noble Lords and commend the order to the Committee.