Inevitably, those organisations participating in the Carbon Reduction Commitment Energy Efficiency Scheme (CRC EES) will incur a number of costs. In addition to the obvious fines and penalties for non-compliance or failing to deliver the required carbon savings there will also potentially be a need to purchase new technologies. Administration costs and, perhaps, consultancy will also swell the CRC bill.

Overall, though, the scheme has the potential to save a considerable amount of money through increased energy efficiency, possibly generating additional bonus payments for those organisations that perform particularly well in this area.

Nevertheless, all organisations will wish to minimise the cost of the CRC EES and other energy-saving initiatives.

Get the data right and avoid fines

Clearly the first step is to avoid fines by ensuring that you register on time. There are also additional penalties for submitting annual reports late, submitting incorrect data and submitting an incomplete or out-of-date evidence pack, as follows:

  • Late submission: £5,000 fine plus £500 per day up to a maximum of 40 days, the total accumulated daily rate fine is then doubled at the end of the 40 days
  • If annual report is still not submitted after 40 days from the deadline, an emissions amount will be determined by an administrator and doubled to form the basis of allowances that must be purchased
  • Incomplete or out-of-date evidence pack: £5 per tonne of allocated allowances

Managing allowances

The introductory phase of the scheme began on 1st April 2010 and will run through to 31st March 2013, though no allowances will be sold until the end of the first year. These allowances will be fixed at £12 per tonne and organisations can buy allowances for previous years and bank them for future years. Quantities will be unlimited but can’t be banked beyond the end of this first phase – namely 31st March 2013. Organisations will not be allowed to borrow allowances from future years.

There is also a recycling element to the scheme to reward those organisations that perform well in reducing carbon emissions. However, there will be a six month gap between buying allowances in April and the bonuses (or penalty adjustments) in October of the same year, so this has implications for cash flow.

From 1st April 2013 the situation changes and there will be an auction-based trading mechanism for allowances, with sealed bids.

Carrot and stick

The CRC EES will operate a bonus and penalty scheme, based on position in the league tables. In the first year the only indicator of performance will be the early action metric, which will then contribute 40% in the second year, 20% in the third year and will be phased out after that.

In parallel, the absolute metric will grow in importance during this time, rising to 75% by the fourth year. The remaining 25% from year 4 onwards will be based on the growth metric.

These metrics will be used to determine position in the league tables. From the fifth year, those in the top half of their league table will receive a bonus, while the remainder will be penalised. These bonuses and penalties will increase year on year to further encourage efficiency improvements and it is likely that the actual percentages will be adjusted as the scheme evolves.

Recycling payments

Revenue recycling payments will be calculated from two elements. The first of these is a set payment based on what proportion your emissions form of the total CRC emissions in the first year. The Department of Energy and Climate Change (DECC) gives the following example to clarify this:

“For example, if Organisation X has emissions of 100 tonnes of CO2 in 2010/11 and the total emissions from all participants in 2010/11 is 10,000 tonnes of CO2 then Organisation X’s share is 1%. The basis for each future recycling payment to Organisation X will therefore be 1% of the total revenue raised each year.”

This is then adjusted by a bonus or penalty payment based on the companys position in the league table. The higher the league table, the bigger the bonus. Organisations that improve more than 'average' spend less each year on allowances and receive a larger fraction of the recycling pot, so receive a double financial benefit.