North East’s CRC simulation suggests firms will struggle to comply

The CRC Energy Efficiency Scheme (CRC) – formerly known as the Carbon Reduction Commitment – is a new 'cap and trade' mechanism, designed to improve energy efficiency in large, ‘low energy- intensive’ organisations such as supermarkets, water companies, banks, local authorities and all central Government departments.

The year-long simulation, involving around 30 public and private sector organisations, was run by energy consultancy TNEI Services on behalf of regional development agency One North East, with the aim of identifying potential problems in advance of the scheme’s introduction.

Darchem Engineering, part of the Esterline Group, was one of the businesses that took part in the scheme. Gary Jobling, its technical services manager, said: “The CRC simulation has had many benefits, not least the perspective it has given us on the information gathering required and where there are gaps in our current systems.”

It clearly makes sense for organisations to get to grips with what is required under the CRC before it is introduced, as penalities will be imposed on organisations for a range of compliance failures – such as failing to register with the scheme or submitting annual reports late – and in order to recoup the costs of participation, organisations will have to perform well in the energy performance league tables which are central to the scheme.

There are two things organisations can do to improve their position in the CRC performance league tables from day one of the scheme – one is to achieve the Carbon Trust Standard, the other is to install automatic meter reading (AMR).

Participation in the simulation scheme encouraged Northumbria Police to install AMR – “and this has been a lot speedier than it would have been without the simulation,” said Clare Swift, sustainable development advisor.

“It has also raised awareness about the need to manage energy use across the organisation and allowed the team to start compiling information at a relevant time and in an appropriate form.”

What the experiment in the North East has shown is that many organisations are still not prepared for the rigours of monitoring, reporting and reducing energy use.

Simulated carbon trading days revealed the need for organisations to have a CRC team in place to take joint responsibility for compliance – spanning senior management, finance, energy management and possibly the legal department because of the serious liabilities involved.

The role of the finance department was found to be particularly crucial as one of the major problems revealed by the simulation was how to account for the money required to buy the carbon allowances. In some cases this could be as much as £0.5 million, with serious implications for the organisation’s cashflow and profitability.

The importance of involving a wide range of disciplines, and particularly the finance department, in CRC compliance is an idea that has also been promoted by the Government-backed Carbon Trust.

“It is very important that businesses engage, not just their environment and energy people, but they ensure they have a broader set of skills looking at the CRC, including the finance department who are going to do the budgeting and auditing [...],” said Harry Morrison, general manager at the Carbon Trust Standard. “It is quite tricky how you deal with the CRC in the Profit & Loss, for example.”

Helen Nisbet, project manager for the CRC simulation at TNEI said: “The companies participating in this simulation have shown a foresight and understanding that this legislation needs to be considered seriously [...]

“We would urge all other companies and organisations that may be affected by the CRC not to underestimate the resourcing issues of measuring, managing and reporting carbon emissions. Ultimately there will be both financial and resourcing costs that need to be budgeted for.”

The Carbon Trust has issued guidance for finance directors on CRC compliance issues, which is available on its website.