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.