How will CRC Affect Your Reputation and Cashflow?
Property owners and occupiers now face a much heavier financial burden than previously anticipated as a result of the changes to the Carbon Reduction Commitment Energy Efficiency Scheme ("CRC") announced in the government's recent spending review. CRC was designed to be revenue neutral to the government, with the money generated from the scheme being recycled back to those organisations obliged to buy CRC allowances related to their CO2 emissions. Now, and until such time (if ever) that CRC is fully implemented, the money will be used to support the public finance.
The deadline for registering for the first phase of the scheme was 30 September 2010. Any organisation which bought at least £500,000 worth of electricity through its half hourly electricity meters during 2008 should now have registered online with the Environment Agency as a full participant. CRC participants will have planned to buy their first allowances at a fixed price of £12 per tonne of CO2 in the proposed sale in April 2011 and expected to receive a "recycling payment" of between 90% and 110% of the cost of those allowances in October 2012. They now face buying two years worth of allowances in the delayed sale which will take place in April 2012 and can no longer expect any part of this to be refunded. In the initial fixed price phase a participant who just meets the qualification criteria is likely to have to spend £38,000 per year on allowances but the figure could be much higher if its business is more energy intensive. At the time of writing, we are waiting for clarification of whether recycling payments are suspended or completely scrapped.
The scheme aims to make large businesses more energy efficient and to use less energy. The qualification criteria relate to electricity use but once you are in the scheme you have to buy allowances for all the energy you use including gas and other fuels. One of the main drivers of the scheme is its impact on reputation, with the Environment Agency due to publish an annual league table showing how well participants have performed. The most significant factor which determines where you are ranked in that league table is whether you are able to reduce the amount of energy you use year on year. As well as being used to name and shame, the league table would have been used to determine the bonus or penalty applied to your recycling payment. It has now been confirmed that the league table will continue to be published even though it is not currently required to determine recycling payments. This reinforces the scheme's reliance on using reputation to influence the behaviour of large businesses.
In addition to the cost of buying allowances and the potential damage to reputation in your business area by performing badly in the league table, failure to comply with CRC requirements will attract a wide range of criminal and civil sanctions. For example, not submitting an annual CRC report on time will attract a £5,000 fine with increments of £500 for each further day of delay, rising to £45,000. The penalty for not buying and surrendering enough allowances will initially be £40 per tonne of CO2. These penalties are expected to rise over time.
Generally it is the case that the person consuming energy supplies is responsible for buying CRC allowances but there is a specific exception when it comes to landlords and tenants. The government considers that landlords can influence their tenants' behaviour and has made landlords responsible for buying CRC allowances in respect of all the energy they supply to their tenants.
Landlords are unlikely to be able to recover the associated CRC costs through the service charge of existing leases and it will not be easy to introduce CRC provisions into a lease subject to a renewal under the Landlord and Tenant Act 1954. Any new lease negotiations will have to take account of how costs and any available recycling payments are allocated between the parties, the wider impact this may have on the attractiveness of premises in the market, the effect on rent review and whether the landlord might need to control other aspects of the tenant's behaviour through the lease in order to reduce energy consumption. Landlords will need to have regular discussions with their tenants in order to encourage a more energy-efficient use of their buildings. Any tenants whose leases provide for them to pay the cost of CRC allowances and suggest that they will receive a share of the recycling payments will be very disappointed. In the absence of recycling payments, a new debate has been generated about whether CRC can now be classified as a tax. If CRC is viewed as a tax, landlords may be much more willing to try to recover the cost of buying allowances from their tenants under the existing ‘outgoings' clause of leases.
Industry consensus is that there should be a standard approach in leases but unfortunately there is still no agreement as to what that approach might be. The worst outcome would be a range of approaches which might further reduce the liquidity of the property market.
It is vital that all those involved in the property industry are aware of the scheme and its implications, in particular how it will affect the drafting of leases and what to consider when negotiating the sale or purchase of properties or businesses. The loss of recycling payments is unlikely to be the last word on the scheme. The Environment Agency has suggested that further public consultation and legislation will follow.
John McGeough, Partner
Commercial Property Practice
email [email protected]
tel 020 7591 3382
Abigail Mitchell, Solicitor
Commercial Property Practice
email [email protected]
tel 020 7591 3360