The end of CRC

The final reporting period for the Carbon Reduction Commitment Scheme (CRC) concluded in March this year. Qualifying companies now only have to manage the final elements of the scheme: ensuring they have purchased and surrendered sufficient allowances to finalise Phase 2 reporting.

The CRC scheme ran for eight years, from April 2010 to March 2019. It covered approximately 10% of the UK’s carbon emissions, and raised roughly £790 million annually for the exchequer.

Qualifying businesses

Qualification criteria for CRC Phase 2 was determined as organisations with at least one half-hourly meter using 6,000 megawatt hours or more of qualifying electricity. This was a simpler method of working out relevant organisations and was implemented following Phase 1 feedback that the system was too complex. The seemingly sensible criteria did a good job of identifying significant energy consumers with a test that was simple.

An issue arose however with qualification being considered only in the period April 2012 to March 2013, and then lasting for all subsequent years in the phase. As time went on, there was an increase in companies who qualified, but had subsequently sold off the (usually industrial) sites that made them qualify for the scheme. This left comparatively low energy users stuck in a scheme for which they were no longer suitable. The qualification criteria became less effective over time. We learnt that rolling qualification criteria for schemes helps to avoid this problem and keep qualifying members relevant.

The impact of ‘greening the grid’

The CRC scheme also changed significantly due to the “greening of the grid”. The government’s electricity conversion factors, which denote the amount of carbon dioxide equivalent emissions associated with consuming a fixed amount of electricity, fell approximately 15% year on year over the last three years of the scheme.

This meant that in three years the number of allowances required to cover a fixed amount of electricity, halved. Some members of the scheme were caught out by this, and held a large number of prepaid allowances which were no longer needed due to the drop in conversion factors that was not forecast. This also had a big impact on the total tax revenue generated by CRC, and if the scheme were to continue, we would expect this to be addressed in a review. We learnt that if part of a carbon scheme’s purpose is to raise tax, then there are factors that can unexpectedly influence this.

The future of compliance

Now the CRC scheme is closed, we see a new future opening for carbon compliance. The tax-raising component of CRC has been incorporated into the Climate Change Levy as an increased flat rate across business energy bills in the UK for firms who pay 20% VAT. This is charged per kWh of energy, and so tax revenues are easier to forecast and less likely to change. However, this has shifted the tax burden initially placed on high emitters to being evenly spread across a wider group of energy bills.

The reporting side of CRC has been followed by the new Streamlined Energy and Carbon Reporting (SECR) scheme. This has a larger footprint of approximately 11,000 qualifying firms, and the new qualifying criteria is attached to accounting standards which is both simple and applicable year on year. We welcome the increased attention on emissions that will be generated by the SECR scheme.

Talk to the EIC team

EIC can offer a full review of your organisation to assess your legal obligations and compliance status. We offer ESOS, SECR, Air Conditioning Inspections, Display Energy Certificates and much more, see our full suite of services here. We’ll provide you with a Compliance Report that will summarise our findings, explain the legislation, and outline your next steps.

Our in-house team includes qualified ESOS Lead Assessors and ISO 50001 Lead Auditors, as well as members of the Chartered Institution of Building Service Engineers (CIBSE), the Register of Professional Energy Consultants (RPEC), and the Energy Institute. Call us on 01527 511 757 or contact us here.

Net Zero UK

The action will require the UK to reduce net greenhouse gas emissions to nothing over the next 30 years. This is a more ambitious target than the previous, which was at least an 80% reduction from 1990 levels.

The decision follows the Net Zero report, by the Committee on Climate Change (CCC), which was commissioned by the government to reassess the UK’s long-term emissions targets. The report recommended the 2050 net zero target for the UK, while issuing a 2045 target for Scotland and a 95% reduction in greenhouse gases by 2050 for Wales.

Representatives of the Scottish and Welsh governments have already announced intentions for the nations to aim for these targets, with the Welsh government aiming to go further than the CCC advice; targeting net zero emissions no later than 2050.

Is this achievable?

The report by the Committee on Climate Change states that the net zero target is possible with known technologies, alongside behavioral and societal changes in people’s lives. The organisation has forecast that that the target is also within the expected economic cost that Parliament accepted when legislating the previous 2050 target under the Paris Agreement.

The report does come with the caveat that net zero is only possible if clear, sensible and well-designed policies to enable reductions in emissions are introduced across the country in a strict timeline. The CCC highlights that current policy would not meet even the previous target.

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Increase in carbon costs likely as EU cut supply of allowances

The European Commission has published the annual surplus indicator for the EU Emissions Trading System (ETS) Market Stability Reserve. As long as the surplus exceeds the level set in the legislation, a total of 397 million allowances will be placed in the reserve, 24% of the total permits currently in the market. This is an increase on the 2018 publication, which saw almost 265 million allowances placed into the reserve in January 2019. The allowances will be placed into the reserve in the period of September 2019 to August 2020.

 

Purpose of the Market Stability Reserve

The Market Stability Reserve (MSR) was introduced to address the large oversupply of carbon allowances that built up following the 2008 global financial crisis. This saw carbon prices reach all-time lows for an extended period of time and by the end of 2016, the European Emissions Trading Scheme had an oversupply of 1.7bn tonnes worth of EUAs. The oversaturation of allowances provided a weaker incentive to reduce emissions.

The MSR will see 900 million allowances, which were removed between 2014 and 2016, transferred to the Reserve, rather than be auctioned in 2019-20. After this, unallocated allowances will also be transferred to the reserve.

Each year, the Commission will continue to publish the total number of allowances in circulation by 15 May. This will allow them to examine whether more allowances should be placed into the reserve or whether allowances should instead be released. This will allow the Commission to better regulate the allowances available.

 

An impact to carbon prices

The restriction of carbon allowances as part of the Market Stability Reserve has been the cause of substantial price increases since 2017. The cost of carbon is currently at €26/tCO2e, having doubled in value year-on-year.

The impact of further allowances placed in the reserve is likely to see continued price rises, as the MSR continues to restrict the availability of supply to the market. The introduction of the reserve caused prices to rise from €4 to over €25 in eighteen months. With the volume of allowances into the EU ETS system remaining tightly restricted, there is the likelihood of further price rises, notably towards the all-time high of €30/tCO2e, last seen in 2008, shortly after the EU ETS was created.

A further increase in carbon prices, particularly if prices were to break to new highs at over €30/tCO2e, would provide a strong bullish signal to the wider energy mix, and likely result in higher wholesale gas and power prices.

 

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Updates to the SECR Scheme

The Streamlined Energy and Carbon Reporting Scheme (SECR) came into force at the start of this month. Quoted companies and large unquoted companies and LLPs are affected, and will now be required to make a public disclosure within their Directors’ Annual Report of their UK energy use and carbon emissions.

 
Over the last few months the ETG (Emissions Trading Group) have been consulting with various parties and collating feedback and queries regarding the guidance for the scheme. As a result, a number of minor updates have been made to the SECR section (Chapter 2) of the Environmental Reporting Guidance.

 

A guide to the updates

All of the updates can be found in Chapter 2 of the Environmental Reporting Guidance.

Below is a summary of the changes:

  • Page 14, 20, 36 – hyperlinks for ISO 14001, BS 8555, ISO 14064-3 and ISO 14064-1 have been updated.
  • Page 26 – reference to public sector has been expanded (first paragraph and footnote 22) and also for charitable organisations (second bullet point).
  • Page 26 – new paragraph inserted to ensure that guidance is not seen as a substitute for the SECR Regulations.
  • Page 30 – reference to corporate group legislation has been expanded (sections 1158 to 1162 of Companies Act 2006) in the last paragraph of section 2.
  • Page 33 and 39 – amended reference to NF3 to reflect that it is not currently listed as a direct GHG in section 92 of the Climate Change Act.
  • Page 45 – footnote 39 referencing Government consultation published on 11 March 2019 on the recommendations made by the Independent Review of the Financial Reporting Council.
  • Pages 50-56 – changes to reporting templates to recommend grid-average emission factor is included as the default by those organisations that choose not to dual report.


Our view on the changes

These updates provide useful clarification on outstanding queries raised by EIC such as dual reporting of electricity. Dual reporting remains voluntary but doing so allows companies to demonstrate responsible procurement decisions. For example, those selecting to procure electricity from renewable sources with a lower emissions factor can demonstrate this within their energy and carbon report if they choose to dual report.

EIC work closely with the ETG and BEIS to help the group reach key decisions regarding carbon compliance scheme development and implementation, including SECR, and will continue to do so. As a result we are able to ensure all of our customers receive the most up-to-date information and we are always on hand to support with SECR compliant reporting.

If you’d like to know more about the Streamlined Energy and Carbon Reporting scheme take a look at my previous blog 7 facts about SECR. Alternatively, you can download our SECR factsheet here.

Energy Policy Dates for 2019

As we look ahead to 2019, we’ve outlined key energy industry changes and dates to take action by.

EU ETS – Market Stability Reserve (MSR)

1 January – MSR Implementation

The European Commission is introducing a solution to the oversupply of allowances in the carbon market, which will take effect in January.

EU carbon allowances, or European Allowances (EUAs) serve as the unit of compliance under the European Emissions Trading Scheme (EU ETS). In response to a build-up of these allowances, following the 2008 global financial crisis, the European Commission has introduced a long-term solution known as the Market Stability Reserve (MSR). With Brexit looming, there’s uncertainty as to whether these changes will affect the UK.

 

Energy Price Cap

1 January – Price Cap implementation

Price protection for 11 million customers on poor value default tariffs will come into force on 1 January 2019. Ofgem has set the final level of the price cap at £1,136 per year for a typical dual fuel customer paying by direct debit.

When the price cap comes into force suppliers will have to cut the price of their default tariffs, including standard variable tariffs, to the level of or below the cap, forcing them to scrap excess charges. The cap will save customers who use a typical amount of gas and electricity around £76 per year on average, with customers on the most expensive tariffs saving about £120. In total, it is estimated that the price cap will save consumers in Great Britain around £1 billion. Read more here.

 

Ofgem’s Targeted Charging Review (TCR) – the end of Triad season?

4 February – Consultation conclusion

Ofgem has launched a consultation, due to conclude on 4 February 2019, into how the costs of transporting electricity to homes, public organisations, and businesses are recovered. Proposed changes could remove the incentive for Triad avoidance.

Costs for transporting electricity are currently recouped through two types of charges:

  • Forward-looking charges, which send signals to how costs will change with network usage
  • Residual charges, which recover the remainder of the costs

In order to ensure that these costs are shared fairly amongst all users of the electricity network, Ofgem are undertaking a review of the residual network charges, as well as some of the remaining Embedded Benefits, through the Targeted Charging Review (TCR). Ofgem are exploring the removal of the Embedded Benefit relating to charging suppliers for balancing services on the basis of gross demand at the relevant grid supply point. This is important as it would eliminate the incentive of Triad avoidance.

 

Brexit

29 March – Scheduled date to leave the EU

Whilst not a specific energy policy announcement, the UK’s departure from the EU is a significant event that has raised a lot of questions concerning UK energy security.

We put together a Q&A on how Brexit may impact the UK energy industry and climate change targets. Read more here.

 

Closure of the Feed-in Tariff (FiT) scheme

31 March – Scheme Closes

The Government has confirmed plans to remove the export tariff for solar power, which currently provides owners of solar PV panels revenue for excess energy that they generate. This will coincide with the closure of the Feed-in Tariff (FiT) scheme.

The FiT scheme was introduced in April 2010 in order to incentivise the development of small scale renewable generation from decentralised energy solutions such as solar photovoltaics (PV), wind, hydro, anaerobic digestion and micro Combined Heat and Power (CHP). Generators were paid a fixed rate determined by the Government, which varied by technology and scale.

The scheme will close in full to new applications from 31 March 2019, subject to the time-limited extensions and grace period.

 

Streamlined Energy and Carbon Reporting (SECR)

1 April – SECR implementation

Streamlined Energy and Carbon Reporting (SECR) is on the way, due to come in to effect from 1 April 2019. The introduction of this new carbon compliance scheme aims to reduce some of the administrative burden of overlapping schemes and improve the visibility of energy and carbon emissions when the CRC scheme ends.

EIC can help you achieve compliance. Read more about SECR in our blog, or visit our website.

 

UK Capacity Market

Early 2019

The UK Capacity Market is currently undergoing a temporary suspension, issued by the European Court of Justice (ECJ), on the back of a legal challenge that the auction was biased towards fossil fuel generators.

The ECJ’s decision means that payments made under the Capacity Market (CM) scheme will be frozen until the UK Government can obtain permission from the European Commission to continue. In addition, the UK will not be allowed to conduct any further CM auctions for energy firms to bid on new contracts.

The UK government has since iterated that it hopes to start the Capacity Market as soon as possible and intends to run a T-1 top-up auction next summer, for delivery in winter. This is dependent on the success of a formal investigation to be undertaken by the European Commission early in the New Year.

 

Spring Statement and Autumn Budget

The UK Government’s biannual financial updates are always worth looking out for.

The Spring Statement will be delivered in March and the more substantial Autumn Budget is scheduled for October. The 2018 budget had a very heavy focus on Brexit, with very little to say concerning energy policy. It is likely this will be the case for the Spring Statement and potentially going forward.

 

Energy Savings Opportunity Scheme (ESOS)

5 December – ESOS Phase 2 compliance deadline

ESOS provides a real chance to improve the energy efficiency of your business, on a continual basis, to make significant cost savings.

In Phase 1 of ESOS we identified 2,829 individual energy efficiency opportunities, equivalent to 461GWh or £43.9m of annual savings across 1,148 individual audits. Our team also helped over 300 ESOS Phase 1 clients avoid combined maximum penalties of over £48million.

With EIC you can achieve timely compliance and make the most of any recommendations identified in your ESOS report.

To find out how we can help, contact us on 01527 511 757, email esos@eic.co.uk, or visit our website.

 

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Our Market Intelligence team keep a close eye on the energy markets and industry updates. For the most timely updates you can find us on Twitter and LinkedIn Follow us today.

Visit our website to find out more about EIC Market Intelligence and how we keep our clients informed at a frequency to suit them.

EU temporarily suspend UK carbon permit processes

EU temporarily suspend UK carbon permit processes

The European Commission has implemented a “no-deal” Contingency Action Plan across specific sectors to help mitigate the continued uncertainty in the UK surrounding the ratification of the Withdrawal Agreement.

The main talking point, regarding energy policy, is the Commission’s plans for the UK’s access to the EU Emissions Trading Scheme (EU ETS).

EU carbon allowances, or European Allowances (EUAs) serve as the unit of compliance under the EU ETS. EUAs are auctioned for use by energy-intensive industries that fall under the scheme, namely power generators, oil refiners, and steel companies, entitling them to emit one tonne of CO2.

How this affects the EU ETS in the UK

The Commission has adopted a number of actions in the area of EU climate legislation to “ensure that a “no-deal” scenario does not affect the smooth functioning and the environmental integrity of the Emissions Trading System.”

This involves a decision to temporarily suspend the free allocation of emissions allowances, auctioning, and the exchange of international credits for the UK effective from 1 January 2019.

The Commission has also elected to allow an appropriate annual quota allocation to UK companies for accessing the EU27 market, until 31 December 2020. This will be supplemented through regulation to ensure that the reporting by companies differentiates between the EU market and the UK market to allow a correct allocation of quotas in the future.

The full Contingency Action Plan can be read here.

Stay informed with EIC insights

Our Market Intelligence team keep a close eye on the energy markets and industry updates. For the most timely updates you can find us on Twitter and LinkedIn Follow us today.

Visit our website to find out more about EIC Market Intelligence and how we keep our clients informed at a frequency to suit them.

ESOS Phase 2 – stay ahead of the deadline

The compliance date for ESOS Phase 2 is fast approaching. Make sure you’re on track to meet the 5 December 2019 deadline.

With under a year to ensure your compliance with ESOS Phase 2, it’s critical to make sure you’re ready to complete all compliance activity within the next 12 months.

The qualification date is 31 December 2018. This means that if you know your business will fit the ESOS criteria, you can start some compliance activities now.

ESOS applies to large organisations, classified as those with:

  • More than 250 employees or;
  • A turnover of more than €50,000,000 and an annual balance sheet total of more than €43,000,000 or;
  • Part of a corporate group containing a large enterprise.

ESOS compliance can help you get a head start with upcoming Streamlined Energy and Carbon Reporting (SECR) compliance – find out more here.

 

Three reasons to comply with ESOS Phase 2

1 – avoid paying over the odds

Many organisations delayed the start of their compliance journey until close to the Phase 1 deadline. This led to a squeeze in service provision, leading many suppliers to increase the cost of their services. Environment Agency (EA) data shows a significant spike in compliance notifications around one month prior to the 5 December 2015 deadline. What’s more, 33% of all who complied by July 2016, did so in the final week of Phase 1. A further 30% of notifications were logged by the end of January 2016.

Had demand for ESOS compliance support been smoothed over the course of 2015, costs may have been more reasonable as the deadline approached.

The lesson here is not to wait until the final months of 2019 to get started with Phase 2.

 

2 – ESOS Lead Assessor numbers are limited

There were almost 950 ESOS Lead Assessors accredited across 14 approved registers by the Phase 1 deadline. BEIS suggests there were enough Lead Assessors to help organisations reach compliance. By 5 December 2015 there were 7.3 qualifying undertakings per Lead Assessor. This is based on an estimated 6,933 organisations that met the ESOS qualification criteria.

However, this doesn’t take into account the Lead Assessors that become accredited purely to certify their own organisations alone. So, in fact, the 900+ Lead Assessors would’ve been spread far more thinly. There’s also a broad scope of the size of organisations (by employee size) and number of sites per qualifying business, meaning not every organisation would have been as easy, or as quick, to assess as another.

Our advice would be to seek guidance from compliance partners you already know who have a proven track record with Phase 1 compliance.

 

3 – Acting now enables you to seize your energy saving opportunity

Delaying compliance for as long as possible means by the time you comply you’ll simply be ticking a box and more than likely paying an unreasonably high cost.

Acting now allows your organisation to really invest in the compliance process by ensuring you have strong and accurate reporting of your energy consumption data. Accurate data is the start of being able to visualise and truly understand when, where, and how you use energy and, more importantly, how you can improve your efficiency to increase savings. EIC can assist you with implementing any energy saving measures identified as part of your ESOS recommendations report. We’ll also ensure these measures work in harmony with each other as part of a bespoke, joined-up Strategic Energy Solution.

 

Why make EIC your trusted compliance partner?

Whether it’s ESOS, SECR, or CCAs, EIC will work with you to reach compliance deadlines and targets. In Phase 1 of ESOS our team identified 2,829 individual energy efficiency opportunities, equivalent to 461GWh or £43.9m of annual savings across 1,148 individual audits. We also helped over 300 ESOS Phase 1 clients avoid combined penalties of over £48m, based on maximum fines.

With under a year until the ESOS Phase 2 deadline, we’re urging you to make a start with compliance. To find out more about how we can help you comply, call us on 01527 511 757 or email esos@eic.co.uk

Update on EU ETS

The Government has directed the Environment Agency (EA) to proceed with preparations for the next phase of emissions trading which will operate from 2021 – 2030. Due to ongoing Brexit negotiations the full detail of the future scheme is not yet known. However, one thing we do know is that NIMs will take effect from January.

In preparation for future reporting, the EA has notified participants in EU Emissions Trading Scheme (ETS) Phase 3 that the data collection exercise, National Implementation Measures (NIMs), will take place between January 2019 and September 2019.

 

What is the EU ETS?

The European Union Emissions Trading Scheme started in 2005 and is the world’s largest carbon-trading scheme. It was introduced to help the EU meet its targets under the Kyoto Protocol which stipulates an 8% reduction in greenhouse gas emissions from 1990 levels. Organisations that meet the qualification criteria – typically large combustion sector and manufacturing processes – are obligated to take part.

The scheme works on a ‘cap and trade’ basis, so there is a ‘cap’ or limit set on the total greenhouse gas emissions allowed by all participants. This cap is converted into tradable emission allowances and provides an incentive for installations to reduce their carbon emissions, giving them the opportunity to sell their surplus allowances.

Participants in the carbon market are allocated traded emissions allowances via a mixture of free allocation and auctions. For each one allowance, the holder has the right to emit one tonne of CO2 (or its equivalent). Those covered by the EU ETS must monitor and report their emissions each year and surrender enough allowances to cover their annual emissions.

 

What are NIMs?

There is a requirement to benchmark participants in the ETS to ensure a fair and equitable distribution of free carbon allowances. The NIMs is a method of benchmarking the emissions of participating installations.

The NIMs data collection requires gathering energy or production data over four years (2014 – 2018), which must be collated, verified by an approved body, and submitted by 31 May 2019.

 

EIC is here to help

We’re experienced in managing EU ETS compliance across a broad range of sites and industries. We’ve also worked with the Environment Agency in the delivery of legislative compliance across all carbon schemes and systems, including ESOS.

We can assist with your EU ETS and NIMs requirements; we’ll review the data held on record and complete the necessary submission to your appointed verifier and the verified data to the Environment Agency. We would also deal with any correspondence between the verifier, Environment Agency, and your organisation.

To find out more about NIMS, download our factsheet here or email info@eic.co.uk.

An insight into SECR

SECR will require all quoted companies, large UK incorporated unquoted companies, and limited liability partnerships (LLPs) to report their energy use and carbon emissions relating to gas, electricity, and transport, and apply an intensity metric, through their annual Directors’ reports.

 

Summary of the Government’s proposed SECR framework

From April next year, large organisations in the UK will need to comply with the SECR regulations. The new scheme is part of the Government’s reform package.

Its aim is to reduce some of the administrative burden of overlapping carbon schemes and improve visibility of energy and carbon emissions. As such, it will be introduced to coincide with the end of the current Carbon Reduction Commitment (CRC) Energy Efficiency Scheme.

SECR will build on the existing mandatory reporting of greenhouse gas emissions by UK quoted companies and the Energy Savings Opportunity Scheme (ESOS).

 

Who needs to comply with SECR?

SECR qualification will follow the Companies Act 2006 definition of a ‘large organisation’, where two or more of the following criteria apply to a company within a financial year:

  • More than 250 employees.
  • Annual turnover greater than £36m.
  • Annual balance sheet total greater than £18m.

There is no exemption for involvement for energy used in other schemes – e.g. Climate Change Agreements (CCAs) or EU Emissions Trading Scheme (ETS).

 

What are the reporting requirements?

From 1 April 2019, affected organisations will be required to:

  • Make a public disclosure within their annual directors’ report of energy use and carbon emissions.
  • Report using a relative intensity metric e.g. tCO2/number of employees.
  • Provide a narrative on energy efficiency actions taken during the reporting period.

Reporting will align with an organisation’s financial reporting year.

 

Is anyone exempt from SECR?

Yes – those exempt from complying with SECR include:

  • Public sector organisations.
  • Organisations consuming less than 40,000kWh in the 12-month period are not required to disclose SECR information.
  • Unquoted companies where it would not be practical to obtain some or all of the SECR information.
  • Disclosure of information which Directors think would be seriously prejudicial to interests of the company.

 

There seem to be similarities to ESOS – can ESOS compliance help with SECR?

Yes. Though ESOS and SECR are separate schemes, and will continue as such, the information from your ESOS compliance can be used to support SECR reporting.

 

Where do I start with compliance?

The detailed guidance for SECR will soon be published. EIC can assist with compliance as well as providing bespoke reporting to ensure that you have real visibility of your energy and carbon emissions both at organisational and site level.

If you would like to know more about SECR, what it means for your business, and how EIC can support you with compliance contact us on 01527 511 757 or email SECR@eic.co.uk.

What impact will Brexit have on UK climate change targets?

The energy sector in the UK had already seen significant changes with the Energy Act 2011 and various proposals for reform of the electricity market. The potential impacts of Brexit on the UK and global economy could be far-reaching. However, the direct impact on the energy industry is likely to be more muted.

 

How will Brexit impact on the carbon market and the EU ETS?

The Government has published plans for the implementation of a UK carbon tax in the case of a ‘no-deal’ Brexit.

Under a ‘no-deal’ scenario, the UK would be excluded from participating in the EU Emissions Trading Scheme (ETS). This would mean current participants in the EU ETS who are UK operators of installations will no longer take part in the system.

In this instance, the UK Government will initially meet its existing carbon pricing commitments through the tax system. A carbon price would be applied across the UK, with the inclusion of Northern Ireland, starting at £16/tCO2, marginally less than the current EU ETS price, maintaining the level of carbon pricing across the UK economy post-Brexit.

The tax would be applied to the industrial installations and power plants currently participating in the EU ETS from 1 April 2019.

The House of Commons Business, Energy and Industrial Strategy (BEIS) Committee has strongly recommended remaining in the EU ETS at least until the end of Phase III in 2020.

The UK’s 5th carbon budget, adopted in 2016, assumes continued participation in the EU ETS, and will need to be altered if the UK leaves the EU ETS.

 

Will Brexit affect the UK’s climate change targets?

The UK’s climate change targets are expected to continue unaffected by whatever Brexit deal is reached. The Climate Change Act 2008 established that such goals are undertaken on a national level.

However, there are several international issues in this area which will need to be settled. The UK’s emissions reduction target forms part of the EU target under the Paris Agreement and this will need to be withdrawn. The UK would also need to submit its own Nationally Determined Contribution under the United Nations Framework Convention on Climate Change (UNFCCC) processes.

 

What about renewable energy?

After Brexit, the UK will no longer be obligated by renewable energy targets as part of the EU Renewable Energy Directive. Additional freedom from State Aid restrictions has the potential to allow the Government to shape renewable energy support schemes.

The development of large-scale projects may be impacted by the availability of funding from EU institutions such as the European Investment Bank (EIB). However, renewable and low-carbon energy will remain a focal point of UK energy policy post-Brexit, with national and international decarbonisation obligations unaffected by their relationship with the EU.

As part of the European Union (Withdrawal) Act 2018, EU legislation will be initially transposed into UK law from 29 March 2019. For some elements of the EU law, the UK will need to reach an agreement with the EU in order to maintain the status quo.

 

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Autumn Budget light on energy

During the Chancellor’s hour-long speech the overall focus was on tax and spending, with little said about climate change. What energy-related announcements were made?

 

Climate Change Levy

CCL is a tax on energy delivered to non-domestic users within the UK. Businesses participating in Climate Change Agreements (CCAs) can avoid up to 90% of this levy by investing in agreed energy efficiency and emissions reduction measures.

This latest Budget announced upcoming changes to CCL rates. The Government’s ongoing efforts to rebalance the main rates paid for corporate gas and electricity use will see the two prices brought more in line with each other.

The electricity rate will be lowered in 2020-21 and 2021-22, whilst the gas rate will be increased in 2020-21 and 2021-22 so that it reaches 60% of the electricity main rate by 2021-22. Other fuels, such as coal, will continue to be aligned with the gas rate.

 

The impact to your energy bills

The increase in revenue for the Treasury will come as a direct result of higher energy bills for businesses. An increase in the CCL for 2019 was already expected as a result of the closure of the Carbon Reduction Commitment (CRC).

 

Carbon Price

Carbon Price Support (CPS) is applied to the power sector in the UK, with the exclusion of Northern Ireland, and has been a key driver in the reduction of coal usage in the UK fuel mix.

The Government has decided to maintain the UK’s carbon tax at £18 per tonne of CO2, until April 2021. However, the budget provides plans for the Government to reduce the CPS from 2021-22 if the total carbon price remains elevated.

In addition to this, the Government has published plans for the implementation of a UK carbon tax in the case of a ‘no-deal’ Brexit. Under a ‘no-deal’ scenario, the UK would be excluded from participating in the scheme. This would mean current participants in the EU ETS who are UK operators of installations will no longer take part in the system.

In this instance, the Government will initially meet its existing carbon pricing commitments through the tax system. A carbon price would be applied across the UK, with the inclusion of Northern Ireland, starting at £16 per tonne of CO2, marginally less than the current EU ETS price, maintaining the level of carbon pricing across the UK economy post-Brexit. The tax would be applied to the industrial installations and power plants currently participating in the EU ETS from 1 April 2019.

 

A freeze on fuel duty

Already announced ahead of the Budget, the Government has promised that fuel duty will be frozen for the ninth year in a row. This will see the tax on fuel, currently 57.95p per litre of petrol, diesel, biodiesel, and bioethanol, remain fixed over the winter period.

 

Enhanced Capital Allowances

The Budget also included changes to Enhanced Capital Allowances (ECAs), which are designed to encourage UK businesses to invest in high-performance energy efficiency equipment. The Government plans to end ECAs and First Year Tax Credits for technologies on the Energy Technology List and Water Technology List, from April 2020. The Government believe these ECAs add unnecessary complexity to the tax system and that there are more effective ways to support energy efficiency.

There is no new funding in place yet, but savings will be reinvested in an Industrial Energy Transformation Fund, to support significant energy users to cut their energy bills and help transition UK industry to a low carbon future.

The Government will extend ECAs for companies investing in electric vehicle charge points to 31 March 2023. This is part of the Government’s ambition for the UK to become a world-leader in the ultra-low emission vehicle market.

 

What about renewable energy?

Despite the recent landmark ‘1.5C report’ from the Intergovernmental Panel on Climate Change (IPCC), the Budget was very light on details concerning climate change and the environment. There were no announcements within the Budget to encourage new investment in renewable energy in the UK, despite industry calls to support new onshore wind and solar.

Leading renewable developers have previously urged the Government to clear a path for subsidy-free onshore wind farms, allowing developers to compete for clean energy contracts. Cost projections, published by the Department for Business, Energy and Industrial Strategy (BEIS), show that onshore wind is currently the cheapest power source available.

 

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The future of the carbon market beyond Brexit

EU carbon allowances are bought and sold as part of the European Emissions Trading Scheme (EU ETS). Currently the UK is part of the EU ETS, but continued participation is contingent on a deal with the European Union.

 

What are carbon allowances?

EU carbon allowances, or European Allowances (EUAs) serve as the unit of compliance under the European Emissions Trading Scheme (EU ETS). EUAs are auctioned for use by energy-intensive industries that fall under the scheme, namely power generators, oil refiners, and steel companies, entitling them to emit one tonne of CO2.

The EU ETS works on the ‘cap and trade’ principle. A limit has been set on the amount of EUAs made available, capping the total amount of greenhouse gases that can be emitted by installations that fall under the system. As the cap decreases with time, total emissions fall.

These emission allowances work as tradeable goods, allowing companies to receive or buy them. After each year a company must use enough allowances to cover all its emissions, otherwise they will be heavily fined. Spare allowances can be saved to cover future needs or sold onto other companies that are short of allowances.

 

Overcoming the oversupply

The 2008 global financial crisis and the recession that followed saw a large oversupply of carbon allowances build up, which in turn saw prices reach all-time lows for an extended period. At the end of 2016 the EU ETS had an oversupply of 1.7bn tonnes worth of EUAs, which significantly weakened the incentive to reduce emissions.

In response, the European Commission has introduced a long-term solution known as the Market Stability Reserve (MSR), which will begin operations in January 2019. The purpose of the MSR will be to address the current surplus of allowances and to improve the system’s resilience to major impacts by adjusting the supply of allowances to be auctioned.

This will see 900 million allowances, which were back-loaded between 2014 and 2016, transferred to the Reserve, rather than be auctioned in 2019-2020. After this, unallocated allowances will also be transferred to the Reserve.

To improve regulation, the Commission will publish the total number of allowances in circulation by 15 May each year. They will then examine whether more allowances should be placed into the Reserve or released.

 

 How will Brexit affect these plans?

With Brexit looming, there’s uncertainty as to whether these changes will affect the UK. Under current plans the UK will remain a member of the EU ETS until at least 2020, almost a full year after its scheduled departure from the EU in March 2019.

Experts have warned that exiting the scheme before 2020, in the middle of an ETS trading phase, would cause disruption for both UK businesses and EU firms. However, staying within the scheme is contingent on a deal with the EU, something which the Energy and Climate Change Minister, Claire Perry, has acknowledged is yet to be formally agreed with EU policymakers.

 

What if there’s no deal?

Under a ‘no deal’ scenario, the UK would be excluded from participating in the scheme. This would mean current participants in the EU ETS who are UK operators of installations will no longer take part in the system. The UK government plans to remove the requirements relating to the surrender of emissions allowances as, post-Brexit, the European Commission will invalidate any allowances issued by the UK in 2019, such that they would have no value on the carbon market.

In this instance, the UK government will initially meet its existing carbon pricing commitments through the tax system, taking effect in 2019. A carbon price would be applied across the UK, with the inclusion of Northern Ireland.

 

Stay informed with EIC

Further details on how the Government intends to apply this carbon price will be covered in next week’s Budget. For the most timely updates you can find us on Twitter. Follow @EICinsights today.