LOW CARBON BUSINESS REGULATION AND ENTREPRENEURSHIP

1. N.K. Tovey (杜伟贤) M.A, PhD, CEng, MICE, CEnv Н.К.Тови М.А., д-р технических наук Energy Science Director CRedProject HSBC Director of Low Carbon Innovation NBS-M009 2009 LOW CARBON BUSINESS REGULATION AND ENTREPRENEURSHIP Recipient of James Watt Gold Medal 1 1 1

2. Low Carbon Regulation Covered over 5 sessions: Some topics will take more than 1 session, some will be part of session only. 2 • Carbon Reduction Commitment • Building Regulations • Code for Sustainable Homes • Regulation in Electricity Supply • Renewable Electricity Options • The Renewable Obligation • Feed-in Tariffs • The Renewable Transport Fuel Obligation • The Future: Integrated Obligations?

3. Carbon Reduction Commitment • A new emissions trading system which will affect ~ 20 000 organisations in the UK • ~ 5000 organisations will fully participate in trading, • remainder will only have to report emissions. • Criteria for inclusion is based on electricity use. • At least one Half-hour Meter (HHM) and • an annual consumption > 6000 MWh • [ annual consumption ~ equivalent to 1500 houses] • If an organisation satisfies first criterion then they merely have to report. • CRC split into Phases • Phase 1 (Introductory) will have a fixed price of CO2 allowances at £12 per tonne • Subsequent Phases will have auctions for allowances

4. Organisational Chart to determine whether an organisation qualifies for inclusion in CRC Note all subsidiaries must initially be counted – however, some may subsequently be exempted if they participate in EU-ETS or have Climate Change Agreements

5. The Carbon Reduction Commitment Periods The CRC will be divided into phases, each of which will be 3 or more years Within each phase there will be: A qualification period, Organisations must assess whether or not they qualify to make an information disclosure or participate fully in CRC A registration period, Organisations must either submit their information disclosure or register as a participant with the administrator A footprint year, participants must monitor their total emissions from energy use. Note some emissions are excluded such as those already covered by EU-ETS etc. A series of compliance years, runs from April to March – first starting in April 2010, participating organisations must purchase allowances for each tonne of CO2 they emit, based on expected energy use, monitor their usage.

6. The Qualification Periodfor Phase 1 is 2008 when initial assessments are made The Registration period, for Phase 1 is April – October 2010 issues of exemption/ allowable deductions must be addressed e.g. Transport Any electricity used solely for motive power can be deducted and if this lowers the total consumption to less than 1000 MWh per annum then an exemption for the duration of the phase applies. Climate Change Agreement If an organisation has more than 25% of emission covered by a CCA then the whole of its emissions are exempt for the duration of the phase. However, all the emissions must be reported EU-ETS Any emissions cover by EU-ETS are deducted from total emissions to determine the emissions for which CRC participation is needed. However, all emissions including those under EU-ETS must be reported Energy supplied to another party Emissions arising from energy supplied to another organisation are deducted from total emissions except in those cases where generation is from Renewable Energy and ROCs are claimed. Qualification and Registration Periods

7. Footprint and Compliance Years Footprint Year in Phase 1 is April 1st 2010 – March 31st 2011 Allowances to cover Year 1 (to 31st March 2011) purchased April 2011 Compliance Year (Year 2)starts April 1st 2011 April 2011 Purchase of expected allowances for 2011 – 12 (Year 2) Note: on this occasion only allowances must be purchased “double” – to cover Year 1 (footprint) and Year 2 (first compliance year) Reporting for year 1 must be done by July 2011with surrender of allowances Recycling Payment for Year 1 – October 2011 Compliance Year (Year 3)starts April 1st 2012 April 2012 Purchase of expected allowances for 2012 – 13 (Year 3) Reporting for year 2 must be done by July 2012 with surrender of allowances Recycling Payment for Year 2 – October 2012 Year 3 is also Footprint year for Phase 2 which starts April 2013

8. Qualification Period Participants with at least one HH meter should determine total electricity consumption Start of Compliance Year 2 Sale of 1st Allowances “Double” to cover 2010/11 actual and forecast 2011/12 Start of Capped Phase Start of Compliance Year 3 CRC Scheme Begins start of footprint year start of 1st compliance year Sale of Allowances to cover forecast 2012/13 Registration Period 2nd Recycling Payment 1st Recycling Payment 2ndAnnual Report Due Allowances surrendered Footprint Report due 1st1st Annual Report Due Allowances surrendered EA sends out qualification packs to all half-hour billing points CRC Timeline

9. Calculating Emissions to be included in CRC Relevant Emissions Relevant Emissions Total Footprint Emissions Total Footprint Emissions Regulated Emissions CRC Emissions Regulated Emissions CRC Emissions MUST: remove emissions from exempted transport and onward Supply All Energy Use Emissions MUST: remove 100% of emissions covered by CCA exempt subsidiaries All Energy Use Emissions CAN: remove up to 10% of emissions, but not if measured by regulated meters or covered by CCA/ EU-ETS. MUST: account for at least 90% of emissions MUST: Remove all Emissions covered by CCA and EU-ETS

10. Purchase of Allowances: Phase 1 • During phase 1 and unlimited number of allowances will be issued, but there will be a cap on total emissions in Phase 2 and thereafter. • All Allowances will be purchased in April of relevant year at a FIXED cost of £12 per tonne [ Remember in 2011 only, double allowances will be purchased to cover footprint year and first compliance year] • Additional allowances can be purchased in the Secondary Market from other participants (or traders) who have a surplus. • Additional allowances can also be purchased through the “Safety Valve System” which is analogous to the “Buy Out Prices” for ROCs • Operation of “Safety Valve” • AIM: To prevent price volatility in Secondary Market (as happened in Phase 1 of EU-ETS) • Participants pay a deposit equal to prevailing Safety Valve price in preceding month. • Government purchases extra allowances on EU-ETS and cancels same number of EU-ETS allowances. • Participants reimburse Government (or receive a rebate) for an difference between deposit price and actual price

11. Purchase of Allowances: Phase 2 etc • Number of allowances issued in initial allocation will be capped consistent with Government Policy. • All Allowances will be purchased in April of relevant year through a bidding process. • There will be a maximum percentage that any one participant can bid. • Participants may bid for different quantities at different prices. • Government will count bids until they meet cap limit to determine a “Clearing Price” • All bids which have been counted will be issued at the “Clearing Price” irrespective of the actual bid price – analogous to the bidding process in the Electricity Pool in 1990s. • Banking Allowances • Allowances surplus to an organisations needs can be sold on the Secondary Market or banked against future years. • However, it is not possible to carry forward banked allowances between phases.

12. Issues relating to self generation of electricity CHP An organisation can claim credits for electricity exported to other organisations. Organisation does not declare own use of electricity An organisation cannot claim credits for exported heat as under CRC it is deemed to have zero emissions. - Could cause problems for District Heating Operations Renewable Generation – If no ROCs are claimed then generation is treated as case with CHP If ROCs are claimed then electricity generated must be declared and emissions calculated as though it was grid imported – i.e. at a relatively high carbon factor – even though the generation would have a low factor – will affect UEA.

13. Operation of the CRC • All qualifying organisations will purchase allowances but will receive a rebate depending on where they are in the CRC League Table. • Those who are at the top of the table will receive a rebate which is higher than what they paid. • Those at the bottom will receive less than what they paid. • The relative position in the League Table is based on Three Metrics • How much actual reduction in absolute emissions has been achieved • To what extent have early action measures been taken • To what extent has the carbon intensity (i.e. carbon emission per unit of turnover) changed • The relative weighting of the metrics changes from year to year

14. Relative Weighting of Phases Should there be a metric to compare carbon intensity within sectors? e.g. A “Widget” manufacturer who has already reduced emissions significantly will find it more difficult than a competitor who has not previously reduced.

15. Example of Performance Company A has emissions which decrease from 2000 to 1800 tonnes between years 1 and 2 of Phase 1 and at the same time output increases from £1500000 to £16000000. Company B has emissions which increase from 3000 to 3100 tonnes over the same period when the output increases from £2000000 to £2500000. How do the two companies compare with regards to the absolute and growth metrics?. • Company A performs much better with regard to absolute metric • Company B is better with regard to growth metric

16. The League table The relative performances of each organisation for each metric are evaluated and ranked. If there are 1000 organisations, the best performing company in any metric is awarded 1000 points while the worst is awarded 1 point. The points for the three metrics are aggregated using the weightings in the table to get an overall point which determines the position of the organisation in the overall league table. Bonuses/penalties are awarded depending on relative position in League table as follows

17. Ascertaining the bonus/penalty from the League Table If ultimate position is 3903rd out of 5000 in the overall performance table, it would have performed worse than average and would incur a penalty. In the second year this bonus/penalty would be given by: Where Bm is the maximum bonus Pm is the maximum penalty R is the rank position determined as shown above T is the total number of organizations involved in CRC In the second year, the maximum bonus/penalty is +/-20% and the bonus/penalty for the organisation would be: i.e. a penalty of 11.224%

18. A Worked Example (1) Evaluate financial performance of two companies in 2011/12 under the Carbon Reduction Scheme if there are 5000 participants in all. Relevant data for the two companies are shown in following table. If the total emissions from all companies remains static at 5625000 tonnes and allowances cost £12 per tone examine the estimate financial benefit/penalty for the two companies if both companies trade in the secondary market at £15 per tone to cover any surplus/shortfall in allowances. The relative rankings of the two companies for the three metrics are shown in the following table while the maximum bonus/penalty in 2011/12 is =/-20%

19. A Worked Example (2) • First work out overall league table position: • Company A = 250* 0.6 + 500*0.2 + 1000*0.2 =450th • Company B = 3500*0.6 + 3000*0.2 + 2400*0.2 = 3180th •  The relative bonus/penalty for each company will be: •  Company A = 20 - 450/5000*40 = 16.40% • Company B = 20 - 3180/5000*40 = -5.44% • The best way to proceed is to set up a table as shown below • The recycling payment score is given by: • Baseline emission * (1 + bonus(penalty)/100) Note the error in the handout – a figure of £12 for Secondary Market was inadvertently used.

20. A Worked Example (3) The best way to proceed is to set up a table The recycling payment score is given by: Baseline emission * (1 + bonus(penalty)/100) = 2328 / 5625000 Company A thus pays out £22800 initially but and receives £27936 and thus profits by £5136, but also gets £1500 on the secondary market making a total profit of £6636 Company B pays a total of £31200 for allowances and receives back £28368 but pays £1500 for extra allowances and thus makes a loss of £4332