CLIMATE CHANGE GOVERNANCE AND COMPLIANCE

1. N.K. Tovey (杜伟贤) M.A, PhD, CEng, MICE, CEnv Н.К.Тови М.А., д-р технических наук NBS-M017/NBSLM04D 2013 CLIMATE CHANGE GOVERNANCE AND COMPLIANCE Carbon Reduction Commitment – Energy Efficiency Scheme http://www2.env.uea.ac.uk/energy/energy.htm http://www.uea.ac.uk/~e680/energy/energy.htm Recipient of James Watt Gold Medal 1 1 1

2. Course WEB Page http://www2.env.uea.ac.uk/energy/energy.htm or http://www.uea.ac.uk/~e680/energy/energy.htm

3. CLIMATE CHANGE GOVERNANCE AND COMPLIANCE Covered over 5 sessions: 2nd/9th/16th/28th October & 6th November 3 • Carbon Reduction Commitment - Handout 1: Powerpoint 1 - Energy Efficiency Scheme • Building Regulations - Handout 1: Powerpoint 2 • Code for Sustainable Homes • Regulation in Electricity Supply - Handout 2: Powerpoint 3 • NETA/BETTA Issues of Diversity, Triad Demand • Renewable Electricity Options • Renewable Obligation • Feed-in Tariffs • Renewable Heat Incentive • Electricity Market Reform • The Renewable Transport Fuel Obligation? • The Future: Integrated Obligations? • Tour of Low Carbon Energy at UEA

4. Carbon Reduction Commitment – Energy Efficiency Scheme • A new emissions trading system which affects ~ 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 • Originally Phase 2 and subsequent Phases allowances would be auctioned • In last 12 months many changes have occurred including use of fixed price allowances in Phase 2 also.

5. Organisational Chart to determine whether an organisation qualifies for inclusion in CRC All subsidiaries must initially be counted – however, some may subsequently be exempted if they participate in EU-ETS or have Climate Change Agreements. In recent months there have been simplification and clarification as to exactly what should be included.

6. The Carbon Reduction Commitment Periods The CRC – EES is divided into phases, each of which is 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 2011, participating organisations must purchase allowances for each tonne of CO2 they have emitted in previous year. Note this is a change from previously when they had to purchase allowances at start of year on estimated emissions for year. monitor their usage.

7. The Qualification Periodfor Phase 1 was 2008 when initial assessments were made The Registration period, for Phase 1 was April 1st – September 30th 2010 issues of exemption/ allowable deductions must be addressed e.g. Transport - originally had to be included and then deducted 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 – original statement 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 - Clarification of this within simplification EU-ETS Any emissions covered 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. Special Arrangements Apply Qualification and Registration Periods

8. Footprint and Compliance Years Footprint Year in Phase 1 is April 1st 2010 – March 31st 2011 with report due July 2011 • Compliance Year (Year 1)As originally planned to start April 1st 2011 • April 2011 Purchase of expected allowances for 2011 – 12 (Year 2) • Reporting for year 0 (i.e. Footprint Year) to be done by July 2011 no surrender of allowances • Recycling of 2011/2012 Payments based on Year 0 performance (i.e. 2010 / 2011) – October 2011 • Original Recycling Scheme will be discussed later • Trading of allowances was possible if one had a surplus or use of Safety Valve System if there was a shortage • Compliance Year (Year 1) as actually operating started April 1st 2011 • April 2011 start of compliance year 2011 – 12 - no purchase at this stage • Reporting for year 1 was done in July 2011 • No recycling of allowances as none had been purchased

9. Footprint and Compliance Years Compliance Year (Year 2) from April 1st 2012 as originally planned April 2012: Purchase of expected allowances for 2012 – 13 (Year 3) Reporting for compliance year 1 to be done by July 2012 with surrender of allowances Recycling of 2012/2013 Payments based on Year 2 performance (i.e. 2011 / 2012) would have occurred in October 2012. Best performing companies get a bonus worst performing ones incur a penalty Trading of allowances/ use of Safety Valve Procedure This year was also to be Footprint year for Phase 2 starting April 2013 • Compliance Year (Year 2) from April 1st 2012 as in simplified procedure • April 2012: Purchase of allowances RETROSPECTIVELY for 2011 – 12 at a fixed price of £12 per tonne • Reporting for compliance year 1 to be done by July 2012 • No Recycling of Payments - in essence this become a simple Tax on emissions. • No opportunity for trading • As whole demand is satisfied - No need for Safety Valve Procedure. • Start of Phase 2 delayed

10. Qualification Period Participants with at least one HH meter should determine total electricity consumption Start of Compliance Year 2 Sale of 1st Allowances to cover forecast 2011/12 emissions Start of Capped Phase Start of Compliance Year 3 CRC Scheme Begins start of footprint 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 EA sends out qualification packs to all half-hour billing points 2nd Recycling Payment based on performance in 2011/2012 1st Recycling Payment based on performance in 2010/2011 CRC Timeline as originally proposed in 2009

11. Phases of CRC Energy Efficiency Scheme - Reporting 2010 2011 2012 2013 2018 2014 2017 2016 2015 Phase 1 Phase 2 Phase 3 Footprint Year Report Only Reports due last working day of July Reporting, purchase and surrender of allowances In further simplification purchase of allowances now done retrospectively for 2011/2012 in June 2012 for surrender in July 2012 and in equivalent times for 2013/14

12. Calculating Emissions to be included in CRC -EES 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 Original Proposal 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

13. Simplified Method for Calculating Emissions to be included in CRC -EES Exclude all energy use for domestic accommodation, transport and unconsumed supply. Exclude also all emissions covered by CCA and EU-ETS. Special considerations apply for kerosene and diesel when used for heating All Energy Use Emissions CRC Emissions In 2013 further simplifications excluded kerosene and diesel and furthermore the requirements relating to CRC emissions were further simplified.

14. Purchase of Allowances: Phase 1 • During phase 1 an unlimited number of allowances will be issued, originally these had to be purchased in advance on estimated emissions – now done retrospectively. • During phase 2 there originally was going to be a cap on total emissions in Phase 2. In the simplification it is now intended that unlimited allowances will be available. • Originally: All Allowances would be purchased in April for following year relevant year at a FIXED cost of £12 per tonne in Phase 1 (although now subject to annual review). Now purchased at end of year. • Originally: Additional allowances would have been available for purchase on the Secondary Market from other participants (or traders) who found they had a surplus. • Now irrelevant om Phase 1 as retrospective purchases are made • Originally: Additional allowances can also be purchased through the “Safety Valve System” which is analogous to the “Buy Out Prices” for ROCs. • Now irrelevant in Phase 1as retrospective purchase are made

15. Purchase of Allowances: Phase 2 etc • Original System for Phase 2 and thereafter – may now be used from Phase 3 • Number of allowances issued in initial allocation would be capped consistent with Government Policy for reducing carbon emissions. • All Allowances would be purchased in April for the forthcoming year through a bidding process – see next slide. • There would be a maximum percentage that any one participant can bid. • Participants may bid for different quantities at different prices. • A Safety Value linked to EU – ETS would operate to cover any shortages • Revised System for Phase 2: • Unlimited Supply of Allowances: • Two periods of purchase: • In April at start of year – e.g. April 2014 for 2014-15, allowances will be available for purchase on estimated emissions • In April immediately following year – i.e. April 2015 for 2014-15. • Prices in second sale will be higher than in first • There will be an opportunity for trading on Secondary Market • No need for Safety Valve

16. Purchase of Allowances under an auctioning system: which still may be used in Phase 3 • Government will count bids until they meet cap limit to determine a “Clearing Price” • All Companies with bids which are counted i.e. above the “Clearing Price” will be issued at the “Clearing Price” irrespective of the actual bid price . • In example: All companies up to and including Company B will be successful. • Companies C and D and those bidding less than £20.75 would get no allowances. • All successful companies would pay £20.79 per tonne • – Analogous to the bidding process in the Electricity Pool in 1990s (see notes on Electricity Regulation). 20 000 000 tonnes from companies bidding above £25 per tonne 20 000 000 tonnes from companies bidding £22 - £25 20 000 000 tonnes from companies bidding £21 - £22 Target 60, 200,000 tonnes Company A £20.85: 100 000 tonnes Company B £20.79: 100 000 tonnes Company C £20.78: 100 000 tonnes Company D £20.75: 100 000 tonnes Companies bidding < £20.75

17. Purchase of Allowances: Phase 2 etc – original scheme • Banking of Allowances • Allowances surplus to an organisations needs can be sold on the Secondary Market or banked against future years. • However, it was not possible to carry forward banked allowances between phases. This has not changed following the Simplifications • Operation of “Safety Valve” - No longer relevant until Phase 3? • AIM: To prevent price volatility in Secondary Market (as happened in Phase 1 of EU-ETS) • If there are insufficient allowances in an auctioned system Participants can request operation of Safety Valve and 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 subject to a minimum price of £14 (revised upwards from £12 – February 2010)

18. 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 (FITs) are claimed then generation is treated as case with CHP • If ROCs are claimed then all 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. • Issue of geographic vs corporate emissions

19. Operation of the CRC – EES – the League Table • All qualifying organisations will be ranked annually in the Performance League Table (PLT). • Originally: organisations would receive a rebate depending on where they are in the CRC League Table – i.e., overall CRC would be Tax Neutral to businesses. In simplified procedure, there is no rebate and CRC becomes a Tax on business • Originally during recycling of funds: • Those who were at the top of the table would receive a rebate which is higher than what they paid. • Those at the bottom would receive less than what they paid. • Following Simpification: In Phase 1, the PLT is still produced, but there is no recycling of funds – so no benefit for best performing companies or penalty for worst performing companies • 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/revenue) changed.

20. Operation of the CRC – EES – the League Table • The Growth Metric is based on Carbon Intensity • Carbon Intensity is measured in terms of carbon emissions per unit of turnover for Private Companies - NOT per unit of output • Is this sensible??? • For Public/Government Bodies, carbon intensity is measured in terms of carbon emissions per unit of revenue • The relative weighting of the different metrics changes from year to year

21. 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.

22. Example of Performance for League Table Company A has emissions which decrease from 2000 to 1800 tonnes over a year 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 • NOTE: growth metric is in terms of carbon per £1 which is NOT a true measure of carbon intensity

23. Carbon Reduction Commitment – Energy Efficiency Scheme • Summary: • 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 • a TOTAL annual consumption > 6000 MWh • [ annual consumption ~ equivalent to 1500 houses] • Currently there are discussion suggesting that only electricity monitored through HHMs need to be counted, and if this happens then the threshold level of 6000 MWh will be reduced • Currently if an organisation satisfies first criterion then they merely have to report.

24. Carbon Reduction Commitment – Energy Efficiency Scheme • Summary: • CRC split into Phases • Phase 1: (Introductory) will have a fixed price of CO2 allowances at £12 per tonne and will be purchase retrospectively at end of year • Phase 2: Unlike the original plans this Phase will also have unlimited allowances, but purchased in two phases: • At a cheaper price at beginning of year based con estimated emissions • A higher price immediately after the end of the year. • This will allow some trading on a Secondary Market • The price will be reviewed annually. • Subsequent Phases MAY revert to the original idea of a cap to limit emissions and allowances will be auctioned.

25. Note: PLT is based solely on the Early Action Metric

26. If a company fails to declare (e.g. Company Z) they get no points

27. How The League Table was going be used under recycling Next section was covered in previous years before simplification procedures. They are no longer relevant for Phases1 or 2 but may well be introduced again in Phase 3 The next section is included in handout, but will only be covered in a formal presentation if time permits

28. How The League Table was going be used under recycling 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

29. Ascertaining the bonus/penalty from the League Table (1) If ultimate position of a company is 3903rd out of 5000 in the overall performance table, It would have performed worse than average and would incur a penalty. The effective penalty/bonus depends NOT ONLY on the rank order position (i.e. 3903 in this case) but also on the relative proportion of its emissions to the total emissions under the CRC – Energy Efficiency Scheme. Suppose company is 3903rd and it has emissions amounting to 27000 tonnes out of a total covered by CRC of 20,127,000 tonnes. What is bonus/penalty for the company? Assume Companies ranked 1 – 3902 have total emissions of 12,500,000 tonnes

30. Ascertaining the bonus/penalty from the League Table (3) Company emits 27000 tonnes and is 3903rd in league table The factor R is the mid point emission of Company A i.e. (62.106+62.240)/2 = 62.173%

31. Ascertaining the bonus/penalty from the League Table (4) If the maximum bonus is Bmax and maximum Penalty is Pmax The bonus/penalty of Company A (BA ) is determined as R is the rank position determined as shown above In the second year, the maximum bonus/penalty is +/-20% and the bonus/penalty for the organisation would be: i.e. a penalty of 4.896%

32. Ascertaining the bonus/penalty from the League Table (5) This section will probably be skipped from 2011 onwards In more general terms, the factor R may be expressed as where r is the rank position of the company in question, N is the total number of companies Ei is the total emissions of company i.

33. 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 30,000,000 tonnes and allowances cost £12 per tonne examine the estimate financial benefit/penalty for the two companies if both companies trade in the secondary market at £15 per tonne 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%

34. 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 • Also work out cost of Allowances either purchased directly or on the secondary market • Assuming the Safety Value Mechanism is not used, the total value of all allowances purchased will be 30,000,000 * £12 = £360,000,000 • Next work out relative R factor for both companies

35. A Worked Example (3) If total emissions of companies ranked 1 to 449 amount to 8,500,000 tonnes For company A the R factor (RA ) will be: Similarly if the total emissions of companies 450 to 3179 is 10,500,000 tonnes For company B the R factor (RB ) will be: Relative Bonus for Company A = 20 – 0.28366 * (20 - -20) = +8.665% Relative Penalty for Company B = 20 – 0.63344 *(20 - -20) = -5.338%

36. A Worked Example (4) Recycled Payment for Company A will be 1800 / 30,000,000 * 360,000,000 * (1 + 0.08665) | | | proportion of emissions recycled payments bonus = £23471.64 ~ £23472 For company B 2700 / 30,000,000 * 360,000,000 * (1 – 0.05338) = £30,670 Company A thus pays out £22800 initially but and receives £23472 and thus profits by £672, but also gets £1500 on the secondary market making a total profit of £2172 or a return of 9.5% on investment Company B pays a total of £31200 for allowances and receives back £30,670 making a loss of £530, but also pays £1500 for extra allowances and thus makes a total loss of £2030 or a loss of 6.5%