From April 2010, some large organisations will have to comply to new 'cap and trade' rules for energy use. Dave Lewis explains how businesses can manage the new Carbon Reduction Commitment Energy Efficiency Scheme

Much debate surrounds the Carbon Reduction Commitment Energy Efficiency Scheme (CRC), which has been fuelled by the Government publishing its final proposals on the scheme.

The proposal was a timely reminder that the start of the CRC is not far away and the importance of taking action.

The CRC will require businesses to buy allowances to cover their carbon emissions, creating a direct link between CO2 and their bottom line. Those that do not prepare will suffer financially, while those that start early stand to prosper.

Participants will have to forecast their energy consumption at the start of each trading year and buy carbon allowances, at a fixed cost of £12 per tonne of CO2. At the end of the year companies that exceed their forecast can buy extra allowances - very probably at a higher price - through the Government's 'safety valve' mechanism at specific times, or on the secondary market.

Revenue from purchases will be recycled according to each business' proportion of the overall emissions in the footprint year. A league table will also be published detailing the best and worst performers in terms of emissions reductions. Those at the top will receive a bonus payment; those at the bottom will face a penalty.

FORECASTING

If businesses are to make the CRC work to their advantage they will need to have detailed plans in place to record their emissions and reduce them. Smart meters should feature as a priority in these plans. These will capture data on energy use which can then be analysed to make informed decisions on energy efficiency. The ability to forecast allowance requirements, risk exposure and cash flow related to allowance purchases will also be crucial.

Armed with this data, businesses can take a longer term view on where energy efficiency measures can be made; the capital investment required to deliver these actions; and the expected outcome in terms of energy, and therefore carbon and allowance savings. These should be linked to a business' overall investment in areas such as plant upgrade and replacement, property selection, and any area which contributes to emissions.

Importantly, under the CRC, any improvements made in energy efficiency become more attractive; whereas previously businesses would have enjoyed a reduction in energy costs, they now stand to benefit from reduced carbon allowance payments and the reputational benefit of an improved league table position. For many organisations, the impact on corporate reputation of a high league table ranking could be as important as the financial implications.

MOVING FORWARD

We expect the CRC to induce a step-change in how businesses look at current and future consumption. The final important ingredient is senior level buy in. So important is energy use to the bottom line, that it deserves board level attention. Boards should be aware of the financial implication of non-compliance, and the impact to a business' cashflow of their carbon certificate, not to mention the reputational risk associated with a low league table position. The only thing boards stand to lose by not getting involved is a slice of their profits.

Dave Lewis is head of business energy services at npower

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