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The Year of Energy?

19 May 2008

Dave Lewis, head of energy solutions at npower business, explains why developments in carbon regulation and preparations for carbon trading and the 'low carbon economy' will make 2008 a significant year.

2007 WAS SOMETHING OF A LANDMARK YEAR on the environment with a number of notable events bringing climate change from the margins to the mainstream and up the boardroom agenda. The Draft Climate Change Bill will make the UK the first country in the world to have a legally binding carbon emission reduction target of 60 per cent by 2050. It is expected to receive Royal Assent by this summer.

The central message coming out of the Draft Climate Change Bill consultation was the Low Carbo Economy – a future in which financial prosperity and low carbon operations are inextricably linked. In order to achieve this, however, and encourage the development, adoption and implementation of better energy management, the Government recognises it must provide the right regulatory framework to make energy efficient and low carbon operations financially viable and attractive.

It is this that makes 2008 so significant. Specifically, the second phase of the EU Emissions Trading Scheme (EU ETS) and development of the new Carbon Reduction Commitment (CRC)is due to be launched. EU ETS is a Europe-wide scheme that aims to reduce emissions of CO2 and combat the serious
threat of climate change through the creation a trading market that puts a price on CO2 emissions. Participating countries are given an allocation that dictates the amount of total emissions they are permitted to release, known as a National Allocation Plan (NAP). The NAP allocate allowances depending on the amount of CO2 participating countries expect to release. According to how they perform they then retain these allowances, sell unused allowances or purchase the additional allowances required. If countries perform well, achieve emissions lower than their target and they stand to benefit from trading the allowances left over; perform badly and they are forced to buy additional allowances according to how far over target they have gone.

These allocations should reduces over time, making carbon a premium product and driving up the price. The higher the price, the greater the incentive for businesses to reduce their CO2 outputs and therefore the allowances they require. This gives gives companies the freedom to identify elements of their business that can enact measures to reduce CO2 outputs and provides the financial incentive to do so. Businesses can therefore undertake emissions abatement where it is cheapest in their operations.

So far, the success of the EU ETS has come under scrutiny. The Allocation Plans under Phase One have been criticised for not being strict enough (in some cases there was even over allocation) and, as a result, the cost of carbon has been too low to encourage participating organisations to trade meaningfully.

The Government and the EU are keen to learn from these mistakes and have already set about addressing some of the acknowledged failures in Phase Two, due to be launched in 2008 and running to 2012. Stronger links between carbon operations and financial success will come through a new and stricter NAP and inclusion of a new raft of organisations in the scheme, which will immediately increase the businesses trading carbon (see overleaf)

The UK’s policy for Phase Two is set to save 29m tonnes of CO2 (MtCO2) each year. This is 11 per cent below projected need in 2010, and is a cut back of 7MtCO2 pa below the Phase One cap. Moreover, 7 per cent of the allowances represented by the UK cap will be auctioned in Phase Two, rather than given away for free, which was the case in Phase One. Holders of Climate Change Agreements and participants of the UK ETS were given the option of applying to 'opt-out' of the EU ETS for the first phase. No opt-outs will be allowed in Phase Two.

Organisations included in Phase One were intensive energy users and installations that emitted particularly high amounts of CO2 emissions, such as energy production and industrial processes. While still focusing on energy intensive sectors, importantly Phase Two will include new sectors including food and drink production, metal and chemical manufacturing and producers of construction materials such as cement, lime and gypsum.

The reduction in the NAP for Phase Two will be targeted at the power generation sector, with all other sectors to be allocated full allowances quotas. This is planned to give newly participating organisations time to adapt and change operations without being financially penalised by having to buy their first set of allowances. They will, however, be expected to understand what their participation means and become involved in the trading of CO2 emission allowances.

Just as the EU ETS has developed from Phase One to Phase Two, there is also every reason to expect it will develop again in Phase Three. Those organisations facing inclusion for the first time will need to ready themselves for a new set of challenges in the next phase, planned for 2013.

Preparing for CRC
And just because you are not in the energy intensive sector, don’t think you are in the clear. The Government this year confirmed its plans for a new emissions trading scheme to cover the non-energy intensive sector. The CRC will include businesses and organisations with an annual energy spend of 6,000 MWh, which will likely include local authorities, supermarkets and other organisations with a large number of smaller sites – about 4,000 to 5,000 organisations. With approximately 14m tonnes of CO2 covered at this level, the CRC is expected to deliver some 1.2 MtC savings a year by 2020.

The exact way the CRC will operate is not yet known, but it is anticipated it will be similar to the EU ETS. The initiative will require participants to purchase enough allowances to cover their agreed emission levels, with the choice open to the organisation on just how much they want to emit. It is expected there will be at least a three-year introductory phase for the CRC to allow participants to gather information on their energy use and emissions.

With an anticipated start date of 2010, businesses may need to start preparing as of 2008. To operate effectively in a cap and trade scheme, those involved in the EU ETS and the CRC will need to look at ways of reducing their overall emissions through technological investment and development, and energy management.

Businesses will need to think in more detail about how they are going to monitor and manage their energy use. This will be essential in order to buy the appropriate amount of allowances and, to monitor consumption and CO2 emissions to see if they are meeting their reduction targets. Some businesses are already responding to this challenge, but others must improve quickly if they are to succeed in a Low Carbon Economy. At npower, for example, we have developed new metering and monitoring tools to help businesses better manage consumption. Our Encompass tool takes data from half hourly meters and automatically feeds it through to a web-based interface giving businesses accurate and timely information on how and when they are using energy. From this data they can establish areas of good and bad performance with a view to establishing best practice. Such tools will become essential with the development of cap and trade schemes.

The FM will become a key player in the delivery of CO2 reduction targets. Working together with their energy supplier to manage premises to improve energy management and reduce energy consumption will become a crucial part of delivering improvements to the bottom line by providing a better overall carbon performance. For businesses that do not expect to be included in this developing carbon legislation, it is still advisable to stay abreast of developments. Emissions trends in the UK are less than promising. They have risen every year since 2002 and analysis developed specifically for the CBI by consultants McKinsey shows the UK’s carbon reduction targets for 2020 are also likely to be missed.

There are also signs that the legislative pressure put on to large organisations will begin to be felt down the supply chain in the way that businesses select their partners. Together with the Carbon Trust, some large retailers have agreed to provide carbon data on their products so that every packet of biscuits and every can of beer will need a label showing the amount of CO2 emitted in its manufacture. With a view to driving CO2 emissions out of their own operations, these retailers will look to suppliers that can deliver products with the smallest carbon footprint possible. So even food manufacturers that would not fall into the membership of the EU ETS or the CRC might find themselves under pressure to reduce carbon outputs, simply through association.

● Dave Lewis is head of energy solutions at npower business

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