Landlords and tenants must talk about the CRC

18 February 2010

According to JLL’s Abigail Dean writing in PFM’s February issue out now, a well thought through and managed approach to the CRC can be an opportunity for landlords to engage with tenants to achieve greater energy efficiency

Click Here to read the article on PFM’s Active Magazine
THIS YEAR MARKS THE START OF a very different approach to carbon management for many companies operating in the UK. From April, any organisation that spends more than £500,000 on electricity annually will be obliged to report its carbon emissions and to trade carbon allowances.
Initially the biggest impact of the Carbon Reduction Energy Efficiency Scheme (CRC) probably will not be financial. The financial outlay on credits for each participant will be relatively low for the first three years and will be dwarfed by total energy spend. What the scheme will achieve is universal comparability in carbon performance in the UK, with a level of transparency that has not been seen before.
The financial implications aside, the CRC represents the first mandatory reporting scheme in the UK where the results will reside in the public domain. From 2011onwards, it will be possible to easily compare participants’ actually achieved performance in a league table. The reputational implications are significant. Nobody will want to be at the bottom of that league table.
There will need to be a significant change in energy monitoring and data management practices for the majority of participating companies and this will be the most significant impact for those involved in property management. FMs will be particularly impacted as they will inevitably be expected to take control of ensuring that meter readings are taken, energy consumption data is verified and the information is centrally collated.
Occupiers and landlords will rely on their FM teams to fulfil these basic obligations and the first challenge will be to accurately map all energy meters within a building or across a portfolio. It will be necessary to establish the location of all meters and then to identify the energy supply that each relates to, the meter type and MPAN number and the company responsible for purchasing the supply. In many modern buildings this may be a relatively straightforward process. However, in some older assets with more complex metering arrangements that have developed and changed over time, this could potentially be a difficult and time consuming process.
Some of the information from this mapping exercise will be required for the initial registration exercise to be carried out between April and September this year (see above). There are significant benefits in undertaking this level of analysis. FMs or property managers will find that the act of recording and analysing consumption data is a powerful tool in achieving efficiency by identifying areas of wastage and unnecessary use. The potential financial benefit associated with energy savings far outweighs the cost involved in carbon credit trading.
At Jones Lang LaSalle, we recently undertook an exercise to model the potential costs of the CRC for the participants, using data from almost 180 real properties (mainly offices and shopping centres), and taking into account consumption patterns, current and projected energy prices and projected carbon prices. Our primary finding was that, even 10 years into the scheme, the potential maximum financial penalty or pay back would be small as a proportion of total energy spend (in the region of 2 to 5 percent).
The Department for Energy and Climate Change (DECC) expects the scheme will result in achieving greater energy efficiency through enabling better monitoring. If this is the case, it has the potential to save the participants far more than they will ever spend in achieving compliance. However, the cash flow implications shouldn’t be underestimated. Whilst money will be returned through the recycling payment, for six months participants will be out of pocket and the cost of allowance purchase is likely to be significant – in the region of £100,000+.
In order to manage the cost of the scheme effectively, it is important that organisations make accurate projections of future emissions when purchasing allowances as they are likely to incur further costs if projections are inaccurate and allowances have to be bought on the secondary market.
For those CRC participants that are in the business of real estate, the most significant issue is probably that of the implications for the landlord/tenant relationship. If a participating landlord is purchasing energy for a building (either directly from an energy supplier or through an FM company) then it will also be responsible for purchasing carbon credits through the CRC scheme.
The behaviour of tenants will, therefore, have an impact on the financial performance and the reputation of the landlord. Whereas recovering the cost of energy consumption is possible through service charge arrangements, recouping the cost of carbon credits will be far more complex. It is highly unlikely that any current lease arrangement allows for this cost to be passed on to a tenant. A new lease, with all the associated legal costs, will be necessary if a landlord wishes to start recovering CRC costs from tenants.
There is also the matter of apportioning energy use between tenants. Even if sub-metering is in place it is still likely that there would be shared services (such as HVAC) that cannot be divided between tenants based on actual consumption.
Additionally, there is the difficulty of deciding when it is appropriate to pass this cost on to tenants. Should it be an additional item in the service charge? What happens if there is a profitable recycling payment – how are these proceeds returned to the tenant and when?
In the first year of the scheme, the penalty or reward from a company’s position in the league table is just +/- 10 percent but by year 2016, this will have risen to +/- 50 percent. Whilst the CRC is often viewed as a tax, it should not be forgotten that it is also an opportunity to make money, over and above the financial benefits associated with energy savings.
For example, for a shopping centre with different types of tenants with very different energy requirements, the apportioning of CRC cost or benefit could be very challenging. If this site’s gross energy consumption was to increase but one tenant had actually been reducing its consumption, should it be penalised along with the other tenants? The same difficulties apply where a landlord owns a range of properties with some improving in energy performance and some deteriorating.
Given the administrative burden of submitting an annual carbon footprint to the Environment Agency, some may feel that the cost of resourcing the additional workload associated with passing costs on to tenants outstrips the financial benefits – particularly in the early years of the scheme where the price of carbon is set at £12/tonne.
In any building, the roles of the landlord, the tenant and the FM in achieving energy efficiency are far from straightforward. Tenants may be reluctant to pay for carbon credits if they feel that the windows need re-glazing or the ventilation system is in need of an upgrade. The scheme may then increase the demands on landlords to undertake energy efficiency improvement works. These complexities are most significant in a multi-let scenario but the landlord/tenant/FM relationship is also likely to be tested by the challenges of managing the CRC in sole occupancy buildings.
The CRC sets out that tenants must ‘cooperate’ with landlords on the legislation. This seems frustratingly vague, but in reality it would be detrimental for the government to try to legislate the landlord/tenant relationship. Those who manage the scheme best will be those that recognise it as an opportunity for more frank and enlightened communication with tenants about the possibility of increasing energy efficiency and who work collaboratively to achieve this goal.
Once basic compliance is achieved and the complexities of administering the scheme between landlords and tenants are being well managed, the next step is to consider how best to perform well within the scheme and to turn it into a money making opportunity. In the first year of the scheme, league table position will be determined entirely by the early action metric (above left). FMs should therefore work with their clients to look at the installation of AMR (Automatic Meter Reading) capability where it is not already in place. This will not only improve league table position but will also reduce the administrative burden associated with data monitoring and will remove much of the scope for human error.
That being said, the cost of replacing meters with AMR technology is typically £300 to £600 per meter and can run into hundreds of thousands of pounds for large portfolios.Landlords, occupiers, FMs and advisors should therefore take the time to formulate the correct strategic approach rather than rushing into a solution in order to gain league table advantage. The other element of the early action metric is the Carbon Trust Standard. This is only available to organisations who can demonstrate a reduction in energy consumption over three years and who have established robust energy data monitoring processes. It is possible to achieve either at a building, portfolio or company level, but as there is a fee associated with certification, it is much more cost effective at portfolio or company level.
Beyond the first year of the scheme, the position in the league table will be increasingly determined by the success of energy saving initiatives. FMs will be increasingly expected to develop and implement low and no cost energy efficiency programmes whilst also advising on the appropriateness and potential success of capital expenditure of energy efficiency improvements.The annual publication of the league table from 2011 onwards will be of great interest and is sure to contain some surprises.
● Abigail Dean is Senior Sustainability Consultant, Jones Lang LaSalle
abigail.dean@eu.jll.com www.joneslanglasalle.co.uk/sustainability
Description of the Metrics
Early Action Metric: In the Introductory Phase of the scheme when there is insufficient data to provide a robust historical trend, the Early Action metric forms part of the League Table calculations to provide incentive for installing Smart Meters and give some
recognition for good energy management undertaken prior to the start of the scheme.
It will be based on two factors which are equally weighted:
 The percentage pf emissions covered by volunatary installed automatic meter reading as of 31st March 2011 and
 The percentage of the organisation’s emissions covered by the Carbon Trust Standard (formerly the Energy Efficiency Accreditation Scheme) as of 31st March 2011.
Absolute Metric: The Growth metric was designed to give some recognition and provide context for organisations that are growing commercially, with emissions that are increasing at a slower rate of growth, or are decreasing. This will be the participants percentage reduction in emissions per unit of turnover, comparing their current level relative to their average over the preceding five years.
Growth Metric: The participants total percentage emissionsreductions calculated by comparing total annual emissions in relations to rolling average emissions for the previous five years. In the first years of the scheme, organisation’s annual emissions will only be compared to the years that have passed since the start of the scheme. In the first year, the Absolute metric will not be used for assessing performance in the league table.