The CRC Energy Efficiency Scheme

Obligations under the Scheme

Groups which are registered for the Scheme will be required to submit reports in relation to their energy supplies for the period 1 April 2010 � 31 March 2011 by 31 July 2011. No carbon allowances will be required to be purchased to cover emissions for this first period. Subsequently reports will be required to be produced on 31 July each year, and groups will be audited on average once every five years.

During the month of April, groups will need to purchase allowances to cover their estimated emissions for the period from 1 April in that year to 31 March in the following year. In April 2011 and April 2012 allowances will be sold by the government at a fixed rate of �12 per tonne of carbon dioxide equivalent (tCO₂e). These allowances will then have to be surrendered at the end of the period. If further allowances are required, they may be purchased on the secondary market, or from the government at a minimum price of �14 per tCO₂e.

The system of fixed price allowances only applies to the introductory phase. From April 2013 the sale of allowances (to cover the period 1 April 2013 � 31 March 2014) will be by way of an auction process.

Groups � particularly those which have a number of different operating entities � will need to consider how the funding of such allowance purchases will be distributed amongst the group.

The Scheme is intended to be revenue neutral to the government. Therefore income from the sale of allowances will be recycled back by way of payments to participants in the Scheme, to give organisations financial and reputational incentives to reduce their energy consumption and carbon footprint. The amount of the recycling payment received by each participant will be determined by its position in a performance table published by the Environment Agency each year.

The performance table is compiled based on three metrics. Firstly, the absolute change in emissions each year; secondly the change in emissions each year relative to the growth in turnover of the organisation; and thirdly the actions taken to reduce emissions prior to the commencement of the Scheme. The weighting of these metrics changes each year.

Group undertakings are required to aggregate the energy supplies they obtain in the UK on half hourly meters under the Scheme. Entities are in the same group for these purposes if:

1. the parent entity holds a majority of the voting rights in the subsidiary entity;
2. the parent is a member of the subsidiary and has a right to appoint or remove a majority of its board of director
3. the parent has a right to exercise a dominant influence over the subsidiary as a result of the subsidiary's articles of association or a control contract;
4. the parent is a member of the subsidiary and controls a majority of the voting rights in the subsidiary entity through a shareholders' agreement;
5. the parent has the power to, or actually exercises, a dominant influence over the subsidiary; or
6. the entities are managed on a unified basis.

This is a wide definition which may capture joint venture companies or investee companies. Despite extensive lobbying, investor entities such as funds, including funds incorporated outside the UK, are covered by the Scheme, and may need to register or provide information, depending the energy usage of their portfolio of investments, and whether they fall into the 'group' definition above.

A group will have obligations under the introductory phase of the Scheme if any member(s) of the group was supplied with electricity in the UK by at least one settled half hourly meter (a "HHM") during 2008. Supplies received by landlords (even if they are passed on to tenants) and by franchisees of members of the group may also need to be included in this analysis as described below.

If the group as a whole was supplied with less than 6,000 MWh through all of its HHMs during 2008, its obligations under the introductory phase are merely to make an information disclosure in relation to its 2008 electricity consumption by 30 September 2010. This must be completed through the online registry.

If the group as a whole was supplied with more than 6,000 MWh through all of its HHMs during 2008, it is required to register for the introductory phase of the Scheme. This registration must be completed by 30 September 2010. The registration process takes a minimum of 2 weeks and so needs to be commenced as soon as possible. Registration is completed through the online registry and a registration fee of �950 must be paid. One member of the group (which must be a UK entity) must be nominated to act as the primary member for the purposes of the Scheme. An individual must be named as the senior management contact in relation to the Scheme for the entire group. Internal procedures will need to be considered to ensure that this individual has sufficient authority to act for the whole group for the purposes of the Scheme. Each group member is jointly and severally liable for the obligations of the other group members under the Scheme.

The requirement to aggregate all supplies received by a group make it possible that a group of otherwise unconnected companies in which a fund holds controlling investments will be required to register under the Scheme, and will be liable for one another's default subject to disaggregation as described below.

Phase 2 of the Scheme will commence on 1 April 2011, overlapping with the introductory phase for a two year period. Whether a group will have obligations under Phase 2 will be determined by the amount of electricity supplied to it through HHMs during the period from 1 April 2010 to 31 March 2011.

Special rules apply where a business is operated under a franchise agreement, subject to the premises where the franchise business is carried out being used exclusively for that business. In this situation, the franchisor (and not the franchisee) will be regarded as being responsible for the energy supplies used for the franchise business and will be required to aggregate such supplies to determine whether the franchisor group is required to register under the Scheme. A franchisee must provide reasonable information and assistance to the franchisor to enable it to comply with its obligations under the Scheme.

Where a landlord receives energy supplies which are passed on in whole or part to its tenants, the landlord will be deemed to be responsible for the energy supply for the purposes of the Scheme. The tenant will only be responsible where it procures and pays for its own energy supply directly from the energy company.

The parties under both franchise agreements and leases are free to enter into whatever commercial arrangements they consider appropriate in relation to the Scheme. It is therefore likely that franchisors and landlords will seek to pass on the costs (and benefits) of the Scheme to their franchisees and tenants. This may require changes to be made to existing franchise agreements and leases.

A group will be allowed to disaggregate certain of its members or groups of members for the purposes of the Scheme if (i) the disaggregation does not cause the rest of the group to fall outside the qualifying level of 6,000 MWh described above, and (ii) the disaggregated part of the group itself falls within the qualifying level and registers as a participant under the Scheme. Disaggregation will therefore not allow any entity to fall outside a group registered under the Scheme when it would otherwise have been included in such a group. Any application to disaggregate for the introductory phase of the Scheme must be completed by 30 June 2010.

In considering whether to disaggregate parts of the group, the following factors may be relevant:

1. Separate fees and charges under the Scheme will have to be paid for the disaggregated part(s) of the group on top of those for the remainder of the group. This includes the �950 registration fee.
2. The disaggregated part(s) of the group will be listed separately in the performance table described above. This may either enhance or damage the reputations of the group's different brands, and may particularly highlight where a single brand is performing poorly.
3. The disaggregated part(s) will receive a separate recycling payment (as described above). Although the total amount received should be the same, it may be an advantage to receive a separate payment in circumstances where part of the group is in a commercial relationship where the costs and benefits of the Scheme are passed on to another party (such as tenants or franchisees).
4. Disaggregated parts of the group will report separately and be audited separately under the Scheme from the rest of the group. Disaggregating will increase the total number of reports and audits, which may increase the total administrative burden to the group. However, in groups where there is no centralised reporting function or centrally located staff, disaggregation may reduce the overall administrative burden for the group. This may well be the case for groups where the highest parent undertaking is a fund which has invested in a number of different operating entities.

Other than where parts of the group are disaggregated, each member of the group will be jointly and severally liable with the other members for compliance with the Scheme. Disaggregation will allow the compliance obligations and liabilities of certain parts of the group to be ring-fenced which may be desirable where such parts operate independently and from which it would be difficult to obtain the necessary information.