Draft Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010 and three related instruments, etc - Merits of Statutory Instruments Committee Contents


APPENDIX 2: DRAFT CRC ENERGY EFFICIENCY SCHEME ORDER 2010


Written evidence from Forth Ports PLC

Forth Ports PLC understands that the House of Lords Select Committee on the Merits of Statutory Instruments will be considering the Draft CRC Energy Efficiency Scheme Order 2010 in the near future. Forth Ports run a group of regionally based ports in the central belt of Scotland and Tayside. Grangemouth is Scotland's largest container port, serving both the Glasgow and Edinburgh Metropolitan Regions. The Port of Tilbury is London's major distribution hub for South East England. We also have a port terminal operation at Chatham in Kent operated under the Nordic banner. We provide marine services, controlling navigation in the Firths of Forth and Tay through the Forth and Tay Navigation Service as well as operating our own towage fleet. We have a Property Division that manages and develops our property assets, a recycling division (Nordic Recycling) and a joint venture renewable energy division (Forth Energy) with Scottish and Southern Energy.

In Forth Ports we are actively working to reduce our carbon footprint through resource efficiency measures. We have been developing these projects for some years, substantially reducing our energy usage with considerable attention at board level. Forth Ports support activities to reduce carbon, indeed the shipping routes calling at our ports substantially reduce the carbon budget of the UK and we strongly believe that more use of the shipping routes calling at our ports could make a significant impact on the UK's ability to meet its carbon targets. A recent study by the Edinburgh Centre for Carbon Management (part funded by the Carbon Trust) showed that just three of the many routes from our ports saved more than three times the Forth Ports Group carbon footprint (Scope 1, 2 & 3) when compared to road transport alternatives. Following further work we have identified that Forth Ports PLC has a carbon leverage in excess of 10:1; we save more than ten times the carbon we emit in conducting our business. Furthermore, (as the government is aware) we are working on a number of potential coastal shipping and barge transport options that will further demonstrate the carbon benefits that can be derived from growing port volumes by diversion from road. We therefore believe that by working in partnership with government and attracting more trade to travel by sea rather than by land we can reduce the UK's carbon footprint and substantially contribute to the 2050 80% target.

We supply electricity to a number of our tenants within our port estates. On average they use 4-5 times the electricity that we use ourselves. Under the current rules of the scheme, we are responsible for the CRC liabilities of our tenants (where we supply the electricity). This is an issue for us, as it makes our CRC liability disproportionately large. Furthermore, we have no control over the electricity usage of our tenants. Many tenants conduct industrial processes, mills, cement batching plants, processing factories, pipe coating, metal working and so on. Many of these tenants own their buildings, albeit on our land. They therefore have full control over their electricity usage, which makes the proposal that we are responsible for their electricity usage in the CRC a challenging one for us. Clearly we will have to recoup our CRC costs, but there is no logical or sensible clear method for us to do so. Many of our leases are for multi-decadal periods, making it impossible to re-write these to factor in a new scheme such as this.

Due to the nature of the scheme, all the tenants that we supply with electricity will be captured, even those with exceptionally small usage, far below the 6,000MW threshold of the scheme for participation. We believe this will result in some of our smaller and more mobile tenants leaving the ports, and therefore a net carbon dis-benefit through all of the additional transportation associated with port related services relocating out of our ports. By far the majority of the tenants that we supply use less electricity on our site than the scheme participation threshold.[10]

A major vulnerability for Forth Ports is how to deal with new tenants entering the port, if we purchased a subsidiary, the scheme recognises this, and the group would not be penalised unfairly. However, if (as in 2009) a new tenant was signed up that used 6 million units a year, this would count as an absolute increase on emissions, regardless of the fact that it was new business. Similarly, we have one tenant, who is a major user who has a plant that is virtually dormant unless they have a contract. The plant could be dormant for a number of years and then operational for one or more years. If these companies were participants in their own right, the scheme may be able to manage this, but as the scheme stands there is no recognition of this issue and our league table position and resulting reputation and recycle payment is highly vulnerable.

This landlord/tenant issue is particularly acute in ports; clearly we will have to pass this cost on to our tenants. There is no obvious way to deal with issues like those outlined in the paragraph above, particularly if all of the other tenants have assisted in the reduction of carbon relative to their business activities. Yet we all lose our recycle payment. We can split a subsidiary company out of the overall Forth Ports Group - so that it reports on its own (where we clearly have control), but we cannot split our tenants out to report separately (when we have no control over them).

Mobile plant was specifically excluded from the CRC until the latest iteration from the Department of Energy and Climate Change. This u-turn doubles our own use CRC liability. This last minute change came as a surprise; given previous correspondence specifically stated that mobile plant was not included. Obviously, the Committee may feel that this particular issue needs further explanation by the Government. Finally, we have been recently informed that the final guidance for the scheme will not be available until April - which is when the scheme starts. We assume that the lack of final guidance will also be an issue that should concern the Committee

Forth Ports PLC is investing in a number of renewable energy projects. In the Port of Tilbury we have consent for four wind turbines, yet once constructed we will be unable to discount this on-site generated renewable energy from our CRC liabilities. In Scotland we are seeking consent for two wind projects and four renewable energy plants on our estates along through our joint venture with Scottish and Southern Energy: Forth Energy.[11] Similarly, if consented, post construction we will not be able to discount this energy against our CRC liabilities. Beyond these projects, we have been working on resource efficiency for a number of years, having created substantial savings to date on energy use per tonne of cargo handled. This has been achieved through infrastructural investment as well as through behavioural initiatives: e.g. encouraging staff to switch off electrical equipment when idle. Last year we saved in excess of 10% across the Forth Ports group of companies relative to the tonnage handled. This is on top of the previous year, where a number of asset areas achieved astounding savings in excess of 30%.

Part of the work we have undertaken to date on carbon budgeting has shown us that, particularly with coastal shipping, there are opportunities for transport carbon footprints to be substantially reduced by modal shift from road (or rail) to sea. In many cases, moving goods by sea can emit one tenth of the carbon or road transport. This by far exceeds the government's aspiration of an 80% reduction by 2050, and it is an immediate saving.

Summary

The upfront payment nature of the scheme presents many companies with cash flow planning difficulties. But the biggest issue is the decision to make landlords (specifically in the case of ports), where they supply electricity to tenants, responsible for the carbon emissions of their tenants under the CRC. This is a particular vulnerability due to the inability of ports to control the energy use of their tenants, and in particular the often impossibility of forecasting the usage of certain tenants. This represents an enormous financial and reputational liability in its current format. Ports are keen to improve energy efficiency and have made great progress on this over recent years. The aim to improve energy efficiency is fully supported, but the implementation is overly complex and completely unfair where we are expected to carry the liability of tenant companies. We would propose that where there is a 'directed utility', the utility has the same duty to inform DECC of its energy on-sales as any power company. We hope that our comments are useful. We look forward to seeing the outcome of this Committee and working with the Governments of the UK and Scotland to reduce carbon budgets through the facilitation of modal shift from road to sea.

January 2010

Information from the Department for Energy and Climate Change

Thank you for your questions on the CRC Energy Efficiency Scheme Order 2010. Please see our responses below:

Q1.  When are the linked Treasury Regulations likely to be laid?

A1.  We are working with HMT to lay the associated Finance Regulations as quickly as possible. We anticipate publishing a draft on our website by the end of February, which will then be laid during the spring. This timeline is subject to possible delays due to scrutiny processes, the budget and the calling of an election. The regulations will make provision for the sale of CRC allowances, and as such it must come into force by April 2011 as this is when the first sale will be held.

Q2.  What exactly is the issue with maintained schools? Is there still dissatisfaction within the schools sector? If so, how widespread is this?

A2.  Generally there is (widespread) support for grouping maintained schools with their funding local authority and the opportunities this presents for their mutual benefit. This recognises the significant contribution that the schools' estate makes to local authorities emissions; contribution figures in the 50-70 percent range are commonplace.

The primary concern from the sector is that local authorities will be financially accountable for schools energy usage but without having sufficient levers to influence their schools' behaviour.

Our response has been to provide a reasonable assistance duty for schools to provide their local authority with relevant information to enable the local authority's compliance with the CRC's obligations, as well as providing local authorities with the powers to pass on the costs and benefits of CRC participation to their schools. We are proposing to work with the Local Government Association and relevant bodies to ensure this power is an effective lever and does not leave local authorities exposed. In addition DCSF will be working through its carbon budget commitments to reduce schools' energy use and therefore contributing to local authority energy reductions.

January 2010

Further information from the Department for Energy and Climate Change

DECC recognizes and applauds Forth Ports' efforts in increasing their energy efficiency to date. DECC Ministers and officials have discussed the CRC extensively with Forth Ports including a site visit by officials. Forth Ports have helpfully set out their situation clearly and comprehensively and with their help the Department has gained a full understanding of their concerns. In response to the five main arguments Forth Ports have set out in their letter to the Merits Committee we make the following response:

Landlords (in this case Forth Ports) have no control over their tenants' carbon emissions

One of the key barriers to emission reductions currently identified in the CRC sector is the split incentives between landlords and tenants. In many cases landlords have the contract with the energy supplier and pass on the costs to tenants, potentially profiting from the arrangement by increasing the price of the energy they sell on. In a brief that Forth Ports sent to us they state that 'it is worth remembering that electricity on-sales represent a substantial revenue stream'. By this we take it that Forth Ports mean this is a profit centre and the more electricity their tenants use the more revenue is generated for Forth Ports. This is exactly the kind of incentive CRC is seeking to reverse so that instead there is both a financial and reputational reward for those who use less energy. In their brief to us Forth Ports explain that there is often no requirement built into leases specifying the need for the Port to provide the tenant with energy at all. If ports want their tenants' to take responsibility for themselves they can connect them to the grid directly, thereby taking away any incentive the Port has to increase their energy use. We hope that the CRC will enable Forth Ports to share the rewards of greater energy efficiency with their tenants.

Landlords (in this case Forth Ports) have no way to share the costs and benefits associated with the CRC with tenants

We remain unconvinced that there is no way for Forth Ports to pass on the appropriate costs and benefits of the CRC to their tenants if they choose to remain responsible for their energy supply. On this issue there seems to be little difference between ports and other landlords that will be participating in CRC. Having engaged extensively with landlords from across the CRC sector we have come across landlords who are now developing innovative and, we expect, effective ways for costs and benefits to be shared such that they further incentivise energy efficiency.

If landlords do recoup their costs small mobile tenants may leave

If these small mobile tenants move to other UK ports there is a strong chance that they would be subject to the CRC in their new location. As the CRC will encourage cost-effective energy savings it will result in a net financial gain to participants so it should not, in general, lead to significant international competitive distortions.

If Forth Ports take on new tenants there would be no recognition of this growth and so they will lose out in the league table

It is not true to say that there is no recognition for growth in the CRC, as the CRC has both an absolute and a growth metric to account both for improvements in energy efficiency both in absolute (total tonnes of C02) and relative (tonnes of C02/ unit turnover) terms. It is however true that the CRC gives a higher weighting to the improvements in absolute terms. This is true for all organisations, not just landlords, and applies equally to those with a strong growth strategy and expectation. We have adopted this approach, because it is in line with the overall objectives of the scheme, and with the need to decouple economic growth from carbon emissions. Furthermore it is important to note that the previous Government consultation which sought views on this revealed widely divergent views as to how 'growth' should be measured. Because of the difficulties in defining a fair and transparent growth metric across the CRC sector, we therefore believe that it is right that at this stage that the absolute metric has the higher weighting. Government is however committed to keeping the scheme under review.

Mobile plants were excluded, now they are included

This approach was announced in the Government response to the consultation in October last year. We had consulted on the definition of transport and took the view that the previous definition lacked the necessary clarity to allow either participants or the regulator to determine whether certain things were in or out of the CRC. We have therefore adopted an approach which is both robust in terms of definitions, and links to other licensing regimes. Thus, road going vehicles are subject to taxes which are in part designed to improve their overall energy efficiency and reduce their carbon emissions. Mobile plant are not subject to such incentives, and we have therefore included them in the CRC.

Once again, we appreciate Forth Ports efforts in setting out their situation so clearly. We are keen to ensure the key principles of the scheme - incentivising energy efficiency, fairness and transparency - are delivered and recognise that refinements to the CRC may be required over time in the light of experience. We are keen that we continue our dialogue with Forth Ports on the scheme design and operation as their experience of it grows.

We have made clear to Forth Ports and other participants in the CRC that we will keep the operation of the CRC under review and there is scope for making improvements to the Scheme before the second capped phase to ensure it delivers the correct incentives to all participants to improve energy efficiency.

February 2010



10   They may be part of a larger group and would qualify in their own right as a result, but as they are supplied by the port, they will not participate at our sites and we will be responsible for their emissions. Back

11   www.forthenergy.co.uk  Back


 
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