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
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