Tuesday, 29 April 2014

Landlords and Tenants Need to Work Out Energy Priorities

Written by Andrew Baker,
Associate Director, Energy and Sustainability

As of 1 April 2014 the government’s Carbon Reduction Commitment energy efficiency scheme (CRC) entered a new phase — triggering an opportunity for participants to save around 5% of their annual CRC costs by purchasing allowances at the beginning of a compliance year.

As with all things CRC, this change will have implications for both landlords and occupiers.

Most organisations with annual electricity costs exceeding £500,000 will have qualified for the second phase of the scheme, under which participants are required to calculate their total UK energy consumption, report it to the government and purchase “carbon allowances” equivalent to their annual carbon emissions.

Since it launched in April 2010, the CRC has been subject to much debate and been tinkered and changed from a cap-and-trade scheme that was revenue neutral for the government, to one in which the government sets the carbon price and keeps all revenues it generates.

For the past two years participants have had to buy allowances at £12 per tonne. In the 2014/15 compliance year the scheme is moving to a dual sale of allowances in which participants will have the option of buying in the “advance sale” in June 2014 at the lower price of £15.60 per tonne of CO2,or buying in the later “buy to comply” sale in September 2015 at the higher price of £16.40.

I welcome the change, and believe the scheme is already playing a vital role in focusing management time and attention on energy consumption. The change is likely to initiate a new series of conversations between landlords and occupiers about the approach to CRC costs, and, in doing so, bring about another opportunity for parties to reduce on-site energy consumption.

Critics will point to the fact that dual sale adds complexity at a time when the scheme was embedding. They are also likely to, quite rightly, question whether the difference between the two carbon prices is enough.

The cost of allowances will be 5.1% more in the second sale, but costs will be incurred 15 months later (equating to an annual rate of 4.1%). As the average CRC participant emits just over 27,000 tonnes of CO2 they will therefore have to purchase £424,000 of CRC allowances to cover their 2014/15 emissions if they purchase in the advance sale, or £446,000 if they purchase in the later buy to comply sale — an additional cost of £22,000.

Rebate or refurb

For corporate occupiers, the decision-making process at these rates is likely to be simple: most would surely be of the view they would be better off investing the capital elsewhere in the business rather than purchasing in advance. A greater differential is therefore needed to reward and incentivise companies to monitor and manage their energy consumption.

An interesting angle for companies considering purchasing in advance is they should instead invest this capital into energy efficiency initiatives such as LED lighting, controls and replacing old equipment, which would certainly provide far better returns.

The situation becomes more complex when applied to landlords. Where CRC costs are passed on to tenants there is limited incentive for landlords to participate in the advance sale. Further, there is a strong case to argue that the 5.1% difference over 15 months is not attractive to their occupiers.

Yet, the third edition of the RICS Code of Practice on Service Charges in Commercial Property states that in relation to the CRC “owners owe a duty of care … to keep costs down”, which could be interpreted to suggest landlords should purchase allowances at the lower advanced price where possible.

The relative expectations of tenants and potential reputational risk are key considerations. Neither approach comes without complexity and administrative burden and, either way, the administrative difficulties and costs incurred are likely to signal another period of criticism for the CRC.

Still, landlords and occupiers should embrace this moment as an opportunity to discuss projects to reduce energy costs — which, after all, remain over 10 times more than the relative CRC costs.

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