Alan Aldridge, executive director of the Energy Services and Technology Association, outlines some of the opportunities and challenges outlined in the comprehensive spending review

With a target to be the “greenest government ever”, the present government has to put into action concrete programmes to achieve that accolade. The previous administration had already committed the country to a “low carbon revolution” but it would take time before it became apparent how the new government set out its own priorities in this area. The comprehensive spending review has set out some of the main themes and further measures, such as December’s Energy Bill, are now beginning to fill in the detail.
    
Perhaps the first thing to note is that, while the government may have changed, the context in which it operates has not. Climate change continues to be a major global issue and security of energy supply is a priority for all industrialised nations. The 2008 Climate Change Act places a statutory duty on the government of the day to reduce carbon emissions in line with a path to a total reduction of at least 80 per cent by 2050. In addition, the UK has obligations under the Kyoto Protocol to reduce emissions.

In parallel with this, there is a continuing rise in energy prices around the world as developing nations like China and India need more and more energy to service their growing economies. Geo-political issues – such as the disruption to gas supplies from disagreements between Russia and transit countries like the Ukraine – also mean that supplies cannot always be guaranteed. Even with consortia purchasing arrangements, the health service is not immune from volatile rising prices and the impact this has on already scarce operational funds.

Emissions trading scheme
To help achieve the significant reductions in carbon emissions necessary to meet its 8 per cent target under the Kyoto Protocol, the European Union introduced an emissions trading scheme (ETS) for heavy industry. This kind of scheme is particularly popular with economists because it is deemed to be economically efficient. Participants purchase emissions allowances or reduce emissions through performance improvements, whichever is cheaper. With the overall total number of emissions capped, a market develops between those who have managed to improve performance more cheaply – and so have surplus allowances to sell – and those that cannot become more efficient so easily.

Clearly, those in the scheme will only choose to invest in energy efficient or low carbon technologies if the price of the allowances is sufficiently high to make it worthwhile. Now, the first few years of the EU ETS have seen significant emissions reductions – despite a low carbon price. There were clearly some easy wins. However, in 2009 UK firms in the scheme actually bought 13 million allowances (one for each tonne of CO2) suggesting that easy gains are running out.

Yet the price of allowances on the spot market remains stubbornly low – much too low to persuade power companies in particular to invest in new nuclear plants. So the government is now consulting on introducing a floor price for carbon and ensuring it is high enough to make the economics work in favour of new investment. The principle is that carbon will be bought at the current market rate but if that rate is below the floor price the purchaser will have to pay the Treasury the difference. This will gain the Treasury a good deal of money while at the same time making energy efficiency investments viable. In ESTA’s view the rate will need to be around £40-50/tCO2 to be effective.

Now, apart from the fact that this is also likely to feed through into the prices consumers pay for energy, it may also affect participants in other schemes like the CRC Energy Efficiency Scheme – although the CSR has injected a large amount of uncertainty into the future operation of that particular programme. In addition, the re-negotiation of Climate Change Agreements (CCAs) – an alternative to the ETS for certain industrial sectors in the UK – has now been suspended until the finalisation of the carbon price support mechanism later this year.

CRC Energy Efficiency Scheme
The CRC EES is an emissions trading scheme modelled on the EU ETS. It aims to capture energy consumers with large energy bills but who are not within an energy-intensive industry. So the health service, along with higher education, were among the groups specifically included in the scheme. It was originally designed to be revenue-neutral with all the funds obtained through the sale of allowances being recycled to participants. However, there was an incentive to improve energy efficiency because a league table was to be produced each year and those at the top received more money back than those at the bottom. Early action in the form of adoption of automatic Monitoring & Targeting (aM&T) systems or membership of a third-party performance assessment scheme (like the Carbon Trust Standard or one based on BS EN 16001 and the BS Kitemark) would move an organisation up the table.

The CSR has taken away the financial impact of this incentive. Funds will now just go to the Treasury and not be recycled. There will still be a league table but will serve as a reputational driver only. The first sale of allowances will also be delayed for a year and the shape of Phase 2, when full trading was due to begin, has been delayed as well pending further consultation.

In effect, the scheme has become a carbon tax and the only way to mitigate the impact is to reduce emissions in absolute terms. It could be argued that even in its original form as an incentive scheme, it was flawed. An allowance to emit one tonne of carbon costs £12 in the first phase. You would need to spend £170 on energy to incur that obligation. So the reduced consumption from energy efficiency investment is worth far more than the savings from needing to buy fewer allowances.

It should, however, be noted that the ultimate aim of the CRC EES was full carbon trading within a few years. A significant floor price for carbon would have increased the incentive value of the scheme. As Phase 2 is now subject to further consultation, we will have to wait and see what impact the scheme has in the long run.

Speaking of carbon taxes, the Climate Change Levy is also to be reviewed. Added to all consumer electricity bills, it was supposed to provide an incentive to energy efficiency but experts have long argued that it is too small – a fraction of one per cent – to make any difference to behaviour.

Building performance
The re-affirmation of climate targets by the government comes at the same time as the latest revision of the Building Regulations came into force in October. This latest version raises performance requirements for both new and refurbished properties by 21-40 per cent depending upon type. With existing commitments on zero-carbon domestic new build by 2016 and non-domestic by 2019, the next revisions will be even more stringent. However, a major question remains about how well enforced the regulations will be. Past experience does not provide much confidence and the planned reduction in local and central government staffing levels may hinder this process further. Time will tell.

While the Regulations are addressing national targets, they are also being driven by European legislation, notably the Energy Performance of Buildings Directive (EPBD). This may be more familiar to health service professionals through a couple of other measures it has brought in – notably Energy Performance Certificates (EPCs) and Display Energy Certificates (DECs). The latter, a snapshot of current energy performance, have to be renewed annually. Until now, they were only for large public sector buildings visited by large numbers of the public. A revised Directive has now been approved that extends the process to buildings down to 250m2. DECs will also be required for private sector as well, bringing in many private health facilities for the first time.

While that change is still a year or more away, 4 January 2011 marked the date at which all air-conditioning units producing more than 12kW of cooling were required to have an inspection under the first version of the EPBD (250kW units should already have been given a formal performance inspection).

Green Deal and Green Investment Bank
Two eagerly-awaited initiatives that were promised in the Conservative Party manifesto were the Green Investment Bank and the Green Deal. The CSR and recent parliamentary activity are starting to put some flesh onto the bones of these programmes.

The publication of the Energy Bill in December set out how the government aims to deliver substantial improvements in energy efficiency across the built environment via the Green Deal. Originally aimed at the domestic sector, its scope has now been extended “enabling smaller businesses to access funding for energy efficiency improvements, and larger businesses to meet their obligations under existing schemes at lower cost, such as Climate Change Agreements or the Carbon Reduction Commitment Energy Efficiency Scheme” as one of the background documents explains.

One of the main benefits of the Green Deal is that organisations do not need to find the money upfront for investments. The cost of the measures installed is paid back over a period of time through the energy bill. However, this is structured in such a way that customers will see an immediate drop in their bills from the installation of the energy saving measures, notwithstanding a repayment component. And the debt associated with this investment stays with the property (or the meter point) not the owner. So if a health sector organisation re-locates to newer premises and disposes of an existing site, the repayments are picked up by the new owner (issues like demolition etc will be dealt with in detailed guidance issued when the scheme goes live).

It should perhaps be noted that for the banks and finance houses that will ultimately finance the package, this kind of investment programme is very low risk. Nor is it new. There is third-party finance available today for good-quality energy efficiency projects – ESTA members are among the financing organisations. So if you don’t want to wait till the end of 2012, please get in touch!

The Green Investment Bank on the other hand is likely to be a vehicle for funding new technologies or very large projects. Energy infrastructure and generating capacity come to mind but it is understood that larger energy-saving projects may also be considered. We await further details on how this will work – and how it will be funded.

The Energy Services and Technology Association (ESTA) represents over 100 major providers of energy management equipment and services across the UK.

For more information:
Web: www.esta.org.uk