By: Clive Longbottom, Head of Research, Quocirca
Published: 26th October 2010
Copyright Quocirca © 2010
When the previous government brought through the carbon reduction commitment (CRC) scheme, it seemed to have promise, although it was flawed in certain areas. The idea was that a body be set up to look at those organisations that had large energy bills that were not core to their business. Those where energy was core (“high intensity energy users”)—such as metal smelters—were already under legislation to manage their energy more effectively.
This second group—or the “low intensity energy users”—were brought in to a model based on a league table. All the 5,000 or so organisations caught in this new CRC web would put money into a pot at the beginning of the year, based on “buying” allowances for their carbon output, totalling over £1bn. Then, by managing their carbon emissions against agreed targets, the league table would be set at the end of the year, with those doing well against their targets being at the top of the table, and those who did badly at the bottom. The pot of money, minus a few running costs, would then be reallocated, with those who had demonstrated good carbon reduction getting back more than they had paid in to the pot, and those who had done badly ending up with less that they had paid in. As time went on, the allowances could be traded, so allowing those who were particularly adept at managing their carbon outputs to sell on allowances to those who were not so good, so providing a further financial incentive.
A pretty good carrot and stick—but the way it was implemented meant that those who anticipated the legislation well could play the CRC league table for all it was worth, running “dirty” during the lead up period and then agreeing targets over a long term that would ensure that they did well financially, for a few years at least. But these minor points could have been managed, and a model could have been put in place that was a beacon for both developed and developing nations as to how best to provide incentives for carbon output reductions.
However, all of that has now been thrown overboard, as the UK’s new coalition government alters the rules and changes the CRC legislation to a straight carbon tax. There are now no winners in the CRC net apart from the Government, who will just charge for the carbon allowances and then keep the money.
The logic goes that with this being a direct cost, it is therefore in an organisation’s best interests to manage its energy utilisation more effectively. But, without any direct winners in the game, and with every organisation already looking at their energy usage due to the unpredictability of its cost (apart from it trending upwards over time), the way that many organisations manage their carbon footprint is likely to change.
More of the cost will often be passed on to the consumer/customer as there is far less incentive for an organisation to try “something new”—to try and be overly innovative in how it manages its energy, as the only benefit is in lower energy costs, plus less CRC tax, rather than by gaining positive revenues through the original CRC approach. Innovation needs investment—and this investment could have been partially or wholly recouped through the CRC repayments and the selling of allowances—now it comes back down to a straight forward return on investment (RoI) calculation. The impact of the new CRC rules looks like adding 10–15% to an organisation’s energy bills—so this may make some changes more attractive than they were on the surface previously—but many others will now wither on the vine.
However, energy will have to continue as a focus, and for those investigating how best to optimise existing usage, or wanting to be able to predict effectively the impact of any changes in their environment on energy usage, there are a few options. In the realms of IT, vendors such as Romonet, nlyte, Externus and Emerson provide software and tools to help model existing environments and predict the impact of changes on energy use by the overall IT estate. CA, with its new ecoSoftware, can provide a more holistic approach to energy usage across the whole of an organisation, including IT—an approach many of the other vendors are also beginning to look at as an extension to what they already do for datacentres. As IT becomes more and more central to the “intelligent organisation”—for example managing energy usage through automated heating and cooling of office space—such tools will become fundamental to the business.
The changes to CRC are retrograde, and will have a detrimental impact on how innovative organisations will be in managing their energy usage. However, the need to optimise existing energy profiles will still remain—and even though innovative energy reduction approaches may be lower on the priority list than before, minimising energy usage on a cost-effective basis should still be high on an organisation’s priorities. Software and tools that start with IT but allow bleed through into the intelligent, IT-controlled overall business will set a foundation for minimising the impact of the new CRC—and may provide a springboard for greater innovation once economic conditions allow.
Posted: 2nd November 2010 | By Philip Petersen :
Interesting article. I believe turning CRC into a straightforward tax will strengthen the incentive for companies to invest in energy management solutions - particularly companies operating data centres, whether they are service providers or corporates with their own estate. You mention tools that can be deployed by IT and facilities to assist this - although you did not include another UK software solution provider www.adinfa.com and its InSite product for monitoring and management. So far, very few data centres have deployed these kinds of technologies yet. There is very little automated real-time monitoring of energy consumption at any level of granularity yet but I believe that this is essential to provide real insight to data centre energy management. Modelling is fine but only gets you part of the way - time passes and set-ups within a data centre change so active monitoring is necessary to understand what is actually happening.
It does boil down to RoI, as you write, and linking the costs of IT services and facilities to the business.
Posted: 3rd November 2010 | By Clive Longbottom :
Philip, I believe that the problem with turning CRC directly into a tax is that it ONLY leads people into investing in energy management solutions - and not into looking at energy alternatives, major changes in energy usage and so on. As such, CRC as it now stands is counter to the Kyoto/Copenhagen agreed targets, which require far more than tinkering around the edges. Unfortunately, in the current economic climate in private , public and governmental arenas, I cannot see the government changing its mind - and as such, commercial organisations will be looking for the quick win, rather than the long term sustainable strategy. In the long term, everyone loses - unless the tools provided can provide both the short term tactical gains and the long term strategic advice, couched in solid business terms. This will be a hard sell, but could work - even against such a crazy move on CRC.
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