Energy and carbon compliance is becoming more and more complex for businesses with the growing amount of legislation and voluntary schemes within this space. As a business, you may have heard of or been affected by the Climate Change Levy, Mandatory Greenhouse Gas Reporting, the CRC Energy Efficiency scheme, ESOS, Taskforce on Climate-related Financial Disclosure, and other regulations. With this crowded landscape, it is no surprise the government is looking to streamline the process for businesses in a way that increases transparency, reduces administrative burden, raises awareness of energy efficiency and saves carbon at the same time. Given this is what the Streamlined Energy and Carbon Reporting (SECR) regulations set out to conquer; we ask whether the Government will achieve its objectives?

What will the new carbon and energy regulations look like?

The SECR is a package of regulations published recently by the department for Business, Energy and Industrial Strategy (BEIS), resulting from a series of consultations to streamline mandatory corporate reporting across 2017 whereby several different options were considered. The proposed solution includes:

  • Increased scope of mandatory reporting – the number of companies required to report will extend to include both quoted and unquoted large companies. The definition of ‘large’ company is to be taken from the 2006 Companies Act whereby an organisation is large if two of the following are met: more than 250 employees; an annual turnover greater than £36mi; an annual balance sheet total greater than £18mi;
  • Mandatory public carbon emissions and environmental disclosures which build upon the existing mandatory GHG reporting requirements and ESOS;
  • The closure of the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme from the end of the 2018-19 compliance year;
  • An increase in the Climate Change Levy (CCL) rates from April 2019 and the rebalancing of the CCL rates for gas and electricity.

The SECR framework will come into effect from April 2019 with the first public disclosures likely to emerge around springtime of 2020 to allow companies a full year to collect the required data.

Who will be required to report and what will businesses need to disclose?

The main changes will come for unquoted companies who will now need to start reporting in step with quoted companies who have been largely disclosing since the emergence of the Mandatory GHG (MGHG) regulation in 2013. The details of the SECR requirements and eligibility criteria are the following:

  • Unquoted large UK registered companies will now have to report their UK energy use and associated scope 1 and scope 2 emissions (must include gas, electricity and transport), and at least one intensity metric.
  • Quoted companies will continue to report GHG emissions and an intensity metric with the added requirement of reporting global energy use under the new scheme.
  • Quoted and unquoted companies will also have to report the energy efficiency actions taken over the previous year. (It was suggested in the consultation phase that companies should be made to disclose their energy efficiency opportunities, but this was declined in the government response. This is, however, a requirement under ESOS, which will continue to run as usual.)
  • Companies will need to disclose the required information in their Annual Report
  • The companies using less than 40,000 kWh of energy in the reporting year will be exempt from reporting against SECR.

Other important points on eligibility include:

  • UK subsidiaries that qualify for SECR reporting, will not have to report where they are covered by their parent group’s report.
  • If a subsidiaries’ parent company is not registered in the UK, but the subsidiary is, they would need to report against SECR. Companies that are not registered in the UK (non-UK incorporated) will not be required to report as they are not obliged to publish an annual report at Companies House.
  • Other organisations outside the scope of SECR framework are those not registered as companies, like public sector organisations, some charities and some private sector .

Key impacts on businesses

Any change in regulation comes with its potential positive and negative outcomes, and the SECR is no different. A few of the key impacts to businesses are highlighted below along with their benefits and challenges.

Increased mandatory reporting scope

The scheme now extends to a wider number of participants. The number of would increase from around 1,200 under MGHG to around 11,900 – approximately the same number captured by ESOS.

Benefits

  • Businesses more likely to take action on climate-related risks if more information is in the public domain.
  • Policy makers and analysts can build a better picture of carbon emissions and energy usage across businesses, creating a more realistic picture of the real climate change risks within the UK.
  • Investors will be able to benchmark businesses and take investment decisions from more inclusive and transparent disclosures.

Challenges

Newly captured companies, particularly those of large size but in relatively benign industries,  may perceive disclosing this information as high risk and high cost due to training and/or outsourcing costs related to new data collection systems.

CRC will now be replaced with CCL

The CRC will be phased out and will be replaced with an increase in the CCL and a rebalancing of the CCL rates for gas and electricity.

Benefits

  • The increase in CCL could result in more engagement at site level, as each site becomes more exposed to the tax portion of their energy billing (formerly the tax was only realised at the group level under the CRC.)

Challenges

  • With no centralised tax liability at a group level, the total cost of climate-related taxes may be lost as the cost is spread out across monthly bills at sites. Without top-level engagement could dilute the efforts to reduce total carbon emissions and costs.

The CCL rebalancing will result in incentives to replace natural gas with electricity

The ratio of the electricity CCL rate to gas CCL will move from 2.9:1 to 1:1 over the coming years.

Benefits

  • This may incentivise companies to replace their gas usage with electricity as the electricity grid decarbonises.  In future, it’s possible the electricity grid can decarbonise further and faster than natural gas will be able to.
  • There is likely to be greater policy reach as CCL changes will affect all companies. (CRC was only a subset of large organisations).
  • CCL is charged on kilowatt hours consumed instead of carbon emissions (which was the case for CRC); with a decarbonising electricity grid, CCL charge brings the focus back to raw kilowatt-hour energy savings.

Challenges

  • Replacement of gas with electricity sounds good theoretically but will pose a major challenge for organisations that are gas-dependant. For example, large facilities that use significant gas for heating without reasonable retrofit to electricity (e.g. prisons, schools, hospitals, etc.) or manufacturers that can’t realistically run their operations on electricity.
  • Small companies will see their CCL liabilities go up as the rate is flat and doesn’t account for business size. This will be a challenge for small businesses, where formerly the majority of the tax liability was with the largest energy users under the CRC requirements.

Disclosure of action on energy efficiency

Energy efficiency actions taken in the reporting year must be disclosed, but organisations are not asked to describe future opportunities they could take.

Benefits

  • The requirement to disclose opportunities taken will spotlight companies that have taken action and set them apart from those that have not.

Challenges

  • The regulation does not require organisations to go that step further and report the energy efficiency opportunities they could take in the future. Many companies are already reporting this type of information to frameworks like CDP, so it seems like a missed opportunity that this information is not mandated.

How should business ensure they are ready for SECR?

  • Act now – Newcomers to mandatory environmental disclosures need to start early as they may need to incorporate this by developing new systems, processes and capacity to meet the reporting deadline By early, businesses can ensure they are carrying out the energy efficiency actions identified throughout the year and report on these later. Companies that are already reporting to the MGHG regulation should consult with their advisors and energy providers to ensure they have all the required systems in place to meet the regulations.
  • SMART data-collection – Businesses should examine data-collection processes to ensure they are not doubling efforts. For example, collating data for the maximum required reporting boundary across all environmental regulation and using a subset of data to meet each requirement (i.e. SECR / ESOS / CDP) can ensure that organisations don’t ‘start again’ every time. Business should communicate across departments to ensure the same data is not being collected multiple times by facilities, finance and CSR teams; using centralised data collection systems as much as possible.
  • Communicate with stakeholders regularly – Reporting of any sort involves a variety of internal and external stakeholders who must be aware of the process from the beginning. Externally, this may involve bringing energy providers into the reporting process. Internally, this should involve each stakeholder in the data collection and disclosure process; including top management. Ensuring senior managers are aware of the requirements, information to be disclosed and timelines can ensure timely sign-off of the final information and clear communication around the need or readiness for third-party

A step towards more inclusive and transparent reporting

With a tenfold increase in companies reporting under this new streamlined approach coming into effect April 2019, there is no doubt the UK will be brought one step closer towards effective carbon emission reduction and improvement of energy efficiency within businesses.

Under this improved framework, companies will also see a closing CRC scheme, they will face higher gas costs relative to electricity costs and will be required to disclose their energy efficiency actions. The one missed opportunity is that the regulation could have been further strengthened with the integration of energy efficiency opportunities within the reporting scheme. To enter what should become a more transparent and inclusive reporting landscape, companies need to act quickly, implement smart data-collection processes and engage internal and external stakeholders effectively.

Carbon Smart has been working with companies of all sectors and sizes to report on carbon emissions and environmental matters for more than 15 years.  Contact us today for a 30 mins complimentary advisory call on the impact of SECR on your business.

Speak to Laura Perez on 0207 048 0450 or write to us at info@carbonsmart.co.uk