The CRC: is there a penalty for early action? September 2009 1

Agenda Introduction The Energy Gap – David Middleton - PowerPerfector Early Action – Harry Morrison – Carbon Trust Standard Carbon Capex Budget – Rodolphe d’Arjuzon – Verdantix Conclusion and questions

Introduction CRC 7 months to go! – April 2010 start date Registration packs from EA expected this month Final consultation closed – remaining policy decisions expected over Autumn Key issues for many participants: How to comply with the CRC Strategies to minimise costs / maximise return: Should you cut emissions now? What is the benefit of ‘early action’? How do you get support for capex investment? Focus for today

Is there a penalty for cutting emissions now? – a simple analysis Cost of carbon in the energy we buy: 0.53 tCO2 per MWh of electricity 1 tCO2 emitted for every 1.89 MWh of electricity Assuming 8p/kWh then 1.89 MWh of electricity costs ~ £150 1tCO2 = £150 electricity cost CRC implications: CRC drives competitive behaviour + mgmt attention Financial gain/loss in CRC is much lower than the cost of energy Cutting emissions now (and having a plan to continue cutting) makes financial sense Note also that a greater starting footprint increases your CRC exposure – all future payments are pegged to that point

Agenda Introduction The Energy Gap – David Middleton - PowerPerfector Early Action – Harry Morrison – Carbon Trust Standard Carbon Capex Budget – Rodolphe d’Arjuzon – Verdantix Conclusion and questions

The Energy Gap …. and its effect on electricity prices David Middleton 11th September 2009

What is the Energy Gap? “Around 75% of our electricity is currently generated from gas and coal today; renewables will expand to around 30% of our generation by 2020” Department of Energy and Climate Change, Low Carbon Transition Plan, July, 2009 “…22.5GW is expected to have closed by 2020 and between 30 and 35GW of new capacity is forecast to be needed by 2030. In the period to 2020, 22.5GW of 76GW of 2007 generation capacity will shut by 2020” Greenpeace, Closing the Energy Gap, September 2008

Electricity prices; volatile and uncertain Current prices are less than half what they were 12 months ago, but what will future prices be? Some organisations are creating an energy efficiency budget with a proportion of any price reduction they get to reduce future energy costs

Agenda Introduction The Energy Gap – David Middleton - PowerPerfector Early Action – Harry Morrison – Carbon Trust Standard Carbon Capex Budget – Rodolphe d’Arjuzon – Verdantix Conclusion and questions

League table calculation All organisations are ranked in a league table Position in the league table decides the amount of ‘recycled’ money you receive The maximum bonus or penalty increases year on year Year 1 Year 2 Year 3 Recycling bonus / penalty +/- 10%* +/- 20% +/- 30% League table calculation: Absolute Reduction 0% 60% Relative Reduction 20% AMR 50% 10% Carbon Trust Standard *Recycling payment in year 1 is double to minimise cash flow impact

Early action metrics are the only ranking criteria in year 1 of the CRC Taking early action to reduce emissions before the CRC leads to financial benefit The Carbon Trust Standard and AMR are the 2 recognised early action metrics To gain benefit from the Carbon Trust Standard organisations must have valid certificates on the final day of each CRC year (31st March 2011, 2012, 2013) Points are allocated for the proportion of CRC emissions covered by the Carbon Trust Standard

Illustrative financial impact of taking early action – first CRC year CRC Footprint 10,000 tCO2 (Equivalent Energy bill) ~£1.5m Annual allowance cost (@ £12/tCO2) £120k Double purchase in 2011 £240k Potential bonus / penalty (10%) on recycle +/- £24k Maximum value at stake 2011 from early action £48k Bonus / penalty based 50% on AMR, 50% on CTS Financial impact scales with footprint Reputational impact as important as financial impact?

The Carbon Trust Standard: certification for good practice in carbon management and reduction Voluntary certification Unique focus on measurement, management and reduction Open to all organisations Developed by the Carbon Trust, and based on international standards www.carbontruststandard.com

Further Information www.carbontruststandard.com harry.morrison@carbontrust.co.uk 0800 019 1443

Agenda Introduction The Energy Gap – David Middleton - PowerPerfector Early Action – Harry Morrison – Carbon Trust Standard Carbon Capex Budget – Rodolphe d’Arjuzon – Verdantix Conclusion and questions

ESTABLISHING A CARBON CAPEX BUDGET RODOLPHE D’ARJUZON 11 SEPTEMBER 2009 16

CFOs need to be directly involved for a wide range of reasons CEO commitments Targets Cash Flow Impact of CRC Carbon Reporting Frameworks CFO remit Rising Carbon & Energy Prices Fund Innovation For Revenue Growth Risks and Opportunities Reasons why it is not straightforward to fund carbon initiatives Resistance to SI in Energy Efficiency Low Funds Availability Poor View Of Offsets 17 17

Potential framework to create a carbon reduction capex budget Key Step 18 18

Additionally, this framework is easily tailored to suit the timing of the cashflows required under the CRC To align with the cash requirements for the CRC Set the carbon price one year ahead of the first allowances purchase to effectively levy the cash from the business units Use the cash to fund the first allowances purchase The capex fund for investments in energy efficiency projects is created when the first CRC refund payment comes in Benefits of this framework Adaptable to entities of any size: single or multi-business unit businesses, small businesses, Local Authorities The agreed company wide carbon price makes it transparent and flexible Central control over funding of projects 19 19

Agenda Introduction The Energy Gap – David Middleton - PowerPerfector Early Action – Harry Morrison – Carbon Trust Standard Carbon Capex Budget – Rodolphe d’Arjuzon – Verdantix Conclusion and questions