UK - the carbon reduction commitment and its impact on global franchisors

This article was first published in the International Journal of Franchising law.

The CRC Energy Efficiency Scheme (CRC Scheme) is a new UK-wide mandatory emissions trading scheme that started operating in April 2010. The scheme applies to franchisors, including those based overseas, as long as the UK electricity consumption of the franchised network exceeds a certain threshold and the franchisor is active in the UK. This article sets out the detail of the new scheme and the compliance obligations of both franchisors and franchisees.

Introduction

The CRC Energy Efficiency Scheme (CRC Scheme) is a new UK-wide mandatory emissions trading scheme that started operating in April 2010. It is expected to involve (at some level) around 20,000 large non-energy intensive organisations, including international franchising businesses, government departments and universities.

The British Department of Energy & Climate Change (DECC) launched a consultation on draft legislation to implement the CRC Scheme in March 2009. The response to the consultation was published in October 2009 and the CRC Energy Efficiency Scheme Order 2010 came into force on 22nd March 2010.

CRC requirements in summary

Any organisation that has at least one Half-Hourly Meter (HHM) will have limited participation in the CRC Scheme. This includes foreign franchisors that have domestic franchisees in the UK. Organisations
 
that consume more than 6000 MWH are full participants. Organisations that consume less than 6000 MWH have certain reporting obligations. Franchisors together with their local franchisees will be a “combined participant” and the franchisor will have overall responsibility for compliance by its UK franchisees with the CRC Scheme even where the franchisor is based abroad.

Organisational groups must participate in the CRC Scheme as a single entity. In general, the highest parent organisation will be the “primary member” responsible. In a franchise network the franchisor is the primary member. Large subsidiaries that consume more than 6000 MWH in their own organisation can register as independent parties.

Full participants in the CRC Scheme will have to:

• Register online by 30 September 2010;
• Measure and record their energy use and calculate their CO2 emissions annually;
• Provide annual energy data via an online registry and submit an annual report on emissions to the Environment Agency (first report due July 2011);
• Buy carbon allowances for each tonne of CO2 emitted (tCO2) in an auction organised by the Environment Agency (first sale will be in April 2011);
• Surrender carbon allowances equivalent to their emissions to the Environment Agency;
• Trade carbon allowances in an open market with other organisations if they have bought too many or too few allowances.

Participants will also be ranked in order of their success at reducing emissions in a public league table. This is expected to attract major public interest and a bad ranking could damage the reputation of a franchised network.

Limited participants will have to report on their energy use.

Application to franchising

Franchisors will have to take responsibility for the emissions of their franchisees. This applies to all franchisors including overseas franchisors that have at least one HHM somewhere in their domestic network. So the presence of a single HHM in one franchised unit is sufficient to trigger the reporting obligation. Failure to report can attract significant fines. The HHM electricity consumption from all franchisee operations will need to be calculated and added to that of the franchisor to determine whether the qualification threshold is met.

The Order defines franchising broadly as based on the following key elements:

• there is an agreement between parties at different levels of the distribution chain;
• the franchisee (not defined) sells or distributes goods or provides services as provided for by the franchise out of a premises;
• the franchisee presents or equips premises so that it has an internal appearance which is substantially uniform with premises belonging to other franchisees of the franchisor (not defined).

So “franchising” could cover other similar vertical relationships irrespective of technical classification (e.g. selective and exclusive distribution systems such as car dealerships). The rationale for this approach is related to the nature of these agreements, where a common business format is imposed by one party to the agreement (the franchisor). This has the potential to influence the way in which energy is used by the other party (the franchisee).

Responsibility of the franchisor

The franchisor will be responsible for reporting on and trading emissions for the franchise group. The franchisees must provide data on their energy use to the franchisor, which can be obtained by requesting an annual statement from energy suppliers. If franchisees refuse to cooperate with the franchisor, the law gives the franchisor the right to apply for an enforcement order. There is nothing in the current proposals for the CRC Scheme giving franchisors any right to reclaim the cost of complying with the scheme from their franchisees. This suggests that unless the franchise agreement contains an appropriate indemnity that can be relied upon, the franchisor will have to bear the costs. Strategies will have to be devised by franchisors for convincing franchisees to contribute towards the scheme costs.

Franchisee landlords

Landlords take responsibility for certain energy use under the CRC Scheme. Where the franchisee’s landlord supplies energy for the premises, the franchisor does not have to take into account that franchisee’s energy use. Whilst this appears helpful at first glance, it will actually add a further layer of complication to the reporting phase in that franchisors will have to exclude from their reports those franchisees that participate in the landlord’s scheme. On the other hand these exclusions may enable smaller franchisors to reduce their overall reported energy use to below the relevant threshold.

Overseas franchisors

The UK Government advises that the CRC applies irrespective of whether the franchisor is based overseas, so long as the UK electricity consumption of the franchised network exceeds the threshold and the franchisor is active in the UK. If the Franchisor did not want to deal with the Scheme itself a UK¬based franchisee could be nominated as the organisation’s representative or a specialist consultancy could be appointed. Ultimate liability for correct reporting and compliance would however remain with the Franchisor.

Practical detail remains to be clarified. Possibly an overseas Franchisor could seek to delegate responsibility to its Master Franchisee or UK Developer in the same way that an overseas holiday company could delegate responsibility to a local subsidiary. Unfortunately the law is silent on this point. The fact remains that responsibility for compliance rests with the Franchisor. It is the Franchisor that will be liable if the franchise network fails to comply.

Determining qualification

As noted above, qualification for the CRC is determined on the basis of electricity consumption through HHMs. If an organisation has at least one HHM it will be caught by the CRC, but will only be a full participant if its energy consumption has been at least 6000 MWH over the course of 2008. Note that an entire organisation may be exempted for the duration of a phase if the amount of electricity in the qualification year after exclusion of transport consumption is less than 1000 MWH. Where consumption is between 1000 and 3000 MWH it will be required to provide the Environment Agency with information on the organisation’s total electricity consumed through its HHMs but will not be required to participate in the CRC.

What is a half hourly meter?

The purpose of HHMs is to measure electricity for billing purposes and also to allow electricity suppliers to ensure there is a balance between the amount of wholesale electricity generated and consumed in a particular period. HHMs may be installed on a voluntary basis or are required to be installed by electricity suppliers where demand at a business during certain peak times exceeds 100 KWH.
 
For the purposes of determining qualification, other types of meters which measure electricity on a half hourly basis are included, even if the electricity is not settled on the half-hourly market. These are voluntary automatic meters (capable of measuring the electricity supplied on an half hourly basis and which are read remotely) and pseudo half hourly meters (where electricity is measured by activity data, notably used to calculate the electricity consumed by street lights).

Franchisors are advised to carry out urgent estimates of their energy use per average franchised unit to establish if their network’s energy consumption is likely to exceed 6000 MWH.

The allowance sale

The CRC will operate as a cap and trade scheme in which participants must buy and surrender allowances corresponding with their emissions (one allowance per tCO2 emitted). Note that while qualification for the CRC is based solely on electricity consumption, the emissions trading scheme is based on all energy use, covering both direct emissions (gas, oil and coal) and indirect emissions (e.g. electricity), but excluding transport emissions, household emissions and emissions covered by Climate Change Agreements or the EU Emission Trading System.

What should franchisors do?

Urgent action is required by all overseas franchisors that have not yet established whether they need to register to the scheme.

• Franchisors must establish as a matter or urgency if HHM’s are used by their UK domestic franchisees. If the answer is yes, a scheme registration may have to be made.
• In a next step franchisors need to measure electricity use across their UK network in the “Footprint year” (2008).

If consumption exceeds 1000MWH a report will have to be filed. As it can take some time to detect all HHM and to collect energy data, it is strongly recommended that all franchisors commence an energy audit as a matter of urgency.

For further information, please contact Babette Marzheuser-Wood.