The Carbon Reduction Commitment (CRC) “A Participants Perspective” (NI Water)

1. The Carbon Reduction Commitment (CRC)“A Participants Perspective” (NI Water) • Climate Change and NI Water • Criticisms of Carbon Trading Schemes • Carbon Reduction Commitment? • Planning for the CRC • Financial implications • Expected performance of UK Water Companies • Key Challenges for NI Water • Further work • Recommendations

2. Climate Change and NI Water • NIW is the single biggest energy user in NI and produces in excess of 148,000 tonnes of CO2 / year from electricity usage alone • Climate Change Risks for NI Water • Water scarcity – 20% increase in global water scarcity by 2015 • Extreme weather events – threaten the existing sewage systems, which were not designed to withstand climate change impacts; localised flooding; supply issues • Discolouration and odour problems – from higher temperatures and more intense rainfall events • Increased risk to assets – pipe systems are likely to become more prone to cracking due to greater soil movement; risk to coastal assets from flooding; storm damage, coastal erosion and a rise in sea level

3. Criticisms of Carbon Trading Schemes • Caps can be set too modest and projections of emissions reductions can also be highly inflated • The auctioning of allowances is considered to be more effective as it applies the “Polluters Pays” principle • Over allocation of allowances weakens the efficiency and effectiveness of any such scheme • Distributional impacts – some sectors can pass on the costs to the customer in higher prices (Not for NI Water?) • Discourages long term investments in new low carbon solutions due to short certainty periods i.e. where will Carbon prices go?

4. Planning for the CRC • NI Water is liaising with Government on key consultation issues • We all need to understand the size of the cap and how quickly this may be squeezed • We all need to understand the scheme design and the requirements for participants • We all need to assess how data will be accurately collected to calculate aggregated energy use and associated emissions • We all need to understand the financial implications of a carbon price and the penalties associated with poor performance • The value of carbon must be incorporated into our business strategies to enable a response to changes in the carbon market

5. Financial Implications of the CRC for NI Water • Unlikely to be cost neutral for NI Water • Costs associated with metering all sites have already been incurred (EAM) • Currently seeking Carbon Trust energy accreditation (EAM) • Administration and transaction costs • Carbon Price – will be significant at around £3.5 M • If the cost of abatement technologies is more than the price of carbon, participants MAY be more likely to pay the penalties – the more economic cost • The government is proposing mandatory penalties for non compliance with scheme rules • £25 per tonne of CO2 in Phase 1 rising to £75 per tonne in Phase 2 ? • CRC regulators argue that most participants will economically benefit from participating in the scheme due to added value from low carbon and energy efficient solutions

6. Expected Performance of NI Water and UK Water Companies • The CRC is designed for non-energy intensive industries, where energy is 1-2% of their operations. However, in NI Water, energy consists of around 15% of operations cost, and after labour, is the largest operational cost • NI Water locally and the water industry generally is unique in terms of its impact on the CRC, as they will be the biggest and therefore most influential player in terms of energy use and emissions • The expected position of NI Water and other water companies in the CRC league table is hotly debated among industry representatives – although most expect the water industry will perform poorly

7. Key Challenges for NI Water (and all participants) • Participation in the scheme • Understanding the emissions trading mechanism and scheme design • Bidding for allowances in an auction and trading emissions in the secondary market • Putting in place adequate plans and preparing for a cap in subsequent years • Accurately measuring energy/emissions data • Double Counting Renewables • Under the CRC there will be no reductions in emissions factors from renewable energy where ROC’s are claimed • Under the CRC purchased renewable energy will have the same emissions conversion factor as fossil fuel derived energy • System administrators will not count this effort twice – could disincentivise investments in renewables? Discussion is ongoing • Striking a Balance • Reducing Emissions Vs Increasing Quality – what are the environmental benefits? • Debate is still ongoing with the government

8. Further Work • Further work is required to; • Identify economically viable low carbon innovations for translation into energy and carbon savings • Identify full (and future) impact of CRC on NI Water • Identify impact of CRC on customers • How will CRC affect the supply chain • How do we find out what technologies are out there, • How do we prove them • How do we commercialise them on a large scale • Further work around ROC issue as most business cases for renewables require ROC value for economic case (e.g. Wind turbines)

9. NI Water - Key CRC Recommendations • Keep it simple – The CRC Scheme design must be simple • The government must consider the challenges for industry (economic recession) • Consider how the scheme will be harmonised with other policies • Influence the price of carbon to ensure the optimal carbon price • Participants must put in place knowledge management teams to support their performance in the scheme • Extending CRC Coverage – could include emissions from other carbon equivalents

10. NI Water - Key CRC Recommendations • Strong government direction and legislation – Support for the water industry’s strategies to reduce emissions whilst increasing water quality. This may include representation on the Committee for Climate Change, to raise awareness of the challenges of reducing emissions in the water industry • Investment required in R&D and increase in On-site renewable Energy Generation – to reduce dependency on energy from fossil fuel whilst making significant CO2 emissions reductions and the introduction of programmes to encourage investments in low carbon solutions whilst at the same time addressing the ROC issue • Greater Enhanced Capital Allowances for Energy Efficiency Products – to incentivise energy efficiency among scheme participants • Creation of cross industry working groups for feedback, further consultation, development, awareness, education and ongoing communication

11. Carbon Reduction Commitment(CRC)Accounting period started on 1st January 2008CRC HAS ALREADY STARTED