Private equity sponsors: do the changes to the CRC Energy Efficiency Scheme mean you can now disaggregate?

In brief

The deadline for registration for the next phase of the CRC Energy Efficiency Scheme is 31 January 2014, with the next phase commencing on 1 April 2014. Applications for disaggregation should ideally be made at the same time as registration so sponsors should be considering now whether or not they wish to disaggregate their funds and/or portfolio companies in respect of the next phase. But the Environment Agency has confirmed that you will be able to disaggregate later, even if you do not apply at registration. The rules about disaggregation have been changed and so you may be able to disaggregate where you were unable to before.

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What is the CRC Scheme?

The CRC Scheme is a UK-wide mandatory emissions trading scheme which applies to public sector organisations and private groups of undertakings whose electricity consumption exceeds a certain threshold during a certain period. Groups must participate in the scheme if they qualify. The scheme operates in phases: the next phase will run from 1 April 2014 to 31 March 2019. Qualification for the next phase will be judged on a group’s electricity consumption in the period from 1 April 2012 to 31 March 2013.

Why does this affect private equity?

Funds are not excluded from the CRC Scheme and so a group could be formed by a fund and its portfolio companies or indeed by a GP, its funds and their portfolio companies. Sponsors will need analyse their fund structures as they stood as at 31 March 2013 to determine the extent of their group for the next phase and to determine which undertaking is the ultimate parent – the “highest parent undertaking” for the purposes of CRC.

Why does it matter?

There are three main concerns for fund groups qualifying for the scheme.

  1. The compliance burden. The day to day responsibility for compliance falls on the nominated “account holder” for the group. This must be any UK based undertaking in the group or a proxy if there is no UK undertaking in the group. In practice, where a fund is the highest parent undertaking, the fund’s manager is likely to take on the account holder role either behind the scenes or as the named proxy. 
  2. The costs burden. Registration and annual fees and the costs for buying allowances to cover the CRC emissions of the group will need to be paid and recovered from the portfolio companies which are actually responsible for the emissions. 
  3. The liability burden. Each member of a group has joint and several liability for the group’s compliance with the CRC so there is a theoretical possibility that one portfolio company could be held liable for the failings of another, even though they have no connection to each other except for having the same investor.

How does disaggregation help?

Disaggregation is the process of de-linking subsidiaries or groups of subsidiaries from the highest parent undertaking’s account and allowing them to have their own CRC registration.

Accordingly, disaggregation could significantly reduce the compliance, costs and liability burdens mentioned above. Helpfully, the rules have been changed for the next phase to make disaggregation easier. Under the new rules, any undertaking or group of undertakings (other than the highest parent undertaking) may disaggregate from a group and there is no need for the group that is left behind to meet the qualification criteria in its own right. This means that it is possible for a fund (as highest parent undertaking) to disaggregate all of its portfolio companies.

Should I disaggregate and how do I go about it?

Whilst disaggregation seems attractive, sponsors should remember that multiple registrations will mean that the compliance and costs burden would be spread across the fund group with multiple fees being payable and each portfolio company having to appoint its own persons to be responsible for compliance.

In addition, disaggregation is only complete when the subsidiary or highest parent undertaking of the subsidiary group registers for the scheme itself. In practice, you will therefore need the consent of your portfolio company in order to disaggregate and smaller portfolio companies who do not qualify in their own right may resist disaggregation.

If you do wish to disaggregate your portfolio companies, the highest parent undertaking must still register for the next phase of the scheme. During the registration process, you will be able to apply for undertakings to disaggregate. The Environment Agency have confirmed that even if you do not make the disaggregation application at the time of registration, you can log back into the account and apply later.

Subsidiaries which were disaggregated in the last phase will need to re-apply for disaggregation for the next phase.

Where can I find further information?

Further information can be found on the Environment Agency’s website or from your usual Osborne Clarke contact.

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