A letter from Simon Walker that outlines the BVCA's formal response to Carbon Reduction Commitment consultation.
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Dear Member
I wanted to draw your attention to a new Government scheme which has the potential to affect many of your portfolio companies in the coming year: the Carbon Reduction Commitment (CRC).
What is the Carbon Reduction Commitment (CRC)?
The Carbon Reduction Commitment is a cap and trade scheme for large 'non-energy intensive' UK organisations to encourage energy-saving. It is due to be implemented in April 2010 and is part of the Government's wider commitment to reduce the UK's carbon footprint (as established in last year's Climate Change Act).
Under the scheme, 'groups ' will be required to purchase annual allowances for each tonne of CO2 which is emitted either directly or indirectly (ie through the use of electricity). The government will then redistribute revenue from the allowances in an attempt to establish a market for CO2 emissions.
Organisations will need to comply with the CRC if their electricity consumption amounts to 6,000MWh or more in total across the group during the 2008 calendar year. This equates, on the basis of the current cost of electricity, to an annual spend of around £500,000 on electricity. DECC estimates that this will cover around 5,000 organisations.
Organisations which consume less than 6,000MWh across the group during this period will still need to complete an on-line form and, if they consume 3,000MWh or more, to provide information on their electricity usage on an on-going basis.
How will it impact private equity?
The wrinkle for our industry is in the way the scheme will be implemented. Government's aim is to apply the scheme on a 'group' basis (which is defined here as parent undertakings and subsidiary undertakings under the Companies Act 2006). The group definition therefore includes private equity-controlled portfolio companies. This means that electricity use will be an aggregate calculation of all controlled portfolio companies. So if you spend £500,000 on electricity in total amongst the portfolio companies you control, you will be included. This will also mean application at fund level (or via a nominated 'primary member'), rather than at individual portfolio company level.
Clearly this disadvantages private equity-owned companies, many of whom will fall below the threshold individually but will be brought in to the scheme in aggregate with other portfolio companies. In other words, disadvantaging them simply because of their ownership model.
Applying a parent and subsidiary undertaking concept to identify a 'group' may work well for some commercial companies, and member firms' companies will be incorporated in the scheme if they fall above the threshold anyway. But there will be a significant number whose individual companies do not fall within the scheme on the basis of their own electricity consumption, and are not part of a group of companies in the normal way (ie there is no single board with overall authority but instead there are individual boards and individual shareholding structures for each portfolio company) but will be brought in as a result of the group definition. We are also concerned about the precedent this potentially sets.
What are the BVCA doing about it?
The BVCA's Legal & Technical committee has been heavily engaged with this issue and with the Department for Energy and Climate Change (DECC) for the last six months in an attempt to rectify the situation.
I wrote formally to the minister responsible for the scheme back at the end of last year outlining our concerns, and discussions have been ongoing since then. The central problem is that the Government's main objective is to bring as many companies in to the scheme as possible. That additional portfolio companies are dragged in is - from their perspective - a positive thing.
Attached is our formal submission to the Government's consultation on the issue, which closes this week. We have made the case that implementation should be at portfolio company level and should apply only to those firms who fall within the scheme individually. We put forward a number of options to bring this about, including: using the commonly understood meaning of the parent and subsidiary undertaking; applying UK GAAP treatment to determine the 'group' definition; or allowing a 'define and explain' method of implementation which would give more scope to implement the CRC in a way which takes proper account of private equity structures.
We will continue to make our case here and keep you updated on developments.
Finding out more
I realise this issue may be new to you and if so is likely to raise many questions. That is why we are co-hosting a member seminar on the topic at SJ Berwin on 9 June 2009. For more information on this, please contact Carmen Murray on cmurray@bvca.co.uk / 0207 025 2971.
Background to the scheme and further information is also available on the department's website at:
http://www.defra.gov.uk/environment/climatechange/uk/business/crc/index.htm
Your sincerely
Simon Walker
Chief Executive
BVCA - The British Private Equity and Venture Capital Association
