How the Carbon Reduction Scheme will affect IT contracts

OPINION: Government plans to cut carbon emissions in the UK willsoon be mandatory for large businesses and public sector bodies. Animmediate consequence will be changes to the contract terms andpricing mechanics of large IT projects.

The Carbon Reduction Commitment Energy Efficiency Scheme (CRC)comes into force on 1st April. Last year, Intellect, the IT sectortrade body, (151KB / 6-page PDF) that the scheme wouldencourage transfers of carbon liability, rather than encouraging anet overall reduction in emissions across the UK.

Intellect criticised the league table at the heart of the CRC,which rates the best and worst performing organisations based onthe rise or fall in their carbon emissions. Intellect, in commonwith other industry bodies, pointed out that its focus on absolutereductions in carbon consumption makes little sense for an industryin growth and that incentives should focus instead on the relativereductions that can be achieved despite overall growth.

At Pinsent Masons and Logica we expect that any review of themetrics used within the league table will be an exercise infine-tuning, not significant reform. The CRC regime is here to stayand we anticipate that there will be no legislative overhauls inthe short to medium term, notwithstanding the imminent GeneralElection.

Some suppliers believe they are being driven to transfer theircarbon consumption offshore. Data centres, for example, might bebuilt in more polluter-friendly countries to avoid having theircarbon emissions attributed to their UK operators.

However, while the CRC is an initiative of Westminster, notBrussels, we anticipate that other countries' laws will catch up.An offshore strategy is more likely to succeed if it is driven byfactors like cost and choice of climate (i.e. a location thatdemands less artificial cooling) rather than choice ofregulation.

In the absence of legislative change, prudent suppliers may bereviewing their contracts.

Where ICT outsourcing relationships are already in place, theservice delivery arrangements may be set in stone and the contractsmay have many years to run. The arrangements may dictate that theservices are delivered in a way which is not environmentallyfriendly; that energy-hungry facilities are used to deliverservices; that dedicated rather than virtualised servers must beused. In many deals, the customer will have agreed to pay a fixedprice for the services – with no incentive to move to anarrangement which reduces energy consumption or the supplier'sutility costs. 

In these situations the supplier can try to negotiate with thecustomer to introduce more environmentally-friendly provisions.Some customers, particularly those in the public sector, willwelcome 'greener' contracts and may agree to changes that offer nocommercial upside. But if the changes mean an increase in thecustomer's costs or an exposure to fluctuating prices, mostcustomers will refuse. Suppliers will also be looking torenegotiate their energy contracts to introduce flexibilitywherever possible to reduce some of their exposure under the newlegislation.

Those suppliers whose contracts allow for re-negotiation and/orprice increases caused by changes in law are in a more attractiveposition and the outcome will be directed by each contract'swording and commercial allocation of risk. However, under manygovernment contracts the CRC will not trigger price renegotiationclauses because the scheme will be classified as a 'general' changein law – which does not allow for special treatment.

For new ICT outsourcing contracts yet to be placed, we expectsuppliers to address the new environmental regime as part of theirnegotiations with customers.

In these new contracts, suppliers will introduce differentialpricing to incentivise more energy-efficient service solutions andto drive new behaviours within the customer organisation to reduce,for example, data processing transactions or the supplier'sreliance on cooling mechanisms in data centres.

We may also see a new focus on contract review clauses triggeredby a change in cost base. These are common in areas of marketvolatility, such as commodity service components, and may be usedmore frequently in future in the area of utility costs.

We expect to see more outsourcing deals with pricing structureswhich allow the suppliers to pass on their utility costs in full tothe associated customer – or to treat them as 'direct supply' tothe customer with the bill being paid through the agency of thesupplier.  This sounds simple but the question of pricingutility costs so that they can be accurately allocated and passedon to any specific customer is not straightforward in the new worldof caps, market pricing for allowances, bonuses andpenalties. 

If suppliers are using fixed prices in the area of data centreoperations, there may need to be a significant contingency withinthe price to allow for the future unknowns in the energy pricingmarket. 

We may also see suppliers 'mirroring' the scheme in individualcontracts to allow them to flow through to customers the regimeimposed by the CRC. Such negotiations will be a challenge: neithersupplier nor customer will want to carry the risk andresponsibility that each regards as the other's problem. 

The direction of environmental regulation is unavoidable andunambiguous even if it is not universal. The CRC is an importantpart of the UK's regime and it may be tweaked but its coreprinciples are unlikely to change. The CRC is not in force untilApril, but its principles can be reflected in IT contractstoday.

By , a partner with Pinsent Masons (the lawfirm behind OUT-LAW.COM) and Nicolette Walshe, Sustainability &Climate Change Consultant, Logica. This article first appeared onthe website of .