The announcement underscores the continued focus on carbon capture, utilisation, and storage in UK energy policy in recent years.
By JP Brisson, Paul A. Davies, JP Sweny, Michael D. Green, and James Bee
On 6 July 2022, the UK government introduced the Energy Security Bill (the Bill) to Parliament, which contained a number of provisions in relation to the proposed future energy landscape in the UK. A key aspect of the Bill is its focus on low carbon energy, in particular the roles of carbon capture, utilisation, and storage (CCUS) technologies and the creation of hydrogen using carbon dioxide captured from the CCUS process (otherwise known as “blue” hydrogen).
CCUS has been an area of focus in UK energy policy in recent years, including the government’s Net Zero Strategy commitment to store 20–30 million metric tons per annum of carbon dioxide by 2030, and its publication of a CCUS Investor Roadmap in April 2022. To ensure that the UK’s CCUS targets can be met, the Bill would establish a framework of economic regulation for the CCUS sector that the government hopes will incentivise investment into CCUS in the UK at the requisite scale. The frameworks that the Bill seeks to introduce have been based on responses to a consultation process on commercial models for CCUS that has been ongoing since 2020.
In line with the government’s approach to date, the Bill recognises the need to adopt different economic frameworks for different component parts of the CCUS value chain. Specifically, the Bill distinguishes between two types of potential operator within the CCUS ecosystem: those for transport and storage (T&S) operators, and those for industrial carbon capture sites. T&S operators are entities that will develop, own, and operate the onshore and offshore networks that transport and store carbon emissions that are captured from emitting industrial sites. The government felt that a separate business model was required for T&S operators compared to the industrial sites themselves, given the differing risk profiles and potential investors.
T&S Regulatory Investment Model
The Bill includes a number of proposed measures to establish the regulatory framework and support necessary to attract private finance into the T&S component of CCUS projects. As well as removing market barriers to investment, the Bill seeks to provide revenue certainty to establish and scale up T&S networks. The measures include:
- Financial Assistance: The Bill would empower the government to provide financial assistance to T&S operators, which may include capital investment as well as other forms of support. The Bill also contains powers to designate a counterparty to manage any revenue support agreements that may be in place for T&S operators, in order to mitigate any market failures that arise at an early stage on the development of CCUS in the UK.
- T&S Licensing Framework: The Bill would establish Ofgem (the UK regulator for downstream gas and electricity markets) as the economic regulator of the UK’s T&S network. T&S operators will require a licence to transport and store carbon dioxide, and Ofgem would have the power to modify licence conditions. This licence would:
- permit the licence holder to charge a fee to users of the T&S network (e.g., industrial operators, power plants, etc.); and
- determine the revenue that a T&S operator would be allowed to receive, which is intended to reflect its costs and a reasonable return on investment.
Ofgem would monitor the charges levied and may challenge them should it determine them to be inappropriate. The economic regulation model for CO2 T&S incorporates not just the establishment of economic regulation but also provisions for decommissioning and amendments to the insolvency regime, recognising the need to future proof the model to the changing needs of the network over time.
- Decommissioning Program: The Bill seeks to introduce provisions to ensure that funds are in place for the decommissioning of T&S infrastructure at the end of the infrastructure’s lifetime.
- Special Administration Regime: The Bill would enable the application of a special administration regime in the event of a T&S operator insolvency to support the ongoing operation of the T&S network and to prioritise the ongoing safety and security of the T&S network.
- Statutory Transfer Scheme: These provisions provide step-in rights for the Secretary of State when there would otherwise be a licence termination, to secure the ongoing operation of the T&S network or to ensure safe decommissioning of the relevant infrastructure when that is not possible.
While CCUS and blue hydrogen are often considered in tandem in policy conditions (for example, see below in relation to the industrial CCUS approach in the Bill), hydrogen T&S is not currently included in the Bill’s proposals. The lack of proposed approach for hydrogen T&S is notable, given that in April 2022 the government doubled its target for hydrogen capacity for 2030 to 10GW.
Industrial CCUS and Hydrogen Investment Model
The Bill also seeks to enable business models to be brought forward to provide investors in low carbon hydrogen and industrial CCUS. The government hopes that this would incentivise further deployment of CCUS in so-called “hard to abate” industries such as cement and steel, industries that are challenging or expensive to operate in a low carbon manner but crucially important to the UK economy.
The Bill seeks to achieve this goal by:
- Contractual Assistance: The Bill would empower the government to incur expenditure and provide long-term financial assistance to support the establishment of CCUS and low carbon hydrogen production. This would allow revenue support to flow through a contractual mechanism. The Bill would also empower the government to designate a counterparty to enter into such contracts opposite the industrial power operator or low carbon hydrogen producer.
- Competitive Allocation: The government expects that, initially, support for CCUS and low carbon hydrogen projects would be allocated bilaterally, but in the future this may move to a competitive allocation system, such as an auction. The Bill would provide the government with the statutory power to set out the allocation process in secondary legislation.
- Hydrogen Levy: The Bill would empower the government to put in place a levy, to offset the cost of financial support to low carbon hydrogen producers. The Bill does not set out how the costs would be borne or the exact structure. The government has indicated that it will consult on the shape and nature of the levy throughout the remainder of 2022, with the levy coming into effect from approximately 2025.
Having been introduced into Parliament, the Bill will now have to proceed through the legislative process and may be subject to considerable revisions as a result of parliamentary scrutiny. Parliament will shortly be entering its summer recess, and so the scrutiny process is likely to begin in earnest later in the year, with the Bill possibly being passed in late 2022 or early 2023. The Bill touches on a number of energy security-related issues outside the CCUS context, and therefore the parliamentary response to these other issues may also impact the speed with which the Bill is passed.
Latham & Watkins will continue to monitor the Bill as it progresses through Parliament, and will also continue to monitor further legal developments in the UK and global CCUS market.