Contracts for Difference (Miscellaneous Amendments) Regulations 2022
(2 years, 7 months ago)
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Lord Callanan
That the Grand Committee do consider the Contracts for Difference (Miscellaneous Amendments) Regulations 2022.
Relevant document: 37th Report from the Secondary Legislation Scrutiny Committee, Session 2021–22
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, these regulations were laid before the House on 31 March 2022.
The recent British Energy Security Strategy spoke of ensuring a new lease of life for the North Sea in low-carbon technologies such as carbon capture. The Net Zero Strategy set out the Government’s ambition to have a carbon capture and storage sector with an operational capability of capturing 20 megatonnes to 30 megatonnes of carbon dioxide per year by 2030. In its Sixth Carbon Budget, the Climate Change Committee re-emphasises the crucial role that carbon capture and storage—CCS—will play in reducing emissions from industrial processes, combustion, electricity generation and hydrogen production. The energy White Paper 2020, set out the Government’s view of how to achieve a low-cost, low-carbon electricity system.
While we cannot predict today exactly what the generating mix will look like in 2050, we can be confident that renewables will play a key role. However, in order to decarbonise while maintaining security of supply and keeping costs low, we will need to balance renewable variability against demand. To do this, we will need system flexibility, energy storage, and non-weather dependent low-carbon generation. We consider that thermal power with carbon capture and storage is one technology that can provide this at scale. In the subsequent Net Zero Strategy, the Government committed to using consumer subsidies to support construction of at least one power CCS plant to be operational by the mid-2020s.
In the round, these strategies illustrate the critical importance of carbon capture and storage technologies. To enable this, we have developed the dispatchable power agreement. This is a carbon capture and storage subsidy for gas-fired projects connected to a full carbon capture and storage system that are intended to provide low-carbon flexible power generation. The dispatchable power agreement contract is a bespoke contract based on the standard terms of the contracts for difference used in the allocation rounds; it has been amended in consideration of specific amendments to ensure suitability for power carbon capture and storage. The dispatchable power agreement will be a key tool used to encourage low-carbon electricity generation by bringing forward investment in power carbon capture and storage plants and to incentivise such facilities to operate in a manner which benefits the UK energy market. It is commonly referred to as a business model and is intended to implement this commitment.
The regulations were laid before the House on 31 March. The amendments in this instrument are needed to ensure that existing regulations under the Energy Act 2013 can be used to award dispatchable power agreements. These regulations are used to award contracts for difference currently. The proposed amendments are not intended to impact the standard contract for difference for the current allocation round or future allocation processes of the standard contract for difference.
This statutory instrument introduces three changes to the existing regulations, which are: the Contracts for Difference (Allocation) Regulations 2014, which we shall refer to, for the purposes of ease, as the “allocation regulations”; and the Contracts for Difference (Definition of Eligible Generator) Regulations 2014, which we shall refer to, for the purposes of ease, as the “eligible generator regulations”.
This statutory instrument, first, amends the eligible generator regulations, specifically the definition of an eligible generator. Currently, generating stations connected to a complete carbon capture storage system are eligible generators. The change allows for retrofitted carbon capture storage projects to constitute an eligible generator. It does this by widening the criteria for carrying out a generating activity to include altering an existing generating station into a generating station connected to a complete carbon capture storage system. By making this change, retrofitted power carbon capture storage plants can be eligible for the dispatchable power agreement.
This statutory instrument, secondly, amends the allocation regulations. Currently, the allocation regulations include a specific reference to contracts granted pursuant to Section 10 of the Energy Act 2013. The regulations refer to such contracts and suggest that they will include a “strike price” and “reference price” within their payment mechanism. The amendment retains the references to a strike price and a reference price, but by amending the language to state that a strike price and reference price “may be included”. An alternative payment mechanism which does not use these terms could also be used. This ensures that contracts which do not specify a strike price and a reference price can therefore be contemplated. This means there will not be a requirement for these specific terms to be used in a dispatchable power agreement and the alternative payment mechanism can be used, which will allow for the alternative payment mechanism under the dispatchable power agreement. Further details of this payment mechanism have been set out in the recent dispatchable power agreement publication.
The third change that this statutory instrument makes is to amend the eligible generator regulations. Currently, an eligible generator is defined as connected to a “complete CCS system”, which means
“a system of plant and facilities for … (a) capturing some or all of the carbon dioxide (or any substance consisting primarily of carbon dioxide) that is produced by, or in connection with, the generation of electricity by a generating station; … (b) transporting the carbon dioxide (or substance) captured; and … (c) disposing of it by way of permanent storage”.
The amendment proposes to add into sub-paragraph (b), after “transporting”, the words
“including by way of non-pipeline transport methods”,
to contemplate potential alternative transport methods. The consultation responses noted that it would be helpful to clarify that transport could be carried out by way of non-pipeline method. The proposed amendments in this statutory instrument intend to facilitate non-pipeline transport generally in the regulations, as has been set out. The proposed changes to the eligible generator regulations aim to be neutral regarding the different possible configurations of non-pipeline transport and will not exclude any particular form of non-pipeline transport.
In accordance with the Energy Act 2013, a consultation was carried out from July to September 2021, and the response was provided by the Government in March of this year on GOV.UK. We received 16 responses to the consultation from businesses and organisations, some directly involved in power CCS, and from trade associations, non-governmental organisations and other interested parties. The responses were largely positive in favour of the proposed changes but respondents requested some clarifications, which we have responded to in the published government response. These proposals will enable the award of the dispatchable power agreement, but they do not create any new commitment to offer support.
In conclusion, the measures introduced by the SI are aligned with the Government’s carbon budget and net-zero targets and help to enable power carbon capture and storage projects. I commend these regulations to the Committee, and I beg to move.
Baroness McIntosh of Pickering (Con)
My Lords, I thank my noble friend and congratulate him on presenting the regulations to us this afternoon. He will be aware that there were great hopes, particularly off the Yorkshire and Humber coast, that facilities had been identified which would be appropriate for exactly the type of venture that is set out in the regulations before us today. So I welcome the regulations, but is my noble friend able to confirm that he believes that the take-up on the proposals for carbon capture and storage will increase and multiply because of the content of the regulations before us this afternoon?
Separately—he might think I am going off-piste here, and I probably am—can my noble friend explain something? If I understood it correctly, one of the difficulties we have with wholesale gas prices impacting the UK as they have—though perhaps not as badly as in other European countries, which rely heavily on Russia—is that we have gas storage of only 60 days, which is about two months. That strikes me as being terribly low. I do not suppose that that would benefit from these proposals, but I would like to understand why, historically, we seem to have a lower storage capacity than other European countries. Is that something that the Government might be minded to look at that?
The only other point I wish to make, which I am sure my noble friend is very familiar with, is the point raised in the 37th report of the Secondary Legislation Scrutiny Committee, which I find myself in some sympathy with. Even though I am a lawyer by training and spent about nine months of my training going through all the scientific evidence—produced mostly by scientists rather than lawyers—on whether fluoride was a carcinogen, I find that even these small regulations before us this afternoon are full of jargon. There is a request in paragraphs 22 and 23 of the 37th report that the Explanatory Memorandum perhaps be revised to enable us humble Members of the House to understand better its contents. Can my noble friend simply confirm that that is the case? If that could happen in advance next time so that, when we see the Explanatory Memorandum we are better able to follow it, it would be very welcome indeed.
I thank my noble friend and his department for all they are doing at this particularly difficult time, and I give a warm welcome to the regulations this afternoon.
Lord Teverson (LD)
My Lords, in fact we should congratulate the Minister, because the officials have rewritten the Explanatory Memorandum. There are two versions of it on the website, and one of them explains all the acronyms in a footnote. Strangely enough, I knew all the ones they listed, but I was unclear about a couple in the rest of the report. It is not there—it is on the website.
First, although the Climate Change Committee and the Government are right that carbon capture and storage technology is needed, exactly as the Minister said, we also need a slightly cautionary note about it. In a way, certainly in terms of power generation, it is a far less efficient way of producing power; it takes energy to produce it, as we are all aware. An opportunity to produce power without CCS is obviously better, although I entirely understand that industrial processes are different.
The other thing I am always cautious about—I know that most of the basis is putting it back under the sea or wherever—is the element of putting pollution back under the carpet to a degree. I am not saying that it is unsafe or anything, but it is always better if we can avoid that.
On the propositions here, having read the Explanatory Memorandum, I understand that the fact that this can include retrofitted power stations is unclear. Clearly, it is much better in all sorts of ways to have retrofitted ones than have to build new ones, although I suspect whether that is economically possible or right depends on whether the particular gas facility—I presume it would be gas; I suppose it could technically be coal—has been future-proofed in terms of utilisation. That is good.
What really concerns me is that the SI says you do not have to use a pipeline. The amount of carbon dioxide coming out of a power generation station of any size will be quite substantial; the thought of trucks in urban areas moving carbon dioxide, maybe over many miles, across the surface outside a pipeline seems quite a challenge in terms of noise, congestion and carbon footprint—depending on how that transport works. I would be very interested to understand the logic behind that from the Minister. As I understand it, this will primarily be in clusters, which it seems to me will always need to be pipeline-based to get the carbon dioxide out to a storage facility, whether it is undersea or wherever. I would be very interested in the Government’s view of why this is necessary, what they expect and whether there will be any limits on how this transportation takes place. Clearly, pipelines must be absolutely right for this rather than some sort of other surface transport.
The SI also goes through the payment mechanisms. I am interested in the Explanatory Memorandum here, particularly on the availability payment. Paragraph 7.13 says that this is a payment for availability to dispatch electricity, and performance. I thought we had a thing called the capacity market to do that. Why do we need this? Does it not compete with the capacity market? I do not understand what the difference is or why we are inventing another load of systems for this. On the variable payment, again, would a strike price not work better? I understand that those options are still available, despite these amendments.
Then we come to the merit order, which says “We will compensate the price to make sure that we have non-carbon intensive gas stations producing electricity ahead of conventional ones”, which is clearly absolutely right for decarbonisation, but it has a cost. The economic analysis in the paper says there is no cost to the private sector, which I guess is right, but I would like to understand what the size of the cost to the taxpayer of all this is expected to be.
Lastly, I would be interested in the government estimate of the extra cost of producing CCS electricity through a gas station compared to conventional generation. The department must have done this to work out roughly what the public expenditure requirements might be.
Lord McNicol of West Kilbride (Lab)
My Lords, although it is a little tangential, I declare my interest as set out in the register as a commissioner on the UK Hydrogen Policy Commission, which is within the same field though not directly relevant to this SI.
First, as other noble Lords have done, I thank the Minister for his explanation of the regulations before the Committee. As we have heard, they make a few minor but important amendments to two previous sets of regulations—the eligible generator regulations and the allocation regulations. Before I dive into those, I reiterate our support for the continuation of contracts for difference as a method of securing energy capacity while ensuring that developers, government and customers can be confident in the security of long-term, high-cost and high-investment projects.
Regulation 2 in the draft regulations ensures that non-pipeline transport methods are included within the definition of complete CCS systems. My reading of the 2014 eligible generator regulations, and that of many who responded to the consultation, certainly did not appear to exclude this system. I am not convinced how necessary it is. I agree that non-pipeline transport of carbon dioxide is essential to decarbonised projects outside the clusters. As the noble Lord, Lord Teverson, said, we would hope that transport around and inside the clusters would be by pipeline.
The noble Lord, Lord Teverson, presumed that this would be on trucks. My presumption was that it would be on rails. Again, it would be interesting if the Minister had any information from the department about how non-pipeline transport would take place, as there is an environmental difference between rail and road transport.
Regulation 2 also widens the criteria for carrying out generating activity to include alterations of existing generation stations to connect them to a CCS system. As other noble Lords have said, this makes perfect sense. I agree that it is an important step to help retrofit a station to give access to the benefits of contracts for difference.
That change is appropriately repeated, in Regulation 3, for the allocation regulations, but the main thrust of Regulation 3 is to allow contemplation of contracts that do not specify a strike price and reference price, in line with the new payment method under the DPA business model. Instead, the DPA business model will implement an availability payment for low-carbon generation capacity and a variable payment, which links the new power CCS plants—again, there is a long time lead-in here, since we are hoping they will be in operation by 2030, so perhaps the Minister can confirm the dates for the completion of the CCS plants—with an unabated reference plant. This is said to incentivise availability and enable more flexible operation. Of course, it is right to ensure that the regulations are updated correctly, to allow for these new developments to take place, but perhaps the Minister could elaborate somewhat on how these changes will incentivise availability and when we can expect to reap the benefits from the new power CCS plants.
The noble Baroness, Lady McIntosh, has already picked up on—and I am sure that the Minister has read with excitement—the Secondary Legislation Scrutiny Committee’s 37th report. In paragraphs 21 to 23, as has been stated, the committee was critical. To be fair, all our interventions have been quite detailed. In the produced documentation, I have been able to understand clearly that it is of importance. We have already had from the department an Explanatory Memorandum on that. I hope that, before all future debates, these points raised on page 9 of the committee’s report will be taken into consideration.
Lord Callanan (Con)
First, I thank my noble friend Lady McIntosh, and the noble Lords, Lord Teverson and Lord McNicol, for their constructive points and comments. Let me start by emphasising that the changes contained in these regulations are essential to enable the award of power carbon capture and storage contracts. The Government are committed to reaching net zero and, of course, to decarbonising our electricity system. All noble Lords will be aware that the Climate Change Committee has described CCS as a necessity and not an option to help us on the road and transition to net zero. Therefore, CCUS will be essential to meeting the UK’s 2050 net-zero target—I think that all three speakers agreed with that point.
Decarbonising the power sector has so far led the UK’s efforts to reduce greenhouse gas emissions. Thirty years ago, fossil fuels provided nearly 80% of the UK’s electricity supply. In 1990, electricity generation accounted for about 25% of total UK emissions, but by 2018 that was down to only 15% of total UK emissions. Today, I am pleased to say that the country gets over half of its power from low-carbon technologies, and the majority of those are renewable.
We can be confident that renewables will continue to play a key and increasing role in our generation mix on the overall journey to net zero, to decarbonise while maintaining security of supply, and keeping costs low. But for when the wind is not blowing and when the sun is not shining—something that applies particularly to the homeland of the noble Lord, Lord McNicol—we will need to balance renewable variable against demand. To do that, of course, we need system flexibility and energy storage, and we need non-weather dependent low-carbon power generation. That is why we consider that thermal power with carbon capture and storage is one technology that can provide that at scale. Therefore, carbon capture storage technologies will be important for the trajectory to achieving our 2050 net-zero target, and they will play a vital role in levelling up the economy, supporting the low-carbon economic transformation in our industrial regions and helping to create new high-value jobs.
On the specific points that were raised, starting with my noble friend Lady McIntosh, I am pleased to say that these regulations will indeed facilitate the rollout of the Government’s CCUS programme but of course will not bring projects forward in themselves. However, I am pleased to say that we have also seen significant interest in the programme, particularly from the east-coast cluster that my noble friend mentioned. We will seek to bring forward at least one power CCUS plant in the mid-2020s. This will be achieved through the CCUS cluster sequencing process and is subject to the outcome of that process, including, as always, value for money and affordability considerations. I am sure that my noble friend would agree with that.
Around half of our demand for gas is met through domestic supplies, but in meeting net zero by 2050 we may still use a quarter of the gas that we use now. So, to help to reduce our reliance on fossil fuels, we have to fully utilise the great North Sea reserve: we have to use the empty caverns that we have created for CO2 storage, and we must bring through hydrogen to use as an alternative to natural gas and help to use our offshore expertise to support our offshore wind sector. As a result of those plans, the North Sea will still be a foundation of our energy security, but of course we will have reduced our gas consumption by over 40% by 2030.
As clarified by the noble Lord, Lord Teverson, who was doing my job for me, the Explanatory Memorandum was revised on 5 May with in-depth footnotes to explain the acronyms and technical terms. I apologise if it was not clear; obviously, it is a complicated subject.
On the points made by the noble Lord, Lord Teverson, we consider that the capacity for T&S networks to be able to accept CO2 from dispersed sites and from international sources, transported by ship, road or rail—which would be non-pipeline transportation—may be important for our long-term objectives of achieving our carbon budgets and net zero, so we do not want to exclude power CCS projects that can transport and store CO2 by non-pipeline transport. We will need significant volumes of new-build, low-carbon capacity to meet growing electricity demand and to take the place of retiring capacity. To complement expanding intermittent renewables, it is important that some of this capacity is flexible and can operate for extended periods when renewable output is lower.
Our existing gas generation capacity is ageing. Most of it was built in the 1990s, during the so-called dash for gas. Advances in gas turbine technology mean that a purpose-built, modern, new-build gas-fired power station with CCUS would be more efficient than an older design retrofitted with CCUS technology. However, utilising existing assets can of course improve value for money in some cases, and to decarbonise our electricity system in line with the targets of the fifth and sixth carbon budgets, we consider that we will have to use existing generation as well as new-build capacity, both of which of course would need to be abated.
On the capacity market, CCUS requires more support for capacity given the co-ordination problem with infrastructure yet to be built, and the DPA incentivises investment to bring forward low-carbon generation capacity. The availability payment also acts as a way to incentivise those power CCUS projects and helps to maintain high capture rates throughout the DPA. I will come back to the noble Lord in writing on his question regarding the “payback” from CfDs for departments, but I think the answer will revolve around the fact that the money goes into Ofgem and is therefore used to offset other CfD payments. I certainly do not think that any of it appears either in the BEIS or Treasury budgets, but I will come back to the noble Lord and confirm the details of that.
On the points raised by the noble Lord, Lord McNicol, we wanted to ensure that non-pipeline transport was explicitly and unambiguously included in these regulations, and there is certainly no presumption in favour of road transport. Indeed, rail or shipping may also be covered and are probably more likely forms of transport. To take one pertinent example, at the moment Norway is currently shipping CO2. I hope that clarifies the point for the noble Lord.
To close, I underline once more that these regulations are a vital part of the UK’s efforts to reach net zero and to decarbonise our electricity system. With that, I commend these draft regulations to the Committee.