Carbon Dioxide Transport and Storage Revenue Support (Directions and Counterparty) Regulations 2024

(Limited Text - Ministerial Extracts only)

Monday 13th May 2024 Grand Committee

Moved by

[Lord Callanan]

That the Grand Committee do consider the Carbon Dioxide Transport and Storage Revenue Support (Directions and Counterparty) Regulations 2024.

[The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)]

My Lords, I beg to move that these regulations, which were laid before the House on 15 April this year under the affirmative process, be approved. I will also speak to the draft Carbon Capture Revenue Support (Directions, Eligibility and Counterparty) Regulations 2024. To save a considerable amount of time, I will hereafter refer to these regulations as the CO₂ transport and storage regulations and the carbon capture regulations.

These regulations are part of a series of secondary legislation made under powers in the Energy Act 2023, a landmark piece of legislation, which received Royal Assent on 26 October; I am grateful for the support that noble Lords gave me in getting that important legislation through. I will first provide some important background on the UK’s carbon capture landscape before turning to the rationale and the details of the regulations.

Carbon capture, usage and storage, commonly known as CCUS, supports the UK’s legally binding commitment to reduce greenhouse gas emissions to net zero by 2050. In 2021, HyNet and the East Coast Cluster were announced as the UK’s first CCUS clusters, where CO₂ will be captured from a range of sources to support the low-carbon economic transformation of our industrial regions. The CO₂ transport and storage network—the T&S network—is essential for building that CCUS capability, as it is the enabling infrastructure for captured CO₂ to be transported to permanent, offshore storage.

To facilitate the development of T&S infrastructure, the Energy Act 2023 makes provision for revenue support to be available to any eligible transport and storage company, abbreviated to T&SCo. Revenue support is part of the broader T&S regulatory investment model, or TRI model.

Under the TRI model, an allowed revenue will be determined for transport and storage companies, and exposure to revenue gaps, which refer to instances where annual revenue from user charges is less than a T&SCo’s allowed revenue, will be mitigated. For example, where a revenue gap arises beyond a T&S company’s control, such as where a network user is late joining the network, a shortfall in allowed revenue may arise. In those instances, T&S companies can increase charges across the user base up to a cap.

Should the increase in charges across the user base up to the cap be insufficient, we are proposing that T&SCos be entitled to revenue support as a last resort mechanism, funded by the Government, enabling T&SCos to recover shortfalls through a revenue support agreement—hereafter shortened to RSA. Without this, there would remain a significant barrier to investment in T&S infrastructure in the early stages of development of the CCUS sector.

I turn to the detail of the transport and storage regulations. RSAs will be offered as a contract between a T&S company and a counterparty, which will be done under a direction of the Secretary of State in accordance with Section 60 of the Act. To maintain integrity of RSA allocation, the first aspect of these regulations places requirements on the Secretary of State’s directions and sets out circumstances in which a direction ceases to have effect, including where the Secretary of State revokes a direction before a T&S company accepts a contract in writing.

Secondly, the counterparty will be responsible for publishing each RSA contract, as well as for establishing and maintaining a public register of key project information. Ensuring transparency of these contracts is essential for encouraging greater understanding of the level of support for, and confidence in, this critical but nascent sector.

To be clear, the regulations allow sensitive information to be redacted by the Secretary of State, ensuring that any sensitive commercial information—for example, information that constitutes trade secrets—or personal data is removed before documents are made public. The statutory instrument’s final measure will require the counterparty to promptly notify the Secretary of State if it is unable to perform its duties.

Turning to the carbon capture regulations, I will first set out the context of industrial carbon capture, ICC, which is critical to decarbonising industries with hard-to-abate emissions and achieving net zero by 2050. The Government’s ambition is to capture and store 6 megatonnes annually of industrial emissions of CO₂ by 2030, increasing to 9 megatonnes of CO₂ annually by 2035. The ICC business models are designed to incentivise the deployment of carbon capture technology by industrial and waste users who often have no viable alternative to achieve deep decarbonisation.

I turn now to the role of the carbon capture regulations in facilitating the business models. The regulations broadly mirror those that I detailed on transport and storage in respect of the Secretary of State’s directions to a counterparty—in this instance for offering a contract with an eligible carbon capture entity, including where directions cease to have effect or may be revoked. The reporting requirements for a counterparty also remain, including a duty to publish contracts entered into, establish a public register and promptly notify the Secretary of State if the counterparty is, or considers that it is likely to be, unable to carry out its functions.

However, the regulations also satisfy the duty in Section 68(4) of the Act, by determining the meaning of “eligible” in relation to a carbon capture entity, specifically one where the CO₂ to be captured and stored is produced by commercial or industrial activities, as set out in the Act.

In short, the regulations set out who can be eligible for support. The transport and storage regulations do not include a definition of eligibility, as an eligible transport and storage company is defined at Section 60(2) of the Act as a person who holds an economic licence or has been notified in writing by the appropriate parties that an economic licence is to be granted. The ICC business models have been developed to support decarbonisation of the industrial sector, including the waste management sector.

We do not consider it appropriate for the ICC business models to support carbon capture deployment for certain parts of the power sector. Therefore, the regulations set out that an entity would be ineligible if it is capturing CO₂ produced by the generation of electricity and is connected to one or both transmission and distribution systems in respect of all the electricity that the generation station produces.

However, capture from combined heat and power plants and energy recovery generating stations would be eligible, regardless of how and whether they are connected to the transmission and distribution systems. It should be noted that these regulations form only one part of the assessment for whether projects would be awarded an ICC or waste ICC contract. Further eligibility criteria are expected to be set for individual allocation rounds in the appropriate allocation guidance.

In conclusion, in implementing transport and storage infrastructure and the industrial carbon capture business models, these draft regulations represent an essential step towards achieving our 2030 deployment ambitions and, ultimately, net zero. I therefore commend them to the Committee.

[Lord Jones (Lab)]

My Lords, I thank the Minister for his explanatory and informative remarks, for these regulations are complexities for the uninitiated in these deceptively thinly paged dual sets of regulations. Surely, they are regulations to be welcomed. It is the war against CO₂, and the Minister, if I may say so, has escaped the thickets of Brexit legislation to display insightful knowledge of the huge energy world.

Climate change is upon us. We should not be complacent. I hope the regulations will facilitate the successful overcoming of a big challenge. There are certainly ambitious targets. Can the Minister explain a little further the register and the counterparty in Regulation 6(2)? Also, in paragraph 4.2 of the helpful and necessary Explanatory Memorandum we see the power of the Secretary of State to “direct”. It is reasonable for a Back-Bencher in a Parliament to query that word. Here, at first glance, it is the granting of all-powerful influence. Is that so? I think I know the Minister well enough in parliamentary terms to know that he is not a person who seeks all-powerful directions, but he might like to explain with his usual expertise what that is all about. This is, after all, a Parliament.

At paragraph 4.3 of the Explanatory Memorandum, we have references to the nations and, not least, to Wales. How many likely carbon capture projects are mooted or in the pipeline for Wales, Scotland and England, not forgetting Northern Ireland? At paragraph 5.3, what is the department’s understanding of

“a reasonable return on investments”?

Is there a percentage in mind? Shall it not be a blank cheque? Can the Minister also explain further, for the uninitiated, what the “CCUS cluster” is at paragraph 5.5?

At paragraph 6.5, the department rightly points to “large upfront capital expenditure”. Can the Minister give a possible list of the scale of this up front? Surely there are in existence projects quite far down the line. I ask for the Minister to give his best guesstimate. At paragraph 5.9, it is welcome—to be very positive—that the public are to be made aware of deployment of a public register of projects. That has to be good.

Time is of the essence. I am aware that in north-east Wales, Connah’s Quay Power Station proposes carbon capture. This station is in the constituency that for 31 years one represented in another place. One visited regularly. It was once mooted for nuclear power, being on the substantial River Dee estuary. I emphasise that I have no registered interest whatever in raising this matter, but since I still live in the shadow of this establishment and have had a connection with it for the best part of 54 parliamentary years, I raise the matter. Currently the station is owned by a company called Uniper, about which I know very little. The company is briefing in the locality. I quote from the letter of invitation to visit for briefing. It is from a shrewd, practical managerial team that I encountered in response to its invitation.

Briefly, it says that it is

“developing plans for a new low-carbon, highly efficient gas-fired power station with carbon capture technology at the site … We expect to reuse an existing pipeline, which will connect to the regional CO₂ infrastructure currently under development by Eni, enabling the captured CO₂ to then be transported to permanent offshore storage facilities in repurposed depleted offshore gas fields”.

I visited this plant as a result of receiving that invitation for briefing and, on the face of it, the project seems to be very much related to these regulations. That is why I have quoted from that letter.

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With those comments, I look forward to the Minister summing up.

[Lord Callanan (Con)]

My Lords, I thank all noble Lords for their contributions. Before I get into the detail on particular questions, I will talk about the general issue, particularly as raised by the noble Baroness, Lady Bennett, of CCUS and the principle. Obviously, that was a Second Reading speech for the legislation rather than for this particular statutory instrument, but let me explain why I think the noble Baroness is both misinformed and wrong.

First, most informed opinion disagrees with the noble Baroness on this, including the Climate Change Committee, which told us in its advice that CCUS is essential and not an option if we are to reach our decarbonisation goals. She said many other things that were incorrect. To take an example, she said that CCUS had never been tried and was unproven. Again, that is incorrect. There are many operating CCUS plants in the US. I witnessed one in Alberta, Canada, last year and, only last week, I was in Iceland to see the opening of the largest direct air capture greenhouse-gas removal plant in the world. It has an operating CO₂ ejection system into the basalt rock, which has been working successfully for many years.

So, the technology does work and is proven. We are attempting it at a greater scale than many other countries, but that is a fantastic business opportunity for the UK. We are privileged to have fantastic, tremendous storage potential in the North Sea, where we can store not only our own emissions but possibly those produced by other nations and Europe as well. This has the potential to be a massive revenue earner for the UK, generating potentially tens of thousands of jobs and millions of pounds of contributions. There are a number—dozens—of really innovative UK companies that are experimenting and working in this area. There is great export potential for the UK, and potentially many jobs—or rather, there are hundreds of jobs already.

I can understand the noble Baroness’s point—and I agree with her—that we should seek to minimise emissions as much as possible by processes such as fuel switching. But what would she say to those industrial plants that generate CO₂ as part of their processes rather than by heating? What about cement plants, for instance? Does she think that they should just close down? Should they not exist at all? These are the practical issues that, when dealing with policies that affect people’s jobs and livelihoods in the construction sector, we need to have a solution for rather than just airy-fairy academic views. As the CCC said, CCUS will be essential and is not an option. If the noble Baroness wants to make a point, I will be happy to hear it.

[Baroness Bennett of Manor Castle (GP)]

I am not sure whether this is procedurally correct, but the Minister directed the question directly at me. Once we set up these CCUS plants and establish the contracts, as I said with reference to incinerators, we will need to feed them, whereas, if we look at different technologies that are being developed for cement, for steel or electric arc furnaces and so on, the point is to—as the noble Baroness, Lady Blake, said—have a transport modal shift. We need to plan for the shift in operations—in ways of doing things—rather than business as usual.

To address the point about the Climate Change Committee, we come back to the issues around growth and the assumption that we must have economic growth. If we look at social innovation and changing the way in which our society works, we are looking at a very different model for the future than is traditionally presented.

[Lord Callanan (Con)]

The noble Baroness is addressing issues that I never even raised. Her last point is for a completely different debate. Nobody is suggesting CCUS for transport emissions or steel emissions. Again, the noble Baroness is evading the central issue. Some industries have no choice but to produce CO₂. Anyway, it is a separate issue—let us get back to the debate that we are here for today.

These two instruments are broadly administrative in nature but outline vital operational procedures to enable the Government’s proposed business models for carbon capture, transport and storage. I start with the issues raised by the noble Lord, Lord Jones, who asked for the directions of the counterparty and the register to be explained further. In relation to a direction to the counterparty, the counterparty would enter into and manage contracts at the direction of the Secretary of State and would be the conduit for HMG funding to successful projects. A direction to the counterparty would be a direction to offer to enter into a revenue support contract. The register would be a public register of contracts entered into, and the details that the counterparty would be required to publish are set out in the schedules to the regulations.

The noble Lord, Lord Jones, and the noble Baroness, Lady Bennett, asked about confidentiality. It is appropriate for companies to be able to protect commercially sensitive or privileged information—for example, information that relates to a company’s intellectual property. We expect redactions to be made to published contract information only when there is strong justification for doing so. Any redactions or exclusions in the contract do not, of course, limit what information must be disclosed in that public register.

The noble Lord, Lord Jones, asked for a definition of “cluster”. We would define it as carbon capture projects, onshore and offshore pipeline infrastructure, transport infrastructure and the associated offshore storage site, all located in a defined geographical area. We have two in the so-called track 1 process in the UK: one is the HyNet consortium in the north-west and Wales, and the other is on the east coast and is centred around Teesside and, to a certain extent, Humberside. There are two additional ones in Scotland as well as the Viking consortium, which will be in the so-called track 2 process.

The noble Lord, Lord Jones, asked about funding for CCUS, and the geography. We have announced up to £20 billion of funding for the early deployment of CCUS in the UK and, as I have just said, we aim to establish up to four clusters in the UK by 2030. The noble Lord might be a little more interested in the details of the projects of the HyNet consortium, which is located in north-west England and Wales. From memory, there is one project in Wales; it is at the Padeswood cement plant, which we are negotiating with at the moment. I think I am correct in saying that that is the one. We are currently in negotiations on eight projects and transport storage systems in total across the two clusters. We hope to reach final investment decisions by the third quarter of this year for the rollout and deployment of this technology. We have announced those first two clusters and the track1 negotiation list with, as I have said, eight projects selected through the cluster-sequencing projects to progress to negotiations by—I hope—the third quarter.

In addition, we announced two further clusters in July last year: the Acorn cluster in Scotland and Viking in Humberside. Again, those will be two additional T&S systems. We think that, after the first two, they will be best placed to deliver on our objectives—again, subject to appropriate due diligence, consenting, subsidy control, affordability and value-for-money assessments.

The noble Lord, Lord Jones, asked what the department’s understanding is of a reasonable return on investment. I would say that that is the six million dollar question, but it is probably a bit more than that. Of course, this is subject to ongoing contract commercial discussions with the relevant projects. The noble Lord can be assured that we are subjecting all the negotiations to precise considerations on value for money, subsidy control and affordability. As an indication of the scale of support, we have announced up to £20 billion for the early deployment of CCUS in the UK.