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

Lord Jones Excerpts

Monday 13th May 2024 Grand Committee

[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.