Storage of Carbon Dioxide (Access to Infrastructure) Regulations 2011

Lord Marland Excerpts

Tuesday 12th July 2011 Grand Committee

Moved By

[Lord Marland]

That the Grand Committee do report to the House that it has considered the Storage of Carbon Dioxide (Access to Infrastructure) Regulations 2011.

Relevant documents: 25th Report from the Joint Committee on Statutory Instruments.

[The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Lord Marland)]

My Lords, the regulations apply in Scotland as well as England and Wales, and are being made with the agreement of Scottish Ministers. I am sure that my noble friend the Duke of Montrose will be pleased with that.

The regulations transpose into UK law requirements that are part of the EU directive on geological storage of carbon dioxide. The directive requires member states to introduce arrangements that enable third parties to access pipelines and storage sites on a fair and transparent basis. Those arrangements must meet certain criteria. So, for example, we must set up independent arrangements to resolve disputes about access, should they arise. We must also ensure that if access is refused on grounds of lack of capacity or lack of connection, the operator makes the necessary enhancements when a potential customer is willing to pay for them—providing that this does not have a detrimental impact on safety or the environment. The directive also provides for access to be refused where there is incompatibility in technical specifications which cannot reasonably be overcome, or where there is insufficient current or likely future capacity.

We consulted on drafts of these regulations in December 2010. The majority of those responding to the consultation agreed that the regulations represented a sensible approach to implementing the directive’s requirements. However, there was concern about how our approach would apply to storage sites. As a result, we modified the draft regulations to recognise the constraints imposed by the natural characteristics and the environmental permitting arrangements for storage sites.

The approach in these regulations is based on the principle of negotiated access, with the ability to appeal to an independent authority if it is not possible for the parties to reach agreement voluntarily. That authority is either the Secretary of State, or Scottish Ministers where the infrastructure is located in Scotland. This approach has many advantages for carbon capture and storage, not least that it is relatively hands-off and therefore the least burdensome for what is currently an immature industry. It already applies to pipelines conveying carbon dioxide and is the basis on which the development of offshore oil and gas pipelines has taken place for many years. It is therefore familiar to many companies interested in participating in carbon dioxide transportation and storage in the future.

The regulations take as their starting point arrangements that already apply to carbon dioxide pipelines, adapt them slightly for consistency with the requirements of the directive and extend them to cover storage sites. They have effect on the construction of a new pipeline or a storage site, and where a third party seeks to secure access to existing infrastructure. Where infrastructure is being newly created, the regulations enable the authority to impose conditions when granting consents. Those conditions may, for example, require the pipeline or storage site to be constructed or permitted to a greater capacity, or in the case of a pipeline, to follow a modified route. However, those powers can be exercised only where there is evidence of demand and where the parties cannot reach agreement. The authority must be satisfied that the conditions it imposes will not compromise the safety and environmental integrity of the infrastructure or its efficient operation.

The regulations also provide for access and modification to existing transport and storage infrastructure. Again, the parties must first seek to negotiate an agreement. If they cannot do so, the party seeking access can apply to the authority for a notice granting access rights. In reaching a determination, the authority is required to consider a number of factors intended to ensure that the legitimate interests of the owner and users of the infrastructure are taken into account and to avoid a negative impact on safety or the environment. Where the authority grants access rights or requires modifications, it also has the power to determine the charges to be made. We are in the process of developing guidance, on which we will consult extensively before it is finalised, on the principles that the authority will use in coming to such a decision on this and on other powers available to the authority in regulations.

The regulations create an offence of providing false information to the authority in discharging its functions under the legislation. A determination made by the authority will be enforceable through the civil courts, in the same way as if the parties had entered into a contract that had subsequently not been honoured. The directive also requires our third-party access regime to be transparent. The regulations achieve this by requiring information about available spare capacity to be published. In determining this available capacity, the infrastructure owner is able to take account of reasonably foreseeable needs and, in the case of a storage site, against a baseline of the permitted storage capacity of the site. I hope that these regulations will find favour with noble Lords and I commend them to the Committee.

[Lord Teverson]

My Lords, again I do not know what else one could do. There seems to be an outbreak of common sense; we are implementing a European directive, which I see this as primarily, to ensure that pipeline and CCS companies do as we scold our children to do—to share, rather than keep things to themselves.

I have two questions for the Minister. First, he mentioned a long track record of facility sharing in the oil and gas industries, which there clearly already is, but I suspect that those provisions did not perhaps come in until a lot of the structures in those industries had got going. In this case, it is a new industry and I presume that we do not have any carbon dioxide pipelines going extensive distances. Clearly, they do within existing industrial plants but I wonder whether we might get into a sort of games theory where no one builds the first one because the first mover, in this instance, is the one who has to find all the finance and raise all the money, which is not inconsiderable. All the businesses coming afterwards will have to do is show that independent authority that it would make sense to share, so they miss the whole hurdle that the first people had to get over. I wonder whether that distorts the market somehow, but I am sure that the Minister will have an eloquent reply on that. Otherwise, this is good legislation.

Finally, I take this opportunity to ask the Minister where we are in terms of CCS and when we might see the network of carbon dioxide pipelines under—I was going to say across—our countryside. Where are we on the four schemes that the Government are promoting?

[Baroness Smith of Basildon]

My Lords, first, we welcome these regulations and the new clauses on this issue added in the other place to the Energy Bill. They all lead towards ensuring that we have the available infrastructure in place and that necessary powers will be available. The noble Lord knows that we fully support CCS, and indeed that we made a commitment in government to fully fund the first CCS project. The regulations pave the way to that. However, as the comments from other noble Lords have highlighted, they do not remove the uncertainties that remain. Perhaps, in the light of the regulations before us, the Minister will be able to offer some reassurance on when the investment for the schemes will be available, because we have had no information on that yet. The CCS levy has been scrapped, the Government's argument being that the burden on business was unfair. Instead, the taxpayer is now to be funding the scheme through the Treasury but we do not know when that is going to happen, so any clarification from the Minister would be welcome.

I want to ask two specific questions on the order. I understand what the Government are seeking to do here and I support that. I will talk through this and see if the Minister can follow, as I have not given him notification of this question. My understanding is that an applicant seeking access to or modification of a pipeline can seek the approval of the Secretary of State or another consenting authority—it need not be the Secretary of State—if negotiations fail to secure such access or modifications as are required. The legislation before us allows an appeal to be made if the consenting authority, which will mainly be the Secretary of State, thinks that there has been a reasonable time in which to reach that agreement. I hope that would only be in exceptional circumstances as it seems to me that, more often than not, the problems in reaching agreement will be not on technical issues but on the commercial aspects.

The evidence base for decisions determines the criteria on which the consenting authority will make decisions, and it does not include commercial considerations. What if the stumbling block to agreement is not technical in any way but commercial? What if it is about price? It seems very difficult for the Government or any consenting authorities to intervene, as stated in the order. As I read it, the Government would not have the power to intervene.

There may be an intention that there should be a regulator to ensure that the pricing mechanisms are fair but, unless I am misreading something in the order before us or its Explanatory Memorandum, I do not see that. Indeed, if we look at the evidence base for option 2, which is on page 10, the impact assessment says on these issues:

“If the consenting authority is required to determine the financial terms for access or modification for … pipelines and storage sites … they would be guided by principles similar to those already used in other sectors”.

That implies that there is a role for the consenting authority and the Secretary of State to intervene on financial or commercial matters. It would be helpful to have some clarification because I am not sure I really welcome a Secretary of State intervening in commercial decisions. There could be a potential difficulty or a minefield if they are required to do that without sufficient guidance about which criteria they should take into account and how that should be conducted.

My only other question is: in terms of the time allowed for negotiations before the applicant can make an appeal to the consenting authority, will there be any guidance on what is reasonable? It seems that different kinds of applications could take different amounts of time, as some will be more complex than others. If the negotiation is around price, that could make it even more complex as it could be that company A is trying to preserve a position that it may want to take in the future. While I certainly support the principle, I would like some further information on those points if possible.

[Lord Marland]

I am grateful to noble Lords. It is a very opportune moment because, as of this morning, I am in the middle of a two-week lock-in negotiation on the first demonstration project. This morning was spent banging heads together to try and make it work further, but I will explain a bit more about that in a moment.

On the specific points raised by my noble friend Lord Teverson and by the right reverend prelate the Bishop of Chester, whom we welcome as always, the first demonstration project will be using existing pipelines owned by National Grid and Shell. They have great expertise and technology and are very comfortable that they can work. In fact, they have exploratory machines working on them at the moment. One has to rely on great companies to come up with the technology, so the likelihood is that a number of the CCS projects will be able to use existing infrastructure. Of course, that will not always be the case and some new pipelines may have to be built to create junctions or things like that.

The plan for the first demonstrator is to force the carbon dioxide, which becomes more liquefied, into the Goldeneye oil well, located in the North Sea. It is a largely Shell-owned platform. The ownership of it has become a bit more complicated but Shell is operating that end of it. On how we know of its ability to keep the captured carbon in storage, the answer is—

[The Lord Bishop of Chester]

In a previous incarnation, I was a chemist. In all my previous experience of carbon dioxide, it never had a liquid state. It went straight from gas to solid; hence you can buy solid carbon dioxide to keep your ice-cream cold, and so on. Under what conditions do you get liquid carbon dioxide? I have not come across it.

[Lord Marland]

I did not actually say it was liquid. I said it was more liquid than gas. Denser carbon dioxide will be moved down the pipes. It is readily identifiable as a subject because, as the right reverend Prelate will know as a great scientist, you cannot touch carbon dioxide.

The right reverend Prelate made another point about storage. We are reliably informed that there will not be leakage. We have to take every precaution to make sure that there will not be leakage and must make sure that all adequate precautions are taken. Of course, this is a demonstration project. We are moving into unfounded territory and who knows what the outcome will be. It is very important that we have rigorously tested the programme, but it is a demonstration project. I will not comment on the outcome of the demonstration project at the moment because the intense negotiations finish on Friday. We remain optimistic.

[The Duke of Montrose]

While my noble friend is on the subject of the demonstration project, I know that oil companies in the United States purchase carbon dioxide to increase the output of their oil wells. Are Shell and other firms gaining a financial benefit from this operation by taking the carbon dioxide in this demonstration project and putting it into an oil field? Is it a win-win situation so far as they are concerned?

[Lord Marland]

That is certainly not the intention. There may be residual oil in an empty oil well, but it is not the driver for them carrying out this process. However, I am grateful to the noble Duke for informing us of that.

The right reverend Prelate asked whether we know whether CCS will be commercially viable. Until we have done the first demonstration, we do not know whether we can do it on a large scale. If we achieve it on a large scale, economies of scale will come into play, and we hope it will become commercially viable. In answer to his subsidy question, that is why the Government have committed £1 billion of capital expenditure to try to make the first demonstrator work. The right reverend Prelate made a very good point about the future of coal. As he said, we are reliant on coal. It is not our intention to rid ourselves of coal but to make it cleaner within a low-carbon economy. As a scientist, he will know that they will have to put in NOx cleaning systems in 2016 and 2017 to make coal cleaner. He is probably the only person in this Room who knows what the effect is, and I will not pretend to go into detail with him on it.

The noble Baroness, Lady Smith of Basildon, kindly gave me some prior notice of her questions. She made two very good points and, if I am honest, I am not completely satisfied in my mind that I have the right answers to them. At what point does a Minister intervene? Should a Minister intervene? What is the reasonable time that should be allowed? In her own words, let us hope that it does not come to that. However, at some point you have to have an ultimate arbiter. At some point it is reasonable to think that the ultimate arbiter should be the Minister, in which case it is reasonable that at some point the Minister would intervene. Should we put a time limit on a dispute? I tend to agree that we should, but if we are too prescriptive about it, we may force the thing in the wrong direction. I will take away those points to consider in the department to see whether there is a straighter edge to put on those two excellent suggestions.

[The Lord Bishop of Chester]

On that point, page 8 of the notes states that there should be,

“the opportunity to refer a negotiation to an independent party”,

for perfectly good reasons. I entirely accept that. Is the Minister happy with the description “an independent party”? It seems to me that he will have a vested interest in being the arbiter if in a commercial situation there is no agreement. It would be normal for the Minister to be regarded as independent for those purposes, as described on page 8.

[Lord Marland]

Where does it stop? At what point is someone independent if the word means that they are able to take an objective and independent view of the problem? I do not disagree with the right reverend Prelate on the conclusion that we are trying to achieve. As I referenced earlier, I think that it needs further thought and a straighter edge. I readily said that we should perhaps try to get a little more detail on it. I do not have a prescription now. I am not necessarily sure that we should have a prescription now, but I am happy to carry on the discussion outside the Committee because it is at the margin of the reality and focus of the issue of CCS. To use the words of the noble Baroness, let us hope that it does not get to the point where we have to.

[Baroness Smith of Basildon]

I am grateful to the noble Lord and thank him for being very candid about his own uncertainties on this statutory instrument. I do not think that it is unreasonable to say that he does not have an exact time limit in mind for when a Minister or consenting authority should intervene. “Reasonable time” is a matter of judgment. I apologise if I am missing the Minister’s comments, but I am still not clear about the financial side and when it would be appropriate for a Minister to intervene in a pricing or commercial decision. It seems to me that a significant part of the regulations concerns the ability to intervene if things are not going as we would like, and agreement cannot be reached. I would appreciate it if the Minister would give me more detail or write to me, as it is crucial to the statutory instrument.

[Lord Marland]

With due respect to the noble Baroness, I think that most decisions in which people have to intervene are commercial, so ultimately a commercial decision will have to be intervened on. I can say that it will be a commercial decision. I quite understand that there may be a case for putting a time limit on when the commercial decision is reviewed. Consideration may need to be given as to whether it is an independent authority and when the Secretary of State appoints the independent authority, but these challenges or disagreements always come about through failure to reach a commercial agreement. We are suggesting that the Secretary of State can intervene and bang heads together to make sure that the agreement is sorted out. I am not sure that one can say more than that.

[Baroness Smith of Basildon]

I know that the Minister is trying to be helpful, but there are four criteria in the regulations on which the consenting authority can make the decision if there is a dispute. None of those is commercial or financial, although it does say in the notes in option 2 that it is financial. I am happy for the Minister to take this away and come back to me. I am still not clear, if the regulations do not state that one of the criteria on which the Secretary of State or consenting authority can intervene is financial or commercial, where the authority to do so will come from, when rather than a technical issue it could be the basis on which the Secretary of State will need to bang heads together, to use the Minister’s words.

[Lord Marland]

I am very happy to carry on this conversation with the noble Baroness outside the Committee, but the point I am making is that whether this is technical or financial, it is all commercial. That is the reality. Everything is commercial when it comes to negotiating these things. The noble Baroness is in danger of taking things at face value without looking at the realpolitik. As I say, I do not think that we want to get into the nuts and bolts of the definition of commerciality. I am very happy to carry on this conversation with the noble Baroness through officials, as always.

[Baroness Smith of Basildon]

That would be helpful.