Great ex-formations – December 2023 update on CCS developments

Since our July article on the development of the TRI licence, the evolution of the legal, regulatory and commercial landscape for the transportation and storage within repurposed geological formations of carbon dioxide (“CO₂ T&S”) has continued apace. The Energy Act 2023, providing for matters including a new economic licensing regime for CO₂ T&S (see our recent article on this here) and a framework for revenue support arrangements for CO₂ T&S network operators (“T&SCos”), industrial CCS emitters and blue hydrogen producers, has been enacted. The Government has continued its stakeholder engagement on the development of the T&SCo licence and ancillary arrangements.

On 20 December, the Government published a statement on carbon capture and storage (“CCS”), together with a bundle of policy papers including:

• A “CCUS Vision” paper setting out the Government’s longer-term aspirations for the CCS sector.
   
• For the “Track 1” clusters (East Coast Cluster in the north east of England and HyNet in the north west):
  • publication of an updated set of Heads of Terms for the CO₂ T&S Regulatory Investment (“TRI”) documentation including the T&SCo licence, the Revenue Support Agreement (“RSA”) and Government Support Package (“GSP”); and
  • following the publication in March 2023 of the initial project negotiation list for emitters connecting to the Track 1 CO₂ T&S network (see our previous article on this here), announcement of the expansion of the HyNet cluster and opening of a further application window for CO₂ emitters wishing to connect into the HyNet project, including published guidance for the application process.
     
• For the “Track 2” clusters (confirmed in July 2023 as Acorn in Scotland, which also retains its designation as a “reserve” Track 1 cluster, and Viking in the north east of England), an announcement on next steps, including a commitment to seek submissions from potential “anchor” emitters for these clusters in early 2024.

CCUS Vision

The CCUS Vision paper reaffirms the Government’s commitment to the development of the CCS sector and in particular its role in achieving the Government’s emissions targets, harnessing the UK’s wealth of offshore geological formations that could be used to store CO₂. In light of the challenges in decarbonising important industries (such as cement and steel) and the value in new sustainable fuel production processes (such as blue hydrogen), projections for the volume of CO₂ that will need to be captured and transported to storage over the coming decades far exceed what is expected to be achievable via bespoke, Government-curated pathfinder cluster regimes alone. Consequently, the Government has set out its ambition to move towards a more open, competitive CCS market.

The Government anticipates that conditions will be favourable for this shift. It is envisaged that the Track 1 and Track 2 clusters will have created supply chains, pushed forward technologies and mitigated risks and costs across the market, reducing the need for Government support and widening the pool of potential participants. Parallel policy developments will also increase the commercial attractiveness of carbon capture, including the continued evolution of UK ETS and the proposed introduction of a carbon border adjustment mechanism. At the same time, the liquidity (but also complexity) of the market will increase with the integration of new components such as non-pipeline transportation (using powers in the Energy Act 2023 – with non-pipeline capture projects eligible for selection from 2025) and cross-border transportation.

It is proposed that emitter network connection arrangements will be awarded via competitive tender (rather than Government selection as for the initial clusters), with the first allocation round targeted for 2027. While transportation of CO₂ will continue to be subject to RAB-based economic regulation, it is anticipated that storage may ultimately be priced on a more competitive basis. Options for overall strategic direction for the sector will be considered, including by way of the Government CCS Strategy and Policy Statement envisaged under the Energy Act 2023 and a role for the Future System Operator.

TRI Heads of Terms

We set out below a brief summary of some of the key updates to the heads of terms for the T&SCo licence, GSP and RSA since the previous versions published in June.

• Construction milestones – developed milestones including “COD Readiness” threshold after which T&SCo can seek pre-operational revenue support under the RSA and relief from Delay WACC (i.e. the penal reduction to zero of the cost of capital component of T&SCo’s allowed revenue in the event of delay) if T&SCo’s first network users are not yet ready to connect.
   
• Reopeners – developed mechanisms for T&SCo to claim adjustments to its allowed revenue and/or extensions of time against its construction milestones, in contexts including changes in law and force majeure.
   
• Availability – greater clarity on how the availability of the CO₂ T&S network infrastructure will be measured, the consequences of this for T&SCo (including new requirements to work towards a remedial plan) and how T&SCo can seek relief.
   
• Scope of works – updated initial indications of how key parameters for the development and construction of the T&S network, including the level of network capacity to be made available to emitters, are intended to be set by reference to the “Approved Project Development Plan”.
   
• Decommissioning – The licence “overlay” on top of statutory decommissioning regimes (including the offshore infrastructure regime under Part IV of the Petroleum Act 1998, the offshore carbon storage regime under Chapter 3 of Part 1 of the Energy Act 2008 and the new provisions in Chapter 2 of Part 2 of the Energy Act 2023) has been built out to an extent, including laying the groundwork for the administration of decommissioning funds.
   
• Standard licence conditions – various updates including clarifications regarding the development and administration of the CCS Network Code (which will govern some of the technical and commercial aspects of emitter connections), the import from the energy supply context of a requirement for persons with Significant Managerial Responsibility or Influence over T&SCo to be “fit and proper persons”, a requirement to notify Ofgem in advance of any change in control, the introduction of a mechanism for Ofgem to introduce T&SCo credit rating requirements in future regulatory periods and the addition of “effective” to the “economic and efficient” standard. The updated heads also note an intent to append a “Derogations Schedule” to the licence, setting out certain specific obligations within the standard licence conditions from the performance of which each T&SCo may be relieved.
   
• Supplemental Compensation Agreement baseline – developed Insurance Schedule to the SCA (setting out the baseline for the insurances that T&SCo must seek and the compensation that the Government may provide where such insurances are deemed unavailable).
   
• Discontinuation Agreement mechanics – developed discontinuation triggers and provisions regarding the calculation of the compensation due to T&SCo in the event of discontinuation.
   
• RSA procedures – developed processes for seeking RSA payments.

Comment and next steps

The regulatory regime for CO₂ T&S remains very much a work in progress. Various secondary legislation will need to be enacted pursuant to powers under the Energy Act 2003, including in relation to licence exemptions and to implement the RSA regime. Substantial areas in the TRI heads of terms remain noted for further development, including the provisions in relation to the scope of the CO₂ T&S network development works and how this might develop over time, cost assessment and insurances. While there has been some progress on the decommissioning provisions in the licence, these are still yet to catch up completely with the Government’s June 2023 Decommissioning Update (on which we reported in our previous article). Ofgem will need to publish guidance on the licence and in particular areas including cost assessment, enforcement and decommissioning.

Some of the Government’s drafting in the context of the T&SCo licence may be a sign of things to come for energy network licences more broadly, including the proposal to “borrow” the “fit and proper person” requirement from the energy supply licence regime and the introduction of an “effectiveness” standard on top of the more usual “economic and efficient” language normally found in energy licences.

The CCUS Vision paper sets out the Government’s intention to consult on a broad range of matters in the CCS context in 2024, including:

• the future direction of CCS in general, including in particular the design of the competitive allocation mechanism for emitters and the legislation that might be needed to implement such a mechanism;
   
• review of arrangements for access to CO₂ T&S infrastructure, including the use of the Government’s powers under the Energy Act 2023 to revoke or amend existing carbon storage access regulations;
   
• the further evolution of UK ETS and the introduction of new carbon policies including a carbon border adjustment mechanism and mandatory product standards; and
   
• in the context of CCS power generation facilities, the next steps in the Government’s Review of Electricity Market Arrangements.