Carbon Capture and Storage: The Energy Act 2008 and Beyond

United Kingdom

Yesterday, those provisions of the Energy Act 2008 (the “Act”) which relate to carbon capture and storage (“CCS”) came into effect. The Act introduces a framework for the licensing of offshore storage of CO2 and extends existing rules for abandonment of offshore installations to carbon storage installations. This will be the first step in creating a full regulatory framework for the operation of CCS in the UK and will soon be followed by further legislation to implement recently adopted EU legislation.

The new provisions will be relevant to companies investigating the feasibility of carrying out carbon storage activities in the UKCS, whether acting as operators, owners or developers.

CCS in the Energy Act 2008

The Act extends the Crown’s ability to grant leases for gas (including CO2) storage from the existing 12 nautical mile limit of the UK’s territorial sea to a maximum of 188 nautical miles within the UKCS. This area is known as the Gas Importation and Storage Zone (“GISZ”). For more information on the GISZ, please see our previous Law-Now, “Gas Importation and Storage Zone (Designation of Area) Order 2009”.

A licence will be required for carrying out the following activities within the territorial sea or the GISZ:

  • the storage of CO2 with a view to its permanent disposal;
  • temporary storage of CO2 (if an interim measure prior to its permanent disposal);
  • conversion of a natural feature for CO2 storage;
  • exploration for a CO2 storage site; and
  • establishment or maintenance of an installation for any of these purposes.

Licences are to be granted by the Department of Energy and Climate Change (“DECC”) or the Scottish Ministers as appropriate. Failure to obtain a licence before carrying out any of the specified activities will be a criminal offence.

An operator may also have to obtain a lease or authorisation from the Crown Estate in order to make use of the seabed or spaces beneath it. The terms of any licence (e.g. commencement, duration) may be linked with such lease or authorisation.

The Act applies the provisions of the Petroleum Act 1998 relating to abandonment of offshore installations to CO2 storage installations. As a result, the operators of such installations (and their affiliates or partners holding a relevant interest) may be required to submit abandonment programmes to DECC and must decommission the installations in a timely manner after operations have permanently ceased.

For more information on the application of the Energy Act to CCS, please see our previous Law-Now, “The new Energy Act 2008 – impact on Carbon Capture and Storage”.

Beyond the Energy Act – the future of CCS legislation in the UK

In December 2008, the European Parliament adopted a Directive on the Geological Storage of Carbon Dioxide. The CCS Directive deals with both onshore and offshore storage and contains detail on site selection, licence requirements, the content of licences, obligations of licence holders, monitoring of the site, third party access to infrastructure and decommissioning. Member States will be required to transpose the terms of the CCS Directive into national law within 2 years from the date of its publication. It is likely that the UK will transpose the CCS Directive under secondary legislation, consistent with the provisions of the Energy Act insofar as it relates to offshore storage.

The UK Government held a public consultation process on the then proposed CCS Directive and on “capture readiness” which closed in September 2008. The response to this consultation is still to be published, and it is likely that the responses will help frame the secondary legislation needed to implement the Energy Act and the CCS Directive.

For more information on the CCS Directive, please see our previous Law-Now, “EU climate change package – impact on carbon capture and storage”.

Encouraging the deployment of CCS

Although UK legislation will ultimately provide the regulatory framework within which CCS will operate in the UK, EU policy and initiatives will most likely provide the commercial stimulus for EU-wide, large-scale deployment of CCS.

A key incentive for CCS deployment will be the EU Emissions Trading System. CCS installations can be opted into Phase II of the EU-ETS (2008-12) and for Phase III (2013 onwards), capture, transport and storage installations will be explicitly included in the EU-ETS. Any CO2 captured and injected for permanent geological storage will be considered as not emitted under the EU-ETS.

Leakage from storage sites will be added as a new source of emissions under the EU-ETS. Appropriate monitoring and reporting guidelines and provisions concerning leakage of emissions from storage sites are still being developed by the European Commission. It is difficult to quantify leakage emissions and the Commission has proposed the establishment of a scientific panel to develop guidance on this issue. This panel will consult with industry and Member States in order to reach its conclusions.

Outside of any public subsidy, for CCS to be commercially viable individual operators will be incentivised to use CCS technologies, thereby reducing their emissions and ETS liabilities, if the cost per tonne of CO2 avoided is lower than the carbon price available to CCS activities. At present, the carbon price is so low that investment in CCS without any other form of governmental incentive or support would not be cost effective for companies. It is anticipated that the carbon price will need to increase to about €45 per tonne in order to encourage the implementation of CCS and will then need to remain stable for a sufficient time to give investors in CCS projects the certainty that they require to proceed.

Even if the carbon price stabilises, any incentive provided by the carbon market will not be sufficient on its own for the early large-scale CCS demonstration projects. The European Commission has indicated that it will look favourably on the use of state aid for covering costs related to CCS demonstration. In addition, up to 300 million allowances from the EU-ETS new entrants reserve will be made available until December 2015 to subsidise the construction of up to 12 large-scale CCS demonstration projects, although how quickly developers can access these funds remains unclear.

The EU has also recently approved the reallocation of €5 billion of unspent money from the 2008 budget to clean energy projects. Of this, €1.05 billion will be allocated to the EU-wide development of CCS technologies. It is envisaged that the UK will receive €180m to apply CCS to coal-fired power plants using both pre- and post-combustion technology. This money would be shared between the plants at Kingsnorth, Longannet, Tilbury and Hatfield.

The UK’s CCS competition is also underway and could provide up to 100% of the additional (i.e. CCS related) capital and operating costs incurred by the project developer in successfully demonstrating the full chain of CCS technologies on a commercial scale. The Government is intending to announce the winner by June 2009. Some of the UK projects may also be eligible for the EU funding described above.