Energy Act 2023: creative licence – overview of carbon dioxide and hydrogen transportation and storage licensing provisions

Following our general update on the enactment of the Energy Act 2023 (EA23), this article looks in a little more depth at Parts 1 and 3 of EA23 regarding the new licensing regime for the transportation and storage of carbon dioxide (CO₂ T&S) and the extension of the existing gas transporter licensing regime for hydrogen pipeline projects. While EA23 received royal assent on 26 October 2023, Parts 1 and 3 are due to come into force on 26 December 2023.

Map of applicable licensing regimes

A substantial matrix of legislation will be relevant to the operation of CO₂ T&S and hydrogen networks, with respect to matters including consenting, health and safety, environmental liabilities and decommissioning (e.g. under the Petroleum Act 1998). We set out a brief summary below of only those specific statutory provisions that will govern the economic regulatory regimes for the operation of these networks.

With respect to CO₂ T&S, Chapter 1 of Part 1 of EA23 has laid the groundwork for a brand-new licensing regime, modelled on existing RAB-based regulatory regimes for energy networks, which will be administered by Ofgem. The Government, in consultation with Ofgem and stakeholders, is at the heads of terms stage in developing the applicable licence conditions. We consider in the next section some of the notable differences between the new EA23 CO₂ T&S licensing regime and the existing regulatory regimes for energy networks.

While the EA23 regulatory regime will apply across both transportation and storage, in the particular context of the offshore storage of carbon dioxide, these new provisions sit alongside (and in some areas modify, but broadly do not supersede) the existing EU-law-derived licensing regime under the Energy Act 2008.

By contrast, with respect to the transportation of hydrogen, the definition of “gas” in the Gas Act 1986 has, since the time of enactment, included hydrogen (alongside natural gas), such that the existing economic licensing regime for natural gas networks (administered by Ofgem) has always been capable of being applied in the hydrogen context (though see below with respect to controls on blending). The Government has, however, expressed a view (recently confirmed in its August 2023 response and minded-to position papers on its August 2022 hydrogen transport and storage infrastructure consultation) that the existing Gas Act regime may not provide the most appropriate foundation for the development of pure hydrogen networks. Consequently, the Government (by way of a late amendment to the Energy Bill) introduced Part 3 of EA23, providing for the designation of hydrogen pipeline operators by the Government and empowering the Government to modify the conditions of any gas transporter licence granted to a hydrogen pipeline operator. The latest consultation papers note that the Government intends to keep the regulatory framework for hydrogen transportation under review as the nascent sector develops and, as such, the EA23 provisions are high-level and open-ended on the detail of how the hydrogen pipeline licence regime will be implemented.

(With respect to the blending of hydrogen into the gas conveyed through existing natural gas networks, this has been controlled to date by other legislation including the Gas Safety (Management) Regulations 1996. The Government intends to consult further before taking measures to encourage further blending.)

As for the offshore storage of hydrogen, following the Government’s September 2023 response to its April 2023 consultation on offshore hydrogen regulation, the Government has enacted secondary legislation to extend the existing licensing regime under the Energy Act 2008 for offshore storage of combustible gases to apply to hydrogen. (The Gas Act also contains some obligations relevant to hydrogen storage operators, though not a full-blown licensing regime.)

For our earlier commentary on the proposals for regulating the transport and storage of hydrogen, please see here.

CO₂ T&S: comment on EA23 regime and differences from statutory regimes for existing energy networks

The new CO₂ T&S licensing regime in Part 1 EA23 has remained materially unchanged since the Energy Bill was first introduced in July 2022. The regime is based on those for existing energy networks, providing that it is an offence to carry out certain activities without either (i) a licence granted by Ofgem (or, with respect to the first licensees, by the Government) or (ii) an exemption from the requirement for a licence (see our previous article here on the proposed exemptions regime). While it is expected that the first CO₂ T&S licences will provide for a RAB-based regime for end-to-end transportation and storage licensees, the language of EA23 is wide enough to allow the Government to introduce other licensing models.

While energy network regulation has provided precedents for the new regime, there are notable differences in context between CO₂ T&S and energy. The UK’s natural gas and electricity networks are mature and extensive, whereas technologies for CO₂ T&S are nascent and there is not yet a broad established network user base. Further, existing networks are designed to convey energy as a valuable resource from producers to consumers, whereas CO₂ T&S networks will solely remove waste gases from emitters for the purpose of locking it away permanently in storage. While a Government Support Package and revenue support arrangements are proposed to mitigate some of the unique risks faced by CO₂ T&S network developers, the impact of these contextual differences inevitably runs deeper. It is perhaps unsurprising, then, that the new statutory provisions for CO₂ T&S are not identical to those for energy network licensing. The aspects of the new CO₂ T&S licensing regime that materially diverge from precedent include the following:

• Regulators’ duties – The Government and Ofgem have a single principal objective in the energy context, phrased in terms of protecting the interests of “existing and future consumers”. By contrast, their principal objectives under section 1 of EA23 are three-fold, perhaps reflecting the nature of CO₂ T&S as being one step further removed from consumers. (Incidentally, it is interesting to consider these duties in the context of the Government’s ongoing Smarter Regulation workstream, on which we recently published a separate article. The Government is consulting on matters including the rationalisation of regulators’ duties and the encouragement of long-term thinking to facilitate strategic investment, and has confirmed that it will, with effect from April 2024, be extending the “growth duty”, introduced under the Deregulation Act 2015, to regulators including Ofgem. The duties set out in section 1 of EA23 may therefore need to be updated almost as soon as they hit the statute book.)
   
• Licensable activities – The first licensable activity provided in section 2(2) EA23, i.e. “operating” a CO₂ storage site is consistent with the language of existing secondary legislation on offshore CO₂ storage. The second, i.e. “providing a service” of transporting CO₂ through pipes used for transporting CO₂ towards a storage site, is a departure from the language of licensable activities in existing energy legislation, but may be in keeping with the idea that, for the purpose of the EA23, the transport and storage of CO₂ is treated as an integrated activity. For example, conveying CO₂ through pipelines that are (at least some of the time) used for the transport of CO₂ towards a geological storage site requires a licence; but conveying CO₂ through another pipeline (e.g. one that exclusively delivers CO₂ to a location where the CO₂ can be used) does not require a licence. Current policy indications are that the offtake of CO₂ from CO₂ T&S networks for use will be prohibited (see e.g. proposed conditions C6 and D6 in the CO2 T&S licence heads of terms published in June 2023, downloadable here). While the regime as a whole is one of “transportation for the purposes of storage only”, the EA23 does reflect the prospect that transportation and storage may be undertaken by different persons (with each licensed accordingly).
   
• Power to amend scope of licensable activities – Energy legislation provides a general power for the Government to add or remove items from the list of licensable activities (see e.g. Gas Act 1986, section 41C). By contrast, the Government’s power under section 2(3)(b) of the EA23 to amend the list of CO₂ T&S licensable activities is narrower: while the Government could use this power to specify that transportation of CO₂ via lorry or ship requires a licence, it would need to pursue primary legislation if it wanted e.g. transportation of CO2 for the purpose of use to be licensable.
   
• Code modification appeals – A notable difference between the CO₂ T&S and energy network regimes is the treatment of appeals against modifications to the industry-led codes that govern some of the granular technical aspects of network connections. While the CO₂ T&S regime mirrors energy legislation in providing a mechanism for appealing Ofgem decisions on licence modifications to the Competition and Markets Authority (CMA), EA23 does not extend to the CO₂ T&S context the right under section 173 of the Energy Act 2004 to appeal Ofgem decisions on energy industry code modifications to the CMA. This would mean that any CO₂ T&S network operator or user that was aggrieved by a modification to the CCS Network Code would likely have to resort to judicial review; one potential consequence of this is that a court may subject Ofgem’s decision-making to a lesser degree of scrutiny, in particular with respect to the substantive merits of any code modification.
   
• General duties of network operators – Energy network operators are subject to statutory duties to maintain an economic and efficient system. Part 5 of EA23 has broadened the scope of these general duties for the Future System Operator (the new whole-energy-system body absorbing the role of the current electricity system operator as well as certain gas system planning functions) to include net zero and security of supply objectives in addition to efficiency and economy. By contrast, Part 1 of EA23 does not impose any such general duties on CO₂ T&S network operators, perhaps due to the emerging nature of the industry, the more “private” nature of CO₂ T&S networks and/or the fact that such duties have been notoriously challenging to interpret.