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

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Carbon Dioxide Transport and Storage Revenue Support (Directions and Counterparty) Regulations 2024.

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.

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.

Lastly, if I may prevail once again upon the Minister, he surely might be able—by letter if not in this Committee—to tell me of his further plans for the great Wylfa nuclear power station on Anglesey. Will he also, helpfully and warmly, indicate that he has something up his sleeve for the now redundant Trawsfynydd power station that once generated nuclear power for the nation? If he cannot respond in terms under the chairmanship of the noble Viscount, Lord Stansgate, he might wish to write to me on any of the points that I have raised. I thank him again for his introduction of these regulations.

My Lords, the noble Lord, Lord Jones, spoke about a war on carbon. Of course, that is a war we should not be having to fight. The arrival of these regulations is an expression of failure over decades. We have continued to dig up and burn coal, oil and gas, and now, having done all that damage to the natural carbon capture and storage—the best possible form of it, which nature has done for us over hundreds of millions of years—we are trying to find a mechanism to undo some of that damage. Yet what we are doing here is establishing an expensive, top-down framework for a technology that does not yet exist at any scale and which, if successful, will create natural monopolies.

This novel industry has zero customers and no guarantee that there will be any in the future. It will be heavily dependent on the Government to adopt an energy and industrial strategy down a route that makes the carbon capture and storage industry possible. It is heavily centralised, risky and expensive, which must be contrasted with the decentralised, readily available and readily deployable technologies that exist as an alternative to CCS. What the Government are proposing with these regulations are huge subsidies for decades, in the hope that at some point there will be economic developments that will start to reduce the cost to the taxpayer. This means that our situation is a bit like the problem we have with incinerators, whereby we build incinerators with contracts to supply them with waste for decades and then have to generate the waste. The Government are really combining science fiction with dinosaur thinking here.

I feel some sympathy for the Minister, because these regulations have landed in your Lordships’ Committee in a rather unfortunate week. To quote the Energy Mix website, referring to the carbon capture and storage industry,

“Industry Navigates Very Bad Week”.

My Lords, I rise to speak to both of these SIs. I note that neither of them has been subject to any report by the Secondary Legislation Scrutiny Committee.

Both SIs relate to carbon capture, usage and storage—CCUS—and are broadly welcomed on these Benches. I will not partake in any debate on CCUS today. It is a suite of technologies that enable the mitigation of carbon dioxide emissions from large point sources, such as power plants and refineries, and the removal of existing CO₂ from the atmosphere. In short, CCUS is one vital tool in the toolbox to help us reach net zero.

The Government envisaged building a competitive, self-sustained CCUS market in the UK. I note that, as of today, no commercial-scale CCUS projects are up and running. CCUS could provide economic growth potential as part of the transition to net zero—£1 billion of government money has already been made available for investment in four potential clusters, which aim to be capable of storing 20 to 30 megatonnes of carbon dioxide by 2030—but CCUS has had a slow and slightly rough start in the UK.

The revenue, directions, eligibility and counterparty SI establishes the process by which the Secretary of State can direct a carbon capture counterparty to offer to contract with an eligible carbon capture entity. It also sets out the requirement that certain information must be published by the counterparty in respect of contracts entered into, as well as the requirement on the counterparty to notify the Secretary of State promptly if it is likely to be unable to perform its functions. This instrument concerns the implementation of industrial carbon capture business models, or ICCBMs—there must be a better acronym—which are intended to support the ambition set out in the net-zero strategy to deliver carbon capture, usage and storage, or CCUS, in four industrial clusters. The ICCBMs have been designed to incentivise the deployment of carbon capture technology by industrial and waste users who often have no viable alternative, as the Minister set out, and are similar to contract for difference schemes.

I thank the Minister for his in-depth introduction to the two SIs that are before us today and for the comments we have heard so far. There will be some repetition in some of our concerns and questions.

I start by setting a bit of the context. I admire the ambition that is expressed, as we discussed during the passage of the Energy Act, recognising that this whole area is just one part of the toolkit in addressing the need to remove carbon from our industry. The Minister outlined the sheer scale of the proposals here, which involves going from 6 megatonnes in 2030 to 9 megatonnes in 2035, but I do not think he expressed what that will mean in terms of the infrastructure required to support the operations. I have to be honest that this Government have so far not had a great track record in delivering infrastructure across the piece, particularly transport infrastructure.

I would like to have a bit more sense, given the backlog in transport investment, of whether investment in this area will jump the queue, if you like, in the planned progress. Is there a plan? That is a question we come back to again and again in terms of delivering on this agenda. Of course, the other major issue around all this is the way the planning system works, or does not work. Can the Minister assure us that we can move forward with confidence in delivering a fairly steep timetable approaching 2025—next year? The clock is well and truly ticking.

Two things are referenced in the wider documentation around the two SIs. One relates to the green jobs plan. Will the Minister comment on how the plan as it is envisaged will deliver, particularly in this area around carbon capture and storage? There is also reference to an industry working group, which I understand from the information is due to be set up at some point this year. Can he tell us when it will be established, and indeed whether the membership thus far has been identified in terms of moving this very important work forward? I think there is also a wider concern about capacity. We have heard that the Secretary of State will take on a great deal of responsibility through these SIs and related work, but Ofgem will also have a significantly enhanced role in oversight—can we have more information about what the additional capacity will look like?

The consultation response is very well detailed, and I welcome the responses to it. I do not want to repeat everything that has been said, but, particularly in response to the additional oversight by the Secretary of State, when we are talking about the ability of the Secretary of State to modify the terms of contract offered, can the Minister give us a little more detail? Which scenarios would generate the Secretary of State considering providing written consent to the modification of the terms of the contract? These are the issues that my noble friend Lord Jones was pursuing. Obviously, the issue of transparency came back very strongly from the consultation. There were concerns around that in terms of establishing a public register, and I think the powers that the Secretary of State seems to have have caused some disquiet from the sector. There has been a request for opportunities for representations to be made around the published information about how decisions are being made. This is a concern that runs across all the responses.

Can we have a little bit more detail around the issues that the Minister believes may prevent a counterparty fulfilling its obligations? Obviously, there is talk in the impact assessment of the Energy Bill around asset stranding and CO₂ leakage. Perhaps we could have a little more detail and information around that, and particularly on what steps the Secretary of State can take to replace a counterparty. These are matters that we will be looking at as we move forward.

As we know, the second SI on carbon capture revenue support has very similar issues; I do not want to repeat myself. Perhaps it would be useful, however, just to dwell on the consultation that took place on this and to have a bit more detail on the specific changes that resulted from that consultation, so that we can have them laid out in detail.

Perhaps the Minister could provide information on the adjustments to the policy, particularly in the light of the stakeholders’ responses to the six-week consultation. How will those adjustments ensure that the instruments meet their objectives? The Government need to be commended on the consultation that they undertook but, for it to be meaningful and useful, they need to give reassurance that these points will be picked up and woven into the response.

With those comments, I look forward to the Minister summing up.

My Lords, I thank all noble Lords for their contributions. Before I get into the detail on particular questions, I will talk about the general issue, particularly as raised by the noble Baroness, Lady Bennett, of CCUS and the principle. Obviously, that was a Second Reading speech for the legislation rather than for this particular statutory instrument, but let me explain why I think the noble Baroness is both misinformed and wrong.

First, most informed opinion disagrees with the noble Baroness on this, including the Climate Change Committee, which told us in its advice that CCUS is essential and not an option if we are to reach our decarbonisation goals. She said many other things that were incorrect. To take an example, she said that CCUS had never been tried and was unproven. Again, that is incorrect. There are many operating CCUS plants in the US. I witnessed one in Alberta, Canada, last year and, only last week, I was in Iceland to see the opening of the largest direct air capture greenhouse-gas removal plant in the world. It has an operating CO₂ ejection system into the basalt rock, which has been working successfully for many years.

So, the technology does work and is proven. We are attempting it at a greater scale than many other countries, but that is a fantastic business opportunity for the UK. We are privileged to have fantastic, tremendous storage potential in the North Sea, where we can store not only our own emissions but possibly those produced by other nations and Europe as well. This has the potential to be a massive revenue earner for the UK, generating potentially tens of thousands of jobs and millions of pounds of contributions. There are a number—dozens—of really innovative UK companies that are experimenting and working in this area. There is great export potential for the UK, and potentially many jobs—or rather, there are hundreds of jobs already.

I can understand the noble Baroness’s point—and I agree with her—that we should seek to minimise emissions as much as possible by processes such as fuel switching. But what would she say to those industrial plants that generate CO₂ as part of their processes rather than by heating? What about cement plants, for instance? Does she think that they should just close down? Should they not exist at all? These are the practical issues that, when dealing with policies that affect people’s jobs and livelihoods in the construction sector, we need to have a solution for rather than just airy-fairy academic views. As the CCC said, CCUS will be essential and is not an option. If the noble Baroness wants to make a point, I will be happy to hear it.