Top of the class, or a carbon copy? Exemptions from the requirement to hold a carbon dioxide transport and storage licence

Part 1 of the Energy Bill that is currently making its way through Parliament (the “Energy Bill”) envisages a licensing regime with respect to the transportation and storage (“T&S”) of carbon dioxide (see previous Law-Now articles in our CCUS series, including the latest here, in this regard). On 16 August 2023, the Department for Energy Security & Net Zero (“DESNZ”) published a call for evidence (the “Call for Evidence”) relating to its proposed exemptions from the requirement to hold a licence under this regime, intended to be introduced via powers to enact secondary legislation under the Energy Bill. In this article, we briefly consider the proposals in the Call for Evidence.

Background: T&S licensing regime

Under the Energy Bill, it is envisaged that a licence, granted by Ofgem (or by DESNZ during an initial interim period), will be required in order to:

1. operate (i.e. control) a site for the disposal of carbon dioxide by way of geological storage; and/or
2. provide a service of transporting carbon dioxide towards permanent storage by means of a pipeline (or any other means that DESNZ may later designate as the CCUS market evolves, such as shipping, road or rail).

The Energy Bill as drafted provides for DESNZ to grant (or vary), by means of enacting secondary legislation, exemptions from the requirement to hold a CO₂ transport and storage licence. Such exemptions can apply either indefinitely or periodically, on a general or a specific basis, and conditionally or unconditionally. The Energy Bill expressly envisages that DESNZ will consult on any exemption regulations before they come into effect.

The Call for Evidence

The Call for Evidence builds on the anticipated types of exemptions envisaged in the delegated powers memorandum published around the time that the Energy Bill was first introduced. The stated aims of the envisaged exemptions regime are to encourage investment into T&S networks and minimise barriers to entry for new market participants where obtaining a licence may impose a disproportionate regulatory burden (by imposing e.g. the RAB revenue model and ringfencing requirements that will come with a T&S licence on persons for whom such provisions were never intended).

DESNZ has proposed three categories of exemptions in the Call for Evidence, each of which will be very recognisable to persons familiar with the electricity and gas regulatory regimes.

Class Exemptions

The first category, “class exemptions”, is intended to allow activities that are generally licensable to proceed without a licence in certain defined scenarios. The intent may be to adopt a similar approach to that used in existing energy contexts, where no certification or assurance can be obtained from DESNZ or Ofgem with respect to the application of a class exemption in any particular scenario, and persons seeking to operate without a licence must instead satisfy themselves on an ongoing basis that they meet the requirements for the relevant class exemption.

DESNZ has itself proposed exemptions for the following two classes of T&S activities:

1. Operating spur pipelines of a specified type (e.g. less than a certain length) connecting emitters to a licensed CO₂ T&S network, in order to prevent the licensing regime having a disproportionate effect on operators of less significant T&S infrastructure; and
2. Research & Development activities for which the operator does not levy charges on third parties, e.g. testing infrastructure and pipelines that inject small amounts of CO₂ into geological storage sites, in order not to discourage growth and knowledge sharing in the UK CCUS sector.

However, DESNZ has indicated that it would also welcome views on other activities with respect to which class exemptions may be appropriate.

Exemptions for specific persons

The second and third categories of exemptions apply to specific individuals rather than classes of persons:

• The second category, “named exemptions”, is for specific persons already identified by DESNZ as being suitable for licence exemption as at the time the licensing regime is initially introduced, e.g. for clusters where emitter projects are already relatively well progressed and the characteristics of their T&S network connection infrastructure are known.
• The third category, “individual exemptions”, is for persons that may in the future apply to DESNZ for specific licence exemptions. This proposal is intended to allow flexibility in light of the rapid development of the CCUS market, in case the need for further exemptions is identified only after the initial class and named exemption regulations have come into effect. DESNZ proposes to set parameters for the application process and consider applications on a case-by-case basis.

In each case, it is envisaged that relevant operators will need to demonstrate that the regulatory burden of their obtaining and complying with a licence would be disproportionate, that the exemption would not present any threat to the interests of T&S network users, and overall why it is not appropriate for them to to transport and/or store CO₂ under the normal licensing regime.

As is the case in the context of licence-exempt electricity distribution networks, for example, DESNZ is considering a requirement for operators of exempt T&S networks to have to offer third party access.

Comment

T&S network operators and emitters will both be pleased to see the development of the basic exemption for “private” spurs. It will be interesting to see how this class exemption (and/or exemptions for any classes) develop, e.g. for scenarios in which multiple emitters are connected to a single private spur.

The proposal for a class exemption for private CO₂ spurs is not a “new” concept in the wider energy sector, and plenty of existing electricity and natural gas networks are already operating under similar licence exemptions. As in these contexts, we expect that a degree of regulatory oversight will still be required for licence-exempt CO₂ T&S operators in order to achieve overall system coherence, e.g. via the CCS Network Code.

From a licensed T&S network operator perspective, it will be important to ensure that exemptions are granted where needed to allow network users are able to install and maintain the infrastructure they need to connect to the network (and therefore contribute to the network operator’s user revenues). At the same time, licensed operators will keep a close eye on potential scope for exemptions to be granted to unlicensed network operators that could seek to compete to provide user connections on less onerous terms.

Next steps

DESNZ has asked for feedback on its proposals in the Call for Evidence by 11 October 2023, with a view to further developing and consulting on the T&S exemptions regime thereafter.