Energy Bill 2022 - Hydrogen and CCUS

The Energy Bill 2022 (the “Bill”) was introduced on 6 July 2022. The bill covers carbon capture and storage, hydrogen production, regulatory reform, battery storage proposals, electricity networks, nuclear, and emerging low carbon technologies – the details of which will be covered by us in due course here. We will soon be publishing our review of the changes to offshore oil and gas regulation.

Here we cover proposals contained in parts 1 and 2 of the Bill aimed to develop the UK’s Carbon Capture Usage & Storage (CCUS) and Hydrogen economies, in line with Ofgem’s broader objectives of decarbonisation and improved customer protection.

Part 1: Licensing of Carbon Dioxide Transport and Storage

The Bill empowers Ofgem to grant licences for

1. Operation of a CO2 storage site: the operation of a site for the disposal of carbon dioxide by way of geological storage; or
2. Pipeline transportation of CO2 for storage: the provisions of services for transporting carbon dioxide by a licensable means of transportation.

In this context “licensable means of transportation” means pipes, a system of pipes or any other such transportation method approved by Ofgem that transports carbon dioxide all or part of the way to a site for geological storage. It should be noted: a licensed transporter will not necessarily transport CO₂ as far as the ultimate storage site. It is as yet unclear whether there will be minimum transport distance below which there will be no licence requirement.

At present, transporting and / or storing CO₂ is not a regulated economic activity. These activities are subject only to Land Use Planning orders and general HSE safety requirements, in contrast to the more heavily regulated pipeline transportation of methane gas. Additionally, CO₂ storage is regulated primarily via the EU CCUS Directive 2009/31/EC (and not the UK’s own Energy Act 2008) which governs liability for long term CO₂ storage. The Bill seeks to reset this: the former specific licensable activities will now be regulated in a similar to the conveying of methane gas under the Gas Safety Management Regulations 1996. The North Sea Transition Authority, which has recently launched a new licensing round, remains the regulator for offshore CCUS licences: the Bill does not clarify how Ofgem’s new economic regulatory role may intersect with that of the NSTA.

The Bill does not propose a procedure for licence applications but instead confers authority on the Secretary of State, in conjunction with Ofgem, to devise secondary legislation setting out the form and manner in which an application for a licence should be made. The Bill also allows Ofgem to award licences by way of competitive tender.

Part 2: Carbon Dioxide Capture, Storage and Hydrogen Production

Part 2 of the Bill authorises the Secretary of State to make provisions for:

1. transport and storage (T&S) revenue support contracts;
2. hydrogen production revenue support contracts, where the contract is between a hydrogen production counterparty and an eligible low carbon hydrogen producer; and
3. carbon capture revenue support contracts, where the contract is between a carbon capture counterparty and an eligible carbon capture entity.

In keeping with CfDs awarded under the Energy Act 2013, before confirming secondary legislation the Secretary of State must consult the devolved administrations. However, beyond this requirement, consultation is largely at the Secretary of State’s discretion; they need only consult any other persons the Secretary of State considers appropriate. The Secretary of State is further empowered to make funds available to anyone encouraging, supporting or facilitating T&S of CO2, capture of CO2, low carbon hydrogen production or T&S of hydrogen. The important proviso being that “eligibility” for T&S revenue support contracts will be limited to only those granted a licence under part 1 of the Bill. The Bill does not offer a definition - such designation is also left to the Secretary of State’s discretion when enacting secondary revenue support legislation.

The Bill authorises the Secretary of State to designate a counterparty for hydrogen production revenue support contracts. The counterparty, which will distribute funds to eligible hydrogen producers, will play a similar role to the Low Carbon Contracts Company under the UK’s CfD regime. Separately, the Bill anticipates that a Hydrogen Levy Administrator (the “Administrator”), whose job it will be to pay hydrogen production revenue support contracts on behalf of the aforementioned hydrogen production counterparty, will be appointed, as will an entity responsible for determining contract allocations. The specific functions of the Administrator are not specified in the Bill. Similarly, the methodology for contract allocation is yet to be set out. We would expect that, as with the standard terms of revenue support contracts which are to be determined by the Secretary of State, these details will be published in secondary legislation.

Part 2 also makes reference to carbon capture decommissioning: the Bill empowers the Secretary of State to draft regulations supporting the financing and logistics supporting carbon storage installation. Enacting regulation will likely intersect with the financial security that is to be made available pursuant to decommissioning requirements set out in a storage permit.

Comment:

The provisions with respect to CO₂ transportation, storage and revenue support contracts for low carbon hydrogen production have been in the works for some time. The laying of this Bill before Parliament is an important step in progressing CCUS and hydrogen production developments in the UK.

However, while this sets out a clear framework for CO₂ transporters, storage operators and producers of low carbon hydrogen, the details of how contracts will be allocated, on what terms and how such future policies will work with existing obligations are needed. As was the case with the introduction of CfDs in 2013, the robustness of the counterparty, will be a key area that investors will wish to understand. In contrast to the Electricity Market Reform approach, the Bill prioritises competition and contract delivery in delivering revenue support schemes which may lead to questions why the initial bilateral approach is not being adopted in the same way for CCUS and low carbon hydrogen projects.

While industry has broadly reacted favourably to the proposals, investors and operators will be conscious that the requirements for licensed status and the value of any such support scheme are, as yet, unclear. In addition, low carbon hydrogen production will be monitored for compliance, with potential loss of revenue support contracts in cases where standard conditions are not adhered to. Once again, the specific monitoring thresholds and enforcement powers are to be the subject of future regulation.

Moreover, some scrutiny may yet come over the extent of government discretion the Bill affords. It currently gives a very wide remit to the Secretary of State, and is in contrast to other recent energy legislation. For example, the 2013 Act made a specific requirement of the Secretary of State to consult any holder of a licence to supply electricity as well as the national system operator; the Bill features no such equivalent obligation.