The Energy Security Bill, announced in the Queen’s Speech 2022, aims to facilitate the United Kingdom’s transition to cheaper, cleaner, and more secure energy. As part of the legislative agenda for the remainder of the current Parliament, the bill will legislate state-of-the-art business models for carbon capture, usage, and storage (CCUS) projects.
CCUS is a suite of technologies that capture carbon dioxide (CO2) from large point sources (for example, a gas-fired power plant) or directly from air and then apply, inject, and store it in deep geological formations (including depleted oil and gas fields). CCUS is instrumental in supporting the United Kingdom’s pledge to capture and store up to 30 metric tons of carbon emissions per year by 2030, and to reach net-zero carbon emissions by 2050, according to its Net Zero Strategy.
CCUS Licensing and Permitting Regime
The Energy Act 2008, adopted in line with EU Directive 2009/31/EC on the geological storage of carbon dioxide, establishes a regime for the regulation of CO2 storage and introduced a licensing requirement for offshore CCUS. In 2011, the Storage of Carbon Dioxide (Amendment of the Energy Act 2008 etc.) Regulations 2011 extended the licensing regime to onshore and the adjacent internal waters in the United Kingdom. Carrying out regulated CCUS operations without a license is prohibited.
The Storage of Carbon Dioxide (Licensing etc.) Regulations 2010, as amended, regulate the issuance of CO2 appraisal and storage licenses (each, a CS License) and storage permits and set out a number of requirements for CCUS operations, including in respect of financial security and state inspections (which were introduced by the Storage of Carbon Dioxide (Inspections etc.) Regulations 2012). The liability for a closed CCUS site upon termination of a CS License is regulated by the Storage of Carbon Dioxide (Termination of Licences) Regulations 2011.
Further, the permitting regime for CO2 capture and discharges to groundwater is regulated by the Environmental Permitting (England and Wales) (Amendment) Regulations 2011.
The North Sea Transition Authority (NSTA), formerly known as the Oil and Gas Authority, is a licensing and permitting authority for offshore CO2 storage (except for Scotland). The NSTA is responsible for approving and issuing CS Licenses and storage permits.
A CS License must be obtained to explore for or use a geological feature for the long-term storage of CO2 in a UK offshore area. Applications for a CS License may be made only in response to a formal invitation from the NSTA in respect of a particular area or areas.
A storage permit is required for CO2 storage in a storage site with a view to its permanent disposal during the operational phase of the CS License. There is a public register of CS Licenses that have been granted.
The Crown Estate holds the territorial seabed rights for CO2 transportation and storage within the UK Exclusive Economic Zone (excluding Scotland). Therefore, offshore CCUS project developers should also apply to the Crown Estate for appropriate transportation and storage rights, in addition to CS Licenses.
Regulative Models and Incentives for CCUS Projects
The United Kingdom’s regulative models and incentives continue to develop. The Ten Point Plan for a Green Industrial Revolution confirmed the United Kingdom’s commitment to deploying CCUS and included a number of targets as a pathway to reach net-zero emissions in 2050. In October 2021, it was announced that the HyNet and East Coast Clusters would be Track-1 CCUS clusters for the mid-2020s.
While the United Kingdom is committed to investing state funds to facilitate the deployment of CCUS, its ultimate aim appears to be the development of a commercial framework for CCUS projects based on sustainable business models. It has taken a number of steps with a view to developing stimulating regulative models that would incentivize CCUS projects.
In 2017, as part of the Clean Growth Strategy, the UK government announced that it would renew its efforts to introduce CCUS at a large scale in the United Kingdom and established the CCUS Council. The CCUS Council acts as a forum for engaging the CCUS sector on discussing and addressing key strategic issues.
BEIS Consultations and Response on Business Models
In 2018, the Department for Business, Energy & Industrial Strategy (BEIS) published an action plan setting out the steps required to deploy CCUS at scale during the 2030s, as well as a number of important reports (including on potential business models for establishing an incentive mechanism for industrial carbon capture, on readiness of UK industrial clusters for the deployment of industrial CCUS, and an update on technical and cost assumptions for power CCUS technologies in BEIS’s modeling tools).
BEIS has conducted a number of consultations and continues to analyze potential business models and incentives for CCUS projects. Within this framework, in 2020, BEIS published the Government Response on Potential Business Models for Carbon Capture, Usage and Storage.
Carbon Capture and Storage Infrastructure Fund
In March 2020, the Carbon Capture and Storage Infrastructure Fund (CIF) was announced. The CIF is instrumental to state support that is expected to be allocated to CCUS. The CIF will primarily support capital expenditure on transport and storage (T&S) networks and industrial carbon capture (ICC) projects.
Possible Business Models
The draft commercial principles for T&S projects envisage an economic license that grants the licensee a regulated revenue stream facilitated by the right to charge a regulated fee (T&A fee) from completion of construction.
The indicative heads of terms for ICC were first published in December 2020 and subsequently amended in 2021 and 2022. In April 2022, the UK government published the latest update on the ICC business model together with a draft of the ICC contract for initial projects and a summary of the ICC business model.
The business model is composed of capital grant co-funding (for initial projects) and ongoing revenue support via the ICC contract for 10–15 years with an industrial emitter.
These UK regulations and policies continue to develop and will likely be subject to more revisions, especially as the Energy Security Bill is expected to legislate for CCUS business models. We will continue to monitor these developments.