EU proposals and the Energy Act 2008 in context

The background

The UK Environmental Audit Committee issued a report in July 2008 saying that the UK Government must set a deadline for coal-fired power stations to adopt carbon capture and storage (CCS) or face closure. The Committee argued that the UK Government cannot rely on the carbon price alone to create the incentives necessary to drive the development of CCS, as there is no guarantee that the carbon price will reach a sufficient level to make CCS cost-effective.

Against the backdrop of this drive for the use of CCS technology in the face of potential commercial barriers, the current regulatory framework also throws up significant obstacles. These obstacles, taken together, represent a challenge to large-scale investment in CCS. Many of these obstacles have been addressed, at least in principle, in recent proposals of the European Commission and the enactment of new UK law. In this article we consider some of the key issues.

EU CCS proposals

At the end of January 2008, the European Commission released a package of proposals to help it meet the EU’s target of a 20 per cent cut in 1990 emissions levels by 2020. The Commission sees CCS playing a key role in meeting these targets, and has released a package of proposals aimed at progressing CCS development, as summarised below.  

  • The Commission has proposed the licensing and regulation of the geological storage of CO2 in a draft Directive (the CCS Directive).  
  • The Commission wants to bring CCS installations into the EU Emissions Trading System (ETS), as set out in a further draft Directive (the ETS Directive).  
  • The Commission pledges to have a “positive attitude” towards State Aid for CCS projects under revised Environmental State Aid Guidelines.

This package of proposals was overwhelmingly approved by the European Parliament on 17 December 2008. The European Council is expected to formally adopt the package as law soon.

UK Energy Act 2008

Domestically, the Energy Act 2008 (the Energy Act) sets out the UK Government’s proposed offshore CO2 storage regulatory framework. It received Royal Assent on 26 November 2008; however, the relevant sections of the Energy Act are not yet in force and require an order of the Secretary of State to take effect. Like the draft CCS Directive, the Energy Act proposes a licensing regime. The regime is similar to that proposed for offshore gas storage: a licence is required for an offshore CO2 storage facility, on such terms as the Secretary of State sees fit. The detail of how such a regime would work has largely been left to secondary legislation.  

CO2 storage: key issues in the draft CCS Directive and the Energy Act

We summarise below some of the key issues arising out of the draft CCS Directive and the Energy Act.  

Licences

Storage licences  

Both pieces of legislation require a licence for CO2 storage and for all applicants to demonstrate certain capabilities and that they have in place some form of financial security for their obligations under the licence. The draft CCS Directive details (nonexhaustively) the information a licence application must contain – for example, a “monitoring plan”, a “corrective measures plan” and a “provisional postclosure plan”. The Energy Act does not provide details of what information a licence application must contain – any further detail is likely to be provided in subordinate legislation.

Exploration licences

Under both pieces of legislation, a company that wishes to explore a certain area to establish suitability for a CO2 storage site would need an exploration licence. The draft CCS Directive proposes that exploration licences would have a maximum twoyear duration, renewable once by a maximum of a further two years.  

The Energy Act also requires a licence for other related activities, such as establishing an installation for CO2 storage.

Exception – enhanced oil recovery The regime under the Energy Act does not cover the use of CO2 for enhanced oil recovery (unless the Secretary of State makes an order to the contrary), which continues to be governed (in general) by the Petroleum Act 1998.1  

No waste to be added to CO2

The draft CCS Directive prohibits any waste or other matter being added to CO2 for the purposes of disposal.

Monitoring

The draft CCS Directive requires each Member State to appoint a “competent authority” in relation to CCS. The Energy Act empowers the Secretary of State to carry out certain functions in relation to CCS. One particular function under both the draft CCS Directive and the Energy Act is an ongoing monitoring role, in part to help allay public concern about the safety of CCS. This includes:

(a) inspections – a system of routine (at least yearly) and nonroutine inspections of storage sites by the competent authority under the draft CCS Directive. The Energy Act provides for the Secretary of State to appoint special CCS inspectors;  

(b) reporting – an obligation on storage operators to report to the competent authority on certain matters (e.g. the results of the operator’s monitoring process) under the CCS Directive;  

(c) licence review – the Secretary of State/competent authority may review storage licences in certain circumstances (e.g. failure to meet licence conditions) and, in the case of the CCS Directive, every five years;

(d) licence withdrawal – following a review of a storage licence, the Secretary of State/competent authority may amend or withdraw a storage operator’s licence. Under the draft CCS Directive, following a licence withdrawal the competent authority may issue a new licence, and until it does the previous storage operator will be liable for any costs the competent authority may incur. Under the Energy Act, the Secretary of State may order an operator to carry out a particular step if the operator breaches its licence. Failure to comply is an offence; and  

(e) public register – the Secretary of State must, under the Energy Act, keep a public register of CCS licences, which is presumably intended to placate public concerns over access to information on the location of CCS facilities.

The draft CCS Directive also obliges the operator to monitor the storage facilities (and “where appropriate the surrounding environment”) in line with its monitoring plan (as approved by the competent authority). If there is a “significant irregularity” or leak the operator must take the necessary corrective measures and notify the competent authority.  

Closure and transfer of responsibility

The operator will, under both pieces of legislation, be responsible for its storage site following its closure until the licence terminates.  

The Energy Act provides for the decommissioning obligations under the Petroleum Act 1998 to apply to CO2 storage facilities. However, the Secretary of State may by regulation change how such decommissioning obligations apply to CO2 storage. The draft CCS Directive provides that responsibility will only transfer to the competent authority when all available evidence shows the CO2 stored will be “completely contained for the indefinite future”. After a transfer of responsibility the former operator will not be liable to the competent authority for the recovery of costs, even if there is a leak.

Third party access

The draft CCS Directive provides for Member States to take necessary steps to ensure potential users are able to gain access to CO2 transportation and storage facilities. Factors which each Member State must consider in deciding whether access should be granted include technical/ logistical factors (e.g. storage and transportation capacity, incompatibility of technical specifications, needs of the owner of the storage site), as well as the proportion of its CO2 reduction obligations the Member State intends to meet through CCS. Member States will be required to ensure that any undertaking refusing access because of lack of capacity or lack of connection makes the necessary “enhancements” to overcome such difficulties, subject to certain conditions (e.g. it must either be “economic” to do so or the potential user must be willing to pay for such enhancements).  

Transboundary cooperation

For any transboundary transportation or storage facilities, the draft CCS Directive requires Member States to jointly meet the requirements of the draft CCS Directive.  

Long-term price support: ETS Directive

Companies operating facilities currently included in the ETS must hold sufficient allowances to account for the CO2 they emit each year.  

The ETS covers power stations, oil refineries and iron and steel plants – but not CCS installations (unless voluntarily opted in by a Member State). From 2013 the auctioning of allowances is, under the ETS Directive, to apply to the power sector in general, including CCS installations. The ETS Directive would provide that operators of CCS installations would not need to surrender allowances for emissions securely stored through CCS. In other words, carbon stored safely by CCS would be treated as “not emitted” for the purposes of the ETS regime.  

The proposed ETS Directive also contains a positive obligation on Member States to spend 20 per cent of revenues from the allowance auction process on (among other things) the development of carbon capture and storage, in particular from coal-fired power stations. However, the UK Government is opposing this article (on the basis that it should be free to decide on how to spend this revenue) so this obligation may be removed.  

Government support for full chain demonstration projects: State Aid Guidelines

The Commission recognises that CCS demonstration projects may need extra finance over and above the incentive provided by the carbon market. Member State support measures are likely to play a major role – as we are seeing in the UK with BERR’s contract competition for the first full chain CCS demonstration project. Indeed, Government support is expressly encouraged in the ETS Directive, which, as mentioned above, currently provides that at least 20 per cent of the revenue from auctioning ETS allowances must be applied to certain purposes, one of which is CCS.

Some of the means to support such projects could potentially fall foul of the rules restricting State Aid. In light of this, the Commission is willing to view favourably the use of State Aid to cover the extra costs of CCS demonstration in power generation projects. The revised Environmental State Aid Guidelines set out this commitment: “the Commission will have a generally positive attitude towards State Aid for such projects”. Because of the limited experience in public funding of CCS, the revised Environmental State Aid Guidelines go no further in laying down guidelines for approving any such aid.  

Our conclusions

The proposals demonstrate some positive concrete steps at UK and EU level towards developing a coherent CCS regime. Here are some of the key points:  

  • Regulatory barriers are being addressed. Some of the legal barriers to CCS (both international and domestic) are being addressed. At an international level, for example, the OSPAR (Oslo and Paris Convention, replaced by the Convention for the Protection of the Marine Environment of the North East Atlantic) and London Convention, which govern the protection of the marine environment, have both been amended to allow for offshore CCS. At European level, the package of measures announced by the Commission in January 2008 includes an acknowledgement that existing EU waste and pollution control legislation would not be suitable to govern CCS. Hence the need for a “bespoke” licensing regime specifically for CCS, as proposed in the draft CCS Directive, together with a suite of amendments to EU environmental legislation which could, as currently drafted, prohibit CCS. At UK level, in setting up a regulatory framework for CCS, the Energy Act strips away some of the outdated regulatory requirements which previously governed offshore projects under UK law, such as the Food and Environment Protection Act 1985.  
  • “Bespoke” licensing regime. The proposal to implement a “bespoke” licensing regime specifically designed for CCS will overcome many of the regulatory difficulties presented by existing legal regimes, especially those concerned with waste and pollution control. However, both the draft CCS Directive and the Energy Act take the form of “enabling legislation”. That is, they establish regulatory frameworks, rather than detailed licensing regimes. We will need to wait for further, more detailed, proposals at national level to understand how the licensing regime will work. In relation to implementation of the draft CCS Directive, BERR has published a consultation document “Towards Carbon Capture and Storage”. The consultation seeks views on the draft CCS Directive, as well as other aspects of CCS regulation (including CO2 storage) and the principle of “carbon capture readiness”.
  • Long-term liabilities. Both the draft CCS Directive and the Energy Act include provisions relevant to medium and long-term liability. For example, the Energy Act applies the decommissioning obligations contained in the Petroleum Act 1998 to gas storage facilities. The draft CCS Directive proposes that residual long-term liability associated with gas storage should be passed back to competent authorities, provided the gas has been, and can be demonstrated to have been, safely secured for long-term (“indefinite”) storage. However, without specific legislation governing long-term liabilities for CCS it is unclear whether, at present, there are suitable legal liability regimes to cover CCS-related liabilities. The main maritime conventions which deal with pollution at sea, for example, deal with oil pollution, rather than pollution generally. It is not clear how and to what extent the Environmental Liability Directive would apply to offshore CCS. If and to the extent that the Environmental Liability Directive or other liability regimes were to apply, it is not obvious how the effects of a major sub-sea leakage of CO2 (e.g. acidification) would be translated into liability.  
  • Onshore CCS not covered by UK proposals. The UK Government has not proposed any onshore CO2 storage regime – and it is not dealt with in the Energy Act. The Government’s view is that, in the short term, offshore CO2 storage is likely to be of primary interest to domestic developers.
  • Funding from financial mechanisms. EU proposals contain provisions designed to encourage revenue support for CCS from the carbon market and from Government investment. It is proposed that CCS be included in Phase III of the EU ETS, with obligations on Member States to invest revenues from the ETS auctioning process in a number of carbon abatement initiatives, including CCS (although it remains to be seen whether this latter provision will survive). The EU Commission has also signalled that it will, when considering potential State Aid issues, adopt a “positive attitude” to CCS projects. The UK Government pressed at UN level for CCS to be included within the Clean Development Mechanism (CDM), allowing CCS to generate tradable credits for carbon reductions under the Kyoto mechanisms. This issue was not concluded at the recent United Nations Climate Change Conference held in Poznan, Poland in December 2008. CDM reform has been postponed until the next conference to be held in Copenhagen in December 2009.