Contributors
The UK government issued two further consultations this month on carbon capture, utilisation and storage (CCUS).
What were some of the key points?
Consultation on the new economic regulator for transport and storage (T&S)
The UK government had already concluded that an independent body would be needed to oversee the development of the CO₂ transport and storage network and to support its deployment, not least as the network would be naturally monopolistic similar to other regulated utilities.
The UK government has concluded that Ofgem is most apt to be the economic regulator for CO₂ transport and storage. This is primarily because of the necessary speed of implementation of the new regulatory regime, Ofgem's proven track record in regulating similar asset types in the UK's energy sector and the close alignment of strategic objectives with Ofgem's existing regulatory activities – specifically existing decarbonisation strategies to support the UK’s net zero emissions target at the lowest cost to consumers.
The principal objective of the regulator would be "protecting the interests of existing and future users of the CO₂ Transport and Storage network, including by promoting effective competition wherever appropriate".
There would be a number of secondary objectives:
- The ability of a licensed T&S network operator (T&SCo) to finance its licensed activities
- The promotion of effective competition between persons engaged in, or commercial activities connected with, the transport and storage of CO₂
- The need to secure an efficient and economic T&S network, to promote efficiency and fairness, while ensuring a return to regulated operators on their assets and investments
- The need to secure resilience of the T&S network
- The need to secure diverse and viable long-term CCUS solutions
- The need to contribute to the achievement of sustainable development
- Protecting the public from dangers associated with T&S activities
- The effect on the environment of activities connected with T&S
- Regulatory activities should be transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed.
CCUS policy would be set by the UK government, using instruments such as Strategic Policy Statements, with day-to-day regulatory decisions made by the economic regulator.
Initially, the regulator's main functions would be:
- Issuing economic licences to designated operators
- Administering the economic licence
- Making necessary adjustments or re-determinations
- Preparing for the enduring regulatory regime
- Conducting any post-construction reviews of transport and storage costs
- Determining and monitoring appropriate performance targets and associated financial rewards and penalties (incentives) for T&SCo
- Considering and undertaking enforcement action where appropriate
- Overseeing network agreements and connection agreements
- Administering licence changes
- Overseeing responsibility for the management of accrued decommissioning funding.
Under the subsequent enduring regulatory regime (i.e. once the new regime is up and running), the regulator's functions would expand to include:
- Designing and administering operational price control reviews
- Determining T&SCo’s allowed revenue
- Determining the appropriate duration of the second and subsequent regulatory periods as the regime continues to evolve
- Setting, reviewing and adjusting necessary tariff arrangements and methodologies
- Adapting the economic regulatory regime (ERR) as appropriate.
The UK government has confirmed the use of licences to authorise T&SCo to operate a T&S network and to allow T&SCo to charge regulated fees for T&S services. The licence would also impose obligations on T&SCo in carrying out its activities. Some exemptions from the need for a licence may be available in limited circumstances.
The UK government also envisages that non-piped sources of CO₂ will be accommodated in the new regulatory model.
Consultation on the offshore decommissioning regime for CO₂ transport and storage networks
The UK government also issued a consultation on decommissioning.
It is proposed that the funded CCUS decommissioning regime set out in the consultation would apply only to the offshore element of the T&S installation. This is partly because the offshore element is regarded as carrying the highest risk and partly because the onshore element can continue to be regulated by local planning regulations.
The UK government would prefer to establish discrete decommissioning funds for each T&SCo such that each storage site would have its own decommissioning fund. It is proposed that each fund would be set up as a co-linked asset with the storage site to which it is connected rather than a separate asset of the T&SCo. The fund would therefore be transferred from one licensee to the next should the site change hands.
The fund would be accessible only by the designated decommissioning entity and by the government, and only for decommissioning activities. Multiple drawdowns could be permitted over the operational life of the network.
For each fund, the UK government prefers a ‘regular funding’ approach. This entails regular payments into the fund, derived from user fees charged by T&SCo. Limited investment of the fund may be permitted, as with the Nuclear Liabilities Fund. The UK government will consider whether securities could be mandated to mitigate against any fund shortfalls, where OPRED judges securities to be necessary in order to protect the taxpayer.
It is proposed that the T&SCo would manage each of the decommissioning funds in line with licence obligations.
OPRED would be the main regulator for calculating and verifying estimates of decommissioning liability and there would be periodic reviews, at least in line with the price control periods.
The proposal is that the accrual profile for the fund would be a straight-line accrual profile subject to negotiation with the regulator.
As regards any surplus after close-out of decommissioning, the T&SCo will be allowed to determine how this excess funding is used.
The UK government proposes that Change of Use Relief (CoUR) from decommissioning liabilities will be available (but not automatic) for re-used assets which are transferred into a CCUS project provided that the associated CCUS decommissioning fund is topped up by an amount equal to the existing decommissioning liability associated with the transferred asset (to be verified by OPRED). A contingency may also be required. The trigger event for issuing CoUR would be the point at which CO2 is first present at the installation.
