It is important to note that while the EA 2023 has laid the foundations for a new regulatory framework, the finer details of that framework will be forthcoming through secondary legislation.
This alert focuses on the key provisions of the EA 2023 impacting the CCUS and hydrogen markets.
State support for CCUS and hydrogen production in the UK
Over the past few years, the UK government (in consultation with the industry) has been working on proposals for the transport and storage, power, and industrial carbon capture business models, the hydrogen production business model (including the Low Carbon Hydrogen Agreement) and the hydrogen transport and storage business models. The EA 2023 sets out a legislative framework underpinning the delivery of these business models.
The issue of how these business models should be funded was debated at length in the UK Parliament before the EA 2023 became law – with a lot of resistance to the government's initial proposal to add a hydrogen levy to consumer bills. The government appears to have moved away from this proposal. One of the options allowed for in the EA 2023 is placing the burden of the hydrogen levy on gas shippers. However, the details of how the levy would work are not available yet and are expected to be set out following the government consultation on the design and scope of the hydrogen levy, which is expected in the coming months.
Licensing and regulation of CO2 transport and storage
The EA 2023 establishes a regulatory framework for carbon dioxide (CO2) transport and storage and gives legal powers to Ofgem as the economic regulator of CO2 transport and storage. The allowed revenue model proposed is similar to that used in the UK for other critical networks such as electricity transmission and distribution. The ultimate aim of this reform is to unlock private finance and remove investment barriers for the CCUS technology.
Under the EA 2023, a licence will be required for (i) operating a site for the disposal of CO2 by way of geological storage and (ii) providing a service of transporting CO2 by a "licensable means of transportation" (i.e., a pipeline or "any other means of transportation that may be specified by regulations made by the Secretary of State").
The EA 2023 introduces a general framework for granting such licences. It contains provisions in relation to transferring, terminating, and amending the licences and Ofgem's enforcement of the licence conditions. It also allows for a process to appeal decisions made by Ofgem.
In the guidance notes to the EA 2023, the UK government clarified that the licence would allow an operator of a CO2 transportation network to charge network users (which will include power plants, industrial facilities, and low-carbon hydrogen production facilities that emit CO2) for delivering and operating the network. It also clarified that Ofgem will have oversight of charges and will determine whether costs are economic and efficient. This will be achieved through licence conditions, which will include the revenue that the licence holder may receive in respect of its activities (the licence holder's "allowed revenue") and a provision as to how the licence holder's allowed revenue is to be calculated. The EA 2023 makes provisions for the safe decommissioning of offshore CO2 transport and storage infrastructure at the end of its operational lifetime. The reference to revenue that the licence holder may receive includes revenue that is calculated by reference to estimates of the licence holder's decommissioning costs.
It is expected that the licences will be granted via a competitive tender process.
The procedure for licence application and further details in relation to this regulatory framework are expected to be set out in regulations (i.e., expect further legislation in this space).
The independent system operator and planner
The EA 23 sets the foundation for the establishment of the independent system operator (referred to as the "Future Systems Operator" in government publications) (FSO). The FSO will be a new independent public corporation that will have responsibilities across both the electricity and gas systems. Its powers and objectives will focus on promoting the UK net-zero objective, the security of energy supply, and the "efficiency and economy" objectives. It will include:
- Coordinating and directing the flow of electricity onto and over transmission systems.
- Making and administering arrangements for the provision of services for the purpose of facilitating the coordination of the flow of electricity onto and over transmission systems.
- Developing the system for the future, including strategic planning and forecasting in connection with the electricity transmission systems and gas pipelines.
The government stated that the FSO "will bring together the planning for the electricity and gas systems, and potentially systems for new technologies like hydrogen and carbon capture and storage, into a single institution to enhance our ability to transition to a zero-carbon energy system and reduce the costs involved".
At this stage, little detail is available as to how the FSO will operate. However, this does implement the recommendation of the Climate Change Committee that, to decarbonise the energy sector by 2025, a single entity that can plan across both electricity and gas would be needed.
Licensing of hydrogen pipeline projects
The EA 2023 also touches upon the issue of licensing for hydrogen pipeline projects. The existing gas transporter licensing regime under the Gas Act 1986 now expressly covers hydrogen pipelines. Further details as to the licensing process are expected to be provided by way of regulations.
Both the Climate Change Committee and the Electricity System Operator have outlined why hydrogen and CCUS will be fundamental to the UK meeting its 2035 and 2050 decarbonisation targets. The EA 2023 is a very significant step towards enabling this. In a world where countries are progressively competing to be a target for energy transition, the policy and financial commitments it represents can also establish the UK as a leading hydrogen and CCUS economy. In particular, the provisions relating to the hydrogen and CCUS business models are bringing the market players closer to getting much-needed state support for pioneer projects in the UK. However, momentum will need to be maintained. At the moment, the EA 2023 is just the tip of a regulatory iceberg, and a large body of secondary legislation will need to be developed fast to make a real impact on the market and ensure that the UK does not fall behind in the global hydrogen and CCUS race.