Navigating change: The Energy Act 2023's framework for carbon capture and storage

The Energy Act 2023 (EA) marks a major transition in the UK's energy regulatory framework, particularly with respect to carbon capture utilization and storage (CCUS) technologies. To achieve its ambitious climate targets, the country needed legislation that provides a comprehensive framework for the development and deployment of CCUS. The Energy Act 2023 outlines the funding mechanisms and business models that will be necessary for the success of CCUS.

 

Regulatory Framework for Carbon Capture in the Energy Act 2023

The EA 2023 introduces a structured regulatory environment for carbon capture and storage, encompassing licensing for CO2 transport and storage operations. In accordance with this framework, operators are required to obtain licenses for the management of CO2 geological storage sites and for the transportation of CO2 via pipelines or other means. Notably, the framework allows for certain exemptions to these licensing requirements, which can be granted by the Secretary of State through future regulations. While a Call for Evidence was published in August 2023 to indicate the government's direction regarding these regulations, as of now, the draft regulations detailing the proposed licensing exemptions have not yet been released for public consultation.

The Office of Gas and Electricity Markets (Ofgem) that acts as the economic regulator for gas and electricity activities in Great Britain, functioning under the authority of the Gas and Electricity Markets Authority (GEMA), has been designated as the economic regulator for these activities. Ofgem ensures that operators can charge network users, such as power plants and industrial facilities, for their services while adhering to cost-efficiency standards.

Furthermore, the legislation requires that all CO2 transport and storage networks operate under a licensing regime comparable to that of existing critical infrastructure sectors . Examples of such sectors include gas and electricity. In these sectors, operators must obtain licenses from GEMA to ensure safe and efficient service delivery. Additionally, the water supply and sewage services sectors also operate under similar licensing systems that enforce quality and environmental standards while maintaining fair pricing for consumers. This approach is designed to encourage private investment by providing a stable regulatory environment that minimizes barriers to entry for new market participants.

The EA 2023 also outlines requirements for the secure decommissioning of CO2 infrastructure at the conclusion of its operational lifespan, thereby reinforcing the sustainability of these projects.

 

Funding mechanisms

To promote the deployment of CCUS, the Act outlines several funding mechanisms aimed at reducing financial barriers for businesses. These include:

• Contracts for Difference (CfDs): This mechanism offers investors revenue certainty through a fixed price for carbon capture services. By aligning the current market price with the cost of carbon capture, CfDs enhance the viability of investment in carbon technologies. The UK government has not yet finalized the exact reference point for the strike price. The consultation document titled 'Carbon Capture Usage and Storage: Amendments to Contracts for Difference,' published on July 21, 2021, describes the 'strike price' as a price for electricity that reflects the cost of investing in a particular low-carbon technology. Typically structured as long-term agreements lasting 10 to 15 years, CfDs provide additional stability and predictability for investors, further boosting their confidence in financing carbon capture projects. The government has committed to holding annual CfD allocation rounds, which will facilitate ongoing investment and support for emerging carbon technologies.
• Government Grants and Subsidies: The Act allocates funding for research and development, pilot projects, and large-scale deployment. These grants are designed to support innovative technologies and encourage public-private partnerships in the carbon capture sector.
• Tax Incentives: The introduction of tax reliefs for companies investing in carbon capture technologies further incentivizes participation. These tax incentives can significantly reduce the overall cost of implementing carbon technologies, making them more viable for a wider range of businesses. The funding framework will initially rely on Exchequer support but is expected to transition towards a levy-based system as projects mature. The government will conduct public consultations to determine the specifics of the levies that will finance hydrogen production and transport. Furthermore, the government has pledged to provide support for up to four operational CCUS clusters by 2030, with the goal of capturing and storing between 20 and 30 million tons of CO2 annually by that time.

 

Cluster development

The UK's journey towards establishing CCUS clusters began in earnest around 2020, when the government committed GBP1 billion to support the deployment of four CCUS clusters by 2030.

In 2021, the UK government launched a systematic approach to identify potential CCUS clusters, leading to the selection of two primary clusters under Track-1: the HyNet Cluster and the East Coast Cluster.

Track-1 Clusters

The UK government has allocated GBP22 billion funding to three out of the eight proposed Track 1 projects. Specifically, this includes two projects from the HyNet cluster and one from the East Coast cluster, along with the necessary CO2 transport and storage infrastructure for each.

The funding is designated for grants that assist in construction and provide top-up payments to emitters and transport and storage companies, ensuring the economic viability of operating the capture facilities and networks.

Furthermore, plans are underway to transition to a competitive allocation process for CCS projects starting in 2027, with intentions to open the HyNet CCS cluster to more companies by 2030.

A significant aspect of some of these clusters is their strategic positioning near facilities capable of liquefying CO2, which enhances operational efficiency by facilitating the transportation and offshore storage of captured emissions. By being located close to liquefaction sites, these clusters can offer additional advantages to emitters, streamlining the process of managing their carbon footprints.

Track-2 clusters

Following the establishment of Track-1, the UK government has initiated the Track-2 process, which aims to develop two additional CCUS clusters by 2030. The objective for these clusters is to transport and store a minimum of 10 million tonnes of CO2 per annum. The primary candidates for Track-2 status are:

• The Acorn CCS Project in Scotland
• The Viking CCS Project in England

These projects are being assessed based on their capacity to meet exacting criteria, including demonstrating a clear pathway for significant CO2 injection rates and establishing connections via pipelines to multiple capture projects.

GGR Framework

Department for Energy Security and Net Zero (DESNZ) is minded enabling engineered greenhouse gas removal (GGR) projects to apply for both Track 1 expansion and Track 2 of the CCUS initiative. GGR business model will implement a “contract for difference” framework, designed to facilitate the large-scale deployment of various GGR technologies in the UK over the next decade. This model is being developed with a technology-neutral approach, allowing it to accommodate a diverse array of GGR technologies, including Direct Air Carbon Capture and Storage (DACCS), seawater CO2 removals, Biomass Energy Carbon Capture and Storage (BECCS), biochar, and enhanced weathering. Additionally, DESNZ is considering the integration of GGR technologies into the UK Emissions Trading Scheme (UK ETS), which currently covers around 25% of UK emissions. This integration could enhance market opportunities for GGR projects and provide further incentives for investment.

By allowing GGR projects to compete alongside traditional CCUS initiatives, the government can stimulate innovation and diversify the types of carbon removal technologies being developed.

Several lessons can be drawn from the Track-1 and Track-2 experience and the forthcoming expansion processes. One important lesson is the value of early engagement with the government’s selection process. A thorough understanding of the criteria for both Track-1 and upcoming Track-2 selections will be essential for positioning projects effectively in future funding rounds.

Location plays a critical role in the success of CCUS projects. Many clusters are being developed near CO2 liquefaction sites, which help optimize transportation and storage of captured carbon. This proximity to key infrastructure presents operational advantages for businesses involved in the carbon management process.

In addition to traditional carbon capture, the UK government’s focus on GGR technologies offers another avenue for participation. Technologies such as DACCS are increasingly integrated into CCUS projects. Businesses looking to enter this space must stay abreast of new developments and regulatory changes to ensure their technologies align with future funding opportunities.

 

Business models

The Energy Act 2023 outlines a variety of business models designed to facilitate investment in CCUS technologies:

• Public-Private Partnerships (PPPs): The Act encourages collaboration between government entities and private companies. PPPs can facilitate the sharing of resources, knowledge, and risks, ultimately driving down costs and increasing the likelihood of project success.
• Service-Based Models: Businesses can adopt service-based models where carbon capture is offered as a service. This approach allows companies to outsource their carbon management, making it more accessible and affordable for smaller enterprises.
• Integrative Approaches: The framework supports the integration of CCUS with existing industrial processes. By coupling carbon capture with energy generation or manufacturing, companies can enhance efficiency and reduce overall costs, creating a more sustainable operation.

These models include economic regulation frameworks that allow transport and storage companies to charge users based on efficient costs and a reasonable return on investment. Given the likelihood of CO2 transport networks functioning as regional monopolies, such arrangements are essential and will require careful regulatory oversight.

 

Conclusion

The Energy Act 2023 provides a robust foundation for CCUS. However, many details regarding its implementation to be fleshed out through secondary legislation, including specific regulations governing the application process for licenses and operational standards. This framework will also address licensing exemptions, which may be granted under certain conditions. The government has indicated that further developments will emerge throughout 2024 as it progresses with its CCUS roadmap and related projects. These advancements are expected to enhance the regulatory landscape, providing clarity and support for the deployment of CCUS technologies in alignment with the UK’s climate goals.

For further insights into how Energy Act 2023 affects UK businesses, visit our Energy Act hub.

Please contact Andreas Gunst if you would like any further information.