Amendment 2

Energy Bill [HL] - Report (1st Day) – in the House of Lords am 5:15 pm ar 28 Mawrth 2023.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Baroness Liddell of Coatdyke:

Moved by Baroness Liddell of Coatdyke

2: Clause 1, page 2, line 7, at end insert—“(d) assist the delivery of greenhouse gas emission targets as set out in the Climate Change Act 2008, including any carbon budgets set under that Act and climate targets specified in subsection (8).”Member's explanatory statementThis amendment places an equivalent principal duty on the Gas and Electricity Markets Authority to assist in the delivery of Net Zero, alongside protecting the interests of current and future transport and storage network users. This would enable Ofgem to better justify and evidence decisions enabling strategic anticipatory investment.

Photo of Baroness Liddell of Coatdyke Baroness Liddell of Coatdyke Llafur

Ironically, I am also going to talk about some of the responsibilities for Ofgem in among other issues. If noble Lords look at the Explanatory Statement, they will see that we are talking about how to put in place a setting within which Ofgem can better justify and evidence decisions enabling strategic anticipatory investment.

I make the point that I am the honorary president of the Carbon Capture and Storage Association. The CCSA has grown considerably in the past two years, because of all the interest in carbon capture. We have been marched up to the top of the hill more than once, but this time we hope that we will be able to deliver.

Amendment 2 talks about the importance of enabling rapid network expansion. For us to meet the emissions reduction targets, carbon capture and storage will need to be rolled out rapidly across the UK during the rest of the decade. One role of the CCSA that I find extremely interesting is its interchange with the industry. There are some big companies in it but there are also small, cutting-edge companies involved in the development of how we cope with carbon capture, storage and utilisation.

I ask the Minister to bear in mind that it is not just Ofgem that needs to understands its remit; we need to look further and ensure that, throughout the industry, there is confidence, consistency and certainty, because the amount of money that will have to be invested in this is very considerable. To capture and store 30 million tonnes a year by 2030, as per the net-zero strategy, we will need to go from absolutely nothing to building significant CO2 infrastructure in a very short space of time, connecting capture projects continually throughout the 2020s. The industry wholeheartedly welcomes the Government’s recent commitment of £20 billion to build the industry up from scratch. It is therefore vital that Ofgem has updated duties that enable it to justify investment to allow for the rapid network expansion to connect more carbon sites to a growing suite of storage sites.

A lot of this is being done elsewhere. We have an opportunity to be leaders in carbon capture, utilisation and storage, but we need help from the Government, and signals need to be given out. Twenty billion pounds is a very large sum of money but it is not enough; it is estimated that around £50 billion will be needed. Some of that can come from private investment—indeed, it is important that it does—but there needs to be the degree of certainty that I spoke about a couple of seconds ago.

In Committee we debated Ofgem’s powers and whether its role in delivering net zero while protecting current and future users of the network is sufficiently clear. My noble friend Lord Foulkes, who is also a signatory to this amendment, stressed this time and again during those debates. The point was also made much more dramatically by the noble Baroness, Lady Hayman. How is it that so many people out there do not think that Ofgem has the right environment, role or powers to deal with the complexity of these issues?

Ofgem’s current set of duties makes it difficult to justify strategic investment in networks, as this would increase costs to current users in the short term. This is the dilemma that has to be got across. This has been an ongoing issue of concern, as raised in the National Infrastructure Commission’s 2019 regulation review, Strategic Investment and Public Confidence, which recommended that economic regulators’ duties be updated to facilitate long-term investment in networks, and, more recently—referred to by the noble Lord, Lord Teverson —in the Skidmore review.

While the Government should be commended—and I do commend them—for proposing that the duties of the economic regulator should include consideration of the needs of existing and future users, a principal duty to deliver net zero by 2050 would help the regulator to effectively balance these two equally important factors. However, it should be noted that, outside of the regulator’s core duties, the Bill includes a further requirement for the regulator to support the Secretary of State in having regard to the Climate Change Act 2008 and the new CCUS strategy and policy statement. That should go some way to addressing this.

However, it is not enough that these mechanisms are not as strong as the regulator’s own duties. This amendment is essential to give the regulator the necessary powers to make decisions that enable the required strategic anticipatory investment on the network. Ofgem will need to be empowered to make well-justified decisions, balancing the interests of current and future transport and storage network users with delivering net zero.

I move on to Amendment 3, which would add to the licensing regime to make it fit for the future. There is a global race on CCUS, with the US and Europe making significant progress in the past 12 months. This is not something that happened years ago; it is happening now. Ever since we submitted the first amendments to this Bill, other countries have got ahead of us. If we are to stay at the front, the industry will need to grow and develop at pace. This amendment will ensure it can do that.

Members may have noticed that the Danish Government made fast work of getting their first injection of CO2 to the Greensand field recently. That was launched to much fanfare. Norway is planning infrastructure to connect its CO2 stores to mainland Europe. I have always been in awe of the speed with which Norway can move on these issues. Like Norway, the UK has significant geological assets—many of them, I should say with my accent, are in Scotland—with a third of Europe’s entire offshore CO2 storage potential at 7,000 million tonnes. That is a dramatic figure and equal to all the EU states combined. Only Norway, with 8,000 million tonnes, has more in Europe.

While the economic regulated model is essential for the initial monopoly networks that will enable domestic industrial decarbonisation, we need to future-proof the regulatory system by enabling private operators to develop merchant models to transport and store carbon dioxide in the longer term. That would be the kind of expenditure within that £50 billion I spoke about a couple of minutes ago. This amendment will enable cross-border transport and geological storage of carbon dioxide to develop over time without having to rely on exemptions being granted to allow private networks to develop.

The enormous potential to offer CO2 storage services to European and other countries presents a terrific opportunity for the UK to become a global leader in CCUS and to accelerate global efforts to prevent CO2 emissions. The legislative framework should avoid any future barriers to cross-border transportation of CO2. The Government want a growth agenda—the Chancellor has repeatedly referred to it—but for us to develop that agenda we really need to make sure that we have the structures in place that would allow it to grow.

This amendment would ensure necessary consistency —which I mentioned at the beginning of my remarks—with the existing regulatory regime for the granting of geological storage licences by the Oil and Gas Authority, now the North Sea Transition Authority, under the Storage of Carbon Dioxide (Licensing etc.) Regulations 2010. The Secretary of State is having regard to the Climate Change Act 2008, and the new CCUS strategy and policy statement should go some way to addressing this.

However, in practice these mechanisms are not as strong as the regulator’s own duties. This amendment is necessary to give the regulator the necessary powers to make decisions that enable the required strategic anticipatory investment on the network. Ofgem will need to be empowered to make well-justified decisions, balancing the interests of current and future transport and storage network users with delivering net zero.

I hope the Minister will take this seriously. If I have not convinced him, will he sit down and talk to the industry itself?

Photo of Lord Teverson Lord Teverson Liberal Democrat Lords Spokesperson (Energy and Climate Change) 5:30, 28 Mawrth 2023

My Lords, I will speak to my Amendment 33, which is around the decommissioning costs of carbon capture and storage installations. First, I will read what is in Clause 85(1) about financing costs:

“The Secretary of State may by regulations make provision for requiring relevant persons to provide security for the performance of obligations relating to the future abandonment or decommissioning of carbon dioxide-related sites, pipelines or installations.”

It is not often that one is shocked in Grand Committee in the Moses Room. Normally it is a feeling of impotence when you are going through SIs, rather than some sort of greater emotion, but I was shocked when we discussed this. I asked the Minister how we protect the funds that are for decommissioning at some point way into the future. How are we sure that they are not like the dodgy builder who takes your deposit and then, when you ask him or her to decorate your house, the phone is no longer answered and the money has disappeared? How do we know, in this rather difficult area of energy, that those “relevant persons”, and more importantly their banks accounts, will still be there so that in some distant future, maybe decades ahead, this money is available?

If I am honest, when I had the answer from the Minister—which I cannot quote as I have not looked it up—I was shocked that there did not seem to be any provision for protection of the rather large sums that I expect to be there. That is why I have introduced this amendment. It is very simple and demands that when these payments are made they are effectively put into an escrow account, or at least a ring-fenced fund of some sort, so that they are there when these facilities need to be decommissioned. It is then up to the Secretary of State to agree when that money can be disbursed so that decommissioning can take place or disbursed because the funds are no longer needed.

It is as simple as that. It is about protecting that money that we as taxpayers and citizens of the UK are owed when that decommissioning happens and making sure that the money really is paid rather than having disappeared at the time. I see no guarantee within the three pages of other details about how these funds should work. I hope the Minister can come back to me and reassure me that, if he is not going to accept this amendment, the Government will ensure that this money is ring-fenced and is there for us and future generations when we reach that decommissioning point.

Photo of Baroness Sheehan Baroness Sheehan Democratiaid Rhyddfrydol

My Lords, I declare my interest in the register as a director of Peers for the Planet.

I shall speak to only one amendment in this group, Amendment 33, in the name of my noble friend Lord Teverson, to which I have added my name. It aims to ensure that decommissioning funds, as the noble Lord has explained, are available for decommissioning when the time comes. I support it not least because it complements Amendment 222A, which I tabled in Committee, on transparency of decommissioning, particularly with respect to future taxpayer liability for decommissioning relief deeds, which are agreements between the individual oil and gas companies and the Treasury. The National Audit Office and the Public Accounts Committee have both expressed concern about this public liability. I quote from the 2019 NAO report on decommissioning:

“With decommissioning activity increasing, the government is paying out more in tax reliefs for decommissioning at the same time as tax revenues have fallen due to a combination of lower production rates, a reduction in oil and gas prices and operators incurring high tax-deductible expenditure.”

That represents a triple whammy for UK taxpayers since, as the report says, for the first time ever, in 2016-17,

“the government paid out more to oil and gas operators in tax reliefs than it received from them.”

The scenario under which that public subsidy of oil and gas production took place in 2016-17—that is, the triple whammy of lower production rates, a reduction in oil and gas prices and operators incurring high tax-deductible expenditure—is the future outlook for the gas and oil sector as the world moves ever more rapidly towards decarbonisation. The USA’s inflation reduction Acts and the imminent EU response via the green deal industrial plan will turbocharge that transition, and rapid transformative change is very visible on the horizon.

While oil and gas expansion currently looks secure, it is only artificially so, given the very generous tax reliefs, subsidies and other support that the Government continue to provide, not least via decommissioning relief deeds. With over 100 new licences for exploration and production on offer, the risk of stranded assets is compounded hugely. Why do the Government persist in giving preferential treatment to fossil fuel producers? That is a question that I have put to the Minister before on several occasions, and I hope that this time there might be an answer.

It used to be that a ceiling of sorts was kept on the overall cost to the taxpayer by the fact that a firm could not claim back more in decommissioning tax relief than it had previously paid in tax. That makes sense but, since 2017, the Government have explicitly said that when firms default the partner firms that pick up the bill can claim back more in tax relief than they have ever paid. That certainly needs some digesting.

It cannot be right to put on life support an industry that has had its day—life support that is publicly funded. The amendment asks the Government to take precautions with the public purse, uphold the “polluter pays” principle and ensure that operators of new fields and buyers of existing ones accept that they cannot escape their responsibility to our planet, the one and only planet that we have.

Photo of Baroness Blake of Leeds Baroness Blake of Leeds Opposition Whip (Lords), Shadow Spokesperson (Energy and Net Zero), Shadow Spokesperson (Business and Trade)

My Lords, in speaking to the amendments in this group, I particularly thank my noble friend Lady Liddell for the well-informed and detailed explanation of why the amendments in her name and that of my noble friend Lord Foulkes are so important and relevant. What we heard was the crossover between the considerations within these amendments and the discussions that we had on the previous group regarding the work that we believe needs to be done to strengthen the hand of Ofgem, particularly to justify and evidence decisions, as we heard, enabling strategic anticipatory investment.

What we have to focus on here, running through all our discussions today, is the sense that we in the UK are falling behind. As described, Amendment 2 in particular speaks to how we can achieve the confidence of investors, and indeed the public, to make the case for the seemingly vast amounts of money that need to be invested—although we know that, in the scheme of what we need to do, the money identified does not come anywhere near the expenditure that we will have to bring forward.

The most important desire in the amendments, which has been eloquently expressed and I hope the Minister can address it, is, particularly in this case, to know how the steps forward will protect the current and future users of carbon dioxide transport and storage networks in particular. Running through all the discussions that we have to have on the Bill is the need to protect the interests of consumers as well as promoting the efficient economic development and operation of the transport and storage networks that we are discussing. The other area is ensuring that licence holders are indeed able to finance activities.

I want to reference the many government amendments; we all know there are many amendments throughout the Bill from the Government, which is worth a comment in itself. I too express frustration that throughout the narrative that is expressed there is ambition and a recognition of enormous potential, but unfortunately, as the noble Baroness, Lady Hayman, so eloquently put it, there is a growing sense from many key players that that ambition and potential have not been matched by action. I hope the Minister can give us confidence that by the end of this week we will get a sense of where that support, and the necessary link to action, will come from. It is an enormous missed opportunity for the whole country and its potential in terms of jobs and providing for our energy requirements that we now have this reputation of falling behind.

Protecting our assets is crucial. I want to add my comments about how the regulations will make access to the infrastructure more appropriate, and how they can amend the carbon dioxide regulations of 2011.

I recognise the comments made by the noble Lord, Lord Teverson, supported by Baroness Sheehan, and I very much look forward to hearing the answer. Protecting funds in this area has to be critical, but I am not sure that we yet know how that is going to be achieved.

Photo of Lord Callanan Lord Callanan Parliamentary Under Secretary of State (Department for Energy Security and Net Zero) 5:45, 28 Mawrth 2023

I thank everyone who contributed to the debate. If the House will have a little patience, I will first take some time to set out and explain the government amendments in this group, before I come on to the non-government amendments.

Amendment 4 to Clause 9 ensures that, ahead of making any regulations under this power, there should first be consultation with the economic regulator and the appropriate devolved authorities.

Amendments 5 and 6 to Clause 19 preserve the independence of the economic regulator by removing the power for the Secretary of State to direct the economic regulator not to impose conditions in consenting to the transfer of a licence.

Amendment 7 clarifies that the requirement to provide information to the Secretary of State or the CMA under Clause 28 is in relation only to Ofgem’s functions under Part 1 of the Bill, not to any of its other functions.

Amendment 8 clarifies that, under Clause 29, disclosure of information to the economic regulator does not breach any obligation of confidence owed by the licence holder making the disclosure, or any other restriction on the disclosure of information. It also clarifies that this provision does not authorise a contravention of data protection legislation.

Amendment 9 provides updated definitions of a “final order” and “provisional order” in Clause 31—these are consequential on amendments made to Clause 32 in Committee, which inserted a new Schedule 3, setting out the enforcement measures in the Bill.

Amendments 10 to 12 and 15 concern the list of persons whom the Secretary of State must consult under Clause 46 before modifying the terms of a company’s licence in relation to a transport and storage administration order. These amendments make it clear that there should be consultation with the relevant storage licensing authority where a carbon storage licence is in place.

On Amendment 35, we must mitigate the risk that decommissioning liabilities fall to the taxpayer, given that the Government ultimately sit as the decommissioner of last resort. Section 29 of the Petroleum Act 1998 enables the Secretary of State to serve notices that require the recipient to submit a decommissioning programme for an installation or pipeline. The Section 29 regime is therefore a key lever in mitigating that risk.

Amendment 35 proposes amendments to Section 30 of the Energy Act 2008, which would enable modifications to Sections 30, 31 and 45 of the Petroleum Act 1998, in its application to the decommissioning of carbon storage installations. These modifications seek to ensure that the Secretary of State can issue a Section 29 decommissioning notice on entities with a licence for CCUS activities, under Section 18 of the Energy Act 2008. This will enable the Secretary of State to impose decommissioning obligations on CCUS licensees, among other persons.

Amendment 36 proposes an amendment to Section 29 of the Petroleum Act 1998. Under current legislation, a new Section 29 notice cannot be issued on assets that have already been included in a decommissioning programme, unless that programme is rejected or approval for it is withdrawn. This would mean that, if an oil and gas asset were subsequently repurposed for use in a CCUS network, the Secretary of State may not be able to serve a new Section 29 notice on the CCUS operators of that asset without first rejecting, or withdrawing approval for, the existing decommissioning programme. This could lead to a gap in liability for decommissioning a repurposed asset, which of course increases the risk to the taxpayer. The amendment seeks to ensure that the Secretary of State can issue a new Section 29 notice on assets that are already within an approved decommissioning programme, thus mitigating the risks.

Amendments 37 to 39 clarify the duties in Clause 92 for the Secretary of State and the economic regulator to carry out their respective functions with regard to considerations in a CCUS strategy and policy statement. The amendments clarify that these duties apply only to functions relevant to the strategic priorities set out in the statement, and related to carbon dioxide capture, usage and storage policy. The amendments seek to exclude other functions set out in Part 2, which relate to hydrogen production that may not rely on CCUS, such as hydrogen produced via electrolysis. They seek to expressly exclude hydrogen levy functions.

Amendments 41 to 47 to Clause 99 ensure that sufficient powers are available to the Secretary of State to be able to update or make new access to infrastructure regulations, should that be appropriate to ensure that access arrangements remain fit for purpose. In particular, updates to the existing regulations may be needed in light of the new economic licensing framework established in Part 1. These amendments are necessary because the existing regulations were made using the powers in Section 2(2) of the European Communities Act 1972, and there are currently no domestic powers to update, replace or make new access to infrastructure regulations.

Amendment 14 to Schedule 5 ensures that, where appeals are made to the Competition and Markets Authority in respect of a decision made by the economic regulator for carbon dioxide transport and storage, a “specialist utility” group is convened to hear such an appeal. This is consistent with provisions for licence modification appeals in the Gas Act 1986, the Electricity Act 1989 and the Water Industry Act 1991, as I am sure the House is aware.

I move to the non-government amendments. Amendment 33 requires CCUS decommissioning funds to be ring-fenced. I thank the noble Lord, Lord Teverson, for his contribution. The Government’s view is that the primary purpose of a funded decommissioning regime is to provide assurance that decommissioning liabilities for CCUS assets will be paid, mitigating the risk that these liabilities fall to the taxpayer—we share the noble Lord’s concern about this. The noble Lord asked me for reassurance that the funds will be ring-fenced. The Government agree that appropriate safeguards will need to be put in place to ensure that the funds carry out the desired function.

The Government’s 2021 consultation on establishing a funded CCUS decommissioning regime set out our proposals for access to the decommissioning funds and, in particular, the expectations for ring-fencing and regulatory authorisation for any withdrawals. The Government expect that the decommissioning funds will be overseen by the economic regulator, to ensure that the funds are accruing appropriately. In addition, the intention is that the Offshore Petroleum Regulator for Environment and Decommissioning will need to authorise any withdrawal requests made by the operator to ensure that use of the funds is restricted to decommissioning-related purposes.

The noble Lord will be pleased to know that the Government plan shortly to publish an update document, which will include further detail on regulatory oversight of the decommissioning funds, the holding arrangements and, crucially, the protection against insolvency. The Government intend to set out the requirements for appropriate restrictions and safeguards for the fund in regulations and guidance. These requirements will be essentially technical in nature, so it is the Government’s view that it would be more appropriate to set these out in secondary legislation.

I move to Amendment 2, from the noble Baroness, Lady Liddell, and the noble Lord, Lord Foulkes, who is not in his place, sadly—I was looking forward to debating with him. It is the Government’s view that this amendment is not necessary. The Secretary of State is already bound by law under the Climate Change Act to ensure that targets to reduce greenhouse gas emissions are met. Under Clause 1(6), the economic regulator is required to have regard to the need to assist the Secretary of State in complying with his statutory duties under Sections 1 and 4 of the Climate Change Act 2008, and to have regard to the statutory emissions-reduction targets in each of the devolved Administrations.

Anticipatory investment will be essential to scale up CO2 transport and storage networks to meet our CCUS ambitions and net-zero targets. However, this investment must be driven by the needs of the users of the network, both those already connected to a network and, of course, those wanting to connect.

The principal objective for the regulator to protect the interests of both current and future users will achieve this aim. Anticipatory investment decisions will need to be well evidenced, and network expansion and development should provide value for all network users. There is a risk that an additional net-zero principal objective could inadvertently delay network developments; for example, the more principal objectives the regulator has to balance, the greater the likelihood of tensions arising between these objectives, leading to protracted or heavily diluted decisions, and potentially adding further costs and delay to the essential delivery of this infrastructure. Fundamentally, decisions on strategic priorities for CCUS are policy decisions, and a strategy and policy statement for CCUS is the appropriate means of providing strategic direction for the regulator regarding policy considerations and the role and contributions of CCUS in achieving net-zero targets.

I turn now to Amendment 3 tabled by the noble Baroness, Lady Liddell of Coatdyke. The CO2 transport and storage regulatory investment model has been designed to attract the investment needed to establish and scale up the transport and storage infrastructure crucial to establishing a CCUS industry across the UK. I am pleased to tell her that we are expecting to announce the outcome of the cluster sequencing process this week, with the track 1 project negotiation list. This is indeed a busy week. We will also provide an update on the expansion of the track 1 clusters and—this is crucial to her interests—our plans for track 2. At the end of her remarks, she asked me to sit down and talk to the industry, and I am pleased to tell her that I did exactly that on Monday. CCUS is now part of my ministerial portfolio, and I am co-chairman of the CCUS Council, which, coincidentally, met on Monday afternoon; we had a long discussion about many of these issues.

As carbon dioxide pipelines and storage assets have essential monopolistic characteristics, the economic regulation model also provides important and necessary protections for users of the networks from anti-competitive behaviour, including monopolistic pricing. I am afraid that the amendment does not offer that protection. The regulatory model is also designed to facilitate our long-term vision of a CO2 transport and storage sector which, ultimately, is able to operate without subsidy. However, as I am sure the noble Baroness will accept, CCUS is currently a rather fledging industry, and government support is needed to enable the deployment of the first CCUS networks. To overcome the market barriers to investment which currently exist, there will be both capital and revenue support available for the initial networks, and the vast majority of industrial users connecting to the networks will be supported by either government funding or, in the case of CCUS-enabled power plants, consumer subsidies. It is essential, therefore, that transport and storage infrastructure development represents value for money to both taxpayers and consumers, and that charges for the use of transport and storage services are fair and proportionate. In our view, that is achieved through economic regulation and oversight by an independent economic regulator.

I share the noble Baroness’s desire to ensure sufficient flexibility in the regulatory framework to allow for future market expansion, and we have designed the legislative provisions with exactly that in mind. The power under Clause 8 to create different licence types, with different conditions, will enable the regulatory regime to respond to market developments and to facilitate a lighter-touch form of regulation for offshore activities in future, should that become appropriate. It is not the Government’s intention to inhibit market developments through a framework of economic regulation, but it is important that there are protections in place for users and consumers, and that we are able to respond to any anti-competitive behaviours, should they arise. It is the Government’s view that the alternative licensing framework that the noble Baroness refers to in her amendment does not provide for that.

I apologise for the long update but, reflecting on these points, I hope that the noble Baroness will withdraw her amendment.

Photo of Baroness Sheehan Baroness Sheehan Democratiaid Rhyddfrydol 6:00, 28 Mawrth 2023

Before the Minister sits down, I will ask him to clarify a couple of things. First, I welcome his statements on decommissioning, but can he confirm whether the safeguarding of decommissioning funds will include all fields, both existing and new? Secondly, can he confirm that it is the FCA that will provide the regulatory oversight for decommissioning funds?

Photo of Lord Callanan Lord Callanan Parliamentary Under Secretary of State (Department for Energy Security and Net Zero)

It would depend on what the noble Baroness means by “decommissioning funds”. What would the decommissioning funds be for? In response to the noble Lord, Lord Teverson, I outlined our intention to ring-fence the CCUS decommissioning funds.

Photo of Baroness Liddell of Coatdyke Baroness Liddell of Coatdyke Llafur

I beg leave to withdraw my amendment.

Amendment 2 withdrawn.

Clause 2: Prohibition on unlicensed activities

Amendment 3 withdrawn.

Clause 9: Procedure for licence applications