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4 July 2008 |
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Recent developments The consultation seeks views on the definition of carbon capture readiness (referred to as CCR) proposed in the draft EU CCS Directive. It describes and seeks views on:
Of particular interest to would-be developers of UK power stations is the UK's current view on how CCR should be handled in the context of the consenting process under section 36 of the Electricity Act 1989 in England and Wales. The UK Government sees CCR as consisting of four elements:
The Government outlines its view that the relevant authorities should be able to grant consents even where a new plant is unable to demonstrate all four elements of CCR. The Government's position is that the only precondition should be the availability of suitable space on site for the equipment necessary to capture and compress carbon dioxide. The other three factors are to be considered by the competent authority when deciding whether or not to consent to a new plant, but a negative assessment would not preclude such consent being given. It is not clear whether the EU would support the UK's view on this and there is sufficient ambiguity in the current drafting of the Directive to raise questions about such an interpretation. It is understood that the UK is requesting that the Commission clarify the situation in an amendment to the draft Directive. The consultation outlines the Government's approach to the injection of carbon dioxide for enhanced oil recovery (EOR). Currently, EOR with carbon dioxide or otherwise is regulated under the Petroleum Act and is excluded from the draft carbon dioxide storage licence regime under the Energy Bill. The Bill, however, does makes provision for a special regime for EOR to be brought in at a later date. The consultation states that the UK Government intends to use this flexibility to ensure that storage arrangements will only apply where carbon dioxide is being injected for the purpose of permanent storage. Once CCS is included in the EU Emissions Trading System (EU ETS) (currently proposed for Phase 3 of the EU ETS, from 2013 onwards) compliance with a storage licence under the CCS Directive will be a pre-condition for deriving commercial benefit for carbon dioxide that has been permanently stored rather than emitted, so where EOR is being carried out with the intention of permanent storage the storage arrangements will apply in parallel with those for petroleum licensing. Pure EOR, which does not have as its purpose the permanent storage of carbon dioxide (and hence has no aim of seeking credit under the EU ETS) will continue to be licensed under the Petroleum Act alone. Liability and financial security arrangements Under the draft EU CCS Directive long-term liability for carbon dioxide storage sites will ultimately transfer to Member States. The criteria for handover of liability to the State are not detailed in the Directive and the consultation invites views on this. In addition, under the Directive, Member States are authorised to request financial security from CCS operators in respect of future liabilities flowing from storage sites. The UK Government has identified two potential approaches which it might adopt. The first is based on the decommissioning of UK offshore oil and gas installations. There, financial security is usually required from the operator (or other interest holder in the installation) that is sufficient to ensure that independent funds are available to meet the cost of decommissioning if the operator or other person fail to do so. Where the regulator takes the view that the assets of the exploration and production companies involved are not sufficient to cover the likely scale of the liabilities, bank-backed security products, such as letters of credit, will be required. In the current North Sea environment, where the average size of exploration and production companies involved is smaller than in the past, most security is provided through letters of credit. This is a source of concern to the oil and gas industry since letters of credit are generally expensive forms of security. In addition, banks deduct the value of a letter of credit from the money it will lend for capital expenditure and thus can have a significant impact on the company's ability to fund projects. The second approach outlined follows that for nuclear decommissioning, as described in the recent Nuclear White Paper. Nuclear operators will be required to contribute (on a mandatory basis) to an independent fund at a level sufficient to meet the full costs of decommissioning their installations and their full share of the costs of safely and securely managing the disposal of their waste. Arrangements will also be made to top up the fund should it prove to be insufficient. Views are invited on both mechanisms, though the consultation states that these mechanisms are suitable to deal with liabilities associated with the decommissioning of storage site installations only and not in relation to contingent risks such as unforeseen leaks after the handover of the site. In the case of contingent EU ETS liabilities, the UK Government's view is that the Directive requires this to be covered by the financial guarantee arrangements to the extent it is not covered by new products such as insurance. This will no doubt be a lively aspect of the consultation. Some might feel that the consultation document has skirted around the bigger issue of contingent liability whilst focussing on the subject of installation decommissioning, a subject with which the industry is familiar (if not entirely comfortable).
The content of this article does not constitute legal advice and
should not be relied on as such. Specific advice should be sought about
your specific circumstances.
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