Written statement on Carbon Capture, Usage and Storage Track 1 - Contingent Liabilities - Nov 13

Minister of State for Industry (Sarah Jones): Today, I am pleased to have laid a Departmental Minute setting out the details of a series of contingent liabilities associated with the Carbon Capture Usage and Storage Track-1 clusters. Carbon Capture Usage and Storage is a critical component of the UK meeting its 2050 net zero commitment particularly via ensuring energy and supply chain security and enabling hard-to-abate sectors to decarbonise.

The taking of these liabilities directly will address issues which have hampered previous attempts at a Carbon Capture Usage and Storage programme, in particular investor confidence and the risk of CO2 store leakage. This support and the rapid launch of the programme fulfils the government's aim to make the UK a global leader in Carbon Capture Usage and Storage, and ultimately creating a self-sustaining sector which supports not only UK business but also provides international opportunities.

Treasury approval has been granted and subject to satisfaction of conditions, we anticipate arrangements will begin to be implemented by the end of this month.

Context and rationale

Carbon Capture Usage and Storage is the only feasible method for decarbonising many hard-to-abate sectors such as cement production, and is currently the most cost-effective method of decarbonising others such as dispatchable power. Whilst there is growing interest worldwide, a programme of this nature is first of a kind and consequently there are multiple market barriers which inhibit the development of a Carbon Capture Usage and Storage market in the UK.

Government support is necessary to address these challenges and enable Carbon Capture Usage and Storage deployment at scale. HMG is reducing investor risk in these technologies by bearing some of the initial risk inherent in developing a Carbon Capture Usage and Storage market, as well as the cross-chain risk existing across the participants in the network.

Whilst the liabilities are in principle for the entire project duration it is expected that in practice government exposure will decrease as users come on to the system, insurers become more comfortable with the 'first-of-a-kind' risks and the depth of the market increases.

Details of the Contingent liabilities

There are 5 contingent liabilities associated with the various Track-1 contracts related to the following arrangements:

1. The Supplemental Compensation Agreement is a long-term mechanism within the Government Support Package, which enables the management of leakage risks at the geological store during operations and the post closure period.
2. The Revenue Support Agreement addresses demand-risks by providing for payments to CO2 transport & storage companies if their allowed revenue is not covered by user fees.
3. The Discontinuation Agreement provides a right for the SoS to discontinue support to the transport and storage companies and entitles investors to be compensated for their investment.
4. The Decommissioning Shortfall Agreement covers potential decommissioning fund shortfall which might arise if decommissioning is required before the fund has been fully built-up.
5. The Discontinuation of Capture Project Contracts allows for payment of compensation to capture projects for any losses due to a qualifying change in law or prolonged CO2 transport and storage unavailability.

Exposure

The table below sets out the HMG's maximum exposure for each of the programme associated contingent liabilities. These concern the five projects that were part of the October announcement: two transport and storage networks, Net Zero Teesside, Protos, and EET Hydrogen – we will notify Parliament of additional contingent liabilities when other projects reach financial close. It is important to note that whilst the table represents the maximum possible exposure, the probabilised exposures and likely crystallisations are far lower. There are robust risk management frameworks in place. Our assessments indicate that there no liabilities that are likely to be realised and the vast majority are very remote.

The contingent liabilities are necessary as it provides confidence in this first of a kind sector. Carbon Capture, Usage and Storage will enable us to accelerate to Net Zero whilst maintaining energy security and delivering growth to our industrial heartlands.