How will the UK/ EU Trade & Cooperation Agreement impact hydrogen development and carbon capture and storage projects?
On 14 December 2020 the UK’s Energy White Paper “Powering our Net Zero Future” was published. Achieving net zero emissions status and fighting climate change was at its core.
The Energy White Paper sets out the ambitious targets that have been set in the UK for renewable and “green” technologies, most notably an offshore wind target of 40 GW by 2030 and a switch to clean hydrogen in heat, power and industrial processes with 5GW of low carbon hydrogen production capacity to be installed by 2030. The Energy White Paper notes the intention of the British Government to pioneer a new British industry dedicated to the capture and return of carbon emissions to under the North Sea and the establishment of a commercial framework to help stimulate the market to deliver a future pipeline of power CCUS projects.
The Energy White Paper was swiftly followed by the end of the transition period, following the UK’s exit from Europe. As a result of Brexit, the Trade & Cooperation Agreement (“TCA”) becomes relevant and consideration needs to be given to the potential implications (if any) of the TCA for UK energy policy, in particular the development of the clean hydrogen industry and carbon capture and storage projects.
The TCA notably contains a number of important commitments on climate change that are not found in previous EU free trade agreements. Title VIII is the chapter focused on Energy with security of supply and environmental sustainability highlighted as key objectives. In addition, the principle of non-regression on carbon pricing is included in the TCA, seeking to ensure that the current level of climate protection in the EU and in the UK will continue to be upheld. There would seem therefore to at least be some helpful consistency in terms of focus of UK Energy Policy and the TCA.
Throughout the TCA reference is made to “electricity” and “gas” which at first glance would appear to exclude hydrogen or carbon capture and storage. There is no specific definition of “hydrogen” or “carbon emissions” included in the TCA with the only gases referenced in Annex ENER1 being natural gas and biogas. A more detailed review of the TCA is, however, required.
A number of the provisions of the TCA apply to “renewable energy” which is defined as energy produced from “renewable, non-fossil sources”. Article ENER 22 is particularly noteworthy as it provides that each party is to ensure that support for electricity from renewable sources facilitates the integration of electricity from renewable sources into the electricity market. Biofuels, bioliquids and biomass are only to be supported as renewable energy if they meet robust sustainability criteria. The TCA Parties are also to co-operate in the development of offshore renewable energy by sharing best practices (ENER 23).
There is no further detail as to whether energy has to be produced solely from renewable, non-fossil sources in order to qualify as renewable or if it is sufficient for non-fossil sources to be the majority source of the energy generated. This of course has implications in the green, blue or grey hydrogen space.
Third party access has long been a key pillar of EU energy policy. Third party access obligations are referenced in the TCA and are stated to apply to transmission and distribution networks. “Transmission networks” as defined in the TCA excludes upstream pipeline networks constructed as part of oil or gas production projects. The exclusion would not seem to apply to pipelines that, as part of a carbon capture and storage project, transport carbon emissions by pipeline for sequestration offshore, meaning that CCSU pipelines may constitute a “transmission network” for TCA purposes and may be subject to third party access requirements.
What about pipelines for hydrogen or where hydrogen is blended with natural gas? If pipeline networks transporting hydrogen are not covered by the definition of “transmission networks” then such pipeline networks would not have to comply with third party access requirements. This may prove particularly important in the early demonstration projects and hydrogen hubs currently planned in the UK where access and usage of infrastructure would typically want to be tightly controlled by the original project sponsors and participants. However, longer term, if a downstream hydrogen market is to be developed, which would seem to be key to ensuring the commercial viability of hydrogen going forward, then third party access to relevant pipeline networks will be important.
Unbundling requirements are also stated to apply to transmission network operators which again may raise issues for pipeline networks used for transportation of hydrogen. Careful thought may need to be given to implications for the new hydrogen hubs being planned as the first “demonstration” projects in the UK, where it is likely that those entities owning and operating the hydrogen production and power generation facilities will also own and operate the pipeline network integral to the functioning of the hubs.
It should be noted that the TCA includes specific provision whereby third-party access requirements and unbundling obligations need not apply to “emergent or isolated markets or systems” or where disapplication is necessary to fulfil a legitimate public policy objective. It could be argued that these exemptions should apply to the hydrogen hubs that are currently being developed and also potentially to carbon capture and emissions pipeline networks although, as noted above, carbon capture and storage pipelines do not appear to be caught by the provisions of the TCA.
So, it would appear that the TCA should not hinder or unduly burden the development of either the nascent hydrogen industry or carbon capture and storage projects with additional regulatory provisions. However, a note of caution.
The TCA is a single agreement, with a single governance structure, designed to act as a foundation for further UK/EU ‘supplementing’ agreements and other arrangements over time. In terms of governance, an important new political body called the UK-EU Partnership Council will oversee the implementation and interpretation of the TCA and will provide a forum for disputes at the political level. The UK-EU Partnership Council has significant powers including the power to amend the agreement itself (as well any supplementing agreements) via mutual consent in certain circumstances. The work of the UK-EU Partnership Council will be supported by a complex network of Specialised Committees, including an Energy Committee, which will have an important role to play in overseeing the day-to-day implementation of parts of the agreement. The Energy Chapter of the TCA specifically notes that the Specialised Committee will be concerned with developing technical procedures for capacity allocation and management on interconnectors, ensuring co-operating as between transmission system operators in the gas and electricity space with a particular focus on “offshore energy” and infrastructure planning and also in the offshore wind sector to ensuring co-operation in the development of specific offshore renewable projects. New Working Groups may also be established to support at a technical level the work of the Specialised Committees.
The Energy Chapter provisions of the TCA are to continue in effect until June 2026 (unless extended). Regular general review periods also apply to the TCA, after which the terms of the TCA may be modified.
There is a risk therefore that provisions of the TCA may be amended or additional provisions formulated that specifically impact the hydrogen and carbon capture and storage area. Regulatory certainty is key to encouraging the large-scale capital investments required in the energy space, particularly in new technology areas. Care will need to be taken by the UK-EU Partnership Council and Specialised Committee to avoid rule changes or introducing regulatory uncertainty that could prove particularly problematic for the future development of the hydrogen and carbon capture and storage industries.