CCUS Transition Access Agreement: Government publishes Policy Position Statement

DESNZ has published a Policy Position Statement ("PPS") setting out its minded-to positions on a number of key commercial provisions of the proposed CCUS Transition Access Agreement ("TAA"). The TAA is a new form of contract being developed for CCUS capture projects that do not require the level of support provided by an existing CCUS Business Model contract. The publication of the PPS follows the release in February of the TAA Draft Commercial Principles ("Commercial Principles") and provides updates on policy evolution since then in relation to key commercial provisions.

What is the TAA and why is it being introduced?

The TAA is being introduced to enable carbon capture projects that do not require the level of support provided by an existing CCUS Business Model to connect to the CO2 transport and storage ("T&S") network. As part of the government's ambition to support a self-sustaining, industry-led CCUS sector in the UK, DESNZ is aiming to reduce government intervention while continuing to support network efficiencies and, more broadly, government Net Zero and industrial strategy ambitions. 

Unlike other CCUS Business Model contracts, the TAA is not expected to include capex or opex revenue support. It is designed instead to provide a structured, contractual route which bridges the gap between a heavily-subsidised sector and market led, merchant framework where users ultimately pay for T&S services directly. As well as formalising the route to CO2 transport for Capture Projects, the TAA is likely to offer some form of limited contractual or financial support with T&S charges and cross-chain risks (see below for more detail). While the TAA does not currently facilitate access to non-pipeline transport (“NPT”), DESNZ has signalled an intention to adapt it for NPT projects in due course.

TAA eligibility

To be eligible for TAA contract support, projects must meet criteria across four categories: 

1. Location - projects must be located onshore in the UK and must mitigate UK territorial emissions and/or generate UK Greenhouse Gas Removals ("GGRs"); 

2. Delivery - projects must be capable of reaching Commercial Operation Date ("COD") no later than the end of December 2032; 

3. Business Model - projects must evidence that they do not require support for capital or operational expenditure (other than potential limited support for T&S fees, if essential and clearly evidenced); and 

4. Sector Specific Criteria - while TAA projects are not required to meet the same sector-specific criteria as projects supported by other CCUS Business Model contracts, specific additional criteria apply to Power CCUS projects (which must generate and export at least 20 MW of low-carbon electricity and have a grid connection date or private wire agreement by COD) and to projects generating GGRs (which will be required to comply with the UK GGR Standard, due to be published in 2027).

TAA contract structure and core provisions

The contract structure of the TAA will likely follow that of other CCUS Business Model contracts, comprising two instruments: (i) a front end agreement containing project-specific information; and (ii) standard terms and conditions governing matters applicable to all TAAs unless otherwise specified in the front end agreement. The parties to the TAA are expected to be a TAA Counterparty (the relevant entity is still under consideration) and the relevant capture project.

Term: DESNZ expects the TAA to have a contract term of up to ten (10) years, reflecting a balance between providing certainty to capture projects and limiting DESNZ's exposure in line with its market transition objectives, and the general precedents set in other CCUS Business Model contracts. DESNZ does not expect to include any provision for extending the TAA beyond its initial ten-year term. A structure similar to the Target Commissioning Window and Longstop Period may be introduced such that delays to commissioning would reduce the effective TAA term.

Conditions Precedent: The TAA is expected to include initial CPs, the precise list of which remains under development but will include standard requirements such as compliance with KYC procedures and supporting corporate documentation as well as project-specific evidence that all necessary planning permissions have been obtained, a T&S Connection Agreement has been signed and relevant codes acceded to. It will also include operational CPs to be satisfied for the Start Date to occur. The final list of operational CPs is still being developed but will include, for example, evidence of metering and settlement arrangements, evidence of required capacity commissioned, evidence of connection to the relevant T&S Network and agreed CO2 sampling and reporting methodologies. Failure to satisfy any operational CP by the agreed deadline may constitute a termination right for the TAA Counterparty.

Representations, warranties and undertakings: The TAA is likely to follow the AR7 CfD and CCUS Business Model contracts in respect of representations and warranties required of both parties at the Agreement Date and Start Date. The Capture Project will also be required to give certain undertakings to the TAA Counterparty relating to general matters such as compliance with laws and authorisations, as well as metering and measurement, access and data rights, operational matters including planned outages, supply chain reporting and subsidy cumulation.

Termination: The TAA is expected to contain various termination rights for the TAA Counterparty in defined situations, including: failure to satisfy CPs within the agreed timeline, failure to satisfy any milestone requirement (expected to be 18 months after contract signature), termination for prolonged force majeure or a T&S prolonged unavailability event, termination for prolonged limited CO2 flow into the T&S Network by the Capture Project and default termination. DESNZ is considering the termination provisions further, including the consequences of termination and whether any compensation should be payable.

Updated Policy Position on key commercial terms

The PPS sets out the government’s latest minded-to positions for some of the key TAA provisions. 

T&S Charges: DESNZ is minded to introduce a mechanism within the TAA whereby, should the aggregate of T&S Charges (being the charges payable by the CO₂ supplier or Capture Project to the T&S Operator in relation to the T&S Network, including flow, capacity and network charges) exceed a certain £/t CO2 threshold agreed during negotiations, a top-up payment would be made to the Capture Project (with the burden of evidence placed on the Capture Project to justify the threshold). DESNZ is also considering whether payments should operate on a "two-way" or "symmetric" basis, or whether DESNZ should charge Capture Projects a fee in return for this and other risk protections granted under the TAA.

Cross-chain risks: Any contractual or financial support in relation to cross-chain risks will be considered on a case-by-case basis and must be clearly evidenced by the Capture Project as essential for it to enter into a TAA; cross-chain risk protections will not apply where the relevant T&S issue is attributable, in whole or in part, to any act or omission of the Capture Project.

T&S commissioning delay: If a T&S Commissioning Delay Event occurs, the Capture Project may be eligible for time relief, allowing one or more of the Milestone Delivery Date, Target Commissioning Window and Longstop Date to be extended day-for-day to reflect the demonstrable period of delay (subject to the Capture Project using reasonable endeavours to mitigate and resume performance). DESNZ does not intend to provide financial compensation or cost recovery in the case of a T&S Commissioning Delay Event.

T&S outages: A T&S Outage Event arises where an event or circumstance affecting the T&S Network prevents the Capture Project from accessing the full entry capacity allocated to it under the CCS Network Code and recorded under its T&S Connection Agreement for more than 24 hours (save where attributable to any act, omission, breach or default of the Capture Project). As the TAA is designed for Capture Projects requiring limited support, DESNZ does not intend to provide financial compensation or cost recovery in the case of a T&S Outage Event.

T&S prolonged unavailability: The PPS sets out the full definition, trigger thresholds, notice procedure for T&S Prolonged Unavailability Event (“TPUE”) and confirms that no financial compensation or cost recovery will be provided.

A TPUE will arise where: (i) a T&S Commissioning Delay Event or full T&S Outage Event (which is not the fault of the Capture Project) lasts for a continuous period of at least 6 months; or (ii) a T&S Cessation Event occurs (being the issue of a discontinuation notice by the Secretary of State to the T&S Operator, or revocation of the T&S Operator's licence without transfer to a substitute operator). The TAA Counterparty has the right (and, after 12 months of a TPUE, the obligation) to issue a T&S Prolonged Unavailability Event Notice and retains discretion to terminate if the TPUE continues beyond the Remediation Deadline and the Capture Project has been unable to provide a feasible alternative plan for a solution. DESNZ does not intend to provide financial compensation or cost recovery in the case of termination resulting from a T&S Prolonged Unavailability Event.

Gainshare: DESNZ is continuing to consider whether to include a gainshare or other mechanism in cases where access to the T&S Network would enable the Capture Project to generate material additional profits directly derived from that access, which are significantly in excess of costs associated with network access.

Change in Law: DESNZ's minded-to position is that any change in law protection should be targeted and proportionate. It will be focused on legislative or regulatory changes directly relevant to T&S Network access and operation such as those relating to the CCS Network Code, T&S licensing conditions or other statutory requirements governing access to the T&S Network. Further work is ongoing on how any payments associated with change in law protection would operate in practice and on how any change in law provisions would interact with other elements of the TAA and the wider contractual and regulatory framework.

Financial Security: DESNZ notes that the registered capacity financial security (“RCFS”) required for T&S Network Users is currently set at zero (£0) under the CCS Network Code, reflecting the position that for initial supported Capture Projects the revenue risk from projects exiting the network is largely underwritten by the Treasury. As part of the transition to a self-sustaining market, DESNZ is considering the suitability of this figure for Capture Projects going forwards but has not yet adopted a minded-to position.

Next steps and timelines

DESNZ expects to publish Heads of Terms for the TAA later this year, which will provide more detailed positions on the TAA's contractual elements. In the meantime, although it is not seeking formal responses on the positions set out in the PPS, DESNZ expects to engage with relevant stakeholders in due course. 

Detailed GGR methodologies are due to be published in 2027, which GGR Capture Projects will be required to comply with for MRV purposes.

DESNZ is also considering what updates may be required to the Network Code to recognise that Capture Projects may now seek T&S Network access under the TAA contract, including potential changes to differentiate requirements between the TAA and other CCUS Business Model contracts (for example relating to financial security provisions, liability caps and delay liquidated damage provisions).

If you are an investor, developer or lender interested in understanding more about what support the TAA may provide to a Capture Project, do not hesitate to get in touch with your usual Linklaters contact or the authors of this article.