My Lords, these regulations, which were laid before the House on 30 July, are technical but, we believe, necessary. They are part of the implementation of the economic regulation framework for carbon dioxide transport and storage established in the Energy Act 2023.
I do not need to repeat what I said earlier about the potential of CCUS, but one of the key points here is the potentially monopolistic characteristics of carbon dioxide pipeline transportation and storage infrastructure. A framework of economic licensing and regulation is necessary to prevent anti-competitive behaviours by infrastructure operators and ensure protections for users and consumers.
Under this framework, an operator of a carbon dioxide transport and storage network requires a licence that permits charging users of the network a fee for delivering and operating the network. The licence will determine the “allowed revenue” for a transport and storage operator, reflecting its efficient costs and a reasonable return on its capital investment. The economic regulator, Ofgem, will oversee charges and determine whether costs can be passed on to users in accordance with the agreed economic framework.
To ensure that the economic regulation framework operates as intended, Ofgem has enforcement powers to ensure compliance with licence conditions and provide appropriate redress for any regulatory breaches. Such redress includes the ability for Ofgem to impose financial penalties on licence holders for contraventions of the licence, up to a maximum amount of 10% of company turnover. That the maximum amount of penalty cannot exceed 10% of company turnover is established in the primary legislation; the regulations that we are discussing today specify how a company’s turnover is to be determined for the purpose of calculating the maximum amount of penalty that could be imposed.
The amount of financial penalty imposed will not automatically be set at the maximum; the maximum penalty of 10% of turnover is a cap, not a target. Any penalty imposed should be reasonable and appropriate, considering all the circumstances of the case. The regulations before us today set out that turnover is to be calculated based on the revenue from the company’s ordinary activities, excluding trade discounts, VAT and other taxes. This includes revenue from goods and services provided by the company, whether authorised by the licence or not.
The turnover is usually based on the company’s revenue for the business year preceding the date of notice of the penalty. However, if the business year is not 12 months long, the turnover is adjusted proportionally. This is consistent with general accounting practices. Any financial assistance from public bodies or publicly owned companies that is directly linked to the company’s ordinary activities, or is provided under a carbon dioxide transport and storage revenue support contract, is included in the turnover calculation.
Ofgem is required by the primary legislation to prepare and publish a statement of policy outlining its policy and approach to enforcement and penalties in the carbon dioxide transport and storage sector. This statement of policy should include the factors and circumstances considered in decisions on whether to impose a financial penalty and in determining the amount of any financial penalty. Ofgem has consulted on documents explaining how it will conduct its enforcement activities and issue penalties in its role as the economic regulator of the CCUS sector. The consultation closed in early July; Ofgem has now considered and published its response.
To conclude, these regulations are technical but necessary, providing clarity on what is meant by “turnover” when determining the maximum amount of a financial penalty that can be imposed by Ofgem. We see these regulations as an essential part of the economic regulation framework for carbon dioxide transport and storage, designed to overcome market barriers to deploying CCUS infrastructure in the UK and achieving net zero while protecting the interests of users and consumers of this infrastructure. I beg to move.