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Public Accounts Committee

Oral evidence: Carbon Capture, Usage and Storage, HC 351

Thursday 12 December 2024

Ordered by the House of Commons to be published on 12 December 2024.

Watch the meeting

Members present: Sir Geoffrey Clifton-Brown (Chair); Mr Clive Betts; Nesil Caliskan; Anna Dixon; Rachel Gilmour; Chris Kane; Rebecca Paul; Oliver Ryan.

Energy Security and Net Zero Committee Member present: Bill Esterson, Chair.

Simon Bittlestone, Director, National Audit Office, Linda Mills, Parliamentary Relations Manager, NAO, and David Fairbrother, Treasury Officer of Accounts, HM Treasury, were in attendance.

Questions 1-81

Witnesses

I: Jeremy Pocklington CB, Permanent Secretary, Department for Energy Security and Net Zero; Ashley Ibbett, Director General for Energy Infrastructure, Department for Energy Security and Net Zero; Paro Konar, Director and SRO for Hydrogen and Industrial Carbon Capture, Department for Energy and Net Zero; and Steve Field, Director for Climate, Energy and Environment, Her Majesty’s Treasury.


Report by the Comptroller and Auditor General

Carbon Capture, Usage and Storage programme (HC 120)

 

Examination of witnesses

Witnesses: Jeremy Pocklington CB, Ashley Ibbett, Paro Konar and Steve Field.

Q1                Chair: Welcome to the Public Accounts Committee on Thursday 12 December 2024. We welcome Bill Esterson, Chair of the Energy Security and Net Zero Committee, as a guest of this Committee; you are very welcome, Bill.

Carbon capture, usage and storage enables the capture and storage of carbon dioxide before it is released into the atmosphere to avoid it having a negative effect on the environment. The Government therefore see this technology as key to achieving net zero by 2050 and have committed almost £22 billion to support the programme’s first stage.

Today, we will examine what progress has been made so far with the Government CCUS programme and whether it will make the contribution required to achieve the Government’s net zero targets. I will start with you, Mr Pocklington. Can you give us an update, particularly on the signing of the contracts this week?

Jeremy Pocklington: There was a very major step forward on the carbon capture programme this week. On Tuesday, we reached financial close and signed contracts with the first carbon capture projects in this country. They are the Northern Endurance Partnership transport and storage project in the East Coast cluster on Teesside, and the Net Zero Teesside power to CCUS project. This is the first time in this country that we have reached this stage. Obviously, carbon capture is used elsewhere in the world, but this is the first time we have used a cluster arrangement.

The Department also remains in close dialogue on the HyNet cluster, which is the second cluster we are seeking to reach financial close on. It is currently in the final stages of negotiation with the transport and storage arrangement there, but also with two emitter projects: the Protos energy-from-waste project and the EET Hydrogen project in that cluster.

Q2                Chair: The first question arising from that is: have you got a timetable for us? When are you likely to sign that second set of contracts?

Jeremy Pocklington: We are working very hard. We will endeavour to do so in the coming months. I am not going to set a timeframe on that because, in my experience, if you set a timeframe on a commercial negotiation, that weakens your hand, so I am unwilling to put the Department in that position. We need to get a deal that is right for taxpayers and consumers.

Q3                Chair: That is a perfectly fair answer. What detail can you share with the Committee on the first set of contracts?

Jeremy Pocklington: We will be setting out more detail. Forgive me, this is happening in real time. I am delighted we have the happy coincidence of signing the contracts this week, but there is more to come on this.

Following our usual practice, in relation to the Net Zero Teesside project, the Low Carbon Contracts Company—forgive me, there will be a lot of technical detail today—essentially, the arm’s length body that operates the low-carbon part of the electricity system, will publish the dispatchable power agreement contract for that arrangement. That is the key detail we will set out there. The Department will also set out further detail soon through a summary of the final business case and the accounting officer assessment on both contracts that we have signed, or both projects that we have completed on this week.

Q4                Chair: Could we turn to the detail of one of projects you have signed? One of them, I gather, is for a new power station with CCUS.

Jeremy Pocklington: Correct.

Chair: I believe some eminent scientists have written to your Department questioning the effectiveness of CCUS in relation to gas-fired power stations because of the increased estimate of the amount of methane and greenhouse gas emerging into the air. That would seem on the face of it to make that particular project less effective that it might otherwise be.

Jeremy Pocklington: I will bring in my colleague to talk about that specific issue. What I would note about this technology, though, is that it has been recommended to the Government by the Climate Change Committee, our independent advisers on the right approach to decarbonise the power sector, and we are confident that power CCUS can play an important role, in particular to manage those situations when the wind does not blow and the sun does not shine. It helps us address the challenge of intermittency in a low-carbon system.

On the specific issue of emissions, I do not know whether my colleague would like to—

Chair: Before we do that, it is probably right that I introduce the witnesses, which I did not do at the start. We have just heard from DESNZ permanent secretary Jeremy Pocklington—you are very welcome; you appear regularly at this Committee. On your right, we have Ashley Ibbett, the director general for energy infrastructure; on your left is Paro Konar, the director for hydrogen and industrial carbon capture. We are also pleased to have with us Steve Field, the director of climate energy and environment at His Majesty’s Treasury. You are all welcome.

I think I interrupted. Were you about to tell us more about the contract?

Ashley Ibbett: I can, if that would be helpful. I should preface what I say by noting that there is an ongoing judicial proceeding in relation to the development consent order for the East Coast cluster that will limit what I can say to an extent.

Chair: I am sure I do not need to tell you, but just be wary of anything that is sub judice that should not be in the public domain.

Ashley Ibbett: Our assessment of the emissions for Net Zero Teesside compares it to the nearest substitutable capacity, which would be an unabated combined-cycle gas turbine. That is the assessment we undertook. You are right: some scientists would have written saying that they see a different counterfactual. We have had further evidence from another group of scientists who agree that the use of power CCUS to create a working electricity mix is very important. There are contested views in this space.

Chair: Okay; fair enough.

Q5                Anna Dixon: I would like to press you on the point about leakage, because that is pertinent. The ambitions that were set for these projects about the benefit and contribution they could make to the overall net zero targets have already been somewhat downgraded. If they will not deliver, or will underdeliver, that is concerning, because we are relying on them to get to the legal limits. How will the risks of leakage from both undersea storage and natural gas transportation affect the effectiveness of track 1 projects, in terms of the UK net zero target?

Ashley Ibbett: We work very closely with a group of scientists and engineers to look at the question of sequestration—the CO2 stored underground. We have looked at other projects that have been in operation around the world. Equinor, one of our partners in the Northern Endurance Partnership, has run two CCUS projects in Norway for a number of decades and has not seen evidence of leakage. The scientists we work with are confident that the risk of leakage is very small.

The question of methane emissions from the gas transmission system needs to be looked at in the broader perspective of carbon budgets, as opposed to through the lens of just this particular project.

Q6                Chair: I thought there was evidence of leakage in one of the Norwegian storage fields. I was just desperately looking for it in my notes—I think one of the bits of evidence we had showed that there was leakage.

Ashley Ibbett: My understanding is that there has been some gas leakage from one of the stores in Norway, but when they analysed that, it was not related to the CO2 injection.

Chair: Okay.

Ashley Ibbett: One of the projects in Norway had some injectivity problems while it was being operated. They solved that through the use of a relief well and continued to store CO2 successfully.

Q7                Anna Dixon: I am concerned that we are banking so much on this technology to meet our net zero targets, yet various parts of the NAO Report, and even the Minister’s letter, say that it will not deliver what we had hoped it would. I am keen to know what assessment you are making of the risk to our overall ability to rely on this technology to meet net zero targets. Has there been a reassessment of, or do you expect the Climate Change Committee to reassess, how much reliance we can place on this technology as a proportion of what we are doing and whether it is therefore value for money for us to invest in?

Jeremy Pocklington: That is a very good and important question. The first thing to say is that we are confident that those projects are value for money. I will publish a summary of my accounting officer assessment in the usual way. It is a GMPP project. We are absolutely confident in the value for money of those projects.

In terms of our assessment of the role that CCUS can play to help us meet our carbon budgets, first, our focus at the moment is on achieving financial close with those clusters—that is a major exercise. I would not like that to be underplayed. I would like to thank everyone who has been involved in that in the Department, as well as our partners. It is a very innovative approach.

Secondly, it is right that we take our time to get this right and to make sure that we learn everything from the current stage of the process. We have said we will set out our plans about the future role of CCUS in the carbon budget delivery plan, which the Department will publish next spring.

Q8                Chair: The evidence we have from Ellen Robottom says that “there is nothing ‘proven’ about undersea storage. On the contrary, only two undersea storage sites exist in the world (the Norwegian Sleipner and Snohvit) and in neither case did the CO2 behave as expected despite extensive geological modelling and surveys”.

Jeremy Pocklington: There are 41 carbon capture projects in the world that we are aware of. In Norway, 20 million tonnes of CO2 have been successfully stored, so this is a technology that has been proven. Ashley may want to comment on those specific Norwegian projects in more detail. But yes, this is the first time the technology has been deployed in the UK, and it is the first time that a cluster approach has been adopted.

Ashley Ibbett: Yes, that is right. Both Sleipner and Snøhvit have been in operation for many years. It is fair to say, I think, that in developing them, the operators of those fields have learned more about both the plume development of carbon dioxide in a store, and how to ensure injectivity works in the way that it should. They have learned a lot from those projects, which are operating successfully now. Of course, one of the partners in those is partnered in our project on the east coast.

Chair: Thank you.

Q9                Bill Esterson: I am pleased that you mentioned the 20 million tonnes of CO2 stored in Norway. Can you say how many years that was over?

Paro Konar: They have been in operation since 1996.

Q10            Bill Esterson: Okay, so they have been going for 30 years. That is less than a million tonnes a year on average—is that right?

Paro Konar: It is dependent on the geology of the stores and how those particular stores operate. Geology differs from country to country. Whether our stores operate in the same way is yet to be determined.

Q11            Oliver Ryan: Thank you all for being here. To touch on the history, it is hard not to be sceptical about the basis of the industry. To be honest, it feels a little bit like paying one group of people to dig a hole, paying another group of people to fill it in, and hoping that there is some kind of ecological output that helps us meet our targets. Politically, that is helpful because it is a bit of a “get out of jail free” card for some of those international targets that we have to meet. When you designed the new programme, how did you consider new risks in the light of what has happened previously with failed auction timetables? That question is for Mr Pocklington.

Jeremy Pocklington: The first thing I would say is that the technology has been recommended to the Government by our independent advisers, as I said earlier. There is a track record of the technology performing in other countries in the world, and there are new things about what we are doing here.

But I think you are referring to the fact that there have been previous attempts in this country to get to this stage. None of those projects has got to this stage. There are different things that we are talking about, such as whether we can find the right commercial arrangements in order to get the investment. We failed to do that in 2015 but have succeeded this week—that is a nine-year gap. You have also referred to geological questions around the technology. It is important that we separate those issues out.

The 2015 project failed because, ultimately, the Government at the time made the decision to withdraw funding in the spending round. At the time, I was the director general, Ashley was the director and SRO, and Paro was the deputy director. We have the experience from the past that has enabled us to learn the lessons from that time, and we have adopted a different approach that has been proven to successfully reach the stage where we can now attract the investment in.

That has required a very different approach. It is ambitious, and it potentially makes this country world-leading at adopting this technology. The projects today will create more than 2,000 jobs in Teesside—I was up in Teesside last week. There will be real economic benefit from these projects. Do you want me to talk in more detail about the specific lessons we have learned from 2015?

Q12            Oliver Ryan: Yes please—and what you have done in trying to address safeguards in the new round, to make sure that historic failures, for whatever reason, whether political or operational, do not happen again.

Jeremy Pocklington: I have five lessons; I will give you a sentence or so on each. The first lesson is that we have adopted a cluster approach. That means we are developing transport and storage in areas where it can be utilised by different projects. There are economies of scale. There is system resilience.

The second lesson, which the NAO referred to, is that we are splitting the chain. The 2015 competition was for a full chain, bringing together the power project, the transport and the storage. We are splitting the chain this time, and we have separate business models for transport and storage, and then for power, for industry and for hydrogen. That enables us to bring in investors that are more suitable for each part of the chain and to allocate risks more effectively.

Thirdly, the Government have defined an irreducible core of risks that the private sector cannot take, or that they will price at an excessive premium. We are managing those, again, as noted in the Report. Leakage risk is an example of that, which we have already talked about.

Fourthly, we have developed a pipeline of projects. That is to ensure competition, so that only the better projects can go forward, and to ensure the network is utilised.

Finally, we have set a whole-life budget. That was a key recommendation from the NAO’s work following the 2015 project. It was discussed much at a hearing in 2017 with this Committee. We have iteratively set and agreed an affordability envelope for the clusters and developed that as the projects have matured. It has been an extensive series of lessons learned. We have had a number of independent reports that took place following the last project, including the Oxburgh report, and have built a new approach for this sector.

Q13            Oliver Ryan: On that last point, I realise they were at different stages, but will this round that has been agreed be more expensive than the previous rounds would have been had they been agreed? My caution is that you have to provide some sort of assurance to an industry that you have created, and you have to provide some confidence, and the easiest way to do that is to pump cash in. Is that what has happened?

Jeremy Pocklington: This approach gives us greater economies of scale and will drive better value for taxpayers and consumers. To assure you, we have not pumped cash in here. That has not been our approach. We have driven a very hard commercial approach with our commercial experts. For transport and storage, this is going to be a regulated asset. A bit like for networks—for wires and pipes—it is ultimately Ofgem that is the economic regulator, which will need to regulate for the appropriate return for these assets. Perhaps Ashley wants to say more on this.

Ashley Ibbett: I would be happy to. It is worth reflecting on the competition, which I was responsible for at the time. We were resting all the arrangements that Jeremy has talked about on a contract for difference model, so we had a funding model for the end-to-end chain. Obviously, we learned from that the challenges of cross-chain risk, which is partly why we have developed the new approach. In terms of a comparison between now and then, when we cancelled the competition we had not actually received the final bids from the projects involved, nor undertaken a value-for-money assessment, so I cannot really draw a direct comparison.

Q14            Chair: I share my colleague’s scepticism about this technology. Given the change of policy, and the fact that you have signed off a big project this week, would it not make some sense to pause and see how this first one goes before rushing, no doubt with some taxpayers’ money, into the next lot?

Jeremy Pocklington: There is a balancing act to be struck when considering the approach. Obviously, it is right that we are continuously seeking to improve and to learn from what we are doing, rather than always moving straight on to the next project—that is what you would expect us to be doing as a responsible Department—but this is also an industry that we are seeking to develop, and we want to build confidence in the industry.

The private sector has invested about £1 billion, at its own risk. It is only this week that some of those investors are starting to get confidence that they will get a return, and the contracts have been signed. We need to continue to nurture this industry, so it is about progressing at an appropriate pace. That is why I came back to the earlier question from your colleague. We need to focus on completing our work on the HyNet cluster, and then we will set out our plans for the role of CCUS and the next steps forward in the carbon budget delivery plan next spring.

Q15            Rachel Gilmour: I get the point that this is innovative and new, and sometimes one has to take a risk. It is all very well for private investors to come up with £1 billion but we—taxpayers—are not private investors. This is taxpayers’ money that you are prepared to take a quite substantial risk with. It is not just about the question of leakage and all the other reports we have had; the point Paro made was about the geology. You do not know what is there until you go there. To my mind, putting so much taxpayers’ money into this, when there are so many questions and nothing definitive, is bananas.

Jeremy Pocklington: I would like to talk about the storage appraisal that has been done; perhaps Ashley wants to talk a little bit more about that. The North Sea Transition Authority has undertaken a significant amount of work to appraise the storage that we have done, so there has been extensive work on the geology and the areas that we are approaching.

The second thing we should talk about is the incentives in the contract. Yes, there are risks, of course. Ultimately, the scale of what is needed to build this new industry requires us to manage those risks. But they are being managed appropriately as well. Perhaps Paro wants to come in on the storage appraisal.

Paro Konar: First of all, before we get storage licences, the North Sea Transition Authority, which is the regulator in this space, appraises the storage sites and does a lot of work to make sure that they are able to store CO2 as well as assess leakage risks.

The other point I will make is that for most of these capture contracts, they come live and we start making the payments out only when the projects themselves are operational. No money is being paid out, apart from a very small amount of grant, before the projects are available.

Q16            Rachel Gilmour: Okay. When you say a “small amount of grant”, how small is it?

Jeremy Pocklington: Less than 2% of the overall funding envelope is being paid out before the operation of these projects. Ultimately, if the Net Zero Teesside project—to take an extreme example, because you were asking about the extreme examples—is not able to capture the carbon, it cannot get the dispatchable power agreement that we have signed this week. It could operate in the market as an unabated plant, but we are doing everything we can to manage those risks, because in this country this is first-of-a-kind technology. I completely understand the Committee’s concern, but the reassurance I would give is that this is not in some way behaving inappropriately: this is about properly managing the risks.

Chair: Okay. We have to keep moving.

Q17            Nesil Caliskan: I will try to be brief. For clarity, Mr Pocklington, when you refer to the whole-life budget, are you referencing the budget of the project or the pipeline of projects?

Jeremy Pocklington: That is a very good question. I am afraid it is quite complicated, so let me have a go at explaining it.

Nesil Caliskan: And I have a supplementary question about the technology.

Jeremy Pocklington: The Government have made available £21.7 billion over 25 years to support the deployment of the five projects that I referred to at the start of the sitting. It is important to understand that about three quarters of that funding will come from levies—including, for example, the users of the power from the Net Zero Teesside power project—and about a quarter will come from the Exchequer. The precise allocation will depend on the final terms of the contracts that we sign, so I cannot give you a precise split today—that is commercially sensitive. The reassurance that we gave earlier was that only a very small fraction of that is up-front capital grant. It is mainly a return on the carbon that is actually being captured and the power that is being produced.

Nesil Caliskan: So the five projects are the pipeline that you refer to over 25 years.

Jeremy Pocklington: Yes, correct. Those are the capture projects. The emitter projects are for 15 years, and the transport and storage ones are for 25 years.

Nesil Caliskan: Okay, but the pipeline is open for 25 years.

Jeremy Pocklington: Yes.

Q18            Nesil Caliskan: My second question is about the fact that this is a moving field. Technologies evolve almost all the time, and when you are talking about an agreed envelope of money—whether it is from the taxpayer, privately funded or coming through levies—a project plan over such a long period of time is at risk of changing that envelope, because of the cost of changing technology. To what extent does the Department consider that as a risk, or as part of the baseline of agreeing those budgets or having an envelope when making those assessments?

Paro Konar: The capture contracts themselves are fixed-price contracts. When we get into the contract and they start producing, there is a fixed price that is allocated. Any construction costs or escalation are at the risk of the projects themselves. Obviously, the technology risk and the operation risk of those projects are yet to be determined—we do not know them—but, as I said right at the beginning, we have done a lot of technical assessment on these projects before we have signed the contracts. A lot of the projects themselves have been signing EPC contracts, which bind the technology provided to certain terms—

Q19            Nesil Caliskan: But do you accept that if carbon capture is a key component of the Government’s commitment to reducing carbon, and over a 25-year period technology changes and gets better, which inevitably it will, there may be a cost associated with that, and therefore there is a risk that is difficult to calculate and build into the baseline?

Paro Konar: You are talking about technology costs falling over time, because they improve—

Nesil Caliskan: Over time, but initially they may be more expensive, and 25 years is not a long period of time for evolving technology.

Paro Konar: What I said was that even if they get more expensive and the costs of the projects rise, that is capped to the strike prices that we have offered in the projects, so the Government will not see those cost escalations for the capture projects. Whatever contracts we have signed at the time of FID, the capture projects’ prices are capped.

For the transport and storage side, the private sector bears 60% of any cost escalation and the Government bear a smaller proportion.

Ashley Ibbett: I want to draw a parallel with what we saw happen in the development of the offshore wind industry; again, our learning for this process draws from that. There, we saw the costs really driven down through deployment—the turbines got bigger, the cost of capital went down and there was commoditisation of the industry.

Lots of the technologies used in carbon capture and storage are well- established technologies—compressing carbon dioxide and moving it through pipes has been happening for decades—but bringing those technologies together in the way we are doing through the clusters, with mixed users on a network, is new, and that obviously carries some risks as you integrate that technology.

We also invest quite substantially in research and development to try to drive down the cost of the industry in future, so we see a trajectory for cost reduction in the CCS industry as well.

Q20            Oliver Ryan: A lot of what I was going to ask about has been covered by my colleague; it was a good line of questions. You spoke before, Mr Pocklington, about a value-for-money judgment coming at a later date. What do you say to those people who say, “Look, this isn’t really about the value for money. This is the cost of being able to abide by international targets on carbon reduction. This is the cost of creating jobs in industrial heartlands. This is the cost of pictures of politicians in hard hats and people backing heavy industry. It’s a lot of money and it’s not necessarily the most efficient spend of money, but it is the cost associated with doing those three things”?

I am a bit heartened to hear that a quarter of the funding is from the Exchequer and three quarters is from levies; I did not know that was the proportion. That will be helpful in the PR battle of trying to make the case for this technology. But do you see what I said—that this is just the cost of doing business and the right thing—as an accurate assessment, as opposed to doing it as a genuinely efficient, economy-leading industry?

Jeremy Pocklington: Our assessment is that carbon capture, as part of a wider suite of policies, is the most appropriate and the best-value way to meet our carbon budgets and tackle climate change. If you do not use carbon capture in some form, the other things that you are doing are more challenging than carbon capture. That is the key essence.

For some industries—for example, cement, where there are very high emissions from essentially chemical processes—as yet we do not have another technology that works that will be able to capture the emissions reliably. So carbon capture has to play an important role in meeting our carbon budgets.

Q21            Chair: Can we be absolutely clear? My colleague was commenting on that 75:25 split. The 25 that comes from the Exchequer is taxpayers’ money; we understand that. But even with the levy payers, in one way or another consumers in this country are paying for it. It is a cost to the country; it is not a free bus pass.

Jeremy Pocklington: Sir Geoffrey, may I come to that, because it is very important?

Chair: Yes, please do.

Jeremy Pocklington: We are very conscious about all the costs, because ultimately consumers and taxpayers are all your constituents. On that, I would refer to the advice the Department recently received from the National Energy System Operator on how to decarbonise the power system. That advice to the Department highlighted the role of low-carbon dispatchable power, of which power CCUS is an example and probably the most deliverable example that we have—though there are other technologies, such as hydrogen to power, that we are looking at closely as well.

The report showed that, if you want to create an electricity system with the lowest overall system costs—that is, the total sum of the capital investment and the operating costs of the electricity system—then the lowest-cost system will include the use of dispatchable low-carbon generation such as power CCUS. The advice shows us that projects such as the one we signed this week will help us to produce the lowest possible system cost for our electricity system.

Chair: Thank you.

Q22            Bill Esterson: The National Energy System Operator has two pathways to 2030. It sounds like you are completely committed to the new dispatch pathway—is that correct?

Jeremy Pocklington: It is correct that it has two pathways. I am not going to comment further on our response on that, but I can tell the Committee that we will be publishing our action plan in response to the National Energy System Operator tomorrow. The Committee does not have long to wait, but it would be wrong for me to pre-empt that publication.

Q23            Bill Esterson: That would have been really useful before today. On a related point, we have been talking about the levy payer’s contribution. Given that you are clearly very committed to carbon capture technology as part of the route to 2030—with the new dispatch or not—how can you be confident that bills are going to come down by 2030?

Jeremy Pocklington: I refer you back to the advice we received from the National Energy System Operator in its action plan. The advice was clear that a clean power system can be cheaper than today’s.

Bill Esterson: Even with the levies?

Jeremy Pocklington: Including all the overall costs that we are talking about—so yes. That is because the system that we need to create is moving away from one essentially reliant on gas setting the marginal price all the time to one where that happens less often. That will reduce the wholesale price in electricity markets, which then—forgive me, I am going to get a little bit technical here—reduces the capacity for some generators, such as our old nuclear plant and old renewables not on contracts for difference, to collect something called inframarginal rents. That means that it is possible both to invest in a clean power system and to create a system that can lead to lower overall system costs and bills. The detail of that matter is for the action plan and will depend on other decisions that the Government take over the coming period.

Chair: I suspect that may be for your Committee, Bill. It may be something that we want to come back to. I have a lot of questions around that, but we have to move on.

Q24            Chris Kane: Can I talk to you about the assessment of value for money? I know we have touched on it, and Oliver mentioned it in his questions. First-of-a-kind projects make it very difficult to judge value for money, but you have said that the projects will be subject to an assessment of value for money. You are now moving forward. What exactly are you assessing as value for money? How are you tackling that? What are you doing? What have you decided are the KPIs for that?

Paro Konar: We started looking at value for money right from the very early stages. When we started this process of cluster sequencing, we started at phase 1, where we did a competitive process of clusters coming forward, and we assessed those against five criteria: deliverability, economic benefits, costs, carbon savings, and learning. As we did that, we chose two clusters that were to be taken forward. We then did phase 2 of the process, where we looked at the emitters within those clusters, and we did a similar assessment with those five criteria, following which we published the shortlist of the emitters that we would be negotiating with.

Following that, at this stage, when we have published a funding assessment, we have done a full value-for-money assessment, which, as per Green Book methodology, is looking at the costs and benefits of these projects and, where possible, monetising the costs and benefits. That was how we assessed overall value for money for the sector.

Q25            Chris Kane: Thank you. How are you weighting your five targets in relation to, for example, the first one, which we have had this week? How are you approaching the weighting of these five criteria?

Paro Konar: The weights were published in the Report by the National Audit Office. Let me try to remember. I think deliverability got 30% of the weight, economic assessment got about 20%, cost reductions got 15%, learning got 10%, and carbon got 25%—if I remember correctly.

Q26            Chris Kane: Well done for bringing that out from your mind! Thank you for that. When you are looking at the value-for-money evaluation, what impact does being a first-of-a-kind project have in all this? It is always easier to do an economic impact assessment in 30 years’ time, when we have got lots of these under our belts. How are you putting that into the mix?

Paro Konar: When we looked at these projects before we assessed the projects and brought them on to the negotiations list, we did a full technical assessment on all the projects, including the T&S network. All the projects had to go through several gateway stages, and we assessed the costs over time. The projects had to go through several classes of cost development, and the uncertainty of the projects, as they went through those several classes of cost development, went down. The projects also had to do front-end engineering and design, which is looking at how the projects will be delivered on a smaller scale, if you see what I mean. That is also how we tested the costs in the evolution of these projects.

Q27            Chris Kane: Not going ahead with a project is obviously a consideration as well. Could you talk about that? How does that factor into your thinking?

Paro Konar: Before we sign the final investment decision, we have a period of negotiations with the project, in which we assess the costs, the commercial indicators and the technical parameters, as I described. Only if the value-for-money tests and the affordability tests are met do we go ahead and sign a final investment decision with the projects. What if, following that, projects do not go ahead? As I mentioned right at the beginning, they get paid only once they are operational. It is only at the operation stage, when they are capturing and the carbon is stored, that the payments actually start flowing out.

There are obviously operation criteria within the business models, such that under the contracts, if projects, as they are operating, are not performing according to the operation criteria, they might get lower payments. They might have to take remediation action. In extreme cases, there might be contract termination. There are lots of protections within those contracts to allow us to do that. Before we get started with projects, many have to meet conditions precedent—so they need to prove that they are able to start and capture at the rate they have set out to us before we start.

Q28            Chris Kane: I suppose there is always a case when you are talking about a theoretical future contract that you will say, “None of these tests have been met.” You have obviously had good news this week that you are moving forward with one. Could you talk about getting that over the finish line? How did you find looking at these five targets in relation to this project? What was difficult? What are your general observations? You have been working hard at this recently.

Paro Konar: Do you mean what has been difficult in terms of the projects themselves?

Chris Kane: My instinct is that judging the economic benefit is easier to be theoretical about in terms of the deliverability. You have now got your five tests, you have got one project over the line, so what are your reflections on the tests themselves and how easy it was to say: “Yes, we are quite happy with this. We are going to go ahead.”?

Paro Konar: The Department is planning to do a lot of monitoring and evaluation of these contracts and we have several processes set up to do that. There is a process evaluation we will do, which will look at the way we have allocated the contracts and at any improvements that we can make there. There will then be a monitoring process of the contracts in operation, which will look not just at how the projects are behaving, but at the benefits that we will be getting out of them.

Q29            Bill Esterson: The NAO Report says that when the Government changed their plans for the use of CCUS and significantly increased the contribution to get to net zero, there should have been changes to the programme design, but that did not happen. Do you accept that criticism and could you explain why they did not happen?

Ashley Ibbett: You are right that we increased our ambition for carbon capture usage and storage in the net zero strategy of 2021, which is when we looked at how we could achieve net zero most cost-effectively. As with any programme in Government, we have to scale what we do to the scale of the challenge, but in doing so also manage the use of public resources effectively. We have tried to strike the right balance in bringing forward the first two clusters while working with potential subsequent clusters as part of that ambition.

Q30            Bill Esterson: Okay. Your estimates are that the eight projects currently under negotiation, or beyond negotiation as of this week, will capture and store a maximum of 4.9 million tonnes per annum. That is less than a quarter of the total target by 2030. What is your response? How would you intend to make up for the shortfall?

Ashley Ibbett: Through the first two clusters we are developing over 8 million tonnes of storage potential. The Report reports average annual emissions of 4.9 million tonnes per annum against that storage. With the HyNet cluster in particular we are running a process to look at making full use of the capacity they have, so the greater capacity available in the storage than we are currently using through those projects we identified in the shortlist of eight. There is an ongoing process—Paro might want to say something more about it—to look at how we utilise the extra storage that is available there.

Paro Konar: That is correct: there is an ongoing process to ensure that we build on the additional emitters in HyNet to fill the capacity. The emitters in HyNet were asked to bid into this process, and we received bids to the deadline of 28 March this year, if I remember correctly. In September we published a delivery assessment of those bids and next year, subject to spending and so on, we should be able to publish the outcome.

Q31            Bill Esterson: BECCS is not included in your current plans, which means there are no dedicated BECCS or greenhouse gas-removal projects in track 1. Is that a problem for the 2030 target?

Paro Konar: I will cover what is included in track 1, and Ashley might want to come in to talk about wider BECCS in general. I will mention a few things about BECCS and negative emissions: in the waste sector 50% of the waste can be biogenic, so that could potentially give us some negative emissions in this sector within track 1. Then in future, under the track 1 expansion process in HyNet, there are some small BECCS projects that have also participated in this process.

Ashley Ibbett: I think that is right. We do bioenergy with carbon capture and storage, and it provides negative emissions space in terms of carbon accounting. It could be important in meeting the carbon budget. As Paro says, there are some projects that are talking to us about whether they can be part of HyNet expansion, and those include some BECCS projects.

Q32            Bill Esterson: There was a lot of controversy about Drax in particular, which is a significant part of our energy generation. How are you assessing projects’ lifecycle emissions to make sure they are carbon-neutral for their full life?

Ashley Ibbett: In relation to Drax and other large-scale biomass generators, we published a consultation on potential transitional support arrangements for those stations. I think it was last year, but I cannot remember the date off the top of my head. We will respond to that consultation in due course. Any assessment we make over the lifecycle of the carbon budgets will take account of the full carbon consequences.

Q33            Chair: I understand that Drax’s licence expires in three years’ time.

Ashley Ibbett: The renewable subsidies run out in 2027.

Chair: So presumably the assessment will need to be done well before that?

Ashley Ibbett: Yes.

Q34            Chair: Let us be clear about Drax. It emits 6.5 million tonnes of pellets each year and 12 million tonnes of carbon. It has had £10 billion-worth of subsidies from 2012 to 2027. I must say, I think that bringing in pellets from abroad, denuding the forestry of those countries, and not counting it towards our emissions—the whole thing just makes no sense whatsoever.

Ashley Ibbett: The biomass that Drax uses is subject to full audit to ensure that it is sustainable. The wood pellets they produce are a side project from wood that would otherwise go to waste. That process is audited through Ofgem as the regulator.

Q35            Chair: Why does it not count towards our emissions targets?

Ashley Ibbett: We consider sustainable biomass to be emissions-neutral, because the lifecycle will replace it.

Chair: We can argue about that, but it is not really sustainable, is it? You plant trees. They lock up carbon. You fell them, and they emit the carbon. It is not sustainable at all—but that is another subject for another day. I just want to say this morning that I think Drax’s arrangement is barking, I really do. That is just my personal opinion.

Rachel Gilmour: I agree with you.

Chair: We do not want to get into that. I will move to Clive.

Bill Esterson: I was going to come on to that after my questions.

Chair: I think we have knocked it on the head. Let’s move to Clive Betts.

Q36            Mr Betts: Are we making sure that each part of the overall project is consistent with achieving net zero? Are you monitoring each part to give assurance on that?

Ashley Ibbett: We are. Paro, do you want to talk about the cluster sponsorship function we are setting up to do precisely this task?

Paro Konar: Yes. After the clusters have been provided with a final investment decision, the department is setting up a cluster sponsorship function, which will look at the operation of these projects, and when they are in operation—across the cluster, not just the projects but the T&S. We have also set up an inter-regulatory forum, and regulators for each of these areas and projects—the NSTA and the Environment Agency—are going to be part of that and share learnings and build understanding.

Q37            Mr Betts: In terms of the value for money, is that based on the initial project and the contracts you are signing, or is it on the assumption that further similar projects will come and will learn from the initial implementation?

Jeremy Pocklington: We need to ensure that the first clusters are value for money on their own terms. However, that is based on a net zero-compliant counterfactual, for which—as I am sure the Committee would understand—we need to make sure that the alternative we are comparing it to is also consistent with achieving net zero. There are then of course wider benefits that accrue from establishing the technology and further expanding it over time.

Q38            Mr Betts: I guess we can ask the Treasury for confirmation that each of these projects standing alone is value for money, and that you will get super value for money if further similar projects follow on.

Steve Field: As Jeremy said, you need to assess the value for money for this project and this programme against the counterfactual of a net zero-compliant pathway. It is clear that if you want a low-cost pathway to net zero, CCUS is part of that mix.

Q39            Mr Betts: Looking at localities, and if we concentrate on the energies which are hardest to decarbonise—do they fit together naturally? Is there a consistency in approach in picking those industries and also certain localities where maybe the storage is there?

Ashley Ibbett: If you look at where the point sources of emissions are concentrated in the United Kingdom, they do tend to be geographically clustered. I think the East Coast cluster is the largest region by emissions. The same is true for HyNet—that is a source of concentrated emissions. There are other point sources of emissions that are more geographically dispersed. That is why one of the policy issues we are looking at is alternatives to pipeline transport—for example, by rail or road.

Chair: Of course, cement manufacturers are not necessarily at those points—they could be anywhere in the country.

Ashley Ibbett: Exactly. In general, if you have a high concentration of emissions, a pipeline solution is the more cost-efficient way. Where you have more dispersed emissions, other means of collecting CO2 will potentially be important. Paro, have I expressed that adequately?

Paro Konar: Yes, absolutely. The reason why the cluster process works really well—and indeed, this is something we have been talking about internationally, and other countries are very interested in deploying CCUS in this way—is that the level of infrastructure buildout will be more limited, as the NAO Report pointed out. You will need to build smaller pipelines to access the emissions, and as they are close to the coast, shorter pipelines as well.

Q40            Mr Betts: Are we certain of how the whole thing would work, in value-for-money terms, where it is looking at more isolated individual sources?

Ashley Ibbett: We are learning from other projects around the world that are looking at this question too. For example, there is a project in Norway due to take its first CO2 shortly, called Northern Lights. They are using a model where they are going to use a ship to collect CO2 from point sources potentially around Europe and inject it into a site in Norway. We are considering whether that sort of approach would work here as well, given our own characteristics.

Q41            Mr Betts: Can I ask about a specific example? Energy from waste has been mentioned. The Department, I think, wants to move towards heat network zoning, where houses and businesses are connected to heat networks. As I understand it, there is an advanced zoning programme about to be launched, which affects my constituency—Sheffield is one of the pilot projects—where you have energy from waste and biomass. Is carbon capture going to be looked at as an integral part of that sort of project?

Jeremy Pocklington: Heat networks will play an important role in decarbonising heating in dense urban areas—your constituency would be a good example of that, as would some parts of central London. Sometimes that can be combined with the other technologies that you have identified.

In terms of carbon capture at scale, though, I would emphasise focusing on the clusters that we have identified in the Department. Those are the track 1 clusters and that we are talking about today—East Coast and HyNet—and then the track 2 clusters, Acorn and Viking, as well. That is where we are focusing our greater efforts at the moment.

We are thinking about how to deal with some of these challenges around dispersed emissions, and there are some other areas of the country with high densities of emissions—south Wales would be another example of that. Different sorts of solutions might be appropriate there, but we need to move, and then learn as we are going—to return to some earlier themes that we have discussed in this hearing.

Q42            Mr Betts: It is no use expanding energy from waste, surely, if you do not deal with the carbon capture at source. If it is an afterthought, we are not doing it right, are we?

Jeremy Pocklington: We think carbon capture can have a role in energy-from-waste projects. It is not the Department’s position that every energy-from-waste project for the next period is going to have carbon capture.

Ashley Ibbett: We are not mandating that.

Paro Konar: That is correct. There has been a consultation under the UK ETS to expand the scheme to energy from waste. We are assessing the results of that consultation and we will come back to it in due course.

Q43            Anna Dixon: I have a short follow-up question. Apologies: I had to step out, so if this has already been covered, please say so. I want to go back to this value-for-money point and perhaps get Mr Field just to go a little further.

You talked about a counterfactual. I am afraid that I did not understand what the counterfactual was, but surely, in weighing up the value for money of these sorts of projects, in terms of carbon emissions, we should be looking at something like the power output per £1 million of investment and the relative strike price compared with, say, wind and solar or nuclear.

From the work you have done on the track 1 projects, once operational, what is the projected reduction in carbon emissions per, say, £1 million of investment? And how does that compare to the counterfactuals that I would be interested in, which would be other green infrastructure and energy projects?

Jeremy Pocklington: Can I start? I answered this a little bit with Mr Esterson’s question earlier—forgive me, you may have been away. The National Energy System Operator has undertaken some analysis on, essentially, how to produce a clean power system by 2030 and beyond. That analysis shows that low-carbon dispatchable power, such as power CCUS, can actually lead to a lower overall system cost for the power sector as a whole—that is the total sum of capital costs and operating coststhan a system just based on renewables.

It is not possible just to compare strike prices in the way that you outline. We do not have a strike price in the dispatchable power agreement; it is a different sort of contract. We essentially want renewables to run and operate as much as possible. This plant should not run ahead of renewables, but it should run ahead of unabated gas. It is a different place in the merit order, and it needs to be incentivised differently.

Just to give you a rough comparison, the Net Zero Teesside project is roughly equivalent to approximately 6 GW of offshore wind—it provides the same benefits to the system. Although it is a single plant—it is 740 MW—it provides the equivalent value to the system as 6 GW of offshore wind.

Q44            Anna Dixon: If you take into account the level of public subsidy, do the sums still add up?

Jeremy Pocklington: These are ultimately funded through consumers’ electricity bills. Our Department’s job is to make sure we maintain secure supplies, decarbonise the system and have bills as low as possible, and we think this can play a valuable role in achieving that mix.

Q45            Anna Dixon: I guess I was asking—this is what we are here to do—whether it is good value for the taxpayer.

Jeremy Pocklington: Yes, as I have explained. I am the accounting officer, and I will publish a summary of my accounting officer assessment in the usual way, as it is a GMPP project.

Chair: Very helpful.

Q46            Chris Kane: Everybody goes on about value for money, whether we are investing in the right places and whether we should be taking this money and putting in offshore wind and other things. You come back with, “We have to do this. This is part of the mix.” How are you ensuring that this money, particularly in this area of the industry, is going to projects that are the hardest to get, which we really must invest in?

Jeremy Pocklington: That is a very good question. The Department will obviously continually seek to learn and improve how it uses each of the available technologies that we have. We are confident that it can play a value-for-money role in all the sectors for which we have designed business models: power for CCUS, industry waste and hydrogen production. It can be value for money in all those areas.

We think it may play a particularly important role in, first, the power sector. We would highlight the project that we have signed this week. The second area I would highlight is the hardest-to-abate sectors. That is where you have high-process emissions from chemical or physical reactions in industrial processes that cannot be abated through simple fuel switching or electrification. Cement and lime are examples of those.

Q47            Chris Kane: I have been learning about this over the past few weeks, and there is a real push to say, “Well, this money could be better spent somewhere else. It could go on other projects.” For me, the most defendable line is, “No, no, we have to do it in areas that we can’t decarbonise in other ways.” As we go forward, you will come under an awful lot of pressure to come away from that, because it makes more sense to everyone when they see value for money. How are you going to stay the course and ensure that is your defensible line—“We have to do this. We are targeting the hardest-to-reach industries, which need this support”?

Jeremy Pocklington: That is absolutely the right question, given the scale of investment that is required. As set out, we are confident that the projects we have reached agreement on are good value for money, and that we will get to a similar place on the HyNet cluster. As we assess projects and clusters in the future, we will have to focus this technology on areas where it is most needed, provides the greatest benefit and is less costly than the alternatives. That is why it is always quite complicated and technical. That is why I talk about the net zero-compliant counterfactual. I recognise that that is technical jargon, but that is because we need to use this technology where it provides more benefits and is cheaper than the alternative.

Q48            Chris Kane: Will you talk to the pressure? My assumption is there is a lot of pressure to divert this into other areas. Are you finding that is a factor? There is a great deal of people saying, “No, do this”—

Jeremy Pocklington: I am talking about a slightly different response. We welcome interest in the Department from potential projects. Our job is to work with those projects and to make an assessment of which ones are value for money and appropriate, but we are not close-minded to new ideas and new technologies. There is risk. We need to be both strategic and thoughtful, but we cannot potentially plan the economy. We need to work with potential projects to work out where that solution is most suitable.

Q49            Bill Esterson: I want to pick up on this point about hard to abate. You mentioned cement and lime. There is a proposal for Peak cluster, which would involve a pipeline from the Peak district. You also mentioned south Wales and the use of shipping. Those are not track 1 or track 2 at the moment, but where are you with your thinking on those?

Paro Konar: Thank you for mentioning that. We speak regularly with the Peak district cluster as well as south Wales, as they continue to develop the cluster and evolve. A lot of engagements are happening with the national wealth fund and Great British Energy in that sector, looking at co-investment opportunities as well. A lot of conversations are happening and we continue to engage with the clusters, but the focus is on the immediate final investment decisions.

Q50            Bill Esterson: Sure, but I feel we are struggling to pin you down on a whole host of things here. That is in the nature of the fact that this is first-of-a-kind technology, I think, but there has been so much uncertainty all the way through the discussions we have had this morning. How can you give confidence to our constituents that CCUS will make the contribution needed for 2030 and 2050?

Ashley Ibbett: In relation to the contracts, we reached financial close earlier this week, on Tuesday. We are working with highly credible industry partners. Our reaching financial close has unleashed £4 billion of investment, with construction jobs in Teesside, and those partners are confident that they can deliver the projects to time and to budget. We have set in place mechanisms to incentivise them to do just that. As we said earlier in the hearing, if emissions are not being captured, they are not getting paid, so the incentive on them to build to time and to budget is very strong. They have a lot of experience of this industry—not in the UK, because this is our first step in the UK, but they are credible partners with a track record of delivery.

Q51            Bill Esterson: I am glad you said that. I asked earlier about 20 million tonnes in 28 years, but we need to do 20 million tonnes a year. It is a completely different scale.

Ashley Ibbett: The scales are different. The projects that are in operation, in a way are designed to capture the amount of emissions associated with whatever technology or processing it is that they are doing. You are right, for these projects, for this cluster, the scale we are talking about is larger than any single project in the world perhaps, but the use of that cluster, and others, enables us to make the most efficient use of the infrastructure we are putting in place.

Q52            Bill Esterson: That is helpful. Is there a plan B, if this does not work? Because 2030 is not very far away—2050 is not very far away, actually.

Ashley Ibbett: Our assessment is that this technology works. It has been shown that it can work in projects around the world, so that is why we have made the investments we have.

Bill Esterson: Unfortunately, I feel like we are going to get the same answer every time to every question.

Q53            Chair: When you are measuring these projects, how do you measure the whole project’s lifetime cycle? In other words, do you take everything into account, including all the transport or tunnelling that emit carbon? How do you measure all the associated activities to assess how effectively these projects are doing in removing carbon?

Paro Konar: When we assess these projects, we take into account the costs of the projects, as well as the carbon emissions reported by the projects themselves. With lifetime emissions and overall emissions, such as those of the pipes, they are not quantitatively measured, but we look at them qualitatively.

Q54            Chair: Why are they not quantitively measured? Surely the raison d’être for these projects is to remove carbon from the atmosphere—that is the whole point. If you are not measuring all sources of carbon being produced in the construction, surely you are not measuring them properly.

Paro Konar: We do measure the carbon that is captured and stored, and there are processes and specific measurements that allow us to do so. However, the steel produced may be produced in a different country, or the supply chain may be done in a different country, so it would be very difficult for us to measure every single unit of carbon that is used to build these operations, depending on where they come from and how they are incorporated in the units of the projects.

Q55            Chair: With great respect, that sounds like a bit of a cop out. It surely should be possible to measure the cost of producing a tonne of steel, wherever it is produced in the world.

Ashley Ibbett: The answer to that, in part, lies in our overall framework for carbon emissions through the carbon budgeting process, which captures all emissions in this country. As countries deliver their own nationally determined contributions in their drive to net zero, emissions within their jurisdictions will be counted in that way too. Measuring emissions associated with the production side is an inherently complex task. You have to decide where you are going to draw the line, which is why looking at it in the context of the overall carbon budgets allows you to tackle the problem in a different way.

Jeremy Pocklington: I am going to add a further layer of complication, if I may. Forgive me, Sir Geoffrey—you have opened this up. The Government are introducing a carbon border adjustment mechanism, which we have committed to introducing, including for the steel sector, from 2027. That will essentially capture the risk of carbon leakage associated with carbon-heavy steel being produced in another country and imported to this country.

Chair: That is very helpful, thank you. We will move on.

Q56            Chris Kane: Can I take you on to the next steps? You have the track 1 project—your first one was announced this week—you have your track 1 expansion projects, and then you have your track 2 projects. I want to start with all of them. How confident are you that the track 1 projects will go operational by 2027? How confident are you in that timeline?

Jeremy Pocklington: That is right. We are now setting up and putting in place a system of arrangements to maximise the chances that the projects are delivered on cost and on schedule. That is essentially being done in three ways. First, it is being done through incentives in the contract. Ultimately, if they want to be paid, the projects need to be operational, which is quite a strong incentive to deliver on time. Secondly, it is through a system of regulatory oversight as well, and I would particularly highlight the regulation from Ofgem on this. It also has a system of oversight of financial penalties that it can put in place to oversee delivery. Thirdly, the Department is obviously building a cluster oversight function to monitor this closely, building on the deep expertise that we have in the Department at the moment. We are putting in place robust oversight arrangements to oversee this.

It is worth the Committee being aware that although I have talked about three quarters of the funding essentially coming from levies, the transport and storage projects are classified as being on balance sheet as well, as potentially are the power and hydrogen projects, but that has not been confirmed yet. That means that we need capital DEL cover—capital spending cover—even if it is being funded from levies, rather than from gilts directly; the majority is coming from that direction.

It also means that we have had to think about applying the essence of managing public money to these projects. We are applying that to a regulated asset. That means adopting the key principles but adjusting them for the process that we have put in place. I will be appointing, for example, an accounting officer for the transport and storage projects. There will be restrictions on novel, contentious and repercussive spend. We are putting in arrangements to oversee special severance pay information requirements, so that we can properly account for them as well. That is a technical detail, but it will be important for this Committee.

Chair: It will be very important, and we will scrutinise very carefully what counts as RDEL and CDEL, revenue or capital. We will look forward to receiving that and scrutinise it very carefully.

Q57            Chris Kane: I was going to ask more about where you are in developing the oversight and how it is going, but I wonder if it might be better as a note. Do you want me to ask about that now, Chair?

Chair: I am very happy for you to do so.

Chris Kane: You now have the first contract, and you have said that you are “developing” departmental oversight. Where are you in that process?

Jeremy Pocklington: We already have a lot of expertise. Nearly 300 people in the Department are working in these areas, and we have built a lot of expertise around the technology. We use technical advisers to provide specific support as well. Some of this is highly technical, as the Committee have alluded to in the questions that you have rightly been asking us today. That function now needs to move into a new phase, as we are overseeing the detail of the construction phase for these projects.

Q58            Chris Kane: Can you speak to the knock-on effect on the expansion and the track 2 projects? What are you thinking for the timeline, based on where we are after this week’s announcement?

Jeremy Pocklington: I was asked this question earlier. What the Industry Minister has set out to the Committee is that we will use the period that we now have, and we will set out the next stage for the role of carbon capture in the carbon budget delivery plan, which we will do next spring. We are in detailed discussion and dialogue with the projects involved in the core of track 1, the track 1 expansion, the other projects in the East Coast cluster and track 2, so it is a complicated array of names. Paro may want to say a little bit more about the nature of that ongoing dialogue, but the key thing to bear in mind in terms of the timetable is that the key milestone will be the carbon budget delivery plan.

Paro Konar: I can add a bit more on the ongoing dialogue. As I mentioned, we are in active negotiations with some projects. We are continuing to engage with the wider pipeline in terms of the build-out for HyNet. For the track 2 projects—Acorn and Viking—we are also in continuous engagement with them. We are learning the lessons of what we are doing currently to see how our processes can be evolved as we bring forward further projects and further clusters, as well as bringing other sources of investment and investment partners within the Government, such as the national wealth fund and Great British Energy, into this.

Q59            Oliver Ryan: Turning to the contingent liabilities for some of these schemes, the numbers associated with the maximum exposure and the reasonable worst-case scenario in the track 1 cluster are huge. What steps are you taking to minimise the risk that these schemes are not realised? As Mr Esterson touched on, we politicians are having to make really difficult decisions at the moment, especially on things like the winter fuel allowance and inheritance tax. We are dealing with hundreds of millions of pounds. This is several billion pounds. How do we make sure we can eke out every penny worth of public value for money out of what the potential of these liabilities are? And make sure that they are not realised?

Jeremy Pocklington: That is an important question and something we are very focused on as a Department. The arrangements to oversee these projects, which I set out in answer to the previous question, are the same arrangements that we will have in place to minimise the risk of any of these contingent liabilities being realised. A question about this earlier was about leakage risk. For example, through the contractual arrangements we have in place, we require there to be commercial insurance in place in the first instance. We are trying to restrict the role of the taxpayer in the extreme risks which the market cannot bear. We are creating a system of incentives that rely mainly on commercial insurance, but also top-up insurance where the market cannot price that appropriately.

Another example would be the risk around shortfalls in revenues for the transport and storage providers. There, a key mitigation is our pipeline of other projects; we have deliberately built a pipeline of other projects so that if our confidence declines about the deliverability of a project coming on to the system, we will bring forward another project in the pipeline. That is why we have chosen these clusters, because there are many emitters in the areas that are suitable for use in this technology. The systems we are putting in place are designed to minimise the risk of these contingent liabilities being called for, but is only right that we declare them to Parliament and declare the maximum liability in the usual way.

Q60            Oliver Ryan: On the reasonable worst-case scenario for the revenue support agreement, which you just referenced in connection with transport and storage, is that relevant just to transport and storage or to the whole-scheme cost or the potential liability?

Paro Konar: The reasonable worst case is for each of those areas. The supplementary compensation agreement is relevant to transport and storage only, because it says transport and storage.

Oliver Ryan: And specifically for the revenue support agreement?

Jeremy Pocklington: The revenue support agreement is about transport and storage.

Oliver Ryan: Which you feel you can do because you can move supply elsewhere.

Jeremy Pocklington: Essentially, that is providing assurance that there will be sufficient carbon coming into the network for the investors in transport and storage to earn a regulated return. Otherwise, the risk we are asking them to bear is that they build it and no one uses the network. Ultimately, that is not an appropriate risk to transfer because the owners of the transport and storage projects do not control whether emitters are brought on to their networks. That is ultimately the responsibility of the Government, which is why the Government are the appropriate party to bear that risk. Does that make sense?

Oliver Ryan: That makes sense.

Q61            Chair: Can I come in on that? These contingencies and liabilities are huge, as the hon. Member has made out. The worst-case scenario is £14 billion, and the maximum exposure is £32 billion. What will you do, as the watchdog on all this, to make sure that these projects are run in ways which minimise the risk of these contingencies?

Jeremy Pocklington: As I think I have already explained to the Committee, minimising those risks has been at the heart of the work that my Department has been undertaking over the past five years. The contracts that we are putting in place are absolutely designed to minimise those risks, and they strongly incentivise the investors and the developers to minimise the risks. There will also be regulatory oversight by Ofgem, with a system of penalties in place. However, the Department will be overseeing it closely, as you would expect.

There are actions we can take if we think the risks are materialising. A good example of that, given that you have highlighted the revenue support agreement, is that if we are not confident about the delivery of a project, we can bring forward additional projects in order to ensure that the networks are being utilised.

Q62            Chair: Some of the categories have a longer tail than others, don’t they?

Jeremy Pocklington: Yes.

Chair: You have not really set that out in the note. Please could you set out—not today because we haven’t got enough time, but in a note—your best estimate of the length of tail on those contingent liabilities?

Jeremy Pocklington: I think there has been quite a lot of technical information today. I am happy to do that.

Chair: Thank you.

Q63            Oliver Ryan: I have a question on a point of information, and it relates to Question 1, which I realise feels like it was about four hours ago. Will the Committee see the contract that has been agreed already?

Jeremy Pocklington: The contract for the dispatchable power agreement for the Net Zero Teesside project will be published by the Low Carbon Contracts Company, so it will be publicly available information. There will be some very commercially sensitive elements, which will be redacted from it, but that contract will be published. The economic licence, I think, will also be published.

Paro Konar: Yes, as well as the revenue support agreement.

Jeremy Pocklington: The revenue support agreement will be published. Those are the key documents needed to understand how the transport and storage projects—

Oliver Ryan: That is what worries me—the revenue support agreement. I realise that the next two of them—the two biggest ones—are associated with decommissioning or it not going ahead. I feel we are slightly too far down the track.

Jeremy Pocklington: There are different sorts of risks. You are right to be very focused on the revenue support agreement.

Q64            Oliver Ryan: My worry, I suppose, is that people have to do this because Government tells them to do it. They then do it and Government pays them to do it. They then put it back out and Government gives them more money to do more of it later. Then the cycle keeps going round, and at every stage, the taxpayer pays.

Jeremy Pocklington: We are asking investors to take a considerable risk here. I have referred to the £1 billion they have invested to date, at risk, with no guarantee of return. The other assurance I can give you, although some of the detailed information is commercially confidential at the moment, is that we are working a lot with the oil and gas majors. The returns that they will be earning on those assets is nothing like the returns they earn on exploration and production in the North sea. CCUS is a sector that will be subject to economic regulation.

Bill Esterson: I was wondering who underwrites the risks, but I suppose you have probably answered that.

Jeremy Pocklington: Yes, but I can have another go around that if you like—the hearing would feel even longer for the Committee!

Q65            Bill Esterson: Indeed. You mentioned a pipeline of projects, which relates to some of the questions we asked earlier. You didn’t mention it then, but you have mentioned it now. That is interesting. That pipeline is for CCUS rather than for other projects, is it?

Jeremy Pocklington: They are emitter projects, which could could join the cluster. There is a range of projects in power, in industry, in hydrogen production and in some other sectors.

Bill Esterson: You are not looking at non-CCUS alternatives, so CCUS has to work, basically.

Jeremy Pocklington: To use the pipeline and storage is to capture the carbon and store it underground. That is what it is.

Q66            Bill Esterson: I am grateful for the further clarification on that point. I would like to ask you about staffing risks. There is a lot of risk in everything involved in this discussion. You have identified capability and capacity issues for the Department and for regulators. I think that, as of April 2024, you said you needed 31 extra full-time equivalent staff to manage the track 1 clusters effectively and a further 154 for later sections of the programme. The predecessor Department suggested that you had a higher turnover of staff on CCUS programmes compared with the Department as a whole because of the lack of career opportunities for technical and specialist staff. How are you managing those challenges?

Jeremy Pocklington: The assurance I would give is that I have the skills, resources and staff I need for this programme and for the work we currently have under way. Actually, we have a core of deep expertise in the Department on carbon capture. I have already referred to the fact that I, Ashley and Paro all played leadership roles in the 2015 competition. Often, the civil service is criticised for lack of expertise. The panel today have deep expertise on this technology.

Chair: And corporate memory too.

Jeremy Pocklington: Indeed. We have nearly 300 people working on carbon capture and the associated programme on hydrogen. I think some of those numbers were just—

Q67            Bill Esterson: Sorry to interrupt, but you said you have 300. Great, but you are saying you need half as many again. That is materially—

Jeremy Pocklington: That assessment was made at a different point in time to the point where we are today.

Bill Esterson: It was just months ago.

Jeremy Pocklington: We have subsequently had a review by the Infrastructure and Projects Authority. I would be happy to share that with the Committee. That gave me assurance that we had the resource that we needed and that we had sufficient resource on this programme, but I am not complacent about it. As we are thinking through and identifying our future programme, we are going to need to ensure that we have appropriate resource, including appropriate commercial skills and appropriate engineering skills in this area. The facts in the Report were facts given where we were at that point in time, but things have moved on since then. We have had a separate assurance. Obviously, I as accounting officer wanted that. I am very happy to share details if you would like.

Q68            Bill Esterson: Yes, and if you did have significant gaps in your resourcing and in your staffing, what would be the implication for progress in the programme?

Jeremy Pocklington: I feel that is a hypothetical question that I am going to struggle to answer; I am afraid I cannot answer that question. I have said I have the resource that I need for the programme—

Q69            Chair: Let me ask a slightly different question. The Report makes it clear that you did historically have difficulty recruiting certain skills because of civil service rates of pay. Does that remain the case and, if so, what variation are you allowed to operate?

Jeremy Pocklington: We do use some specialist technical capability that we procure separately to make sure that we have some of the specialist skills that we need, which would not be appropriate within the civil service pay structure. Is there anything you would add, Ashley?

Ashley Ibbett: I would agree. Obviously, for some particular, very highly specialised expertise, it would not be a sensible use of departmental resourcing to try to in-source that, so we use professional technical advice. On the skills in the programme within the Department, we have made a lot of progress in both upskilling the people we have and bringing new skills into the organisation. We have teams not just in London but in all our places for growth across the country; we have a big team in the north-west. So we are we are bringing in talent all around the country to work on the programme.

Q70            Bill Esterson: One final question from me. Yes, it is a hypothetical question—I think that has been the nature of this morning's discussion, frankly. Is it fair to say that it is a significant risk if you do not fill those gaps?

Jeremy Pocklington: In a highly specialist area, it is important that we have access to the skills that we need to continue overseeing this programme and making further progress. That is something that I as permanent secretary spend a lot of time on with my senior team, ensuring that we can continue to recruit and access the skills that we need, not just for this programme, but for a range of other programmes. It is something we must keep looking at closely; it is a risk we have to monitor and act on all the time.

Chair: I think that is a fair assurance from the permanent secretary.

Bill Esterson: We got an answer.

Q71            Chair: Moving on, you have developed bespoke business models for carbon capture that outline how the risk can be shared between the Government and the private sector, and we are getting on now to how we structure these deals. You obviously have huge enthusiasm for this project—I can understand why—but what external scrutiny is given to these models to ensure that we are getting best value for money for the taxpayer?

Ashley Ibbett: As you say, we have a number of different business models, which we have developed through a very lengthy process of consultation with the industry to understand what is bankable, what is not bankable, and what risk allocation is appropriate between them, and we then stress tested that internally with our professional advisers. Our colleagues from the Treasury and the Infrastructure and Projects Authority work very closely with us, and are part of our programme structure, to make sure that the instruments we are using can deliver value for money for the taxpayer and the consumer. The models are rigorously assessed through this process, but that does not mean that we rest on our laurels. We are always looking to see whether there are improvements we could make in our arrangement to drive even better value for money, and we have done that throughout the processes we have gone through.

Q72            Chair: You are going to publish quite a lot of information fairly shortly on the accounting officer assessment, the contracts and so on, and I imagine this is something we will very much want to come back to, but we will leave it there for the moment.

In terms of how you actually structure the deal, if I were a venture capitalist putting in seedcorn funding—which, effectively, is what you are doing—I would be wanting quite a significant slice of the equity cake. For example, if you were doing a project for cement manufacturers and they were then able to sell carbon-free cement because their CO2 was being captured, they would be able to charge more for that special cement and would be making bigger profits. I am just concerned that, under your agreements, the taxpayer would not be reaping the benefit from any of that.

Paro Konar: We have structured the business models such that risks are borne by the sectors who are best able to bear them. As Ashley mentioned, we have gone through a significant period of developing this business model, which included a lot of consultation with industry and a lot of third-party assurances when industry and external analysts also fed back into the consultation.

You are right that, in the future, you would want the sector to sell low-carbon cement at higher prices to be able to access this. That requires future product standards, which are being developed, to allow for low-carbon cement to be sold at higher prices. That is something, again, that we are working on with international partners, and we are thinking internationally about how these product standards can be developed to allow for these low-carbon markets to come forward.

Q73            Chair: With great respect, I have listened to that answer very carefully, and it did not answer my question. Let me try again. If the private sector makes a significant increase in profits from one of these activities, it is surely only right that if the Government put in the seedcorn money—which is effectively what you are doing—the Government should get a share of that profit. Is that built into these economic models?

Paro Konar: The way the models are designed is to reduce costs for the Government, in terms of the subsidy and revenue costs that they are paying out. The benefits are the carbon savings that are made, which are quantified and valued, and that is how we get the value-for-money benefits. In future, if the Government were to take an equity position in these companies, they could do so through the Great British Energy framework or indeed through the national wealth fund.

Jeremy Pocklington: Although we have the broad models, and the specific example you are raising is a good one, some of those questions are, again, a little bit hypothetical. Although we have designed business models, there will still be further negotiations to be had based on the specific project in question. Of course, we would be looking very carefully at the economics of the developers and the investors, including what benefit they accrue from the projects but, at the moment, we have not got a cement factory that we have agreed—

Chair: No, I just used that as an example of the concept.

Jeremy Pocklington: What we have got is a power project where all the cost overrun risk is borne by the private sector, not by the taxpayer. We have agreed the dispatchable power agreement for that, and we will set out those details in due course.

I think that you are also raising quite an interesting question there that we will need to look at: should Government either take equity stakes in projects, which would be one way to capture some of that upside, or have a profit share arrangement? That is exactly the sort of thing that the Department is considering in an open-minded way, as to what is appropriate for the next set of projects coming down the line. It has not been a relevant issue for the power project, for the reasons that I have outlined, but it is something that we will keep in mind and consider for the future.

Q74            Chair: Let me follow the logic of this through. In an answer to an earlier question on contingent liabilities, you said that in terms of insurance for some aspects of these projects, you would expect the market to take the first tranche and the Government would underwrite the underwritable tranche above that. If that is the case, the Government is taking the ultimate risk, so surely the Government ought to get some share of the ultimate profits. Bearing in mind again that there is a very long tail with the contingent liabilities, it does seem to me that when you are thinking about how you negotiate these business arrangements, you ought to be thinking about that.

Jeremy Pocklington: We think that the deals that we have struck are appropriate and do appropriately balance risk, reward and return for the private sector, for the taxpayer and for the consumer. I cannot go into all the technical details today of exactly how these contracts work—we will set that out in due course—but I think that we are absolutely alive to ensuring that there is an appropriate return and upside for the taxpayer and consumer on this. I do not know whether Ashley wants to say a bit more.

Ashley Ibbett: Just a couple more words. For these very-first-of-a-kind projects, there is obviously an inherent risk associated with them, and that is why it is appropriate for Government to be involved, because the market could not sustain that risk on its own. As the market develops, that risk balance will move. We set out our work in our CCS vision about the market evolving over time such that the Government can step further away from the risk and leave the market to bear it. In the case of insurance for storage, for example, we will test the availability of that product through the lifetime of the project.

Chair: I absolutely take that point, Mr Ibbett. But presumably, now that you have signed this first set of contracts, that will produce an incredibly better investment scenario for the private sector in the second tranche. So from now on, you need to be thinking about this profit share or equity stake—whatever it is—very carefully. We will reflect on that as a Committee in our Report and make recommendations. Mr Field, I would ask the Treasury to think about that very carefully, because if as a country we are putting in these vast amounts of money, we will want, if possible, to try to recoup some of that money, albeit perhaps over many years to come.

Q75            Anna Dixon: I want to press the point you have been making, Chair. I heard something earlier from Ms Konar about co-investment, GB Energy and the national wealth fund. The projects in track 1 have been long in the making. We recognise it is still early in the new Government, and we have only just created GB Energy, but if the public were listening to the hearing, they would hear that we are looking to put in £21.7 billion of public investment. I appreciate that that is over quite a long period, because these are long-term investments. I was reading that the amount of private sector investment—perhaps this is an underestimate—may be about £8 billion. Relatively speaking, this is a major public investment and the public would want to know that there was going to be some payback and we were going to have a stake in this, perhaps through GB Energy.

I want to press the point about making sure, as future projects come online and you learn from them, and confidence in the investments grows, that, on our behalf, you are striking deals that secure that investment for the public. I want to press you on the point that, as you are designing and learning from this first tranche and going into the next tranche, you will be designing that into the process and consulting further.

Jeremy Pocklington: The reassurance I give to the Committee is, of course, that we are seeking to learn from our experience. These are the first projects we have signed. We talked at the start of the hearing about the initial projects in the HyNet cluster. We will continually reflect on what is the best approach and best way to structure projects in future. You would expect me to say that. Obviously, this Government have set out a different approach from the previous Administration in this area. That obviously will be important.

Q76            Anna Dixon: It is clear that you, as civil servants, and your Department have invested a huge amount. You have a large number of staff. A lot has been invested in this. I am keen to make sure that if anything goes off track, whether that be the costs spiralling, further delays, some of the various interdependencies in these projects starting to go off track, or the carbon benefits that were estimated not being delivered, there is not a sort of “no going back”. I feel there is a real risk. We have had so many years of failed projects. We are finally on the cusp of making this investment. You have said there are proven technologies, but you are also saying this is the first of a kind. So I have flipped between going, “Oh yes, there is some track record elsewhere in the world,” to going, “We have no idea whether this is really going to work at this scale.”

If you find, for any of those reasons, that it is not going to deliver, how do you put the brakes on? How do we stop the momentum of this? Clearly, your Department has been on a mission—sorry, I do not mean it in that sense—for a long time to pursue this technology, but we are on the cusp of something that is still the first of a kind. How will you put the brakes on?

Jeremy Pocklington: We have been working hard to deliver these projects. You will not get this far if you do not work incredibly hard. These are very complicated negotiations. It is a multi-party endeavour across a range of organisations, so I am not in any way ashamed about that, but we have done it in a way that is very hard-headed. We make sure that we have independent oversight and scrutiny of the work that we are doing both in Government but also externally. So we welcome the NAO Report into this. It is something that we will monitor very closely in the months and years to come.

There are a lot of penalties in the arrangements that we have put in place. If the developers underperform against those arrangements, Ofgem can ultimately revoke licences in some situations. In the extreme cases that you allude to, although we have to be mindful of them up front, we have put robust arrangements in place. As we have discussed, though, there are some residual risks that it is not possible to mitigate entirely. That is the nature of developing this sort of technology at this scale in the country.

Q77            Anna Dixon: So if those risks materialise, you are confident that there are ways of pulling back from very large-scale investments.

Jeremy Pocklington: Correct.

Anna Dixon: That is not meant to take anything away—I am sure that you and your teams have been working extremely hard to get this deal.

Chair: Thank you. To finish off, I call Oliver Ryan.

Q78            Oliver Ryan: Ms Konar, when you answered the Chair’s question, I think the answer was generally, “No, we do not take a stake, but it would be one to look at in the future.” That was an interesting conversation, and I would like to see us look at that in the future. You said that it is in essence because we get the benefit of carbon reduction elsewhere. I am half expecting that the value-for-money assessment will say, “It costs this much, but this is the carbon reduction, and this is the price we have made for that.”

How do we do the calculation of the price and the value of the reduction in the carbon per tonnage? Is it a calculation that is done on the alternative cost of removal, or is it done on the price that we set? To be frank, if you gave that to the public, people would say that it sounds like you are picking a number out of the air, pricing it to carbon and writing off all your costs. How do you make the case that it is not that and there is a tangible value for the taxpayer?

Paro Konar: You are absolutely right that the value-for-money assessment is trading off the cost of the projects against the value of the carbon saved. This is as per Green Book methodology, which we follow. The value of the carbon saved is the social cost of carbon, which is published in the Green Book. We draw our assessments from that and assess in terms of both the investments we have made and the carbon savings against a counterfactual of doing alternatives or, in this case, more expensive projects.

Q79            Oliver Ryan: It reinforces my view that this is an offset like when you buy a ticket on a budget airline—you pay a cost and you realise that you may not get much out of it, but you have paid it because you feel like you need to offset the carbon somewhere. You have bought a pack of loo roll and you need to pay to plant the tree; that is what this feels like. It is very expensive and it is on a national scale, but it feels like it is—

Jeremy Pocklington: It is the equivalent of taking 6 million cars off the road. That is what it is.

Oliver Ryan: It sort of feels like cash, cash, cash, but it is all justified because of the benefit of taking carbon out. That is the argument, isn’t it?

Jeremy Pocklington: The assessment is that if we did not proceed with these projects, what would we do instead? The technologies that we would need to use or the levers we would need to pull are more expensive to the economy than—

Q80            Oliver Ryan: I completely accept that. As a political argument, without drifting into the policy area, there is something to be said for this idea. When the value-for-money assessment is made, I would like to see a little less of that and more of the economic benefits to the thing, and more of the fact that it will be mega-efficient, and that if we are going to spend this money to plant that tree, we are doing it in the best possible way. There is an assessment and a calculation so that you can try to meet the risk.

Jeremy Pocklington: We need to go broader. The equivalence to taking 6 million cars off the road each year is the start, but there is more than that. The contracts have been designed deliberately, as you would expect, to ensure that the money is spent as efficiently as it possibly can be. We talked about the 2015 option being based on a different model that would have had higher financing costs than the model we have adopted now, for example.

I also highlight the jobs and growth benefit that come from this. As I mentioned earlier, I was up in Teesside last week. I think there have been about 3,000 construction jobs during the construction of the Net Zero Teesside project, and 60% of the supply chain will be domestic. We are very focused on the wider benefits, as well as being focused on the carbon itself. There needs to be this broader narrative around the projects, but that needs to be backed by the substance.

Q81            Chair: I am going to reprimand myself, because I am going to ask one more question. We have gone over two hours. I am still concerned about the question of financial discipline in negotiating the contracts. We have had a number of Oxford professors give us evidence. One of their recommendations is that “the Government implement carbon storage obligations to help create a self-sustaining market, secure investment, and align CCS policy with the polluters pay principle…Similar regulatory tools have proven effective in other sectors at driving the transition to Net Zero.”

Ashley Ibbett: I think we talk to the same academics who talk to you. The carbon storage obligation is an idea that a number of people have talked about. It is a very complex policy question, but we continue to talk to the academics and others about those sorts of models that might evolve in the future.

Chair: Right. Well, I think we have given you a fair run for your money. This is a complex problem. I commend your Department, Mr Pocklington, because whatever our views on the subject, it is incredibly complicated. You have obviously worked extremely hard on getting this far, so you are to be congratulated on that.

We are very pleased with the investment that is going into the north-east and the jobs that you have created, which were just mentioned. That is a good spin-off benefit. Hopefully, in the longer run, the whole thing will produce the carbon reduction that we hope it will. You have given us a lot to think about today. We thank you very much for subjecting yourselves to our questions, and we look forward to scrutinising these projects further in the future. The uncorrected version of the transcript will be available in the next few days.