I don't think there should be exceptional circumstances either, but it might have been politically necessary to get this agreed.
Whilst I don't agree they belong in the women's estate, it's possible they were thinking of someone along the lines of a non violent, GRC holding late teen TW, who has been on puberty blockers and has had breast implants but hasn't yet had so-called bottom surgery. So potentially someone who is small, highly feminised (for a male), functionally infertile, maybe even with micro penis.
I don't think that individual belongs in the female estate, but the risk to them in the male would be exceptionally high. They are the sort of sympathetic case which many still imagine and I could see a scenario where that kind of individual was being repeatedly presented as a reason not to block TW, and someone has proposed the "exceptional circumstances" ministerial approval to get around it. Which I can see the logic for as we know that the number of these individuals is tiny, comparatively.
I might be giving them too much credit mind you!
It's not perfect but, for rUK, it's a big step forward.