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How to deliver large energy projects in compliance with the Subsidy Control rules

08 April 2022

The Government has launched its Energy Strategy, announcing ambitious plans to ensure up to 95% of the UK's electricity originates from low carbon sources by 2030.  One of the most eye-catching announcements is a plan to support the construction of eight new nuclear reactors, including two in Sizewell in Suffolk.  In this article, we explain how large energy infrastructure projects can receive public funding in line with the current Subsidy Control rules and identify how such projects might be affected by the forthcoming Subsidy Control Act 2022. 

The Energy Supply Strategy

The objective of the new Energy Strategy is to ensure that the UK has a secure, clean and affordable supply of energy in the long term.  The plan has been developed in response to long term concerns about how the UK can move towards cleaner sources of energy, but is naturally also shaped by more immediate concerns including moving away from Russian fuel as a result of the invasion of the Ukraine.

The main announcements are:

  • eight sites across England have been identified for new nuclear reactors. A new body, Great British Nuclear, will be responsible for the delivery of these plants and the £120m Future Nuclear Enabling Fund will launch later this month;
  • the government will reform planning laws to speed up approvals for new offshore wind farms and seek to develop partnerships with communities that wish to host turbines in exchange for guaranteed cheaper energy bills;
  • doubling the national targets for hydrogen production to 10GW by 2030;
  • easing rules for installing solar panels on homes and commercial buildings with the objective of increasing capacity five fold by 2035
  • a new licensing round for North Sea oil and gas projects to be launched this summer; and
  • a Heat Pump Investment Accelerator Competition in 2022 worth up to £30 million to make British heat pumps, which aims to reduce demand for gas.

These new announcements are designed to complement the estimated £22bn of investment already directed towards the Green Industrial Revolution.

Subsidy Control and Energy Projects

Subsidies for large energy infrastructure projects are inevitably high profile and stand a higher risk of being the subject of challenge.  This remains the case, even though EU State aid law has been largely disapplied since 11pm 31 December 2020. 

The Subsidy Control rules are the post-Brexit legal requirements that apply to the award of most subsidies now awarded within the United Kingdom.  In practice, they oblige public bodies at the point of making a legal commitment of financial assistance to assess the impact of the measure on the UK's international subsidy commitments, including those set out in Chapter 3 of the EU-UK Trade and Cooperation Agreement ("TCA") and other trade agreements.   In doing so, public bodies will need to be mindful of the Government guidance in this area and of relevant case law.  In almost all cases, the public body will require the potential recipient of funding to submit a report setting out how it envisages its proposal will satisfy the rules, which is then incorporated into the reasoning of the body awarding the funding.

Article 363 of Chapter 3 of the TCA, defines "subsidy" as:

"…financial assistance which:

(i) arises from the resources of the Parties, including:

(a) a direct or contingent transfer of funds such as direct grants, loans or loan guarantees;

(b) the foregoing of revenue that is otherwise due; or

(c) the provision of goods or services, or the purchase of goods or services;

(ii) confers an economic advantage on one or more economic actors;

(iii) is specific insofar as it benefits, as a matter of law or fact, certain economic actors over others in relation to the production of certain goods or services; and

(iv) has, or could have, an effect on trade or investment between the Parties".

The criteria are cumulative. Therefore an award of public funding to an organisation to construct energy generating infrastructure is very likely to fall within the scope of what is a subsidy.

When a subsidy is present, the TCA sets out different routes by which a measure may be rendered lawful.  The most common Subsidy Control route for large infrastructure projects is to build up a case demonstrating how the measure aligns with six common principles set out at Article 366 of the TCA, these being:

  1. subsidies pursue a specific public policy objective to remedy an identified market failure or to address an equity rationale such as social difficulties or distributional concerns;
  2. subsidies are proportionate and limited to what is necessary to achieve the objective;
  3. subsidies are designed to bring about a change of economic behaviour of the beneficiary that is conducive to achieving the objective and that would not be achieved in the absence of subsidies being provided;
  4. subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy;
  5. subsidies are an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means; and
  6. subsidies’ positive contributions to achieving the objective outweigh any negative effects, in particular the negative effects on trade or investment between the Parties.

In practice, this involves developing arguments and building an evidence base demonstrating how each Common Principle might be satisfied, with reference to the relevant guidelines and case law.  Some funders like to design their measures to align with EU State aid law exemptions and approvals, but it should be noted that this is not required, nor are EU State aid law exemptions legally decisive under the UK's new regime. 

That said, a source of challenge under the new regime is from the European Commission, therefore funders may find a level of assurance in following the EU's rules.  The higher risk of challenge though comes from Judicial Review from an interested party (usually a competitor).

A judicial review challenge will normally focus on how the decision has been made and therefore it is important that there is a clear audit trail working through all the relevant requirements at the time the award is made.  In this regard, it's important to note that energy and environmental subsidies are subject to additional requirements at Annex 27 of the TCA.

Impact of the Subsidy Control Act 2022 on Energy Projects

The Subsidy Control Bill is still proceeding through Parliament but is expected to receive Royal Assent in the coming weeks.  The draft legislation expands the definition of subsidy and sets out an additional Common Principle, which is focussed upon protecting the UK Internal Market. 

The new regime will be overseen by the Competition and Markets Authority ("CMA") which shall produce reports upon contentious awards.  The categories of award which are to be referred to the CMA are currently the subject of a consultation process, but we note that the draft legislation anticipates that a mandatory notification process will apply to measures relating to the "production of electricity".

Conclusion

Accelerating the UK's transition to a secure, clean and affordable energy supply will inevitably require public funding to be invested.  The new Subsidy Control rules create many opportunities to award funding more quickly, but also offer less certainty than the previous State aid regime.  Therefore to be safe, those seeking public funding will need to work with the funder to ensure there is a clear and methodical audit trail demonstrating how the relevant rules have been complied with.

You can register for our forthcoming webinar on the Subsidy Control Act here.

DWF Law LLP is an international law firm with an exceptional reputation for advising on matters involving public funding.  This includes advising Central Government on large capital projects and Local Government on how to deliver public funding programmes. Please free to get in touch with our Subsidy Control lawyers if it would be useful to discuss any of the issues raised in this article or other matters related to public funding. Our UK offices are Belfast, Birmingham, Bristol, Edinburgh, Glasgow,  Leeds, Liverpool, London, Manchester and Newcastle.

Further Reading