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Large energy subsidies present a stern test for the UK's new Subsidy Control regime

26 August 2022

Government officials are working up a range of potential interventions to help mitigate the UK's energy crisis, including guarantees to help defer payments and incentives to accelerate the construction of new energy generating facilities.  The scale of this package of subsidies is likely to be significant, but it also represents possibly the first major challenge for the UK's new Subsidy Control regime. 

Energy prices are soaring across Europe, primarily as a result of the reduction in the supply of Russian gas following the invasion of Ukraine.  There has been a record increase in gas prices during the last six months and, within the UK, the current prices represent an 11 fold increase compared to the wholesale gas price from 2019.  Household energy bills have risen by over 96% in this time.  Businesses are also under significant pressure, with otherwise viable businesses closing in response to increased prices, in particular within high energy sectors such as steel, paper, ceramics, chemicals and glass production.  The threat to household incomes and budgets is being talked about as inevitably precipitating a full-blown recession if something is not done to alleviate this particular strain.

Energy is a priority for the new Prime Minister

Both candidates for the leadership of the Conservative Party recognise that the energy crisis and its impact on the cost of living is the overriding economic priority and therefore this issue is likely to dominate the political agenda over the coming weeks and months.  Government officials are said to be working up a range of interventions, including a package of subsidies, for the new Prime Minister to consider upon his or her arrival at 10 Downing Street on 6 September. 

Proposals being worked up are understood to include:

  • short term interventions to protect the poorest and most vulnerable citizens from the steep increase in bills and help energy intensive businesses continue to trade;
  • medium term financial mechanisms to support energy suppliers to defer payments, albeit the £100bn proposal tabled by energy companies this week appears to have been ruled out at this time; and
  • long term investment in alternative sources of energy generation and targeted incentives to the private sector to invest in energy efficiency measures or reduction in consumption.

These are all different subsidies of one form or another, and while some may escape technical qualification as subsidy under the law, for example direct support to individuals and general measures which affect all businesses, others most certainly will qualify as selective subsidy and will need to be addressed as such in order to be compliant with new law and safe from challenge. 

Impact of the new Subsidy Control regime

Following Brexit, the UK announced that it would be setting up its own domestic State aid regime.  The Subsidy Control Act 2022 received Royal Assent on 28 April 2022 and was promoted by the Business Secretary Kwasi Kwarteng as enabling "quicker and more flexible support" to be awarded to businesses.

Part of the Subsidy Control Act 2022 came into effect in April, including a more restrictive definition of Subsidy.  The remainder of the Act is scheduled to come into effect in "Autumn 2022", and will affect the delivery of the support measures for the energy crisis in at least three main ways:

  • the new rules are untested in the Courts and therefore recipients may harbour concerns about whether funding will be challenged and recovered in due course. The new Subsidy Control regime contains many technical aspects and the Government recently published 192 page draft guidance to assist with this;
  • Section 24(1)(c) of the Subsidy Control Act 2022 imposes a prescriptive test for whether businesses are considered "ailing or insolvent". This is similar to the EU State aid "undertaking in difficulty" test which under certain circumstances prevented awards of Covid-19 support to businesses under EU State aid law; and
  • under Section 52(1) of the Subsidy Control Act, there will be a duty upon public authorities to seek a report from the Competition and Markets Authority ("CMA") before awarding a "Subsidy of Particular Interest". The Government confirmed on 24 August that all subsidies of £10m or over awarded to a particular recipient within 3 years, as well as awards of £5m or over for certain higher risk sectors, will need to obtain such a report and will be prohibited if they do not.  This may delay the award process, but is likely to give recipients of funding greater assurance that the financial assistance would be able to withstand legal challenge.

There are steps which the Government could take in response, including declaring a "National or global economic emergency" under Section 44 of the Subsidy Control Act 2022, which would allow for the suspension of the "ailing or insolvent" test.  The Government could also set up Streamlined Routes for common awards under Section 10 (ie. set up a specific subsidy scheme or schemes for energy-crisis-related awards which carefully defined the limits and conditions for award deemed acceptable in advance and therefore negating the need for more individual examinations).  Such Streamlined Routes would be able to bypass the need for CMA review.

Conclusion

The new Prime Minister and his or her cabinet face very difficult decisions as it attempts to tackle the Energy Crisis.   In the short term emergency interventions will surely be needed to ensure viable businesses are able to survive the winter and the poorest households are protected.  In the longer term, subsidies are very likely to be needed to accelerate the delivery of the Energy Strategy in order to ensure that the UK has its own secure, clean and affordable supply of energy.   The previous administration invested in the so-called Green Industrial Revolution and it seems likely that this will be identified as a solution once again, noting that it provides a means not only to address the energy crisis, but also provides a route to nurture the business sectors of tomorrow and contribute to levelling up the United Kingdom.  The scale of these subsidies will present a significant challenge to the new Subsidy Control regime, testing whether it really is faster and more nimble than the EU's State aid rules. Whilst recognising the scale of the challenge, we're optimistic that the new regime will be able to prove its value, in these most difficult of circumstances.

DWF Law LLP is an international legal services business with market leading expertise in Public Sector matters, including the legal compliance of subsidies.  This includes advising Central Government and international businesses on how to achieve their objectives within the rules. 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