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Energy Crisis: UK government contemplates multi-billion subsidy package for energy intensive industries

12 October 2021

The UK Government is apparently locked in talks with business about how to mitigate the 'energy crisis' for business and is reported to be considering announcing a programme of subsidies to support the industries which are most severely affected.  In this article we consider how such support could be designed in line with subsidy control law (assuming there is a political will and sufficient funding to do so of course) and the possible implications under the Northern Ireland Protocol and the WTO rules.

Wholesale gas prices have soared by 250% since January 2021, creating a situation where businesses operating within high energy consuming sectors, such as steel, paper, ceramics, chemicals and glass are having to consider suspending production.  The Business Secretary, Kwasi Kwarteng held talks with industry leaders in these sectors on Friday to seek to understand concerns and told Andrew Marr-on-Sunday that he is actively considering "all solutions" to resolve the issue. 

This is understood to include a package of subsidies, which will be easier to award under the new Subsidy Control rules (as derive from the EU/UK Trade & Cooperation Agreement or "TCA") than would have been the case under the previous EU State aid rules, pre-Brexit.  This is because under EU State aid rules, financial assistance towards running costs would normally be considered as operating aid, which could only be awarded in certain very specific circumstances, and normally only following due consideration and approval by the European Commission.  For some sectors, including basic steel manufacturing, such support is prohibited altogether. 

The EU rules do allow special dispensations for measures undertaken to deal with natural disasters, and otherwise to deal with particular exceptional occurrences, albeit for the latter normally this requires European Commission approval prior to intervention again.  On the basis the recent pandemic was not deemed a natural disaster there is no reasonable expectation that the current energy crisis would be deemed so either.  Rather, the old regime would require working with the European Commission to deliver a worthwhile intervention scheme, as indeed happened during the pandemic. 

The TCA has its own equivalents to the above, but does not contain the sectoral prohibitions for industries like steel.  The current energy crisis would not credibly be seen as a natural disaster nor some other exceptional non-economic occurrence.  However it could plausibly be seen as a "national economic emergency".  The TCA contains express provision to allow the UK to deliver subsidies on a "temporary basis to respond to a national or global economic emergency" (Article 364.3 TCA) provided they are "targeted, proportionate and effective in order to remedy that emergency".  This gives scope for action in the present case, and without needing to satisfy the European Commission first.  Moreover, the award of subsidies by the UK within this provision of the TCA, if done carefully and properly within the above limitations, is also outside the scope of the bilateral remedial measures as apply between the EU and UK (ie. provision for trade sanctions on account of subsidies).  It may also be done outside the usual prohibited subsidies as set out in the TCA (eg. aid to ailing or insolvent enterprises without a credible restructuring plan).  

What the above means is that provided the UK can show the current crisis is a national economic emergency (which does not seem implausible) then it has considerable room for manoeuvre in determining some form of support scheme to help businesses deal with soaring energy costs, in whatever form that might take, for example by tax credits or other mechanism(s).  It is correct that any measure following the above would still need to satisfy the new six 'common principles' from Article 366 TCA, for example being satisfied that the measures were no more than proportionate and the minimum necessary to secure the public policy objective, but since the UK Government would naturally be very keen to do that anyway this is unlikely be a hindrance.  

What is perhaps more complicated however is thinking how such a measure could be devised to cover the whole UK without running into difficulties in respect of the now notorious Northern Ireland Protocol, whereby the rule of EU State aid law continues to apply in respect of matters that affect the trade of goods in Northern Ireland and the all-Ireland electricity market.  An all UK scheme to support manufacturers with soaring energy costs would cover business in Northern Ireland too which would risk running straight into jurisdictional questions on the application of the Protocol, if that were not a sufficiently sensitive subject already.  This, as with most things related to Brexit and simultaneously keeping the Irish border open, looks more intractable.

The UK Government would also need to be mindful about WTO rules, in particular the possibility that any subsidy could be considered actionable under the Agreement on Subsidies and Countervailing measures.  Under this Agreement any of the other 163 WTO members could potentially challenge the measure under the WTO's dispute settlement procedure or charge extra duty ('countervailing measures') on any subsidised UK production which when exported to other markets was found to be causing material injury to domestic producers of the like products in those markets.  This is liable to be a minor consideration however, as such disputes are very rare and this issue applies generally to most subsidy awards anyway, and any scheme devised to address present circumstances would be based on keeping things going rather than boosting exports.

The Government is keen to stress that the Energy Price Cap, which limits charges for domestic customers, will remain over the Winter.  In practical terms, this is holding back a wave of bill increases for millions of customers.  However the Energy Price Cap is not available to businesses and therefore high energy sectors are already facing the difficulties arising from soaring wholesale prices. 

The Government now faces the difficult task of intervening to support businesses affected by the energy crisis, while doing so in a way that is safe from challenge and does not unduly antagonise its key trading partners.  Insofar as subsidies are used, there is a route under the new UK Subsidy Control rules as derive from the TCA (NB. the Subsidy Control Bill remains a programme for future law that is not applicable today).  However, any intervention will need to be designed to align with the Common Principles and take stock of the Northern Ireland Protocol if it is not to run into serious difficulties.  

DWF Law LLP has exceptional experience in public funding issues, including setting up programmes of support which satisfy government guidance, advising upon how to compliantly procure services and satisfy the Subsidy Control rules. This means that we are a safe pair of hands when it comes to managing issues such as this. If it would be useful to discuss any of the issues raised in this article or other matters related to public governance or funding, please contact a member of our UK public sector team to discuss how we might assist you.

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