111: Subsidy advice unit gets down to business

State aid was a major source of tension between the UK and the European Union during the Brexit negotiations but, since 1 January 2021, the UK has been developing its own rules on subsidies. We posted previously about the Subsidy Control Act 2022 (the Act) as it passed through Parliament, and the new regime is now up and running.

The Act established a new body, the Subsidy Advice Unit (SAU), to advise public authorities on their use of subsidies to deliver policy. The SAU opened for business on 4 January 2023, and has now published its first two reports, which give some early pointers about how the UK’s new domestic subsidy rules will be applied. The SAU itself is part of the Competition and Markets Authority, the UK competition regulator.

The SAU’s reports are non-binding. Public authorities decide whether to give a subsidy or make a scheme based on their own Assessment of Compliance, with the benefit of the SAU’s evaluation where applicable.

SAU’s report on the Energy Bills Discount Scheme

Earlier this month, the SAU released a report on the assessment made by the Department for Energy Security and Net Zero (DESNZ) of the Energy Bills Discount Scheme for Energy and Trade Intensive Industries (the Scheme). DESNZ, as the public body awarding the subsidy, had assessed how the Scheme complied with the new UK subsidy control principles as well as guidance specific to the energy and environment sectors.

In summary, the Scheme aims to discourage businesses from passing on increasing costs to their customers by providing a discount (funded by government) based on energy consumption above a certain threshold. Businesses are eligible for the Scheme if at least 50% of their revenue is generated from the UK in a specified sector, which ranges from wine manufacturing to aluminium production. The business must also have a certain type of contract with their energy supplier.

Subsidy schemes can be referred to the SAU on a voluntary or mandatory basis, and the SAU has published guidance for public authorities on how to make a referral to it. In this case, DESNZ referred the Scheme to the SAU under s52(1)(a) of the Act on the basis that it was a scheme of particular interest under the Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022. Regulation 3(2) sets out that a subsidy will be of particular interest where the subsidy amount exceeds £1 million and the total amount of the subsidy and any other related subsidy given within the applicable period is more than £10 million.

The SAU raised the following main points in its examination of the DESNZ assessment of the Scheme:

• in explaining the design of the Scheme, particularly how and why the thresholds and maximum discounts were chosen, DESNZ could have shown how those elements of the Scheme were limited to the minimum necessary to achieve the policy objective;
• DESNZ did not attempt to systematically identify and evaluate the relevant beneficial effects and all potential negative effects of the Scheme;
• DESNZ did not specify in enough detail how the Scheme would directly contribute to the policy objectives of the Scheme; and
• the DESNZ assessment should have more clearly explained that beneficiaries of the Scheme are not relieved from liabilities as polluters under the relevant law, either directly or indirectly.

SAU’s report on the Contracts for Difference Scheme

In February 2023, the SAU published its first report – on the Contracts for Difference Scheme (CfD) – after it was referred by the Department for Business, Energy & Industrial Strategy (BEIS). The BEIS Scheme, which began in 2014, aims to encourage low carbon electricity generation through a contract between low carbon electricity generators and the Low Carbon Contracts Company (LCCC).

Under the CfD Scheme, the electricity generator sells power at a variable market price. Where the average market price is below the price agreed under the CfD contract, the LCCC tops up the difference. Where the market price is above the contract price, the generator company must pay back the difference to the LCCC. Contracts are typically for 15 years.

The SAU report on the BEIS assessment of the CfD Scheme made the following main points:

• BEIS could improve its analysis of whether the CfD was consistent with subsidy control principles. The SAU found that BEIS often relied (perhaps unsurprisingly) on conclusions or decisions reached by the European Commission when it had approved the CfD Scheme in its previous phases. BEIS could have identified the benefits and negative effectives of the CfD Scheme on competition and investment in the UK; and
• BEIS clearly articulated the policy objectives of the CfD and the market failures the Scheme sought to address. The SAU commended BEIS for identifying why the Scheme limited the amount of the subsidy to the amount necessary and limited the scope for over-compensation.

Features of the post-Brexit subsidy rules – transparency and light-touch?

Although much of the SAU report is critical of the DESNZ assessment of the Scheme, the UK’s new subsidy control laws are, in principle, more light-touch than the EU state aid regime.

First, the SAU is only tasked with providing non-binding advice to public authorities, not ruling on the lawfulness of the subsidy awarded. This means that, unless an interested party makes a successful challenge in the Administrative Court or the Competition Appeals Tribunal (CAT), the scheme will be prima facie lawful if the awarding body has complied with statutory and SAU guidance.

Three claims involving subsidies have recently been heard, although only one is in the CAT:

• British Gas, E.On and Scottish power unsuccessfully brought a claim against the government for its support of the takeover of energy supplier Bulb;
• British Sugar also had a judicial review dismissed in relation to the decision to introduce a zero-duty tariff quota on raw cane sugar; and
• this July, the CAT will hear its first Subsidy Act case – an appeal against Durham County Council to grant a subsidy to its own household waste business.

Second, the Act also increased the threshold for ‘minimal financial assistance’, which is not subject to subsidy control requirements, to £315,000. Under EU law, this threshold is EUR 200,000 (around £177,000 at today’s exchange rate). This may mean fewer subsidy schemes will be liable to challenge.

However, public authorities looking at subsidy schemes for regeneration or deprived local areas, for example, may find the new system more onerous. EU state aid rules contained specific exemptions for ‘assisted areas’, which have not been replicated in the new UK regime. Moreover, as EU state aid rules were primarily concerned with preventing distortions in open market trade between Member States, measures which did not affect trade between states (ie ‘local’ measures) were, by definition, not ‘state aid’ at all. The new UK subsidy regime applies to purely domestic subsidies, and so does not replicate that.

The new UK regime also impose stricter transparency rules, in order to facilitate the challenges by interested parties which police the new system. Under section 33(1) of the Act, a public authority must register a subsidy scheme given or made by them unless it is covered by an exemption. The database of these schemes is available online to the public.

Future SAU reports

The SAU appears to have a busy schedule ahead of it. It has accepted referrals from the Arts Council of England to English National Opera over a proposed subsidy of £11.46 million and from Greater London Authority regarding its proposed subsidy scheme of up to £126 million to the Refugee Housing Programme Scheme. Both SAU reports on the schemes are due in May 2023.

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