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On 30 June 2021, the new Subsidy Control Bill (the Bill) had its first reading in the House of Commons. This Bill, once passed into law, will introduce a new UK regime regulating the distribution of subsidies from government bodies to businesses in the UK. The new regime sets out nine additional principles that public authorities must consider when granting energy and environment subsidies.

  • The Bill is expected to be the biggest change to the UK’s legislative landscape since Brexit and will be a significant change to the previous European state aid system that applied to the granting of state subsidies in the UK prior to 2021.
  • Subsidies must be awarded in accordance with certain key principles including the specific principles that apply to certain energy and environment subsidies. These principles are derived from the UK’s international obligations contained in the UK-EU Trade and Co-operation Agreement (UK-EU TCA) at annex ENER-2.
  • As is common in subsidy regimes, there are de minimis provisions and exemptions for matters like emergency situations.
  • Certain subsidies will continue to be prohibited. These prohibitions largely mirror requirements contained in trade agreements to which the UK is party and WTO rules. The UK government has also added a ‘relocation’ prohibition as part of its agenda to ‘level up’ the UK and stop businesses moving within the UK as a result of any subsidy.
  • The CMA will be responsible for reporting to public authorities on subsidies and a new Subsidy Advice Unit will be set up at the CMA. The Competition Appeal Tribunal will have jurisdiction to hear challenges to the grant of any subsidies.

Background

Following the UK’s exit from the European Union, the EU state aid rules no longer apply directly to subsidies granted in the UK. The UK-EU TCA imposes certain restrictions on each party in the grant of subsidies, as do the UK’s free trade agreements (FTAs) with other countries and the WTO’s rules on subsidies. However, these obligations potentially presented difficulties for parts of government considering subsidies, as they are contained in a number of different agreements with differing rules. In February 2021, the government launched a consultation on a new subsidies regime, the results of which have fed into the current proposals.

The government stated in its announcement on the Bill that the new system will be “designed to be more flexible, agile, and tailored to support business growth and innovation, as well as maintain a competitive free market economy and protect the UK internal market”. The principal difference from the EU state aid regime, which required subsidies to obtain up-front clearance from the European Commission unless they fell within a block exemption, is that the Bill proposes a regime whereby governmental bodies granting subsidies self-assess their proposed subsidy against a set of broad principles, with only certain types of subsidy requiring mandatory advice from the UK Competition and Markets Authority (CMA).

Key points on the Bill

The key points of the proposed new regime are:

1. Definition of subsidies. A ‘subsidy’ is a type of financial assistance which meets the four limb test contained in the Bill; that is, the financial assistance: (a) is given from public resources (directly or indirectly); (b) confers economic advantage on one or more parties; (c) benefits one party over other parties in respect of goods or services; and (d) has an effect on competition in the UK or internationally, or has an effect on investment between the UK and another country.

2. Principles. Public authorities are required to consider seven main principles (set out in schedule 1 to the Bill) and nine additional energy and environment principles (set out in schedule 2 and applying in relation to certain types of subsidy in those sectors) when considering whether to grant a subsidy. Public authorities are not permitted to give subsidies that are contrary to the principles. The principles are fairly high level and include matters such as the benefits of the subsidy outweighing the negatives, and the subsidy being designed to achieve a legitimate policy objective while minimising any negative effects on competition. Save for the principle relating to subsidies which may distort competition within the UK, the other six principles mirror the subsidy principles agreed in the UK-EU TCA and the nine energy and environment principles are derived from the principles agreed at annex ENER-2 of the UK-EU TCA.

This approach is a departure from the European state aid regime where subsidies (referred to as ‘state aid’) are presumed unlawful unless de minimis, covered by a block exemption or approved by the Commission in advance.

3. Energy and environment principles. As a general summary of the principles that a public authority must consider when granting energy and environment subsidies, subsidies:

a. must be aimed at delivering a secure, affordable and sustainable energy system and a well-functioning and competitive energy market, or at increasing the level of environmental protection compared to the level that would be achieved in the absence of the subsidy;

b. must not relieve the beneficiary from liability as a polluter;

c. for electricity generation adequacy, renewable energy and cogeneration, must not undermine the ability of the UK to meet its relevant obligations under the UK-EU TCA, and, except in limited circumstances, as set out in the Bill, such subsidies must be determined by means of a transparent, non-discriminatory and effective competitive process;

d. for electricity generation adequacy, may be limited to installations not exceeding specified CO2 emission limits;

e. for renewable energy and cogeneration, must not affect the obligations owed by recipients of the subsidies or their opportunities to participate in electricity markets;

f. in the form of partial exemptions from energy-related taxes and levies in favour of energy-intensive users, must not exceed the total amount of such taxes or levies;

g. in the form of compensation for electricity-intensive users given in the event of an increase in electricity costs which has resulted from climate policy instruments, must be restricted to sectors at significant risk of carbon leakage due to the cost increase;

h. for the decarbonisation of emissions linked to industrial activities in the UK, must directly lead to an overall reduction in greenhouse gas and other emissions; and

i. for improvements of the energy efficiency of industrial activities in the UK, must improve energy efficiency by reducing energy consumption.

4. Exemptions from the regime. Certain subsidies will be exempt from the regime, including if they are de minimis or otherwise exempt. Exemptions set out in the Bill include responses to emergencies like natural disasters, economic emergencies, and national security, among others.

5. Prohibition or requirements of certain subsidies. The subsidies that are prohibited in the Bill (for example, giving unlimited guarantees or assisting firms where there is no credible restructuring plan) are based on the international obligations of the UK (under WTO rules and other FTAs). This is the case except for the prohibition on subsidies that require businesses to relocate from one part of the UK to another as a result of a subsidy, which is intended to ensure regions of the UK do not seek to attract business from another part of the UK by offering subsidies.

6. The CMA’s role. The CMA is responsible for reviewing referrals made by public authorities. This is a new function for the CMA, because the Commission was responsible for state aid matters prior to Brexit. The Bill proposes a new Subsidy Advice Unit within the CMA – this will require additional resources for the CMA. It is proposed that the CMA will consider three types of referral:

a. Mandatory pre-award referral. Public authorities will have to request a report from the CMA on a “subsidy, or subsidy scheme, of particular interest” or a subsidy or scheme which the secretary of state has directed the public authority to refer to the CMA before it is given or made.

b. Voluntary pre-award referral. Public authorities may request a report from the CMA on a “subsidy or scheme of interest”, which will provide them with support for their application of the principles to their proposed subsidy.

Note: “subsidy, or subsidy scheme, of particular interest” and “subsidy or scheme of interest” will be defined by additional regulation, details of which have not yet been published.

c. Post-award referral. The secretary of state may make a post-award referral to the CMA within a period of 20 working days beginning with the day on which the subsidy or scheme was published on the relevant database (or if information about the subsidy or scheme does not need to be published on the database, the date on which the subsidy or scheme was given or made).

7. Enforcement. Interested parties can apply to the Competition Appeal Tribunal (the CAT) to review subsidy decisions. As with the CMA, this is a new function. The CAT’s review of a subsidy decision will be on judicial review grounds and not a full review.

8. Subsidy database. The Bill envisages that the secretary of state will set up a subsidy database for transparency.

What’s next?

The Bill requires parliamentary approval, which is likely to take several months. The government expects the new regime will come into effect in 2022.

In the meantime, we expect there to be a lot of debate, nationally and internationally, on the new Bill and the proposed new legal framework in the UK.

Until the Bill is enacted, the subsidy principles in the UK-EU TCA (including annex ENER-2), WTO rules and FTA provisions will continue to apply. It has been reported that the first legal challenge has been launched in the UK High Court, challenging a grant of tariff-free access to the UK market for certain overseas sugar as breaching the principles contained in the UK-EU TCA.

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