Electrifying development: New challenge lodged to public subsidy for energy storage projects

The latest subsidy control challenge was published at the end of November, objecting to a funding scheme established by the Gas and Electricity Markets Authority (“GEMA”) to support longer-duration energy storage projects.

The challenge

The funding scheme creates a “cap and floor” arrangement under which participating projects will be guaranteed a minimum “floor” level of revenue, with top-up payments made by the National Energy System Operator (NESO) where commercial prices fall below that floor, in exchange for which they will be required to return excess revenues to customers where these exceed the “cap”. NESO is wholly owned by the Department for Energy Security and Net Zero and the floor payments will be funded through charges NESO imposes on electricity suppliers.

In its challenge lodged on 24 October the applicant, Zenobe, alleges that GEMA’s funding scheme constitutes a subsidy scheme, and that (because GEMA did not recognise it as such) GEMA has failed to comply with its obligations under the Subsidy Control Act 2022 (the “Act”) to (1) carry out a subsidy control principles assessment, (2) consider the energy and environment principles in addition to the “core” subsidy control principles, (3) make the scheme only if satisfied it was consistent with both sets of principles, and (4) refer the assessment to the Subsidy Advice Unit (SAU) within the Competition and Markets Authority as a scheme of particular interest. Zenobe asks the Competition Appeal Tribunal (CAT) to quash the scheme.

New issues

As we have previously observed on the first, second, fourth and fifth legal challenges to subsidies, most challenges so far have been brought on the basis that the public authority giving the alleged subsidy did not treat it properly as a subsidy, and this latest challenge is consistent with that.

Two features of this challenge make it different and worth watching. First, the applicant (that is, claimant) sought to expedite the procedure by asking the CAT to abridge the respondent authority’s usual time for lodging its defence. Conversely GEMA asked for a stay – that is, to pause proceedings for the time being. Normally it is the public authority that wants a challenge dealt with swiftly, to avoid any prejudice to its ability to get on with its intended course of action. Why the difference here? That arises from the second novel feature of the case.

That second feature is that section 27 of the Planning and Infrastructure Bill (as amended on report) will – if enacted in its current form by Parliament – impose a statutory duty on GEMA to establish a scheme designed for the purpose of encouraging the development and use of long duration electricity storage installations. The details of that provision require precisely the sort of “cap and floor” scheme that is under challenge here. GEMA appears to be suggesting in its defence that this will create a “Statutory Bar” to a legal challenge to the scheme.

That argument is – presumably – based on section 78 and Schedule 3 to the Act. Those modify how the Act applies where a subsidy is given “by means of primary legislation”. Paragraphs 4 and 5 of Schedule 3 provides in particular that the modified regime applies where a public authority (such as GEMA) has a duty under primary legislation to give a subsidy or make a subsidy scheme (but not where it only has a power to do so). In such cases, the duty under paragraph 6 of Schedule 3 to conduct a subsidy control principles assessment applies only to devolved legislation, not an obligation imposed by the UK Parliament. And in neither case does the obligation arise to refer the scheme to the SAU.

There is also a procedural argument – to the extent that GEMA is required to make such a scheme, the correct person for Zenobe to bring proceedings against will be the UK Government (as “appropriate authority” under paragraph 2(1)) and not GEMA.

This challenge is therefore likely to be key to understanding how the CAT treats subsidies mandated by Parliament (and how it treats subsidy decisions that are made in anticipation of them being mandated by Parliament). If GEMA ultimately has to lodge a full defence (that is, if a strike out on the basis of the statutory bar is unsuccessful) then it is likely to seek to plead that charges levied by NESO are not “public resources” for the purposes of the Act, giving the CAT the opportunity to define the parameters of what are and what are not public resources.

In the meantime, the applications for an abridged period to lodge a defence, and for a stay, were both rejected by the CAT. The challenge and Parliament’s consideration of the Planning and Infrastructure Bill will continue in parallel.

If you would like to discuss how this affects your organisation please contact Jamie Dunne, Charles Livingstone or your usual Brodies contact.