A cautionary tale: Subsidy Advice Unit reports on government support for industry energy bills

The Subsidy Advice Unit (the “SAU”) recently issued its second report evaluating a subsidy control compliance assessment for a subsidy scheme of particular interest. Here, Oliver Slater analyses the report and discuss what it means for public authorities undertaking their own compliance assessments (whether destined for SAU referral or not).

Background

We commented on the SAU referral process as part of our overview of the Subsidy Control Act 2022 (the “Act”). In summary, public authorities must refer so-called “subsidies of particular interest” to the SAU before award. A subsidy is categorically of particular interest if it exceeds £10m (or £5m in certain “sensitive sectors”). Similarly, any scheme which allows for a subsidy of particular interest to be awarded under it is a subsidy scheme of particular interest, and must also be referred to the SAU.

Once referred, the SAU evaluates the extent to which the referring authority has complied with its requirements under the Act, namely in preparing a compliance assessment for the subsidy or scheme against the subsidy control principles. The SAU’s reports are made publicly available on the SAU’s website. While a SAU report does not bind the referring authority, a particularly critical report may affect the feasibility of the subsidy or scheme bearing in mind that potential challengers are put on notice of weaknesses in the public authority’s case.

The SAU’s first report analysed the Department for Energy Security and Net Zero’s (“DESNZ”) Contracts for Difference Scheme. As with that first report, the SAU’s second report also evaluates a DESNZ scheme, this time the Energy Bills Discount Scheme for Energy and Trade Intensive Industries (the “Scheme”). The Scheme provides energy bill discounts to firms in certain energy intensive and trade intensive sectors.

The SAU’s report

The SAU’s report makes a number of comments in respect DESNZ’s compliance assessment. The report could be perceived as somewhat critical as it notes that the authority failed to carry out a sufficiently detailed assessment and in certain cases did not provide suitably comprehensive evidence.

In this regard we consider what is happening is the public sector is still calibrating to the language and requirements of the SAU. The SAU is running an economic analysis in accordance with the subsidy control principles and guidance. There are key lessons learned in the recent SAU report.

Notable points raised by the SAU include the following:

• The SAU notes that DESNZ in its analysis has identified ‘high-level’ and ‘strategic’ objectives for the Scheme, but does not set out specific policy objectives. The SAU also make comments about the extent to which a market failure is identified:“Whilst the Assessment refers to a market failure and includes evidence of the existence of market effects, the scale and scope of these effects is not explored in detail, nor are these impacts disaggregated and quantified. The Assessment also does not clearly identify how this potential market failure might relate to the identified high-level objectives, or how it informed the scheme design.”
• The SAU notes that the assessment would have benefited from further consideration of alternative levers to remedy the market failure other than subsidy (and justification of the rejection of such alternative levers with adequate evidence). The SAU makes the following statement:“The alternatives considered are presented at a high level, with little detail on what they would involve in practice, including whether they would entail other forms of subsidies rather than an alternative to a subsidy. For instance, the Assessment does not discuss what type of energy efficiency measures or loans were considered, or what direct cash grants would cover. While DESNZ’s conclusions might be correct, the reasoning employed and evidence base used to reach them is not clearly set out.”
• The SAU express concern that counterfactual – i.e. what would happen in the absence of the subsidy – is presented at a “high level”. While the SAU recognises that a quantification exercise may not have been feasible in the time available to DESNZ, the assessment would have benefited from “at least a qualitative analysis of the additional benefits” of the Scheme. As it stands, no such additional benefits are expressly set out. Further, the SAU note that DESNZ’s reasoning and evidence to explain the counterfactual more generally is “not clearly set out”.
• DESNZ accept that there is a risk of non-additionality occurring (meaning the Scheme may fund costs which would have been funded by recipients themselves in the absence of the Scheme). This can often be the case with major grants from central government. The SAU state that DESNZ’s assessment would benefit from further analysis in this regard and exploring mitigations.
• The SAU note that the method of selecting grant recipients may lead to subsidies being awarded above the minimum necessary to rectify the market failure. DESNZ’s “somewhat crude” methodology also presents a “significant risk” of distorting competition between firms which fall just below the support threshold (and therefore receive no discount) and firms which narrowly qualify for support. However, because of DESNZ’s “high-level” competition assessment, the SAU is “unable to evaluate the size or likelihood of competition distortion.”
• The SAU is of the view that DESNZ “has not attempted systematically to identify and evaluate… relevant beneficial effects and all potential negative effects of the [Scheme].” In other words, the SAU considers that there has been a limited balancing exercise as required by Principle G.
• In relation to the energy and environment principles, the SAU queries why the assessment references the environmental benefits of the Scheme when the stated aim of the Scheme (from an energy and environment perspective) is to deliver a secure, affordable and sustainable energy system. DESNZ is encouraged to provide further detail and evidence on the environmental benefits of the Scheme if the environmental elements of the energy and environmental principles are engaged. Further in relation to the energy and environmental principles, the SAU finds that DESNZ’s “brief explanation” fails to “directly address Principle G in the context of the [Scheme].”

Discussion

The nature of the SAU’s latest report serves a stark warning to public authorities: subsidy control compliance assessments must be thorough, thought through and supported by adequate evidence. Going for a SAU report in respect of a subsidy of particular interest is a material undertaking and one that must be thought through and (indeed) undertaken via a specific economic lens. The warning is of course particularly applicable to authorities awarding subsidies or schemes of particular interest (although nearly all subsidies must illustrate compliance with the principles, the requirement is particularly stark where the SAU will undertake and publish a review). The SAU process is not a mere procedural hurdle which authorities can underestimate. Where there are deficiencies in subsidy control assessments, the SAU will identify and publicise the same – a critical report inevitably heightens risk of challenge.

What is also clear is that the SAU is evaluating based on a strict framework. In particular this means adherence to the SP Rules for Reviews Against the Subsidy Control Principles for Material Subsidies:

1. Authorities MUST follow strictly the procedural and substantive rules in the Subsidy Control Statutory Guidance.
2. Authorities MUST identify a specific market failure in the language of the Subsidy Control Guidance. An entity not performing is not the same as market failure and language must be focused around identified market failures including matters such as negative externalities or information imbalance. Considerations actively require an economist’s approach to establishing a market failure – identifying market failure cannot be a lawyer’s job alone.
3. Authorities MUST identify a specific public policy objective.
4. Where positions are asserted they REQUIRE supporting evidence.
5. RELEVANT and RECENT quantitative and qualitative evidence should be provided to support positions. High level generalities will not suffice.
6. Consideration of the subsidy REQUIRES consideration of the criteria for selection of the subsidy too. One cannot consider a subsidy without considering the competitive framework
7. Authorities MUST consider all subsidy control principles including the energy and environment principles (where applicable). Mere lip service to a principle will not do. There is a requirement to illustrate active consideration has been undertaken.
8. Consideration of alternatives and counterfactuals SHOULD be demonstrated.
9. Assessments should be SUPPORTED by external evidence where possible.
10. NONE of this means subsidy control assessments need to be hundreds of pages long. What matters is addressing the principles in a clear and concise manner and understanding exactly what the SAU is looking for.

Oliver Slater is a Solicitor at Sharpe Pritchard LLP.

Sharpe Pritchard’s subsidy control team is fully conversant with the requirements and procedures of the new legal regime and is used to undertaking a quasi-legal and economic review. We advise authorities across a wide variety of subsidy control matters, including assisting with thorough and well-evidenced subsidy control compliance assessments.

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This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email This email address is being protected from spambots. You need JavaScript enabled to view it.