Subsidy Advice Unit Report on Contracts for Difference

The Subsidy Advice Unit (SAU) has published its first report on a subsidy scheme of particular interest referred to it under section 52(1)(a) of the Subsidy Control Act 2022.

The report evaluated the assessment carried out by the Department for Business, Energy and Industrial Strategy (BEIS) of the subsidy control compliance of the Contracts for Difference (CfD) scheme, which aims to encourage low carbon electricity generation. Although the report made some positive observations on the assessment, it also identified areas where it could be strengthened. These recommendations could be useful to other authorities when they carry out assessments of subsidy control.

Background – The scheme

Whilst the CfD scheme has existed since 2014, a number of changes have been made to the existing CfD scheme for Allocation Round 5 (AR5), meaning that a mandatory referral to the SAU was necessary. The modification of a scheme is to be treated for the purposes of the application of the subsidy control requirements as the making of a new scheme unless it is a permitted modification within the Subsidy Control Act 2022. CfD contracts are between a low-carbon electricity generator and (the Low Carbon Contracts Company (LCCC)). When the market price is below the strike price agreed in the CfD, the generator receives a top-up payment from LCCC and when the market price is above the strike price, the generator must pay back the difference to LCCC.

SAU Report

The SAU’s report is a non-binding evaluation of BEIS’ compliance assessment. It provides an insight into what SAU will expect from public authorities in relation to their assessment of subsidy and scheme compliance against the subsidy control principles.

The compliance assessment followed the 4 step approach which involves:

  • Identifying the policy objective, ensuring it addresses a market failure or equity concern, and determining whether a subsidy is the right tool to use
  • Ensuring that the subsidy is designed to create the right incentives for the beneficiary and bring about a change
  • Considering the distortive impacts that the subsidy may have and keeping them as low as possible
  • Carrying out a balancing exercise

In addition to considering compliance with the standard subsidy control principles, the assessment also included consideration against the energy and environment principles set out in the Subsidy Control Act 2022.

Generally, the SAU identified that BEIS had used evidence to display that there is a continued need for support for the CfD scheme. The SAU also considered that the assessment outlined the policy objectives and market failures clearly and identified the aspects of the scheme which are relevant to limiting the subsidy to the amount necessary.

The SAU did, however, identify the following as areas where the assessment could have been improved.

  • The use of evidence could have been improved if BEIS utilised more up-to-date evidence as well as explaining how observations made in European Commission decisions remain valid under the UK subsidy control regime.
  • Alternative policy tools should have been more thoroughly assessed, and in particular, more analysis could have been used.
  • BEIS could have better established what the position would have been in the market without the CfD scheme, which would have improved the argument that the scheme will contribute to a change in the behaviour of subsidy beneficiaries.
  • Finally, the assessment could have been improved by a better evaluation of the benefits and negative effects of the scheme, both quantitively and qualitatively. SAU concluded that the assessment does not include a balancing exercise of all the effects, and does not explicitly draw a conclusion

Other authorities may find it helpful to take account of these recommendations when assessing subsidy control compliance of subsidies and subsidy schemes.

Geldards has experienced advisers who are happy to assist with any queries and concerns that you may have in relation to subsidy control and your obligations in complying with this.

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