In this edition, we highlight the key regulatory and policy developments this Autumn which will impact investors in and operators of energy and infrastructure assets in the UK. Please get in touch if you'd like to discuss any of the issues discussed below.
Do the policy changes announced by the UK Government in September mean that it is rowing back on its commitment to Net Zero? Or is it justified in doing so to maintain public support for the clean energy transition? We look at what the Government is proposing and discuss the likely impacts.
In September the Government announced that, in view of the UK's "over-delivery" on reducing emissions, a revised plan was justified to avoid loss of public support for transition. The announcement focussed on measures which were presented as easing the burden on individual consumers – but were interpreted by some as signifying a weakening of the UK's commitment to Net Zero.
For more detail on all these changes, see our detailed briefing
Some critics of the announcement suggest that it indicates a significant rowing back from the UK's Net Zero ambitions. But does this critique hold up? For example, the independent Climate Change Committee assesses that moving the ban on sale of new petrol cars and vans to 2035 will only have a small direct impact on future emissions because the Government has not suggested removing the Zero Emissions Vehicle Mandate; this has already been legislated for and requires 80% of new cars sold by 2030 to be zero emission vehicles (rising to 100% in 2035). Similarly, only 6% of UK homes use oil or LPG for heating, so the overall impact of postponing the ban on new oil or LPG boilers in off-grid homes is likely to be fairly limited in practice.
On the other hand, announcements like these are likely to be interpreted by many consumers as meaning that they won't be required to make changes for more than a decade and so there's nothing to be gained from switching earlier. Industry has been highly critical of what it perceives as the Government's failure to maintain a consistent message to consumers. There are also concerns that some changes, such as not proceeding with the planned requirement on landlords to upgrade the energy efficiency of residential properties, will cost consumers in the long run in the form of higher energy bills (even if it appears to save money in the short term because it makes significant rent rises less likely).
In our view, it may be more accurate to describe the UK as exhibiting a shift in mindset away from focussing on acceleration towards a policy which puts more emphasis on stability – hence the confirmation in the King's Speech of moves to issue further licences for oil and gas exploration, so as to reduce the UK's reliance on energy imports against the background of the war in Ukraine. Once again though, there are risks that such changes in policy end up sending mixed messages to investors – even if they are not intended to signify a weakening of resolve to achieve Net Zero in the long term. For example:
The UK Government may be hoping that "greening the financial system" (see section 5 and section 6) will in practice be more effective at driving progress towards Net Zero than measures such as banning gas boilers or petrol cars. Indeed, requirements on investors to be more transparent about their environmental impact may well lead those businesses to put pressure on their investee companies and suppliers to help them demonstrate their green credentials. However, to be effective, green finance initiatives should ideally dovetail with operational regulatory requirements to create multiple incentives to move towards Net Zero. So, for example, the Zero Emission Vehicle mandate will help ensure a stable regulatory framework for the development of charging infrastructure, and the UK's Green Taxonomy could ensure that investors with a sustainable mandate are encouraged to raise funds for it.
There is much to be said for policies that encourage investors to prioritise greener investments and the market is often a better judge than Government of what will work in practice. However, the danger remains that by appearing to row back on operational policy and regulation (i.e. concerning infrastructure, homes and cars), the UK risks falling behind other countries which are pulling on both the financial and operational policy levers. That said, there appears to be some recognition of these concerns in the Autumn statement, with the announcement of measures designed to remove barriers to investment (via planning reform and regulatory developments) and encourage investment (via a new investment exemption for the Electricity Generator Levy) – see section 3.
For a more in-depth look at the issues discussed here, see our detailed briefing.
In October 2023, the UK Government announced that it was cancelling further stages of the controversial HS2 rail line; only the first stage, between London and Birmingham, will be completed and funding for the remaining stages will be diverted to other projects. We look at what this means for UK transport strategy and the wider UK infrastructure sector – particularly in the light of the Government's stated ambition to make it easier to implement major infrastructure developments.
The following further phases of HS2 (due for completion in 2032-33) have been cancelled:
Although construction on Phase 2 had not started, significant preparatory steps had been undertaken, including purchase of relevant land. Phase 1 (from London to Birmingham) will be completed and trains will run from a new station at Euston, but this will be smaller than originally planned (6 platforms instead of 11). To reduce burdens on the taxpayer, the Government plans to seek more funding for the Euston development from the private sector and to adopt a more ambitious approach to redevelopment of the local area, potentially involving up to 10,000 homes.
The £36 billion earmarked for HS2 will, on the basis of the Government's current plans, be spent on a variety of different transport improvements (including rail, roads, mass transit systems within cities and bus networks), with a regional split as follows:
The Government has also confirmed that it will provide £12 billion to improve connectivity between Liverpool and Manchester, to fund the Northern Powerhouse Rail scheme (but this is not funding that has been diverted from HS2).
Critics of the decision point out that HS2 was designed not just to allow faster connectivity but also to address capacity constraints on the West Coast mainline – and that the projects to be funded in its place address different problems, primarily sub-optimal connectivity within and between major towns and cities in the North and the Midlands. The Government's main response to this is that in the wake of the pandemic, passenger numbers are down by 20% and therefore capacity is less of an issue (although this does not do much to address concerns about insufficient capacity for rail freight, as opposed to passengers). It also argues that the very substantial rise in the projected costs of HS2 (the cost of the first phase has risen from an initial estimate of £20.5 billion to £44.6 billion) means that it is now a very expensive way to address any remaining capacity issues – and that the money will be better spent on a broader range of projects aimed at improving connectivity in the North and the Midlands.
The National Infrastructure Commission has pointed out that the decision on HS2 "leaves a major gap in the UK's rail strategy around which a number of cities have based their economic growth plans……A new comprehensive and long term strategy that sets out how rail improvements will address the capacity and connectivity challenges facing city regions in the North and Midlands is needed." Although some details of the Government's plans in the wake of the decision have been published (notably here and here), these are more in the nature of a list of existing or potential projects for which funding will now be made available. The Government will now need to work with local and regional authorities to develop a coherent strategy (or set of strategies) to fill the gap left by the cancellation of the remaining phases of HS2; in particular, broader economic and infrastructure plans are likely to need some significant recalibration.
What does this say about the UK's ability to implement major infrastructure projects?
Major infrastructure projects are, by their nature, complex and challenging to deliver – and the UK is not the only country to have experienced difficulties in implementation. That said, the decision not to proceed with the remaining phases of HS2 is hardly an advertisement for the UK's ability to deliver major projects of this type. The National Infrastructure Commission has made a number of recommendations for reform, including:
The decision to cancel phase 2 of HS2 will have come as a bitter blow to many Local Authorities and developers alike, given the expected economic boost that it would have brought to certain areas. It also means that work undertaken on Local Plans, site allocations and planning applications may need to be scrapped, having been predicated on the delivery of this critical piece of infrastructure. On the flip side, sites which were previously safeguarded along the route could now come forward for development, albeit that the loss of the route has now introduced considerable uncertainty and, potentially, stifled the investment needed to underpin previously ambitious plans for growth.
The 100+ pages of the Autumn Statement contained a number of measures which are likely to be significant for the infrastructure and energy sectors. Here's our take on the main highlights:
There is much to welcome in the Autumn Statement and it is encouraging to see the Government committing to implement recommendations of independent bodies on planning reform and electricity networks. There also appears to be a recognition that action is needed to tackle excessive delay in approving and implementing infrastructure projects – and the opposition Labour Party is reported to be considering similar measures, if elected. A drive for faster decision-making in planning is not new but the proposed changes do risk the creation of a two-tier planning service, with commercial applications being prioritised over housing applications. That is difficult to square with the parallel announcement of further investment to unlock more housebuilding.
There is still some way to go in developing pension reforms that could open the way to increased investment in infrastructure. The next General Election is likely to take place before this work is concluded, but Labour has said it will also look at how pension funds can support economic growth.
As regards investment zones, the tax reliefs are welcome but it remains to be seen whether they will have the desired effect; similar measures do not appear to have been as successful as the Government had hoped in attracting investment to freeports. It may be that investors want more reassurance that the UK Government prioritises longer term regulatory stability, as this is an area where many commentators think that the UK's reputation has taken a hit in recent years. That said, with its emphasis on measures to speed up project delivery and create greater certainty for investors, many aspects of the Autumn Statement represent a step in the right direction on that issue.
The UK's National Security and Investment Act (NSI Act) has been in force for almost two years. It enables the UK Government to scrutinise M&A deals and a range of other transactions (including acquisitions of assets only, without any related business or enterprise) on grounds of national security (click here for our detailed briefing). Many of the sectors where prior notification (for qualifying transactions) is mandatory relate to infrastructure, including communications and data, energy and transport. Unlike similar regimes in other countries, there is no requirement for a foreign (non-UK) investor to be involved. There are also no financial thresholds or de minimis exemptions; instead the focus is generally on the nature of the underlying business or asset in which an interest is being acquired (and whether it falls within the list of sectors/activities that the Government is concerned about).
It will be apparent from the brief description of the NSI Act above that it can easily "bite" on a wide range of infrastructure deals. So what lessons can be gleaned from the experience of past 2 years, particularly as regards the infrastructure sector?
The good news from the perspective of infrastructure investors is that clearance remains the norm, with over 90% of transactions during the reported period being cleared without being called-in. A "call in" means that the Investment Security Unit (ISU) has decided that the transaction requires further investigation; this will normally result in a delay in completing the deal (and will always do so in relation to deals subject to mandatory notifications). On the other hand, the regime captures a high number of transactions overall.
Between 1 April 2022 and 31 March 2023, 866 notifications were received. Whilst this is slightly below the Government's initial estimate of 1000-1850 per year, it is still a substantial number.
Energy and infrastructure deals appear to account for a significant proportion of overall notifications, but because of the way the figures have been set out, we have not been able to arrive at a precise figure.
As you might expect, defence and military-related acquisitions featured prominently in terms of the number of transactions called-in by the UK government. But infrastructure also features heavily, with the top 10 sectors (in terms of call-in numbers) including energy, data infrastructure and communications. Indeed, communications and energy were the second and third highest categories for the number of final orders made (behind military and dual use).
In the 2022-2023 period, 65 transactions were called in; this is broadly similar to the number of deals subject to a more formal process of scrutiny (involving, at a minimum, a Phase 1 investigation) over the course of a year by the CMA under the UK's merger control regime. The average number of days from call in to final order was 77 – which highlights the potential for significant delay in completing deals.
In practice, very few deals are blocked – only 5 were blocked or subject to a divestment order between 1 April 2022 and 31 March 2023. In most cases, security concerns are addressed by the imposition of conditions. An example of a deal which raised concerns in the infrastructure sector (but was ultimately cleared) was the proposed acquisition of development rights for the "Stonehill Project", aimed at improving the UK Power Grid's ability to use renewable energy by StoneHill Energy. The concern appears to have been that a majority shareholding in StoneHill owned by a Chinese government department (the State-Owned Assets Supervision and Administration Commission) could pose risks to the UK's critical energy infrastructure network. However, rather than blocking the deal, the Government imposed a package of remedies requiring StoneHill to obtain Government approval before appointing a power offtake operator and preventing the sharing of information from that operator to StoneHill.
To reflect its experience over the past 18 months, and recognising the high clearance rates, the Government has recently launched a Call for Evidence covering potential changes to the NSI Act regime. As part of this, Government is considering whether there are any sectors currently subject to mandatory notification that should no longer be (due to limited national security risks arising) and also, conversely, whether some of the mandatory sectors should be expanded. Infrastructure investors should note the proposals to:
The consultation will remain open for input until 15 January 2024. For more details on the NSI Act regime, see this LinkedIN post from our Competition Team and this briefing: The National Security Act: Emerging trends from the UK's first interventions.
Although ESG reporting requirements are not new, their volume has considerably increased in recent years, particularly in the UK and the EU, at both fund and corporate level. This section only focusses on requirements relevant to Infrastructure funds (see section 6 for coverage of corporate level obligations). There is a notable increase in the focus on transparency and accountability and the pace of change and expansion is set to continue, with many further developments in the pipeline. It is also worth noting that UK funds and businesses may still be impacted by EU ESG regulations. This is naturally the case where they wish to access the EU market, but the EU has also adopted measures with extraterritorial impact including, notably, the Corporate Sustainability Reporting Directive ("CSRD") (see section 6).
Under the EU's Sustainable Finance Disclosure Regulation ("SFDR") which started applying in March 2021, the managers of EU Infrastructure funds, as well as those of non-EU Infrastructure funds whose in-scope financial products are marketed into the EU, are required to make pre-contractual, website and periodic disclosures of matters around sustainability risk and objectives. Such disclosures are aimed at showing the sustainability profile of the SFDR firm's products as well as how sustainability risks and principal adverse impacts are integrated into the firm's processes at both entity and product levels.
As the industry grapples with the SFDR in its current form, we await the outcome of the European Commission's Targeted Consultation and Public Consultation on the implementation of the SFDR and its possible reform. The consultations focus on whether the SFDR is meeting its stated objectives and whether there are any issues with its implementation. For further information on this and potential changes, please see our more detailed briefing.
Closer to home, the UK has continued to chart its own course on sustainability and has sought to tailor a wide-ranging, domestic disclosure regime, based on international standards and building on the experience of the EU regime. The UK regime is still evolving, although the cornerstone has been laid and mandatory TCFD-aligned disclosures are now required for large UK asset managers.
Divergence from the EU is therefore inevitable (and, in truth, has already started). The question is, how divergent from one another, in substance, will the two regimes be when they are finalised (or, at least, more settled) and what will this mean for those firms and groups having to comply with either one or both of them in different scenarios?
In terms of significant proposals in the UK, the FCA is expected to publish its Sustainability Disclosure Requirements ("SDR") and anti-greenwashing rules for regulated financial entities before the end of this year (see a more detailed briefing here). Though not equivalent to the EU's SFDR, the disclosure requirements of SDR would similarly target improved transparency leading to better informed decision-making by investors. Unlike the current version of SFDR, SDR would also be a labelling regime, creating three categories of sustainability labels for financial products.
In the 2023 Green Finance Strategy the UK Government has also indicated its intention to align the private financial sector with its Net Zero commitment, meaning that UK regulation in the sector is expected to increase further in the coming years, both in terms of further disclosure requirements (e.g. reporting against international sustainability standards) and substantively (e.g. requirements to adopt a transition plan).
To help asset managers understand their reporting obligations under the UK TCFD and EU SFDR, we have created an online interactive ESG tool, which can be accessed here.
In addition to the fund level sustainability reporting requirements (see section 5 above), there have been many developments in relation to corporate sustainability reporting, which many infrastructure operators will be getting to grips with or should have on their radar.
Non-financial reporting obligations were first introduced in the UK in 2017 to implement the EU’s Non-Financial Reporting Directive 2014/95/EU (“NFRD”). As a result, certain organisations (including listed entities with over 500 employees) have been required for several years to include a non-financial information statement in their strategic report. This statement must contain information on the impact of the business on environmental matters, employee relations, social matters, respect for human rights and anti-bribery and corruption.
In the EU, these obligations have now been subsumed into, and expanded under, the new Corporate Social Reporting Directive ("CSRD"). CSRD will impact companies with significant EU business, requiring a detailed report on the material impacts of the business, as well as risks and opportunities to and for the business, across the spectrum of ESG topics. Any entity covered by CSRD additionally needs to prepare a report under the EU Taxonomy Regulation. By contrast, UK companies must continue to comply with the NFRD requirements under UK law (as well as complying with CSRD if they fall within its scope).
The UK is also currently considering potential options for refreshing and rationalising current reporting requirements to ensure that its non-financial reporting framework is fit for purpose.
In the UK, disclosing climate-related financial information in line with the recommendations of the Taskforce on Climate-related Financial Disclosures ("TCFD") is currently required for:
Just as we get to grips with the TCFD reporting framework, replacement reporting standards are already on the horizon. The UK has recently supported the adoption by the International Sustainability Standards Board (“ISSB”) of its first two sustainability standards (IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and S2 Climate-related Disclosures) and is already planning for integration of these Standards into UK law, with national modifications as necessary. To be known as "Sustainability Disclosure Standards", they will be mandatory for reporting by listed companies and certain FCA-regulated entities, potentially as soon as 2025. In relation to listed companies, the FCA has already published steps that companies should be considering ahead of 1 January 2025, when these standards will start to apply.
While the requirements in IFRS S2 are broadly consistent with the TCFD core recommendations and recommended disclosures, there are some differences, which are summarised by the IFRS Foundation in this comparison. Companies that apply the ISSB Standards will meet the TCFD recommendations and so do not need to apply the TCFD recommendations in addition to the ISSB Standards. For further information on the ISSB Standards and other developments in sustainability reporting in the EU and UK, see our briefing.
Following Brexit, the UK has retained legislation implementing Article 8 of the EU Energy Efficiency Directive, which is now coming up to its third reporting phase ("Phase 3"). Broadly, ESOS applies to "large undertakings" i.e. any UK company that either employs 250 or more people, or has an annual turnover in excess of £44 million and an annual balance sheet total in excess of £38 million. It requires them to measure and audit their energy use and report them to the UK's Environment Agency. The original reporting deadline of 5 December 2023 has now been extended to 5 June 2024 to allow the Government time to pass legislation making changes to the scheme.
Last year the Government announced several changes to ESOS, including the reduction of the 10% de minimis exemption to "up to 5%", the addition of an energy intensity metric in ESOS reports and a requirement for participants to set a target or action plan following the Phase 3 compliance deadline, which they will be required to report against for Phase 4. See our briefing for further details. The Environment Agency has also recently indicated that the Government will consider broadening the scope of ESOS to medium-sized companies in Phase 4 (this was considered but rejected for Phase 3).
We have recently published a full update to our interactive ESG timeline. Please refer to this for further details of recent and expected UK and EU legal and regulatory developments relating to ESG and wider sustainable business topics, many of which will be relevant to the infrastructure sector (at fund and corporate level). Please also refer to our ESG and Impact webpage for further updates and thought-leadership pieces on a wide range of relevant ESG topics.
Activity in the infrastructure and energy sectors often has significant impacts (both good and bad) on the environment and as we explain below, the risk of litigation in this area is significant.
ClientEarth's high-profile attempt to hold the directors of Shell plc to account for their company's approach to climate change in the UK courts has highlighted concerns around whether boards of UK companies are taking sufficient account of the wider environmental impacts of their decision-making and activities. Ewan McGaughey et al v. Superannuation Scheme Limited is another example of a recent attempt to bring a derivative claim against directors in the UK courts, similarly alleging failures in relation to climate change strategy. For further details of both claims, please see this earlier briefing (noting that the ultimate outcome of both was in favour of the directors).
Despite being unsuccessful, and the UK courts generally showing a reluctance to intervene with directors' decision-making, these cases have added fuel to the ongoing debate as to whether or not directors' duties and the notion of corporate purpose should be amended in English law, to take greater account of environmental risks and impacts and wider ESG factors. We share our thoughts on this issue in this recent briefing.
The principal aim behind many climate change claims may not be to "win" but to draw attention to activities that cause and contribute to climate change – litigation being just one way of achieving this. As activists continue to drive the agenda and push for novel ways to hold companies to account, it would be advisable for boards of infrastructure businesses to increase the focus on transition risks and other ESG risks and factors and to evidence careful thought-process in their decision-making and business strategy.
The idea that new projects should not only avoid harming biodiversity, but in fact positively contribute to it, represents a significant cultural shift. The Environment Act 2021 first introduced the concept of Biodiversity Net Gain (BNG), with the requirement for developers to submit and have approved (prior to commencing development) a plan showing how a 10% gain in biodiversity value will be achieved. The 10% figure is a minimum, not a cap – in practice, local standards may require a higher percentage. Embedding BNG in the planning process represents a significant step and one which will require early engagement with the LPA from pre-app stage and right through to the grant of planning permission.
The Government had originally intended to implement BNG in November 2023, but this was delayed until January 2024 for major schemes, and April 2024 for small sites. Nationally Significant Infrastructure Projects (NSIPS) are expected to be subject to a BNG requirement from 2025.
The Government has promised a raft of guidance for developers and LPAs on how BNG will operate in practice. Some guidance is already available, with the rest expected to follow at the end of November ahead of BNG becoming mandatory at the start of next year.
The delivery of BNG can range from the creation of new habitats, such as chalk grasslands or meadows through to smaller enhancements such as the installation of bee bricks and green roofs. The specific BNG requirement will be calculated by reference to Biodiversity Metric 4.0, with the delivery of BNG being secured via planning conditions and legal agreements.
There is a hierarchy of approaches through which this requirement can be met. The first preference is to do it on-site. However, recognising that some development sites may be constrained in this regard, developers will also be able to meet their BNG requirement in the following ways:
High nitrate levels in freshwater and coastal habitats can damage protected sites by encouraging the excessive growth of certain plants and algae via a process called ‘eutrophication’. This harms water quality, thereby causing die-offs of other plants and impacting on the animals and wider ecosystems linked to that water. Under the Conservation of Habitats and Species Regulations 2017 , local planning authorities are tasked with assessing the environmental impact of planning applications and local plans which may affect these protected sites. They can only approve new residential development if it can achieve ‘nutrient neutrality’. This requires mitigation of the nutrient loads within the additional wastewater and surface water which will be created by the development, for instance by creating new wetlands to strip nutrients from water or establishing buffer zones along rivers and other watercourses. Critics argue that this requirement has a significant negative impact on new developments, particularly the number of homes granted planning permission.
In August, the Government announced that it planned to introduce an amendment to the Levelling Up and Regeneration Bill that would remove this requirement in order to allow for the delivery of more than 100,000 new homes. It would then expand the Nutrient Mitigation Scheme run by Natural England, doubling investment to £280 million. However, this amendment was rejected by the House of Lords, leaving developers frustrated with the resulting uncertainty. No legislation to expand any mitigation scheme was included in the King's Speech. That left the Autumn Statement as the next opportunity for the issue to be addressed and it was there that Jeremy Hunt announced the Local Nutrient Mitigation Fund, investing £110m over the next couple of years to "deliver high quality nutrient mitigation schemes, unlocking 40,000 homes". The intention is that the funding will unlock stalled schemes by supporting LPAs to deliver schemes which offset nutrient pollution.
The Energy Act 2023 (the "Energy Act") received royal assent on 26 October 2023. It represents one of the most significant changes to the UK's energy legal landscape in recent years, including establishing a new legal obligation for Ofgem to consider net zero targets when exercising its duties and adopting a range of measures to incentivise the development of new low-carbon energy infrastructure.
The remit of the Energy Act covers a broad list of different areas of energy policy in the UK including, but not limited to, carbon capture and storage, hydrogen production and transportation, offshore wind, sustainable aviation fuel and nuclear fusion. However, in many cases the regulatory frameworks will ultimately be determined by secondary legislation.
Another area of development is the implementation of powers to enable the regulation of heat networks for the first time. As part of this, Ofgem will put in place an authorisation regime, in addition to controls relating to pricing and the quality of service provided to end users.
In setting out the future of the regulatory landscape for energy, which covers a broad selection of infrastructure sectors, the UK Government has said that its aim is to provide legal certainty to investors in order to incentivise investment. However, until such time as the relevant secondary legislation is implemented, there will be many questions concerning the long-term shape of the UK's energy framework.
That being said, the infrastructure sector undoubtedly stands to benefit from a number of significant opportunities arising from the Energy Act, particularly in relation to the increased access to finance, and it remains clear that the sector's success will be a key determining factor in the UK's Net Zero targets being achieved.
Stakeholders should pay close attention to the implementation of relevant secondary legislation over the coming months, which will provide greater clarity on the regulatory mechanisms underpinning the Energy Act. The implementation of contractual mechanisms to facilitate financing opportunities will be of particular interest to infrastructure actors, while the effects of introducing competitive tendering in the onshore energy sector may also be of relevance.
You can read our detailed briefing on the Act here.
There has been no change to the energy efficiency rules for new build properties, which will still be required to meet more demanding standards – nor have the rules for commercial properties changed. However, as regards existing properties which are rented out for residential purposes, the Government has announced that it is not proceeding with expected new requirements on private landlords to improve standards under the Minimum Energy Efficiency Standards regime ("MEES").
Since April 2020, the MEES rules have required landlords letting or continuing to let a dwelling that falls within the regime to have obtained an energy performance certificate ("EPC") for the property with a rating of E or above, unless they have registered an exemption. It had been anticipated that the next step would be that all the minimum requirements for landlords letting dwellings would shift to C by 2025. However, the Government announced on 20 September 2023 that this trajectory would no longer be pursued and the Energy Efficiency Taskforce would be disbanded. Instead, the Government indicated that it would focus on encouraging households to upgrade their property's energy efficiency where they can.
The current MEES rules remain in place, but these decisions have left the real estate sector confused and frustrated about the direction of travel. Many larger businesses have already embarked on investment and upgrade programmes intended to achieve compliance and also to fit with their own ESG criteria. Those who do not continue to upgrade their property stock's energy efficiency may find it harder to secure top-grade tenants and/or interest rates on their borrowing, and could risk their stock becoming stranded. More widely, the announcement creates uncertainty over whether the move towards mandating improvements of this type will be delayed substantially or even abandoned, which is obviously unhelpful from a longer-term investment perspective.
There may also be a wider impact from the changes, as it had been expected to drive expansion and innovation in the market for retrofit products and services for older properties, to help businesses comply with the higher standards. Finally, given that home heating is a major source of emissions, the relaxation will make it more challenging for the UK to meet its climate change targets.
The MEES regime is complex and also applies to commercial properties (as opposed to the private rented sector). For more detail, including a helpful flowchart on commercial properties, see this briefing.
Whilst the regulatory position has been somewhat weakened by changes such as the dilution of MEES rules (see also section 1), decarbonisation of heat in homes remains a key challenge on the path to net zero. In the face of scepticism from many, including the National Infrastructure Commission (which has advised against it), the Government is continuing to explore hydrogen as a possible replacement fuel for domestic boilers. Despite this, we are starting to see more innovative business models rolling out around heat pumps (to date largely in new build – but this could provide impetus for initiatives in retrofit sector, which will be the next big challenge). With the new regulatory regime coming in for district heating (see our discussion of the Energy Act 2023 in section 9), this could be another way to accelerate decarbonisation of homes.
Another important part of the wider picture in this space is the development of new approaches in electricity distribution and generation aimed primarily at households, such as National Grid's Demand Flexibility Service and initiatives to aggregate homes into "virtual power plants" (using electric vehicles (EVs), appliances, batteries, and solar arrays to support the grid).
However, whilst there is clearly much that the market can do to help drive the transition to cleaner energy in householders, regulation and Government policy has an important role to play – and as we highlighted in section 1, the changes announced in September (including the weaking of the commitment to higher standards under the MEES rules) have been much criticised for sending the wrong signals to both consumers and industry.
In February 2023, the UK competition and consumer regulator, the Competition and Markets Authority (CMA), launched a market study into housebuilding. It is now consulting on a proposal to make a market investigation reference under section 131 of the Enterprise Act 2002 in relation to the supply of new homes to consumers. We discuss this in more detail here. The CMA's final decision on the reference is due by February 2024, but their preliminary findings are that there are two main areas of concern:
In March 2023, the Government published a consultation into the design of a new infrastructure levy (IL) to be paid by developers to fund affordable housing and local facilities such as GP surgeries, transport links and schools. Seen by many as quite a radical step, there had been some doubts about whether this would be taken forward. However, the IL duly appeared in the Levelling Up and Regeneration Bill and survived the passage through both Houses of Parliament to make it into what is now the Levelling Up and Regeneration Act 2023.
IL will be a locally-set, mandatory charge levied on the final value of completed development and represents a major reform to the present system of developer contributions being secured through S106 Agreements and the Community Infrastructure Levy (CIL).
Importantly, there are only skeleton provisions in the Act – further consultation and secondary legislation are needed before the provisions come into force and the detail emerges about how the IL will work in practice.
The proposal to introduce an infrastructure levy is quite radical and represents a brave move by Government to tackle a complex issue. Sensibly, there is a recognition that such a significant overhaul will, inevitably, create some teething troubles as people grapple with its introduction. As a result, the Government will adopt a 'test and learn' approach (as opposed to 'trial and error'!), with a phased introduction over the course of a decade and a minority of LPAs being introduced to it initially.
The Building Safety Act 2022 overhauls the existing health and safety regulations for residential buildings. The following points are of particular note:
Following the recommendations of the Grenfell Tower Inquiry Phase 1 report, new fire safety rules came into effect on 23 January 2023. These impose additional fire safety duties on Responsible Persons, with criminal sanctions for non-compliance, as we discuss here. Finally, the Government has announced that residential buildings of more than 18 metres in height should be designed with a second staircase. This brings the policy in line with the recommendations of the National Fire Chiefs Council and RIBA, but it is thought that in London, plans for around 123,000 homes have been scrapped or delayed as a result of the change to the regime.
The infrastructure and energy sectors in the UK and EU import a large number of finished and semi-finished goods from around the world, including from many countries where environmental regulation is lower than in the UK and EU. Where those goods are carbon-intensive, Carbon Border Adjustment Mechanisms (CBAMs) in the EU and the UK are likely to make them more expensive over the coming years. For example, if carbon-intensive construction materials or components have been produced in a country with lower environmental standards, CBAMs are likely to require payment of an additional charge when they are imported into the EU or UK.
The EU's Carbon Border Adjustment Mechanism or CBAM entered into its transitional period on 1 October 2023. Importers of carbon-intensive goods must now meet carbon reporting obligations set out in the CBAM Implementing Regulation. From 2026, CBAM will require companies to pay a levy on the carbon emitted during the production of certain carbon-intensive goods made outside the EU when they are imported into the EU to address 'carbon-leakage'. Although in-scope companies have a few years before the obligation to purchase CBAM certificates applies, and the reporting and compliance obligation sits with the importer, energy and infrastructure actors importing significant pieces of hardware and components into the EU should:
In relation to the energy sector, it should also be noted that no distinction is made between products related to fossil fuel energy and those aimed at renewables – importing a wind turbine blade will be subject to CBAM in exactly the same way as importing parts of an oil rig tower. See our detailed briefing for more information.
Not yet – but earlier in 2023 the UK Government ran a consultation in relation to implementing a domestic UK CBAM and recent press reports suggest that the Treasury is planning to introduce a scheme in 2026, when the EU mechanism takes effect.
Sectors covered in the first phase of the EU CBAM include the following carbon-intensive raw materials/inputs: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. Other countries' CBAMs are likely to have a similar focus, but may differ somewhat in terms of their exact scope.
While the UK does have its own emissions trading system (UK ETS), data from September 2023 indicated the cost per tonne of carbon dioxide produced was trading at just over half of the value per tonne of EU equivalent. This is likely to mean that UK products will face a carbon adjustment, which could make them less attractive from an EU importer perspective.
The EU and UK are both taking steps designed to safeguard the supply of critical raw materials. These include rare earths, which are essential for products that support the green energy transition, such as batteries and the magnets in wind turbines.
The European Commission has released a draft of the 'Critical Raw Materials Act' ("CRMA"). The purpose of the CRMA is to ensure that the EU maintains access to a resilient and sustainable supply of critical and/or strategic raw materials.
Among other things, the CRMA provides for the monitoring of critical raw material supply chains and will require certain large companies to audit their supply chains. Interestingly, however, these audit requirements are less onerous than other recently implemented, and proposed, EU due diligence regulations. In particular, the CRMA only requires large companies to carry out an internal audit mapping their supply chain, assess vulnerabilities of their supply chain, and report the same to the board of the company. This is in contrast to the more onerous due diligence requirements within the EU Deforestation and Batteries Regulations.
The EU Deforestation Regulation requires third-party verification and auditing of due diligence processes and oversight by "top level management". The Batteries Regulation goes even further, requiring a fulsome diligence assessment pinpointing the exact geolocation of the plots of land where commodities were produced, details of the operator's upstream suppliers and downstream customers and reporting on request to relevant competent authorities. These due diligence obligations are part of an ongoing extension of due diligence obligations across the EU, which include a Draft Regulation on Products Made with Forced Labour, and the anticipated Corporate Sustainability Due Diligence Directive ("CS3D") (see our briefing). The anticipated impact of these developments should not be underestimated, with companies around the world pulled in either directly or as part of an in-scope company's wider value chain.
Additionally, the CRMA would introduce a suite of EU-wide objectives designed to boost the resilience and circular economy credentials of the EU's supply chain. These measures include easier access to finance, significantly shorter permitting times for 'Strategic Projects' (which are projects that further the objectives of the CRMA) and an initiative to create an international Critical Raw Materials Club to act as a nexus for strategic third country partnerships. For more information, see our briefing on the CRMA.
In July 2022, the UK Government published its own Critical Minerals Strategy, which includes a framework for accelerating the UK's domestic production of critical materials. The framework includes provisions helping to categorise what materials are considered to be critical in the UK, signposting Governmental financial support, reducing barriers to domestic exploration and extraction of materials, and increasing foreign direct investment into the UK's minerals sector. It is yet to be seen whether the UK Government will enshrine this strategy in law through the implementation of new legislation.
With substantial fines for breaching competition law, it's not surprising that many businesses are cautious about working with competitors. However, in its recently finalised Green Agreements Guidance, the UK Competition and Markets Authority (CMA) makes it clear that competition law should not prove a barrier to legitimate green collaborations between competitors. This is helpful news for the infrastructure sector because it should allow for greater burden sharing when it comes to the costs of transitioning to a cleaner, greener approach. So what does the Guidance say about what's permitted and what isn't?
Helpfully, the CMA provides a range of examples of Green Agreements which are unlikely to infringe competition law and will not be prioritised for review. These include:
Where collaborations fall outside these safe categories, the CMA's approach will depend in part on the type of arrangement at play. In another helpful move, the CMA's most permissive approach is reserved for a sub-set of green agreements – namely 'Climate Change Agreements' – which specifically combat climate change by, e.g., reducing the impact of greenhouses gases produced by the relevant firms' activities. However, the Guidance warns that the CMA is likely to take enforcement action against "sham" arrangements which use green objectives as a "smokescreen" to allow broader, anticompetitive information exchanges and collaborations to take place.
For asset owners, managers, pension funds and other financial services firms, of particular interest will be the CMA's new confirmation that agreements between shareholders to vote in support of corporate policies that pursue green goals (or against policies that do not) will be unlikely to infringe competition law, assuming that the relevant corporate changes lobbied for are themselves in line with the CMA's green guidance.
In circumstances where, as was seen in the US in particular, financial industry groups pursuing ESG goals (e.g., NZAM and Climate Action 100+) have been subject to allegations that their objectives and membership criteria breach antitrust laws, this extra guidance is welcome.
However, caution does still need to be exercised when signing up to industry-wide pledges which include specific commitments to withhold custom, services or investment from non-sustainable firms. The Guidance confirms that such Green Agreements are unlikely to be treated as a 'by object' offence – i.e., akin to cartel conduct and illegal by their very nature - but clarifies that the anticompetitive effects of such 'collective withdrawal' agreements (and their benefits) will likely need to be assessed before getting comfortable. Further, the risk of a private challenge (in the UK or abroad) remains.
Finally, the CMA has made it clear that when it comes to providing informal comfort on potential green collaborations, it has an 'open-door policy' and is "determined to help businesses" to achieve their green objectives. Informal advice from the CMA is often helpful with more novel arrangements, so this is a very welcome commitment. That said, it should not be assumed that obtaining such guidance will necessarily be straightforward – especially when the CMA is being asked to look at something new.
To get full protection from enforcement action and fines, the CMA requires parties to jump through various hoops, including conducting an initial self-assessment, complying with any CMA recommendations and keeping their agreements under review. However, even without going through the informal advice process, the CMA has indicated that it will not pursue enforcement action against agreements which comply with the principles of the green guidance.
For more information, see our detailed briefing on the UK CMA Green Agreements Guidance.
