Infrastructure Spotlight – Summer 2024

Labour's plans for energy and infrastructure: Net gain or net zero?

The UK is now entering a new period of leadership under a significant Labour majority, which has not held power in the UK since 2010. The new Government will remain bound by the UK's climate commitments (in domestic and international law) and its fiscal restraints in a challenging socio-economic environment. It will also inherit recent policy foundations, including the recent Energy Act 2023, which had relatively strong bipartisan support. In that vein, it is tempting to see Labour's likely policy on energy, infrastructure and the UK's wider net zero ambitions as 'more of the same'. However, a closer look does offer some hope of (net) gain. 

Reading between the lines of Labour's Manifesto

As part of its 2024 Manifesto (the "Manifesto"), the Labour Party made some strong statements around the importance of the UK's net zero obligations, in addition to overhauling and regenerating the UK's crumbling infrastructure, all in line with the new Prime Minister's vision of making the UK a "clean energy superpower". What exactly that will look like in practice remains to be seen and may largely depend on economic conditions over the coming Parliament. At its core, Labour has promised to "shape markets, and use public investment to crowd in private funding", centred on a new Green Prosperity Plan in partnership with businesses and with a stated goal of creating 650,000 jobs across the UK by 2030.

Great British Energy, but just how Great remains to be seen

Although Great British Energy ("GBE") had been announced prior to the election, the proposal to set up a new entity to provide the UK with energy security and make it a "world leader in floating offshore wind, nuclear power, and hydrogen", also formed a key part of the Manifesto.

The intention behind GBE is that it will be a publicly owned investment platform (working alongside private partners) that will apparently manage and co-invest in green technologies and capital-intensive projects and enable the deployment of local energy production.

It is also notable that GBE has been pitched to  voters as also lowering household bills and creating jobs – signalling that the new Government is aware of the political risk associated with the perceived cost of the energy transition. Labour has stated that GBE will be funded with £8.3bn over the course of Parliament – with £1.7bn coming from an extension to the existing windfall tax on energy companies, which is discussed in further detail below.

As it stands, there is still limited information available on how GBE will work. It is not clear whether it will become a UK version of major government-owned energy companies seen elsewhere (think EDF in France) or will be more of a continuation of the government-backed investment vehicles seen under previous UK administrations (such as the UK Infrastructure Bank or Green Investment Bank), whose investment profiles have tended to be minority and tightly defined. However, if properly funded and resourced, it could form an important part of the UK's energy strategy in the coming years, particularly if it is able to attract significant private investment. Which brings us to the National Wealth Fund.

National Wealth Fund and the focus on mobilising private capital

In addition to GBE, as part of its Green Prosperity Plan Labour also plans to establish a National Wealth Fund to invest in industries of the future (e.g. renewable energy, decarbonising steel production and battery manufacturing). This fund would be given £7.3bn by Labour to invest, with a target of attracting £3 of private investment for every £1 of public money. One of the main proposed beneficiaries of the fund is British ports, which are set to receive £1.8bn. This money would be used to upgrade ports around the UK and develop the energy industry on the coast – such as the deployment of offshore windfarms.

Labour has also stated that it plans to use the fund to accelerate carbon capture technologies and the manufacturing of green hydrogen. As discussed in Section 2 (What does the Energy Act 2023 mean for infrastructure?), it is anticipated this will also be achieved through a continuation of the demand support mechanisms established under the Energy Act 2023 – a regime which reflected the previous government's focus on mobilising private capital, and which appears likely to continue in the new regime.

Oil and Gas – out with the new, stick with the old

Despite the emphasis on 'green' energy, Labour has emphasised that it will not be rushing to "turn the pipes off" for oil and gas, and an orderly transition remains the goal. Although Labour has promised not to issue any new North Sea exploration licences, it has confirmed that it would honour existing licences and work with businesses to manage existing oil fields for the duration of their lifespans. The Manifesto also contained a commitment to not grant new coal licences and to ban fracking.

It has been estimated that these measures will raise an extra £1.2bn per year. This extra revenue is part of Labour's plan for funding GBE and investment into net zero projects. However there has been some criticism, particularly by the Scottish National Party, who have said that it would result in 100,000 job losses. This is another example of where Labour will have to navigate competing narratives around energy and job security, and differentiated impacts across the nations, with their wider green agenda.

Planning and Grid – perhaps the greatest near-term opportunity to unlock investment

Delays (and cost) in getting grid capacity and planning consent for energy and infrastructure projects have proven a major obstacle to scaling investment and development, particularly in recent years.

A clear example of the UK's planning regime being a bar to entry for infrastructure is the fact that relatively limited onshore wind capacity has come online since the planning system was used to bring in a de facto ban on onshore windfarms. Labour has already announced that it has amended the UK's National Planning Policy Framework to remove two tests that historically have been used to stop or delay certain onshore developments –a change that took effect from the 8 July 2024.

Whilst this change may cause a backlash if communities feel that their concerns are not being listened to, Labour plans to build support for each development by ensuring the community will directly benefit from them. Labour's overall objective is to double onshore wind, triple solar panels and quadruple offshore wind by 2030. The removal of these restrictions is something that Labour pledged to put into action within weeks of coming into power – so this provides an early indication of Labour's commitment to reform in this area.

In addition to planning, Labour's Manifesto also highlights awareness of the barrier posed by grid capacity constraints – which again formed a key part of the previous administration's Energy Act 2023. For further details, please see Section 2 (What does the Energy Act 2023 mean for infrastructure?). To that extent, Labour has also vowed to invest in the grid so that it can meet current demands and cope with the expansion of green energy.

Transport – an overhaul of rail and acceleration of EV

In addition to the above, Labour's manifesto proposes a "long-term strategy for transport". In terms of rail, Labour wants to overhaul the current system and deliver a unified rail system that focuses on reliable, affordable, high-quality and efficient services. To make this happen, Labour plans on establishing a new entity called Great British Railways ("GBR") and bringing certain operations into public ownership when current contracts with private operators come to an end or are terminated for poor performance.

The party also wants to accelerate the roll out of electric vehicle charging ports and re-introduce the 2030 phase-out date for new cars with internal combustion engines. For further details, please see Section 7 (EV charging infrastructure in the UK: the current state of play).

A time of opportunity?

As with any Manifesto, Labour has made some big promises on revitalising energy and infrastructure in the UK. With limited information being available at this stage, other than what is in the Manifesto, it is not currently clear how effective these policies will be at attracting investment and innovation to these sectors.

That said, should there be a period of greater political and economic stability and if these policies are acted on and properly implemented, there is clear opportunity for significant infrastructure investment in the UK in the coming years.  There seems little doubt that this will be required if the UK is to meet its climate goals.

The UK's Energy Act 2023 was passed into law in late 2023 under the stewardship of the previous Conservative government.  Despite the importance of the legislation – it was hailed at the time by Ofgem as the most significant and wide-ranging piece of energy legislation in over a decade – it perhaps received relatively little attention. That may in part be because many of its measures were focused on laying foundations for a more streamlined and less risky environment for private capital to be deployed, as opposed to more attention-grabbing large-scale subsidies or similar government interventions. As we reflect on the 4 July election results, the question is now (as with energy and infrastructure more generally, discussed above) whether the Energy Act's approach will be continued by the new Labour administration and if it will still be sufficient to help in achieving the aim of a decarbonised and de-globalised UK energy system.

The Energy Act 2023 is very much a 'framework' piece of legislation. This means it establishes in law the principles and outcomes in each of these areas; but leaves it to the government of the day to prepare the detailed secondary legislation which establishes how these new measures will actually work. As such, the new Labour administration in effect will be putting the flesh on the bones established by the prior Conservative regime. This may be less disruptive than it sounds. We understand that the Energy Act was prepared via a relatively collaborative process between the two parties, and it was broadly supported by Labour through the legislative process (with no Labour MPs voting against it on the final reading). We also note that the key dynamics that underpinned the policy rationale for the legislation – legally binding net zero targets, lack of public funds meaning a private capital solution was required, a need to streamline consenting processes – remain unchanged. Therefore, we do not expect a radical departure by the new Labour administration from the overall approach established by its predecessor's Energy Act.

A ruling from the New Zealand Supreme Court has been attracting attention well beyond that particular corner of the Southern Hemisphere because of its potential impact on novel climate change claims in other common law jurisdictions, such as the UK.  Infrastructure owners and operators should take note because the case may influence the approach of courts elsewhere – and may encourage the growth of private litigation.

Courts vs regulators

The ruling is also significant because of what the court had to say about the relationship between regulators and the courts. One school of thought – which was accepted by the NZ Court of Appeal – is that climate change is primarily a matter for expert statutory regulators, not the courts, which should not seek to impose themselves by effectively setting up a rival scheme of regulation. However, the NZ Supreme Court took the view that even an extensive scheme of regulation is likely to leave gaps and problems for other legal processes to address.  Indeed, regulators are usually focussed on imposing penalties for breach which will hopefully act as a deterrent in future; they do not normally see their role as being to secure compensation for parties which have suffered damage as a result of breaches of environmental law.  Court proceedings to obtain damages for environmental harm should therefore be seen as complementary to, rather than at odds with, most environmental regulatory schemes.

For more detail, see our briefing: New Zealand Supreme Court releases Smith v Fonterra & Ors decision on novel climate change claims

Corporate sustainability due diligence and reporting laws continue to move forward at pace, with infrastructure operators and developers likely to be impacted either directly or indirectly.

Sustainability reporting: UK and EU

The UK's non-financial reporting framework mandates ESG and climate-related reporting requirements on some of the largest UK companies, including certain regulated, listed or large entities with over 500 employees. Less detailed ESG reporting requirements continue to apply to other "large" UK companies (such as the requirement to prepare a s.172(1) statement). In the EU, the new Corporate Sustainability Reporting Directive ("CSRD") is now in force – impacting both EU and non-EU companies (including some UK companies) with significant EU business. Under the CSRD, reporting companies must prepare a detailed report on the material impacts, risks and opportunities of the business across the spectrum of ESG topics.  Any entity covered by CSRD additionally needs to prepare a report under the EU Taxonomy Regulation.

EU Corporate Sustainability Due Diligence Directive

After significant political turmoil the EU’s Corporate Sustainability Due Diligence Directive ("CS3D") was adopted in May 2024 and is now due to come into force on 25 July 2024. CS3D will impose a due diligence duty on in-scope large companies based in or operating in the European Union, requiring that they take steps to identify, prevent and mitigate human rights and environmental impacts connected with their own operations, those of their subsidiaries and in their chain of activities.

With potentially very large, turnover-based fines for failure to comply, a specific right for persons adversely affected by a failure to discharge the duty to bring civil claims, and extra-territorial scope expanding to non-EU companies with significant business in the EU, this is set to significantly impact the traditional boundaries of legal and operational risk and as such is already being factored into supply chain and compliance planning – particularly for those actors involved in large, complex infrastructure value chains.

What's in a name? The UK anti-greenwashing rule

On 31 May 2024, the UK's new "anti-greenwashing" rule and associated non-handbook guidance came into force; the rule aims to regulate the marketing of funds using terminology or claims which relate to the environmental or social characteristics of the relevant investments.  The critical point is that firms must have a sound evidential basis showing that any claims they make in relation to the sustainability characteristics of their funds are:

• consistent with the actual sustainability characteristics of those funds; and 
  
  
• generally fair, clear and not misleading.

As we explain in our briefing, the UK has adopted a flexible, principles-based approach (consistent with its approach in many other areas of financial regulation). Whilst this avoids being overly prescriptive, it puts a potentially heavy burden on firms to document how their communications and marketing complies with the new rule. This is part of a wider package of measures that will start coming into force in December 2024.

Greenwashing and fund names: EU developments

Meanwhile, in the EU, final guidelines have been published on fund names using ESG or sustainability-related terms such "sustainability", "green", "climate", "environmental", "impact" and "transition".  These guidelines will apply three months after the date of their publication on the European Securities Market Association's website in all EU official languages (subject to a further grace period of six months for pre-existing funds). Broadly speaking, ESMA defines three categories of ESG or sustainability-related terms. In-scope funds across all three categories will need to be able to demonstrate that at least 80% of their investments meet environmental/social characteristics or sustainable investment objectives in accordance with the binding elements of the fund's investment strategy; other requirements will apply on a calibrated basis depending on which category of term is relevant.

Other developments

Other developments on regulation of funds focussing on sustainable investment in infrastructure and energy transition include:

• The publication by ESMA of its final report on greenwashing, setting out its recommendations on supervising asset managers;
  
  
• The EU's summary report setting out industry views in response to its SFDR review;
  
  
• The Joint ESAs Opinion on the assessment of the Sustainable Finance Disclosure Regulation.

The new Labour Government has made it clear that housing is one of its key priorities – so what can we expect to see over the next few years? 

The party's manifesto commits it to facilitating the construction of 1.5 million new homes over the next Parliament, together with "a new generation of new towns" (although no specific targets appear to be attached to this). Although the UK's planning regime is a crucial vehicle for the protection of neighbourhood amenities and the environment, there is widespread recognition that some aspects of the current framework present a significant barrier to new development (including housing).  Against this background, Labour states that it "will not be afraid to make full use of intervention powers to build the houses we need" and promises to:

• "immediately" amend the National Policy Planning Framework and restore mandatory housing targets;
   
• strengthen the presumption in favour of sustainable development; 
  
  
• fund 300 additional planning officers (through a stamp duty surcharge to be paid by non-UK residents); 
  
  
• adopt a more permissive approach to development in green belt, focussing on release of so-called "grey belt" land (but it is unclear how this will be defined);
  
  
• require local government to update Local Plans and introduce new mechanisms to coordinate strategic planning between different areas;
  
  
• reform compulsory purchase compensation to facilitate land assembly; and
  
  
• strengthen planning obligations to "ensure new developments provide more affordable homes"

Travers Smith partner Jamie McKie commented:

Reform of private rented sector

Investors with an interest in new housing for rent should note the following manifesto commitments, which would go further than the recently enacted Leasehold and Freehold Reform Act 2024:

• enactment of Law Commission package of reforms on leasehold enfranchisement, right to manage and commonhold 
  
  
• "immediate" abolition of section 21 "no fault" evictions
  
  
• enhanced protection against discrimination and unreasonable rent increases
  
  
• improved standards on building safety

Whilst the previous Government had also tabled a Bill to reform the private rented sector, this failed to complete its passage through Parliament before the election.  The new Government will therefore have to "go back to square one" in terms of legislating for the above changes.  That said, the fact that civil servants have recently done a significant amount of work on reform of this area may help to speed up the process of tabling a revised Bill in this area.  The previous Government had planned to delay the abolition of the section 21 method of obtaining vacant possession of a dwelling until such time as the courts had the capacity to deal with the greatly increased caseload that would be generated by this change to the law. It is not known how the new Labour Government would square this circle.

Spring Budget: key measures relevant to housing

Lastly, the Spring Budget contained a number of measures relevant to housing, including from 6 April 2024, a reduction in CGT from 28% to 24% for residential property gains. 

As regards the reduction in CGT, Labour indicated during the election campaign that it had "no plans" to increase rates of CGT.  On the other hand, this was not a manifesto pledge and "no plans" would not preclude the development of plans, now that it is in Government. For more detail on these measures, see our briefing.

In February 2024, the House of Lords Committee on the Environment and Climate Change (the Committee) suggested that the UK's electric vehicle (EV) strategy – including its public charging infrastructure – needed a "rapid recharge".  Is the Committee right to be worried.

Where are we now?

According to ZapMap.com, the UK currently has about 64,000 public charging points, of which about 12,500 are rapid charging points. The latter can typically charge an EV battery to 80% capacity in under 30 minutes and have seen the biggest increase in installations (up by 45% on the previous year, albeit from a much lower base); other chargers usually require the EV to be hooked up for considerably longer (at the slower end 6-12 hours). If current growth rates (of about 35% per year) continue, the Government expects its target of 300,000 by 2030 to be met.  ZapMap provides a more detailed breakdown here.

Is the current target too low?

The Committee didn't reach a firm conclusion on this – but noted that the Government's own analysis conceded that up to 700,000 might be necessary to meet demand.  By way of comparison, it also noted that the Netherlands (with a population of about 17 million, as opposed to the UK's 66 million) has already reached 500,000; its target is 1.7 million by 2030.  One possible reason for that difference in approach is that the Netherlands is very densely populated and it may be that fewer households have driveways allowing them to install their own private, domestic charging points. However, it is estimated that 25-40% of UK households have a similar issue, particularly in densely populated urban areas, such as London – making them similarly reliant on public charging points.

Is the roll-out fast enough?

The Committee also noted that the ratio of charging points to EVs is worsening – meaning that there may not be enough to meet demand. This highlights a key dilemma for investors, which is that EV charging infrastructure will only make money if the number of EVs increases – but consumers will only have the confidence to purchase EVs if they feel that the public charging infrastructure is sufficient to meet their needs (not just in the area where they live but also regionally and nationally for the purposes of longer journeys).

Ideally, therefore, installation of charging infrastructure needs to run ahead of demand. The problem is that demand is affected by numerous external factors, including the UK Government's recent decision to push back the ban on sale of new petrol and diesel vehicles from 2030 to 2035 – which was greeted with dismay by many industry participants, as we highlighted in the last edition of Infrastructure Spotlight. This uncertainty may mean factoring in an initial period during which returns may well be somewhat lower than would be expected in, say, a more mature market where demand was more predictable. 

Having said all that, the overall direction of travel is clearly away from petrol and diesel vehicles – indeed, as things stand, legislation requires over 80% of new vehicles sold by 2030 to be zero emissions and, prior to the election, the Labour Party stated that it wished to restore the ban on new internal combustion engine cars by 2030.  Over the longer term therefore, investors should be able to have a fair degree of confidence that they will see a reasonable return on investments in charging infrastructure.

Is "destination charging" the way forward?

"Destination charging" is a term used to describe charging points at locations where a driver typically stops for 20 minutes or more, such as supermarkets, hotel and leisure facilities, workplaces or commercial car parks.  There is a widespread consensus that this presents a valuable area of opportunity, both for investors in charging infrastructure (because the sites are likely to be attractive to EV owners) and owners of suitable sites (which stand to gain a new revenue stream) thus avoiding the need for subsidies such as the LEVI Fund. Nevertheless, despite these commercial incentives, there remain a number of obstacles – for example, issues around planning rules and fire safety can sometimes cause problems with development of destination charging sites (as well as installations in other locations).  If – as noted above – the Government is keen to minimise the extent to which it has to subsidise charging points, it needs to ensure that, wherever possible, obstacles such as these are minimised.

The importance of reliability

Surveys suggest that EV drivers' number one concern is the reliability of charging infrastructure. Investors and operators should note that the Public Charge Point Regulations 2023 introduce a requirement for 99% reliability for rapid charging points; failure to meet this could result in fines from the Office for Product Safety and Standards. Operators should therefore ensure that they have robust arrangements with their suppliers to remedy any reliability problems quickly and facilitate recovery of financial loss.

The fact that so many complex variables are involved highlights the need for the Government to play an active role in monitoring progress and taking action where it can, to address obstacles to progress.  As regards potential new subsidies, it remains to be seen whether public funds can be found for these – but if so, there is arguably a stronger case for directing subsidies towards EV ownership, rather than charging points. This is because, following several years of growth, EVs appear to be struggling to get above the 20-25% level for new car registrations – whereas with charging points, the recent picture on growth is somewhat more positive (see above).

The last Labour Government encouraged extensive use of partnerships with the private sector to build new public infrastructure, ranging from hospitals, schools, further education colleges, prisons, courts, libraries and leisure centres through to parts of the road network, street lighting and waste management. These were known as Private Finance Initiative or PFI deals.  The newly elected Labour administration would appear to be less keen on this type of approach – but as many of the PFI contracts were very long term, it will still have to contend with the expiry of a significant number of PFI deals on its watch.  We look at the risks and opportunities that this presents for investors and operators in this area.

How many PFI deals are due to expire and when?

According to the Infrastructure and Projects Authority PFI Dashboard, there are over 650 PFI deals still in operation, with a total capital value of over £52 billion – and the majority are due to expire in the next 15 years.  Whilst the timescales here may seem relatively long term, the Government is advising public authorities to start planning for expiry 5-7 years ahead of the actual end date.

In the run-up to expiry, public authorities are likely to focus on two issues:

• ensuring that the assets are handed back in good condition (unless they have reached the end of their useful life); and
  
  
• working out what will replace the current operation and maintenance arrangements e.g. whether to continue to outsource (but on different terms) or to take the relevant services back in-house.

Risks for PFI owners/operators

Historically, there has generally been a recognition that PFI deals only work if there is willingness on both sides to show a reasonable degree of goodwill and flexibility. As a result, many have relied heavily on cordial relationships between the parties coupled, in some cases, with a relatively relaxed approach to contract management.  However, a 2023 report commissioned by the Infrastructure and Planning Authority (known as the White Fraiser report) notes that some public authorities are adopting a more rigorous and, at times, aggressive approach. 

Why the more rigorous/aggressive approach?

There would appear to be a number of factors driving this change in approach:

• a legitimate concern to ensure that the relevant assets are handed back in as a good a condition as possible – the aim being to ensure that the PFI owner/operator carries out all specified maintenance/upgrades prior to expiry;
  
  
• a general desire to save money, against the background of public spending cuts; for example, there have been suggestions that in some cases, public authorities are complaining about failures to comply with specifications that are no longer needed, primarily to obtain deductions from the unitary fee payable to the PFI owners/operators;
  
  
• the fact that in some cases, the fee decreases towards expiry, which may undermine the commercial incentives for the PFI owners/operators, leading in some cases to under-performance; and
  
  
• a desire to make changes to the assets to meet the changing needs of service users or achieve net zero targets (although much depends on the drafting of the PFI contract and in many cases, changes of this type may be outside its scope).

Some PFI owners/operators have also expressed the view that they are being held to a higher standard than public authorities typically are for e.g. maintenance of their own infrastructure – and that this is unreasonable. However, the report notes that one of the original aims of PFI was to maintain assets to a higher standard than was normally the case in the public sector; as a result, it suggests that this is not a legitimate justification for failure to meet performance specifications.

Opportunities

Although PFI expiry presents certain risks, there are also opportunities for private sector providers. In particular, public authorities may not have the appropriate knowledge or resources to take the entire PFI deal back in-house. PFI owners/operators may be able to leverage their existing knowledge and relationships with subcontractors to offer replacement deals.  These could include the following:

In many instances, public authorities may decide to run a competitive tender process (and may often be required to do so under public procurement rules).  This means that there are also likely to be opportunities for investors and operators which have not been involved in the relevant PFI deal before. 

As we explained in section 8 of our last edition of Infrastructure Spotlight, Biodiversity Net Gain (BNG) is an important new requirement that developers must meet in order to obtain planning permission (broadly, they are required to demonstrate that the development will make a positive contribution to biodiversity of at least 10%). We recently published a briefing on this key topic which seeks to answer many of the most frequently asked questions about this complex topic, including the following:

HMRC have published a Revenue & Customs brief outlining a change in the VAT treatment of voluntary carbon credits (VCCs).

What are voluntary carbon credits?

VCCs allow businesses to offset their emissions by purchasing carbon credits produced by programmes targeted at removing or reducing greenhouse gases from the atmosphere.  Each credit can be used to compensate for the emission of one tonne of carbon dioxide or equivalent greenhouse gases. These carbon credits are “voluntary” in the sense that the use of carbon credits to reduce emissions is not legally required or regulated.

Future VAT treatment: a more complex picture

From 1 September 2024, sales of VCCs which take place in the UK will be capable of being taxable supplies.  HMRC have stated that this change is a result of significant changes in the VCC market, including the emergence of secondary market trading and businesses incorporating VCCs into their onward supplies. However, not all supplies of VCCs will be taxable supplies (i.e. within the scope of VAT).  For example, holding a VCC as an investment does not constitute an "economic activity" so will continue to be treated as outside the scope of VAT.  Sales of VCC by self-assessed projects with no independent verification will also be outside the scope of VAT.

HMRC have also updated their internal manuals, outlining factors that could be considered when assessing whether a supply of a VCC is a taxable supply or outside the scope of VAT.  The existence of a tradeable instrument, a quantifiable reduction in greenhouse gases and independent verification and registration of the unit are all pointers towards a taxable supply.

From 1 September 2024, trades in VCCs will be brought within the scope of the VAT Terminal Markets Order (TMO).  The TMO provides for the zero rating (VAT charged at 0%) of certain commodity transactions on named commodity exchanges or “terminal markets”.