Infrastructure Spotlight – Autumn 2023

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.

What changes did the Government announce in September?

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.

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).

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 £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:

• Projects in the North: £19.8 billion
  
  
• Projects in the Midlands: £9.6 billion
  
  
• National projects: £6.5 billion

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). 

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.

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:

• Infrastructure planning:  the Government will implement key recommendations from a National Infrastructure Commission study published in April 2023 (although it has not fully adopted the Commission's suggestions on environmental assessments).
  
  
• Pay, more – get planning consent faster?  to help "bust the planning backlog", a new "premium planning service" will be introduced, with guaranteed accelerated decision dates for "major business planning applications" (and fee refunds when these are not met).
  
  
• Business expensing/capital allowances:  full expensing of qualifying capital expenditure will be made permanent  (see section 1 of our detailed briefing on the Autumn Statement  for further explanation).  Whilst this will apply across all sectors, the infrastructure and energy sectors stand to benefit more than some because of their significant capital expenditure.
  
  
• Pension fund reform:  the Government provided some more information on plans announced in the Chancellor's Mansion House speech from July 2023 to help pension schemes invest in a more diverse range of assets.  It is hoped that this will encourage greater investment in illiquid, long-term assets, including UK infrastructure. 
  
  
• Investment zones: 3 more Investment Zones will be created (Greater Manchester, West Midlands and East Midlands) to add to the 3 areas already announced (Liverpool, West Yorkshire and South Yorkshire).  A further 6 are expected to be created in due course.  These will benefit from significant tax breaks similar to some of those available in freeports (where the window for claiming tax reliefs will now be extended from 5 to 10 years).

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?

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.

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.

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:

• expand the scope of the Communications category by reducing the minimum turnover threshold for public electronic communications networks or services below the current £50m cut-off;
  
  
• expand the scope of the Data Infrastructure category to bring within scope entities that own, operate, manage, or provide services to, colocation data centres; and
  
  
• to update the Energy category to include multi-purpose interconnectors over time (to reflect changes made by the Energy Act – see section 9 below).

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).

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 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.

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.

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 v Shell plc:  are directors doing enough to address ESG issues?

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 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 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:

• achieving the required gain on an alternative site for a duration of at least 30 years; or
  
  
• as a "last resort", purchasing what will be known as ‘biodiversity credits’, when the system has been set up.

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.

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. 

You can read our detailed briefing on the Act here.

In this section, we look at changes to some of the energy efficiency rules for buildings, together with the wider picture on the transition to cleaner energy for domestic properties in the UK.

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 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.

The bigger picture

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.  

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.

The Building Safety Act 2022 overhauls the existing health and safety regulations for residential buildings. The following points are of particular note: 

• New Building Safety Levy:  the Act imposes a new building safety levy (sometimes referred to as the "Gateway 2 Levy").  This is payable by developers of new residential buildings in England that are 18 metres or more in height or at least seven storeys tall (unless excluded).  The levy must be paid during the pre-construction stage. 
  
  
• New register of higher-risk buildings:  Occupied higher-risk buildings (or those that could be occupied) must be registered with the Building Safety Regulator ("BSR") by 1 October 2023, and it is an offence to allow residents to occupy an unregistered building after this date.  When new higher risk buildings are completed after 1 October 2023, they must be registered before residents can occupy them.  To find out more about this obligation, including what counts as a higher risk building and the process for registration, read our briefing here. If you would like help with registering relevant buildings with the BSR, or with ongoing compliance, please contact our head of Construction and Engineering, Ed Colclough.

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.

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.

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?

Non-problematic agreements

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:

• databases to pool the green credentials of suppliers – provided that there is no commitment to (not) purchase from certain suppliers;
   
• collaborations which are designed to ensure compliance with UK law – provided participants can exceed those legal requirements;
  
  
• industry codes of conduct and targets – provided that these are open, transparent, allow participants to decide how to meet or exceed those standards etc. (specific guidance applies to more integrated industry standardisation.); and
  
  
• joint R&D relating to environmental improvements which firms would be unlikely to pursue on their own due to the level of risk involved or the investment required. 

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.   

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. 

For more information, see our detailed briefing on the UK CMA Green Agreements Guidance.