Market view: the effect of Brexit on EU state aid rules

On 23 June, UK voters decided in their majority that the country should leave the EU. The government has accepted this verdict and is in the process of formulating its policy on the type of post-Brexit relationship that it would seek to negotiate with the EU.

For the moment nothing has changed: the UK remains an EU member and as such it continues to have an obligation to comply with EU law. The extent to which the UK might be able to disregard EU law requirements will depend on the type of post-Brexit relationship that the UK and the EU will agree.

Of particular relevance to the energy sector is the fact that under certain Brexit scenarios, the government’s ability to grant subsidies might increase.

Currently, EU state aid rules impose important restrictions on the ability of EU member states to grant aid which favours certain businesses at the expense of others. However, not all state aid measures are prohibited as EU law recognises that certain circumstances justify state intervention and the grant of aid. In line with this, EU member states are required to notify proposed aid measures to the European Commission before implementation, so that it can determine the extent to which a measure might be compatible with EU law.

UK renewable energy subsidies, such as Renewables Obligation Certificates, Feed-in Tariffs (FIT) and Contracts for Difference, have all been subject to European Commission notification and state aid approval, as have the government’s proposed subsidies in relation to the Hinkley Point nuclear power station.

Post-Brexit it is almost certain that the need for compliance with EU state aid rules will continue in circumstances where the UK continues to have full access to the EU “single market” – a market where there is freedom of movement for goods, services, capital and persons. The effects of other scenarios are less clear. If access to the single market is limited only to certain economic sectors, then compliance with EU legislation (including state aid rules) might be necessary only in relation to those sectors.

In circumstances where the UK does not have access to the single market (or in any event, to the aspects of the single market which relate to energy), then EU state aid rules are unlikely to continue to apply to the energy sector. This does not mean that the UK would be unrestricted in its ability to subsidise energy companies. This is due to WTO commitments, including specific anti-subsidy obligations which arise under the Agreement on Subsidies and Countervailing Measures (ASCM).

At the same time, it is true that WTO rules on subsidies are, in practice, less strict than the EU state aid rules. This despite the fact that the definition of what constitutes a subsidy under WTO rules is wider than the equivalent definition of state aid under EU law and the fact that unlike EU state aid rules, WTO rules do not currently provide for any form of subsidy exemptions. And yet, as suggested above, WTO rules alone, might make the grant of Government support easier, not only as a result of the absence of any pre-notification requirements, but also because other than in relation to certain specific types of subsidies which are prohibited due to their nature, all other forms of subsidies are only “actionable” where these have caused (demonstrable) adverse effects on the interests of Member(s) seeking to challenge that subsidy.

Demonstrating such adverse effects as a result of subsidies to the renewable or even, nuclear energy sector, would seem more difficult than under EU state aid rules where the requirement for subsidies to have an effect on intra-EU trade is interpreted broadly.

Indeed, in a WTO context, even the question of whether specific subsidies lead to conferring a benefit on the recipient – which is an important element of the definition of a prohibited or “actionable” subsidy, broadly equivalent to the concept of “selective advantage” under EU State aid law – has proven difficult to establish, at least in relation to renewables.

For example, in 2013 the EU and Japan were successful in challenging under WTO rules Canada’s (Ontario’s) FIT arrangements which made such subsidies conditional on the purchase of local goods and services. However, the challengers failed in their attempt to demonstrate that the FIT itself constituted a subsidy because of insufficient evidence that the measure conferred a benefit to recipients.

Of course, even if there might be greater flexibility for granting Government subsidies post-Brexit, it is an entirely different question as to whether the government would consider it appropriate to make use of such greater flexibility in the context of the energy sector.