Funding Options for Energy Infrastructures in the Energy & Utilities Sector - Part 5: Financing Energy Projects
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As the UK navigates the complexities of Brexit, one sector that has felt the ripple effects is the Energy & Utilities sector. Part 5 of our Brexit series delves into the implications of State aid and EU initiatives in energy infrastructure investments.
The UK's departure from the EU has resulted in a loss of direct access to EU energy infrastructure investment initiatives such as the European Fund for Strategic Investments (EFSI) and Projects of Common Interest (PCI). These EU-driven programs, typically limited to member states or closely associated countries, are crucial for funding and supporting strategic investments in Europe’s energy infrastructure.
The EFSI, launched by the EIB Group and the European Commission, aims to make available more than €500 billion by 2020. Post-Brexit, the UK is no longer automatically eligible for EFSI funding streams, reducing access to this significant source of capital. Similarly, PCI designation, an EU mechanism to finance cross-border energy infrastructure projects, excludes UK projects from EU PCI processes, limiting their eligibility for streamlined permitting or EU financial support under this framework.
The UK government, however, remains committed to clean energy and net zero targets. To compensate for the loss of EU funding, the UK is focusing on domestic funding initiatives, bilateral deals, and alternative trade strategies to support energy infrastructure investment and net zero ambitions. The UK's strategy includes efforts to strengthen alliances and reduce trade barriers globally, which includes maintaining cooperation on critical infrastructure and renewable projects, albeit lacking the advantages of direct EU funding programs.
Limiting access to EU funds could significantly affect the UK's ability to finance and ultimately realise energy projects, particularly capital-intensive projects such as offshore wind farms. The EU has launched the EFSI to help overcome investment gaps in the energy sector, but any subsidies granted under the EU regime may cease to be paid for the simple reason that they require EU membership of the applicant and beneficiary.
A potential way forward to object to the loss of subsidies could be to bring a claim under the Energy Charter Treaty (ECT) since the ECT applies between the EU and the UK as parties to the ECT. The UK intends to transfer the EU state aid rules to national legislation, which may make planning and operation of energy projects past Brexit easier, less risky, and continuously attractive to investors.
Energy investors are recommended to monitor the developments closely and to prepare themselves for safeguarding existing subsidy grants and remaining in projects, or alternative funding. The UK government has published guidance on state aid post-Brexit and in case of a hard Brexit.
In 2017, EIB financing in the UK totaled €1.8 billion, and the total investment of the EIB Group was €2.1 billion. The UK plans to establish a full UK-wide subsidy control framework based on transposing the existing EU State aid rules, with the Competition and Markets Authority (CMA) expected to take over this task.
Part 6 of our series will delve further into the impact of Brexit on the Energy & Utilities sector, focusing on the CMA's role and the implications for the UK's energy infrastructure projects. It remains to be seen how the UK will manage to maintain its energy ambitions without the direct support of EU funding programs.
[1] European Commission. (2014). European Fund for Strategic Investments (EFSI). [online] Available at: https://ec.europa.eu/info/business-economy-euro/business-environment/business-models/investment-finance/eu-finance-and-investment/european-fund-strategic-investments-efsi_en
[2] House of Commons Library. (2019). Brexit: State aid and EU initiatives in energy infrastructure investments. [online] Available at: https://researchbriefings.files.parliament.uk/documents/CBP-8901/CBP-8901.pdf
[3] House of Commons Library. (2019). Brexit: implications for the European Investment Bank and the European Investment Fund. [online] Available at: https://researchbriefings.files.parliament.uk/documents/CBP-8847/CBP-8847.pdf
In light of the UK's exit from the EU, the finance sector may need to adapt in response to the loss of EU funding for energy infrastructure projects. For instance, the Energy & Utilities sector could potentially seek alternative sources of capital, such as domestic funding initiatives or alternative trade strategies, to maintain development and investment in the energy industry.
Government efforts to establish a UK-wide subsidy control framework based on transposed EU State aid rules may serve to mitigate some of the challenges facing investors in the energy sector. However, the ramifications for energy projects and the energy industry as a whole, particularly with regards to capital-intensive projects like offshore wind farms, remain uncertain without the direct support of EU funding programs.
