Infrastructure Spotlight – Summer 2024

Much of the tone and approach here reflects what we have seen under the previous Conservative government. The focus is on viewing these ambitions as a means to strengthen the UK's presence on the world stage (references to 'superpower' pervade both parties' discourse) and to increase domestic prosperity through leveraging private capital and the markets (rather than a more state subsidy driven route). However, whereas Conservative policy and announcements around decarbonisation have in recent years become increasingly hawkish on the cost of the energy transition, this is not evident from Labour's stance. It remains to be seen whether that will translate into action. However, at a crucial point in the climate crisis, and in view of the need to ensure public support for the transition and longer-term certainty on policy direction for investors, tone matters.

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.

£8.3bn - Total proposed funding for Great British Energy

£1.7bn - Revenue raised by extension of Energy Profits Levy

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.

£7.3bn - Total proposed funding for National Wealth Fund

£29.2bn - Total target funding once private investment included

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.

Energy Profits Levy

In terms of related tax policy, Labour is proposing a 3% increase on the existing Energy Profits Levy (the so called 'Windfall Tax'), introduced as a response to high profits in the sector back in May 2022, from 75% of excess profits to 78% (while also extending it to 2029). Labour will also remove certain investment allowances, which enabled tax relief for businesses that were impacted but were criticised in some quarters as a loophole.

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.

Nuclear – continued support for big and small

It is clear from its manifesto that Labour views nuclear energy as playing a fundamental role in the UK's decarbonisation strategy. Labour has vowed to complete current nuclear projects, such as at Hinkley Point and Sizewell. Labour has also identified the introduction of small modular reactors as a way of achieving energy security, decarbonisation and creating jobs – which is in line with the UK's existing energy strategy in this area, and an area in which promising progress has been made of late.

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.

Larger projects

Plans to speed-up applications for larger projects by streamlining the environmental assessment process, established by the previous administration via the Energy Act 2023 (see Section 2), look set to be continued by the new regime. And as part of a wider planning overhaul, Labour also plans on merging the existing Infrastructure and Projects Authority with the National Infrastructure Commission, creating a new National Infrastructure and Service Transformation Authority. This body will set strategic infrastructure priorities and oversee the delivery of projects. Before any projects commence, the new body will stipulate how it must be planned, designed and costed – to reduce the risk of expensive discontinuations or variations to major projects, as experienced with HS2 (see the last edition of Infrastructure Spotlight).

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).

Thames Water – to nationalise or (probably...) not to nationalise?

One of the thornier issues that Labour may have to grapple with early in its tenure is the ongoing financial difficulty of Thames Water. Despite Labour's manifesto being noticeably silent on the issue, senior figures in the party have suggested that Labour does not want to bring Thames Water into public ownership - whilst failing to give any further indication on what Labour's proposals might be. If nationalisation is off the cards, then the new government may be looking to private investors to take on the burden. However, potential investors may be deterred by Labour's proposals for tougher regulations on water companies. The difficult balance between making the private water market attractive for investment, achieving the capital improvements required for acceptable environmental performance, and minimising cost increases to end users shows every sign of being an ongoing dilemma for the Labour government.

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.

2. Where now for the Energy Act 2023?

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 election results from last week, 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.

A recap on the Energy Act's key measures

We looked in detail at how the Energy Act seeks to achieve its goals of decarbonisation and deglobalisation in the UK energy in our presentation here. To recap, key measures include:

1. District Heat: a new regulatory framework designed to facilitate the development of district heat networks. Areas covered include consumer protection (e.g. pricing transparency and service levels), zoning (including a requirement to connect to networks in identified zones) and licensing of operators (which, importantly, will facilitate much-needed compulsory acquisition, permitted development and street-works rights).
2. Support for Future Technologies: new licensing regimes, as well as revenue support agreements (which operate like Contracts for Difference in providing private investment comfort on levels of demand and pricing for these new technologies), for hydrogen transport and CO2 aim to provide a stable environment for these new technologies which will facilitate investment. There is also notable support for nuclear, including establishment of 'Great British Nuclear' - a name which is confusingly similar to Labour's proposed Great British Energy, discussed above.
3. Reducing consenting delays: new competitive regimes for onshore transmission networks, and various measures to streamline planning (for offshore windfarms in particular) will, it is intended, help reduce delays to getting these key project consents, and often therefore investment, for new renewable energy projects.
4. Smart Energy systems: various measures seek to enable the delivery of a smart and flexible energy system within a clear regulatory framework - including to promote smart meter roll out, to regulate smart energy appliances, and to regulate providers of load control services.

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.

3. Does a New Zealand ruling on nuisance spell trouble for the infrastructure sector?

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.

Novel "climate system damage" tort

In Smith v Fonterra & Ors, the NZ Supreme Court allowed a claim for environmental damage to proceed on the basis of the novel tort of "climate system damage", which has not previously been recognised, either in New Zealand or elsewhere. Claims were also made based on the well-established torts of nuisance and negligence. All 3 heads of claim have been allowed to proceed – although the litigation is still at a relatively early stage and it is far from clear that the claimant will ultimately succeed.

It's important to note, however, that the ruling does not amount to an endorsement by the NZ Supreme Court of the "climate system damage" tort. In fact, the court did not consider it in any detail at all; it only allowed it to proceed because it had already concluded that the nuisance claim was arguable and that permitting the other two heads of claim to go to trial would not add materially to costs. Even so, to the extent that courts in other jurisdictions follow similar principles when asked to consider preliminary issues, the judgment suggests that where a novel tort is combined with claims based on more established torts in climate change litigation, defendants may find it difficult to strike out the novel tort claim at an early stage.

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.

4. Sustainability due diligence and disclosure rules for corporates: where are we now?

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.

UK Proposals

In the UK, in March and May 2024, two separate but linked consultations included a proposal to increase the size thresholds for companies, which determine, amongst other things, which ESG reporting requirements they are subject to. Under the proposal, the updated financial thresholds would include "large" companies as those with over £54mil turnover (currently set at over £36mil). This was expected to take around 132,000 companies out of scope of non-financial reporting requirements. The later proposal suggested an increase to the employee number threshold for medium-sized undertakings from 250 to 500 employees (meaning that "large" companies would need over 500 employees). As proposals under the previous government were designed to alleviate reporting burdens for medium-sized entities, it remains to be seen whether these will be taken forward or shelved by the new Labour government.

What will continue as planned (albeit delayed), however, are the new Sustainability Disclosure Standards ("SDS", or alternatively, Sustainability Reporting Standards or "SRS") for listed companies and a new labelling regime and anti-greenwashing rule (see Section 5 (Infrastructure Funds)) for regulated financial entities (Sustainability Disclosure Requirements or "SDR"). For the former, the UK is still expected to formally endorse the International Sustainability Standards Board's ("ISSB's") first two sustainability standards (IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and S2 Climate-related Disclosures). Disclosures under these standards are expected to become mandatory for reporting by listed companies and certain FCA-regulated entities, potentially as soon as 2026. For further information on the ISSB Standards and other developments in sustainability reporting in the EU and UK, see our briefing.

With the emphasis continuing to be on encouraging private finance towards "green" and "sustainable" investments, the UK SDR's investment sustainability labelling regime is likely to continue to be a key supporting pillar underpinning this strategy. Infrastructure operators and developers looking for private investment should be alive to these requirements and their stringent sustainability criteria, as they may lead to enhanced pre-investment due diligence, stricter investment criteria and reporting obligations. It also presents opportunities for operators of renewable and sustainable assets that can meet higher environmental and climate standards who will be able to position themselves well at a time when the investable universe for certain investors choosing sustainable labels will suddenly become more restricted.

UK Energy Savings Opportunity Scheme (ESOS)

Following Brexit, the UK has retained legislation implementing Article 8 of the EU Energy Efficiency Directive, which is now in 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 to the UK's Environment Agency. The original reporting deadline of 5 December 2023 was extended to 5 June 2024 to allow the Government time to pass legislation making changes to the scheme. A subsequent update in July provided by the UK's Environment Agency confirmed that it would not take enforcement action against companies that submit their notifications by 6 August 2024 but had registered in the new digital reporting platform prior to 5 June.

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 (as currently defined) companies in Phase 4 (this was considered but rejected for Phase 3).

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.

Keeping up to date with ESG developments

Please refer to our interactive ESG timeline 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.

5. Infrastructure funds: UK and EU regulators tackle greenwashing

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; an
• 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.

First FCA investigation into climate-related issues

The UK's Financial Conduct Authority has opened its first enforcement investigation into climate-related issues. The information was provided in response to a Freedom of Information Act request by the nonprofit organisation, ClientEarth. The FCA confirmed that it had opened the investigation in July 2023, although it refused to name either the company being investigated or the specific misconduct that it was investigating.

Firms should expect to see the FCA take more action in this area: the introduction in May this year of the new "anti-greenwashing rule" is designed to bolster the FCA's power to take action against firms overstating their sustainability credentials. As noted above, alongside that the FCA has also published comprehensive guidance which, as we discuss in more detail in our briefing and our Sustainability Insights publication, firms should have regard to in endeavouring to meet the FCA's expectations under the "anti-greenwashing rule".

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;
• TheJoint ESAs Opinionon the assessment of the Sustainable Finance Disclosure Regulation.

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