Tate and Lyle Sugars Ltd v Secretary of State for Energy and Climate Change & Anor

Countries across the world are seeking to reduce the level of carbon dioxide emissions into the atmosphere. One way of doing this is to encourage the growth of electricity generation from renewable sources rather than using fossil fuel. An EU Directive, Directive 2001/77/EC on the promotion of electricity from renewable energy sources in the internal electricity market, set a target of delivering 10% of electricity from renewable sources by 2010.

The Government introduced the Renewables Obligation Order in 2002 to give effect domestically to the Directive. Active financial support is needed to encourage generating stations to use renewable sources because otherwise the costs will be too great to attract the appropriate investment.

This is an appeal by Tate & Lyle, the owner of a large sugar business, who have adopted an unusual technology, using renewable sources, and have sought to take advantage of the Government subsidies. They allege that the Secretary of State has unlawfully allocated to the technology they have employed a lower subsidy than he ought to have done. They took proceedings for judicial review before Moses LJ, sitting as a judge in the Administrative Court. The judge dismissed their application and they now appeal to this court.

I will summarise the essential background facts but only in so far as it is necessary to understand the issues in this appeal. A much more detailed exposition is to be found in the judgment of Moses LJ below.

The Renewables Obligation was first introduced in 2002. The domestic scheme works as follows. Licensed electricity suppliers have to produce to Ofgem, a regulatory body, a certain number of Renewables Obligation Certificates. These certificates are provided to renewable energy generators and they can be sold to electricity suppliers to meet the suppliers’ obligations to produce a specified amount of their output using renewable sources. If the suppliers fail to provide the required number of certificates, they must pay a “buy out price” with respect to the shortfall, which is akin to a fine. This caps the cost of the system as far as suppliers are concerned and since the price ultimately is paid by the consumers, it caps the cost to consumers also.

As originally devised, certain technologies were deliberately excluded from the scheme, such as those using peat as fuel, because it was not considered desirable to encourage their use. Otherwise the original scheme provided the same support for all technologies. It is measured by paying an amount of subsidy for each megawatt hour of electricity generated from eligible sources. The 2002 scheme allocated one renewables obligations certificate per megawatt hour (1.0 ROC/MWh).

The Renewables Obligations Order 2009 altered the system of subsidy by differentiating for the first time between different technologies and subsidising some more than others. This was because following an Energy Review in 2006, the Government had decided to promote the development of some of the more expensive renewable technologies and these required higher subsidies to encourage investment. Accordingly, the 2009 Review adopted a system known as ‘banding’ which involves placing different technologies in different bands. The rate of subsidy varies so that some technologies receive only 0.25 certificates per megawatt hour (0.25 ROC/MWh), whereas others receive up to 2 ROC/MWh. The ultimate holder (normally the supplier) is paid a particular sum of money for each ROC.

The particular technology adopted by Tate & Lyle involves a system which is described as co-firing of biomass with combined heat and power (“CoCHP”). The co-firing means that it uses both renewable and fossil fuels; the reference to biomass is to products of animal and plant (in this case the biomass currently being used is wheat husks purchased for the purpose and stored in biomass fuel storage silos); the reference to CHP identifies the fact that the generator provides not merely electricity but also heat, and so it is a combined heat and power station (hence CHP). In general this will result in a higher subsidy than would otherwise be paid because CHP stations usually make more efficient use of the energy content of fuel than stations which produce power alone.

When identifying the band of a particular technology the Minister must have regard to certain specified matters. This is an obligation imposed by section 32D of the Electricity Act 1989 which in turn was substituted by section 37 of the Energy Act 2008. It took effect on the 1 April 2009. Section 32D(4) provides as follows:

“Before making any banding provision, the Minister must have regard to the following matters:

(a)

the costs (including capital costs) associated with generating electricity from each of the renewable sources or with transmitting or distributing electricity so generated;

(b)

the income of operators of generating stations in respect of electricity generated from each of those sources or associated with the generation of such electricity;

(c)

the effect of paragraph 19 of Schedule 6 to the Finance Act 2000 (c.17) (supplies of electricity from renewable source exempted from climate change levy) in relation to electricity generated from each of those sources;

(d)

the desirability of securing the long term growth, and economic viability, of the industries associated with the generation of electricity from renewable sources;

(e)

the likely effect of the proposed banding provision on the number of renewable obligation certificates issued by the Authority; and the impact this will have on the market for such certificates and on consumers;

(f)

the potential contribution of electricity generated from each renewable source to the attainment of any target which relates to the generation of electricity or the production of energy and is imposed by, or results from or arises out of, a Community obligation. ”

It is to be noted that it is not simply costs and revenue which are material, but also other factors, including the need to meet any Community obligations and also the desirability of encouraging certain technologies more than others.

The Minister assessed the CoCHP technology used by the appellant as justifying 1 ROC/MWh. He did this in part by assessing costs without having available any very precise criteria. He took as a starting point the cost of a new station for dedicated biomass and then discounted capital expenditure. That approach was a matter of contention and the appellant submitted that the Minister ought to have obtained detailed and specific information about the cost of the particular technology from Ernst & Young, who had provided detailed costing information in respect of many of the technologies that were subject to assessment. The appellant considered that it had been unfairly treated as a result of the principles adopted by the Government to assess its costs, and it commenced judicial review proceedings to challenge the analysis.

In fact this application was overtaken by events when the Department discovered in the course of preparing for the judicial review proceedings that the figures it had deployed to assess costs were erroneous and gave too low a figure. Once apprised of this error, the appellant submitted that if the costs had been properly calculated it would inevitably have led to the assessment of their technology as falling within the 1.5 ROC/MWh band.

In view of this, the Secretary of State decided to carry out an early review pursuant to Article 33 of the 2009 Order. Article 33 provides, so far as is material, that a banding provision may be reviewed in one of two ways. The first is a general review of all technologies at four-yearly intervals commencing in October 2010. The second, under Article 33(3), empowers the Secretary of State to review “all or any of the banding provisions at any time if satisfied that one or more of the following conditions are satisfied”. There are then set out various grounds on which a review can be carried out including the following, which relates to changes in costs:

“(e)

the costs of generating electricity in any of the ways listed in the first column of Part 2 of Schedule 2 are significantly different from the costs of generating electricity in that way to which the Secretary of State had regard when making the banding provisions”.

In this case a full review of the CoCHP technology was conducted pursuant to that paragraph. The Secretary of State commissioned some consultants to advise on the relevant costs. That resulted in an alteration of the costs from the figures used for the original assessment. More significant was the fact that, in conducting the review, the Secretary of State had regard to the up to date information on the revenue side. Since the wholesale electricity price had increased substantially from the price when the original assessment was made, this improved the revenue position and therefore reduced the level of subsidy that would be necessary to cover the costs of setting up and operating the technology.

After considering all relevant information, a consultation document was produced which concluded that the required ROC band would be between 0.6 and 0.7 ROC/MWh, a little below the figure of 1 ROC/MWh that had been originally assessed. This assessment was reviewed independently by a body known as the Renewables Advisory Board, a group of industry representatives who are described as “stakeholders”. Finally the Minister concluded that the appropriate level was 1 ROC/MWh which in fact involved no change at all in the band to which the appellant had been allocated.

The appellant then amended its original judicial review claim challenging the way in which the review had been conducted. I set out below in more detail the arguments advanced before us in support of their claim; in substance they simply repeated the submissions which had failed to find favour with Moses LJ. In a nutshell the appellant was saying that the review should have involved only a correction of the costs which had been wrongly calculated on the first occasion. If that error alone had been corrected, and the remaining information left as it was, then the appropriate band would have been 1.5 ROC/MWh. It was wrong for the Secretary of State to carry out a completely fresh review with more up to date information. The effect was to discriminate against Tate & Lyle when compared with all other competitors using other technologies since they had been assessed on the basis of much lower electricity prices, and therefore smaller revenues, than had been used when assessing the appellant’s technology.

Lord Justice Moses rejected this submission. He concluded that there was nothing unlawful in the Secretary of State applying up to date information when carrying out the review of CoCHP. He noted various authorities to the effect that in the normal way a decision maker reconsidering a decision will do so in the light of material circumstances then prevailing: see R v Secretary ofState for the Home Department ex parte Zeqiri [2002] UKHL 3 at 42, paras 42-43. He also held that it would have led to an over-subsidy to ignore the up to date figures, given the increase in wholesale electricity prices, and that this in turn would have involved a breach of the prohibition against competitive distortion attributable to State aid (see Article 107, TFEU) since if correct it would compel the Secretary of State to over-subsidise CoCHP in breach of the state aid provisions. The judge pithily summarised his conclusions as follows (paras 63-66):

“The review under Article 33(2) has started in October 2010. It is expected to last three years. Until it is completed, in 2013, the Secretary of State is in no position to know whether, as a result of the increase in wholesale electricity prices, other technologies are being over-subsidised under the present continuing allocation or not. It is not possible to know whether those technologies are in the same position as Tate & Lyle until such a review takes place. In respect of some, their costs may have been increased at a greater rate than revenue. In respect of others, their costs may have been reduced. But the statutory scheme cannot work at all if such features are to be constantly updated. The only occasion for updating is either a lengthy review lasting a number of years in respect of all technologies or the review contemplated by Article 33(3) in respect of one or more technologies once Article 33(3) is triggered. ”

It seems to me that if the Secretary of State concludes, on updated figures, that a particular technology would be over-compensated if the allocation of ROCs was increased, he is not compelled to ignore that conclusion in the interests of consistency. He is not compelled to over-subsidise CoCHP.

The basis of the allocation of subsidy will inevitably become outdated in the period between reviews. After all, that is the whole point of a review. But it does not seem to me possible to justify allocating to Tate & Lyle an increase in ROCs/MWh merely because others may also, pending a review, be in receipt of an excess of subsidy. Avoiding State Aid which leads to distortion in the market is as much a cardinal principle as consistency of treatment. Pending a complete review, there are bound to be some technologies which benefit from changes in the predicted costs and revenues and others which suffer.

For that reason I take the view that the Secretary of State was justified in maintaining an allocation of 1 ROC/MWh.”

The appellant submits that this analysis shows that the only reason the judge found against the appellant was a reason relating to state aid. I do not think that is a fair reading of the judgment. It seems to me that the judge has found that quite independently of state aid, it would be inappropriate to impose a duty on the Secretary of State which would involve granting a greater subsidy than was necessary to compensate for the necessary investment, and that this would not involve unfair discrimination when compared with other technologies.

The appellant’s argument is that the trigger for the review was the incorrect assessment of the cost of implementing the technology; it was only because of the admitted error of government that it was necessary to carry out the review. Had the initial banding been properly carried out, it would inevitably have led to 1.5 ROC/MWh being awarded for this particular technology. That, accepts Mr Fordham QC, is the essential premise of his case. On the assumption that the premise is correct, fairness to the appellant required that the technology they employed should have been assessed in the same way, and according to the same criteria, as everyone else.

The reason for the early review, and its only legitimate purpose, was to correct the error. All that had to be done to achieve that purpose was to substitute the proper costs figure for that originally employed. No other factors had to be altered. Had that been done, the review would necessarily have resulted in a more favourable banding.

In carrying out the review, the Secretary of State was not required under the terms of Article 33 to do anything other than to correct the error, and this should have involved assessing the appropriate banding in the light of the information available when the original decision was made.

Mr Fordham accepts that Zeqiri confirms that in the normal case a public body reconsidering a decision will do so in the light of the material circumstances then prevailing. But there are exceptions to that principle, and one is where it would lead to unfairness to act in that way. Mr Fordham cites by way of example Rashid v Secretary of State [2005] EWCA Civ 744; [2005] Imm A.R. 608 in which the Court of Appeal (Pill, May and Dyson LJJ) held that it was an unfair abuse of power for the Secretary of State to refuse to afford asylum to an applicant in circumstances where had the Secretary of State properly applied his own policies when the claim had originally been made he would have done so, and where others had been allowed asylum in precisely the same circumstances. Similarly here: had the Minister properly applied his own policy when first making the assessment, the appellant would have received a higher subsidy, and applying different criteria to other technologies involved unjustified discrimination as between the different technologies and was therefore unfair and constituted an abuse of power. All other technologies were assessed on the basis of a much lower electricity price and that necessarily favours them. But for the Minister’s own error, no early review would have been conducted and the appellant would have been in receipt of a more generous subsidy. It cannot be lawful for the Minister to rely on his own error to justify adopting a full review which is prejudicial to the appellant.

Mr Chamberlain, counsel for the Secretary of State, denies the premise of the argument. He says that even had the correct figures been used originally, it is uncertain whether this technology would have been placed in the 1.5 band or not. The witness statement of Mr de Souza shows that the Secretary of State had had regard to a whole range of factors when fixing the bands, and it is not necessarily the case - even if it may be said to be likely - that the banding would have been different even had there been a proper appreciation of the true cost of the technology. It follows, submits Mr Chamberlain, that it was inevitable that the Secretary of State would have to carry out a fresh determination, and the best available figures had to be used.

More importantly, Mr Chamberlain submits that even if he is wrong about that (as indeed the judge thought) and the appellant’s technology would have been placed into the higher band, nonetheless once the Secretary of State had determined to correct the error by carrying out a review, he was entitled -indeed, possibly obliged - to do so on the basis of the best information available. He submits that there is no principle of public law which states that if a public body makes a decision in error, it must in putting that decision right put the wronged party in the position he would have been in had no error been made. On the contrary, the usual situation is that on reconsideration, the decision should be made on the material facts then available as Moses LJ had correctly held.

Mr Chamberlain accepts that there will be cases where that approach would not be appropriate. He recognises that there is a public law duty to act fairly and consistently and without unjustified discrimination, as enunciated in such cases as Middlebrook Mushrooms Ltd v The Agricultural Wages Board of England and Wales [2004] EWHC 459 and R (Kelsall) v Secretary of Sate for the Environment, Food and Rural Affairs [2003] EWHC 459. But that duty was not infringed here. The assessment of the appropriate band for Cochin was carried out in precisely the same way as the assessment of other technologies. The parameters were exactly the same; all that differed was the factual material, and that was for the very good reason that the assessment was made at a different time. That fact alone did not constitute unjustified discrimination. On the contrary it was justified given that the purpose of the banding exercise is to determine an appropriate subsidy sufficient to provide an incentive to persons to develop renewable energy technologies. It could frustrate that purpose, and would be contrary to the public interest, to focus only on historic figures when more accurate information was available.

So in this case, if the appellant were right, it would mean that the Secretary of State would be legally obliged to provide a subsidy which was twice the amount needed to cover the cost of developing the technology. It was not justified to impose that burden unnecessarily on the taxpayer, and moreover it would infringe the principles of state aid to do so, as Moses LJ held.

Counsel also emphasised that the decision to carry out a full review was not bound to work to the disadvantage of the appellant. In this case it did because revenue had grown faster than costs. However, that was not inevitably the case and moreover, the Secretary of State did not know that it would be the case when he began the early review exercise. The assessment could have turned out in the appellant’s favour if costs had outstripped revenue. For the same reason the appellants were wrong to assert that competitors were necessarily treated more favourably because they had not been subject to an early review. If costs have risen disproportionately to prices with respect to any particular technology, the failure to carry out an early review will be to the detriment of those persons employing that technology.

Furthermore, it is far from fanciful to suggest that costs may have increased faster than prices for some technologies, notwithstanding the steep rise in electricity prices. Mr Chamberlain referred the court to evidence that costs have risen significantly for many electricity generators, and he drew our attention to a specific case where the European Commission had approved a re-banding whose effect was to increase the subsidy where costs had outstripped prices: see State Aid decision no N 65/2010 of 30.03.2010.

Finally, counsel submits that the failure to focus on current figures could seriously work to the prejudice of third parties and operate contrary to the public interest by discouraging appropriate development. Say, for example, that costs had risen more steeply than the price of electricity: in that case a focus on historic figures would lead to the subsidy being smaller than it ought to be, and potential investors in the technology might be discouraged from entering the market.

In my judgment, the key to resolving this case lies in identifying the purpose of an early review. The appellant submitted that the only legitimate purpose of the review was to correct the error in relation to the assessment of costs and that necessarily required the historic costs figure to be used. Any other approach involved discriminatory and unfair treatment. By contrast the Secretary of State’s case was that although the error was what triggered the review, it did not dictate its terms. The purpose remained to assess as carefully as possible the appropriate band for the particular technology in order to provide the requisite level of subsidy and no more. Any other approach undermined the interests of the public and risked infringing the state aid provisions.

I prefer the submissions of the Secretary of State. In my judgment, even if the appellant’s premise is correct, and the court is satisfied that the appellant’s technology would have been banded more favourably had the correct costs information been used, this did not compel the Secretary of State to carry out the review on the limited basis advanced by the appellant. As Mr Fordham accepts, the usual situation requires a public body to reach decisions in the light of all the information then available.

I do not accept that this case falls within one of those exceptional circumstances, such as Rashid, where it would be unfair to allow the Minister to make the assessment in the light of up to date information. I do not consider that the error perpetrated in this case is akin to the maladministration identified in Rashid. Indeed, in R (AM) v Secretary of State for the Home Office [2009] EWCA Civ 833 Lord Justice Toulson observed that Rashid went beyond a matter of mere error by a caseworker and could fairly be characterised as amounting to an abuse of power.

In addition, in Rashid the claimant as an individual was unfairly treated, and a remedy could be granted removing that unfairness without jeopardising the interests of others. That is not so here. It is vital to remember that what is being assessed is the appropriate band for determining the subsidy appropriate for a particular technology; it is not determining the payment appropriate to the particular person or body which operates it. A failure to focus on up to date information could prejudice the interests of those considering investing in a particular technology if, as a result of increases in costs, the relevant subsidy was insufficient to cover the development costs. It might discourage investment which is thought to be highly desirable in the public interest. By contrast, if costs have decreased relative to revenue, it involves providing an unwarranted financial windfall to the user.

I recognise that fairness is an important principle of public law but in determining what is fair in any particular context it is necessary to have regard to the wider public interest. I am not persuaded that as a consequence of this review the appellant is being unfairly treated. They are in fact receiving the appropriate subsidy for someone incurring the costs involved in developing their particular technology. It is true that they were not obtaining the windfall resulting from the increase in electricity prices which they would have received had no error been made. Furthermore, it may be the case that other producers are receiving a windfall as a result of that price increase and will continue to do so until their technologies are reviewed (although as I have said there will be no windfall if costs have outstripped the electricity price). That is not, in my judgment, a sufficient reason to confer this benefit on the appellant. It may be bad luck that but for the error the appellant would have been treated more favourably than was necessary properly to subsidise their technology, particularly since some others will have received the more favourable treatment. It does not follow that it was unfair and an abuse of power to carry out a full review.

In my view, once the decision to review had been taken, it was certainly open to the Secretary of State to approach the case in the way he did by considering up to date materials. I do not say that he necessarily had to adopt that approach. If the error had been quickly pointed out to him, he could no doubt have taken the view that the information would not have changed sufficiently materially since the earlier assessment to justify a further detailed assessment on the basis of fresh information. But he was not obliged to act in that way merely because the trigger for the review was his own error, and there may have come a time when the public interest would have dictated that he was obliged to carry out a full review.

In view of my conclusion on the principal ground of appeal, certain other arguments advanced before us do not need to be determined and I do not finally decide them.

First, it is not necessary to decide whether on the evidence the premise underlying the appellant’s argument is correct. This is the assertion that the CoCHP technology would have been placed in the 1.5 band in the original assessment had the error not been made. Suffice it to say that I find persuasive the analysis of Moses LJ that the technology would have been banded in that way.

Second, I have reached my conclusion on the principal ground without relying on the Secretary of State’s argument, accepted by Moses LJ, that if the Secretary of State had simply corrected the error and used historic figures for the revenue side of the equation, it would have infringed the state aid principles by providing unlawful state support for this particular technology. However, I doubt whether the argument is correct. It seems that the Secretary of State would have been required to alert the European Commission to any change in banding, but if the recalculation had been made simply by adjusting the costs figure as the appellant urged that it should, I do not see why it should have given rise to any concerns that the subsidy was improper. The Secretary of State would have no more reason to believe that this was the position with CoCHP than any other technology, yet it was not suggested that they all had to be reviewed under EU law in view of the change in the electricity price. It was only after reviewing all the up to date information that the Secretary of State was in a position to say that the 1.5 banding would constitute an unjustified subsidy.

Mr Chamberlain submits that even if that is correct, once the Secretary of State had gone down the fresh assessment route and had formed a view as to the appropriate band, he would have been obliged to tell the Commission of this. That would be so even if this court had found in the appellant’s favour. That may be right - although Mr Fordham reserved his right to make submissions on this should it be relevant - but even if it is, it would only affect the form of remedy. One would hope that if the court said that the Government had acted unfairly in failing to reassess on the basis of the historic costs figure, the Commission would have found that an acceptable reason for approving the subsidy. In the event, the issue does not arise.

For the reasons given, I would dismiss the appeal.

I agree.

I also agree.