The NSI Act 2021 - implications for clean energy transactions

New legislation, The National Security and Investment Act 2021 (NSI), has come into force today, 4 January 2022, which may affect you if you plan to sell, buy or invest in:

• an entity which either holds a transmission, distribution or interconnection licence or would be required to hold a licence if it did not benefit from an exemption; or
• an individual generating project (regardless of technology) that has a total installed capacity of 100 MW or more; or
• you, together with any of your group companies (or your proposed buyer or equity funder together with any of their group companies) hold a portfolio of generating assets within Great Britain (or a Renewable Energy Zone) which has (or will have after the proposed acquisition) an aggregate capacity of 1 GW or more, regardless of the installed capacity of each individual generating asset).

What is it?

The NSI gives the Secretary of State (SS) the power to call-in transactions which it considers pose a risk to national security. This call-in power is retrospective and applies to transactions completing on or after 12 November 2020. Further details of the scope of the NSI can be found here .

How does it apply to clean energy transactions?

The NSI is likely to impact a broad range of clean energy transactions involving operational assets, regardless of the size of the target project, and large institutional investors and utilities with a significant presence globally will need to consider the application of the NSI in transactions in the UK market going forwards.

The NSI captures, amongst other things, certain 'notifiable acquisitions' completing on or after 4 January 2022. A notifiable acquisition takes place when a person gains control of a qualifying entity and that qualifying entity meets a "specified description". A ‘qualifying entity’ is an entity which is not an individual, so it includes companies, LLPs, partnerships, trusts and unincorporated associations.

The specified descriptions below may be relevant to clean energy transactions:

• Transmission and Distribution Assets and Interconnectors (paragraph 3(c) of Schedule 11 to the (National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 (NSI Regulations))

  Any qualifying entity which holds a licence under section 6 of the Electricity Act 1989 (Electricity Act) (or, save for an exemption having been granted in accordance with section 5(1) of the Electricity Act, would be required to be licensed under any of sections 4(1)(b) (transmission) 4(1)(bb) (distribution) or 4(1)(d) (interconnection) of the Electricity Act).

  For example, any project participating in the transmission of electricity and either requires a transmission licence or is eligible for an exemption in respect of the same.

• Large Generation Projects (paragraph 3(d) of Schedule 11 to the NSI Regulations)

  A qualifying entity which owns or operates an individual generating asset that has a total installed capacity equal to or greater than 100 MW or holds in aggregate capacity equal to or greater than 1 GW and which holds (pursuant to section 6(1)(a) of the Electricity Act) or is exempt from holding (pursuant to section 5(1) of the Electricity Act) a generation licence.

  A 'generating asset' is defined in the NSI Regulations as 'an asset used to generate electricity' with 'generate' being defined by reference to section 4(1)(a) of the Electricity Act. This will capture any operational assets (but will not apply to projects in construction).

  It should be noted in particular that the 1GW requirement takes into account not only the capacity of the target project but also the total installed capacity of any generating assets owned or operated by the acquirer and its group undertakings (paragraphs 3(d)(i) and 4(6) of Schedule 11 to the NSI Regulations) elsewhere in Great Britain or a Renewable Energy Zone. This has the potential to be far reaching and could bring even single acquisitions of small operational assets into the mandatory notification regime depending on the nature of the acquirer.

  This would be triggered, for example, where an acquirer, its parent undertakings and its subsidiaries together hold a portfolio amounting to 950 MW of generating assets (regardless of individual asset size) and the acquirer intends to buy a 60 MW project.

• Large Aggregation Projects (paragraph 3(d) of Schedule 11 to the NSI Regulations)

  A qualifying entity which owns or operates an individual generating asset that has a total installed capacity equal to or greater than 100 MW or holds in aggregate capacity equal to or greater than 1 GW in Great Britain and which carries on aggregation (defined in the NSI Regulations as 'combining multiple customer loads or generated electricity for sale, purchase or auction in the electricity market of Great Britain').

  As above, the 1GW requirement takes into account not only the amount of customer load and generated electricity available to the qualifying entity, but also the total amount available to the acquirer and its group undertakings.

• Gas Transporters (paragraph 3(e) of Schedule 11 to the NSI Regulations)

  A qualifying entity which holds a licence under section 7 (transport of gas) or 7ZA (operation of gas interconnectors) of the Gas Act 1986 or which carries on an activity pursuant to an exemption from section 5(1)(a) (other than by way of a gas interconnector, the conveyance of gas through pipes to a premises or to a pipeline system operated by a gas transporter) or section 5(1)(aa) (participation in the operation of a gas interconnector).

• Gas Processing (paragraph 3(f) of Schedule 11 to the NSI Regulations)

An entity which owns or operates a gas processing facility which has the technological capacity to carry on gas processing operations in relation to greater than 6 million cubic metres of gas per day.

What do I need to do if it applies to my transaction?

Where a transaction falls within the scope of the NSI mandatory notification procedure the buyer must notify the SS and the SS must approve the transaction before completion.  We would strongly recommended that the transaction does not proceed to completion without notification and approval.

The SS has 30 working days from the date of notification to review the transaction to decide whether to call it in for further assessment or confirm that no further action is to be taken. If a call-in notice is issued, the SS must within 30 working days either make a decision or give notice of an additional period of 45 working days (in which case such additional period will commence on the expiry of the initial 30 working day period). The period may be further extended voluntarily if the SS and the applicant agree.

Completing a 'notifiable acquisition' without the prior approval of the SS will render the transaction void, and civil and criminal penalties may be imposed on the acquirer (and its officers).

You should note that even if your transaction does not fall into one of the specified descriptions referred to above, you should consider whether (a) it could fall under any of the other specified descriptions in the NSI Regulations or (b) it could otherwise be considered to pose a risk to national security and therefore be subject to call-in. Further details can be found here.

Conclusion

While the NSI creates a procedural hurdle for clean energy transactions, in reality acquirers should be mindful of the underlying purpose of the NSI, to ensure that the national security interests of the UK are protected. BEIS has been keen to make clear in its guidance that … "the call-in power will not be used to interfere arbitrarily with investment" and "is not a system for screening all acquisitions in the economy"[1].

Ultimately the filing obligations and any sanctions for failure to notify will fall on acquirers and as such acquirers will be keen to structure transactions such that notifications can be made and clearances granted (where required) prior to close.

Developers, sellers, existing shareholders and targets should, however, be mindful of the SS' power to render transactions void in the event a notifiable acquisition completes without approval and will want to make sure that they get sufficient comfort in this regard prior to completion.

[1] National Security and Investment Act 2021: Statement for the purposes of section 3 (published on 2 November 2021)