• qualifying entities that own or operate an LNG import or export facility ( noting that the UK does not have any LNG export facilities at present ) which has the capacity to process more than 6 million cubic metres of gas per day .
Electricity
The following qualifying entities are within the scope of the Regulations in relation to the electricity market :
• qualifying entities holding a transmission licence , distribution licence or interconnecter licence under section 6 of the Electricity Act 1989 ( the “ Electricity Act ”) or carrying on any activity under an exemption granted in respect of section 4 ( 1 )( b ), 4 ( 1 )( bb ) or 4 ( 1 )( d ) of the Electricity Act pursuant to section 5 ( 1 ) of the Electricity Act ;
• qualifying entities holding a generation licence under section 6 of the Electricity Act or carrying on any activity in pursuance of an exemption from section 4 ( 1 ) ( a ) of the Electricity Act granted to the qualifying entity by order under section 5 ( 1 ) of the Electricity Act ; or
• qualifying entities carrying on “ aggregation ”, the activity of combining multiple customer loads or generated electricity for sale , purchase or auction in the electricity market of Great Britain .
In the case of generators and aggregators there is a material test and the qualifying entity must meet either of the following conditions :
• the qualifying entity is an owner or operator of any individual generating asset that has a total installed capacity equal to or greater than 100 megawatts ; or
• the “ relevant capacity ” of the qualifying entity is equal to or greater than 1 gigawatt . The term “ relevant capacity ” is defined broadly to cover the electricity generation and aggregation capacity of the qualifying entity that is the subject of the acquisition and also that of the purchaser and its affiliates .
The relatively low threshold of 100 megawatts means that acquisitions of utility-scale electricity generating projects will most likely be caught within the scope of the specified descriptions and will be notifiable transactions if a trigger event occurs . It is a slight quirk that the capacity requirements refer to “ total installed capacity ”, meaning that projects in the construction phase that have not started generating electricity are not caught by the 100 megawatt threshold , even if the relevant project will have a much greater capacity once it commences commercial operations . Investors should be wary of the “ relevant capacity ” test given that the test is cumulative encompassing both the purchaser ’ s group and the target , as well as both generation and aggregation activities .
4 . Implications for participants in the energy sector
M & A
The Secretary of State has stated that the Act should not be viewed as a barrier or deterrent to investment in the UK . Nonetheless , investors considering the acquisition of UK companies and assets will need to carefully consider whether proposed transactions are within the scope of the Act given the serious consequences of failing to comply with the mandatory notification regime and any order issued by the Secretary of State . This is particularly the case for investors in the energy sector given the broad specified descriptions set out in the Regulations , meaning that acquisitions of companies operating in the UK oil and gas and electricity sectors will often be in the scope of the mandatory notifications regime . The application of the Act to a transaction and the requirement to make a mandatory notification will likely have timing and economic consequences for parties that will need to be considered as part of the overall timeline and expenditure on transaction costs when considering whether to proceed with an acquisition .
From a contractual perspective , sale and purchase agreements now typically contain conditions precedent regarding the non-application of the Act to the relevant transaction . Sale and purchase agreements should also consider addressing the risk allocation as between buyer and seller if the Secretary of State issues an interim or final order that prevents the relevant transaction from completing or has the effect of altering the economics or desirability of the relevant transaction .
Notably , asset transfers are outside of the mandatory notification regime . As a result , asset transfers of UK energy assets – such as an interest in a petroleum licence and joint operating agreement or similar interests , which is a typical transaction structure in the UK North Sea – would not be subject to the mandatory notification regime . However , such transactions are still subject to the Secretary of State ’ s call-in power if the trigger event relating to asset acquisitions occurs ( as would likely be the case in respect of a transfer of a participating interest in a petroleum licence and joint operating agreement ). The risk of a call-in is minimal if the transaction is unlikely to give rise to national security concerns .
However , given the Russian invasion of Ukraine and subsequent focus on energy security as a key element of the UK ’ s national security more generally , transactions in the energy sector involving foreign purchasers can reasonably be expected to come under greater scrutiny from Government . The Secretary of State ’ s recent decision to call-in Macquarie and British Columbia Investment bracewell . com