Is the energy crisis fuelling additional scrutiny of foreign investment in this sector?

Background

The ongoing energy crisis is proving once more, as the pandemic already did back in 2020, that political and economic uncertainty are strong drivers for the development of FI control. As the prices of gas, fuel and electricity hit the headlines every day and the war in Ukraine threatens the continuity of gas supply to Europe for the winter, governments are increasingly using their FI regimes to protect and keep control of energy supply within their borders. 

The need to reduce dependency on third-party imports has led the EU to take a number of measures to reduce its reliance on Russian fossil fuel and accelerate its transition towards renewable energy, including through energy savings and the diversification of energy supplies. 

On top of these measures, FI control has played a key role in safeguarding energy infrastructure. Over the past few months, we have seen countries increasing the scope of their FI rules to target a broader spectrum of energy deals. In addition, energy transactions reviewed under FI rules tend to warrant closer scrutiny, triggering a Phase II review and often only being cleared subject to remedies that ensure security of energy supply. Finally, some countries have opted for the nationalisation of energy companies in response to the energy crisis.

More energy deals under review

As highlighted in a previous blogpost (see here), the type of energy transactions subject to FI screening has broadened considerably over the years. Echoes of this trend are still present, with countries amending their rules to fit that pattern. 

For instance, France put in place new FI rules from the beginning of this year. The revised rules extend FI control to R&D activities relating to technologies involved in the production of renewable energy, capturing more energy transactions (see our blogpost here). 

Similarly, Germany amended the Ordinance on the Designation of Critical Infrastructures in January 2022 by lowering considerably the thresholds which energy assets need to meet to be designated as critical, and adding new categories of assets for oil and fuel as well as district heating. If the threshold for the respective type of activity is met (e.g. 104MW net capacity for a conventional electricity generation asset or a lower threshold for certain specific assets), an asset is designated as sensitive and a participation of as little as 10% of voting rights may trigger a mandatory filing. Further, we understand that a list for the designation of certain critical components for energy assets is currently in preparation and will likely be issued in early 2023. Going forward, a 10% voting rights shareholding in a developer or producer of such components would also trigger a mandatory filing.

As a result, the German FI regime now captures a broader range of transactions. The political pressure behind this can be seen from the EC’s statement of April 2022 calling upon Member States to ensure effective FI screening of investments coming from Russia and Belarus. Although not directly linked to energy, this guidance provides confirmation of the direction of travel.

In the US, an executive order was recently signed (see here for our post) which highlights certain national security factors that the Committee on Foreign Investment in the United States (CFIUS) should consider when evaluating foreign investments in U.S. businesses. Among the areas of concern, the order charges CFIUS with further considering the effects on US supply chains and US technological leadership in the clean energy sector as the committee conducts foreign investment reviews.

An enhanced review of energy transactions

An illustration of the higher level of scrutiny attached to energy transactions can be seen from the EC’s second annual FDI report. Out of all the deals subject to a Phase II in 2021, 21% concerned the energy sector. In the same vein, the first annual report on the NSIA shows that around 9% of mandatory notifications and 13% of voluntary notifications concerned the energy sector.

It is also not uncommon that cases concerning the energy sector result in remedy decisions. For example, since the NSIA came into effect at the beginning of 2022, the UK Secretary of State has already cleared three energy deals subject to remedies. In each case, the conditions restricted information-sharing between the (Chinese state-owned) acquirer and the target, as well as the buyer’s ability to appoint key employees. With the acquirees engaged in distribution network operations (Electricity North West) and battery storage projects (the Stonehill project and XRE Alpha), NSIA final orders have, to date, addressed transactions involving electricity distributors.

And here comes the State

The on-going energy crisis has also led to a new trend - the nationalisation of energy companies to ensure security of supply. 

In some cases, this occurs through the use of the FI rules. Back in April 2022, Germany used the extensive powers under its FI regime to seize all the voting rights of Gazprom Germania, the local subsidiary of the Russian gas company, and put them under the fiduciary control of the Ministry for Economy (see our previous blogpost here). This intervention took place after Gazprom had transferred all the shares of its German subsidiary to a different Russian company without obtaining prior approval by the German authorities. Since then, the Government has gone further and nationalised Gazprom Germania in November.

In other cases, governments may simply step in to ensure security of energy supply. In France, 17 years after EDF’s initial public offering, the company will be re-nationalised, as announced by the Prime Minister in September 2022. The French government, which already owns 84% of EDF, recently made a public offer to purchase the remaining 16%. And this is not an isolated event - the German government had previously also nationalised Germany’s largest importer of gas, Uniper – the first of several anticipated to take place throughout Europe.

In both cases, these developments highlight once again the high level of sensitivity of deals in this area.

Final remarks

FI tools are widely used by governments to guarantee security of supply and protect energy infrastructure. Although investments in the energy sector remain possible (especially in a context where investing in energy infrastructure is championed by the EU), investors need to be mindful of the additional layer of scrutiny that such transactions will be subject to - which may entail a longer review process and potential remedies – and factor in these considerations at the planning stage of their deals.