Policy risk is often treated as a single question of political direction. For investors in energy infrastructure, a more useful analysis starts with the legal form of each commitment on which project revenue depends. Two revenue streams that appear equally exposed to a change of government can carry very different risks, because one rests on a contract the state must honour and the other on a policy the state may revise at no cost.
ENERMO’s assessment of policy and regulatory risk therefore asks three questions of each revenue line. What form of commitment supports it, how readily could that commitment be changed, and what would the state have to pay to change it?
Three forms of commitment
Government support for energy projects takes three legal forms, and each gives investors a different level of protection.
| Feature | Policy commitment | Statutory duty | Contract |
|---|---|---|---|
| Examples | Strategies, targets and ministerial announcements | Duties set in an Act of Parliament | Contracts for Difference |
| Binding on government | No | Yes, until amended by Parliament | Yes |
| Enforceable by investors | No | On process only, through judicial review | Yes, through a claim for damages |
| Compensation if withdrawn | None | None | Damages or contractual compensation |
Contracts give the strongest protection. A Contract for Difference is a private-law agreement with the Low Carbon Contracts Company, a government-owned counterparty, and its standard terms protect the generator against certain changes in law directed at it. While Parliament retains the power to legislate over a contract, doing so would expose the state to substantial compensation claims and weaken confidence in future allocation rounds. The form of support that appears most dependent on government is, in practice, among the most difficult to reverse.
Forward-looking and retrospective change
Governments can change future support with relative ease. Closing a scheme to new applicants, reducing the budget for an allocation round or reforming the grid connection queue requires no compensation and affects only projects that have not yet secured support.
Retrospective change is far harder to achieve. In 2012 the Court of Appeal held that the government had no power to reduce feed-in tariffs retrospectively for installations that had already qualified ([2012] EWCA Civ 28). Entitlements already accrued under existing schemes are therefore well protected, although the future terms of those schemes remain open to change.
Taxation
Taxation sits outside this hierarchy. A levy on generator revenues can be introduced within weeks, needs no compensation and is rarely overturned by the courts. The Electricity Generator Levy shows where the burden falls. Announced in November 2022 and applied from 1 January 2023, the levy covers exceptional receipts from renewable, nuclear and energy from waste generation. Output sold under a Contract for Difference is excluded, because the contract already returns revenue above the strike price.
Merchant revenue and revenue under older subsidy schemes therefore carry a tax exposure that contracted revenue largely avoids. Investors should price tax risk separately from the risk of a change to the support itself.
Exposure across the project life cycle
Exposure to policy change falls as a project matures. A project still seeking planning consent, a grid connection or a support contract holds options that a government can withdraw at little cost, and an asset that relies entirely on merchant revenue has no commitment to enforce. A project that is consented, connected and contracted rests on commitments the state would have to pay to break. A firm grid connection agreement, which is a contract with the network operator, adds to that protection, although it secures only the right to connect.
Investment treaty protection
The United Kingdom left the Energy Charter Treaty on 27 April 2025. Investments made before that date keep the treaty’s protection for a further twenty years, until 27 April 2045. Later investments must rely on domestic contract and property law and on any bilateral investment treaty that applies. Overseas investors should therefore check which regime covers each stage of their investment, since capital committed after the withdrawal may lack the protection that earlier capital holds.
Implications for investors
The most effective way to reduce policy risk is to convert options into commitments. Each step, from planning consent to a firm connection and a contracted revenue stream, improves a project’s position against every form of policy change considered here. Due diligence should map each revenue line to the commitment behind it, assess how readily that commitment could be changed and at what cost to the state, and treat tax exposure as a separate risk. ENERMO assesses political risk as one of the five TECOP risk dimensions at every gate, and applies this analysis in its policy and regulatory advice to developers, investors and lenders.
This article provides general commentary on policy and regulatory risk and does not constitute legal advice.