England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
ADMINISTRATIVE COURT
Mrs Justice Andrews DBE
[2014] EWHC 2377 (Admin)

		Royal Courts of Justice Strand, London, WC2A 2LL
		7th August 2014

Lord Justice Richards :

1. This case concerns a decision by the Department of Energy and Climate Change ("DECC") that Drax Power Limited ("Drax") did not qualify for an Investment Contract ("IC") in respect of Unit 3 at the Drax Power Station in North Yorkshire. An IC is a form of support for the generation of renewable energy. Unit 3 is currently accredited under the Renewables Obligation ("RO") as a co-firing unit, capable of burning both coal and biomass (a renewable energy source), but an IC was sought in connection with its proposed conversion to burn biomass alone.
2. The award of ICs was the subject of a competitive process run by DECC. One of the criteria to be satisfied, referred to in this litigation as the "Key Criterion", was that "without the contract there is a significant risk that the electricity generation to which the contract relates will not occur or will be significantly delayed". By a letter dated 22 April 2014 DECC informed Drax of its decision that Unit 3 did not qualify for an IC because it did not meet the Key Criterion.
3. Drax brought judicial review proceedings to challenge the decision. In a judgment handed down on 14 July 2014, Andrews J held that the decision was one that no reasonable decision-maker could have made. She quashed the decision, granted a declaration that the Key Criterion was satisfied, and remitted the IC application for prompt reconsideration by DECC in the light of the judgment.
4. The Secretary of State appeals against the judge's order, contending that DECC's decision was rational and lawful and that the judge fell into error in reaching a contrary view.
5. Permission to appeal was granted by the judge herself, together with directions setting an abbreviated timetable, for the pragmatic reason that certainty was required before a deadline of 1 August 2014, when relevant regulations were due to come into force and the power to award an IC would fall away. For the same reason the appeal was listed before us on an expedited basis for hearing on 1 August. The deadline was subsequently circumvented by the decision of DECC to grant a conditional IC in respect of Unit 3, on terms that provide for termination of the contract in the event that the judge's order is set aside on appeal. The litigation still needs, however, to be resolved speedily, because relevant budgets have to be finalised by mid-September: the value of the IC is about £1.3 billion, though this is said to be expenditure that would otherwise be incurred under a different support regime (that of the RO, described below). The court's task in providing a speedy judgment has been greatly assisted by the excellent submissions, both written and oral, of Mr Martin Chamberlain QC for the Secretary and State and of Mr Tim Ward QC for Drax.

The background: support for the generation of renewable energy

6. The background is described at paragraphs 4-24 of the judgment of Andrews J. The following summary is taken partly from the judgment and partly from counsel's skeleton arguments for the appeal.

The Renewables Obligation and Contracts for Difference

7. The case arises out of the change in mechanisms used to support the generation and use of renewable energy from the RO to Contracts for Difference ("CfDs").
8. The RO was introduced in 2002 to require electricity suppliers in the UK to source an increasing proportion of their electricity from renewable sources. The regime (currently given effect in England and Wales by the Renewables Obligation Order 2009, as amended) imposes an obligation on all electricity suppliers licensed under the Electricity Act 1989 to produce a certain number of Renewables Obligation Certificates ("ROCs") in respect of each megawatt hour of electricity that each supplies to consumers in the UK during a specified period. It now also bands the different technologies that are used to generate electricity from renewable sources, so that the number of certificates issued in respect of that electricity depends on the way in which the electricity has been generated. ROCs are issued to renewable electricity generators on the basis of their renewable output. ROCs are sold by the generators to electricity suppliers with or without the associated renewable electricity.
9. The RO regime has two major drawbacks for electricity generators like Drax. First, the price of ROCs is driven by the market, so that generators cannot be certain about how much income they will receive from renewable generation. Secondly, there is political and regulatory uncertainty because the scheme could be amended or withdrawn at any time. These uncertainties make it more difficult for generators to make or obtain long-term investments and commitments.
10. As part of the Government's electricity market reform, the RO is being replaced by a regime based on CfDs, to which formal effect was given by the Energy Act 2013. Under the new regime, low-carbon generators with a CfD will sell their electricity into the market in the normal way. The CfD is a long-term, private law contract under which the generator is paid the difference between an estimate of the market price for electricity (the reference price) and an estimate of the long-term price needed to bring forward investment in a given technology (the strike price). This removes generators' long-term exposure to electricity price volatility, substantially reduces the commercial risks faced by these projects and encourages investment in low-carbon generation. The counterparty to the CfDs will be a Government owned, limited liability company, funded as necessary via a levy on suppliers.
11. The CfD is intended to provide greater certainty to generators in relation to the price that they will be able to obtain for renewable energy which they generate, and thereby to encourage investment in renewable energy generation.
12. Units which are already converted to biomass and are in receipt of ROCs in the conversion band under the RO are not permitted to receive support under the CfD regime. But a unit may receive support under the RO as a co-firing unit and yet remain eligible for a CfD provided that it has not fully converted under the RO: on conversion to full biomass there is a one-off choice between RO support and a CfD. The same choice applies as between RO support and an IC, described below.

Investment Contracts

13. As part of the transition from the RO regime to the CfD regime, ICs are being awarded to generators as an early form of CfD in order to avoid the risk of an investment hiatus in the period leading up to the full implementation of the CfD regime.
14. ICs are governed by section 44 of, and Schedule 2 to, the Energy Act 2013. "Investment Contract" is defined in paragraph 1(1) of Schedule 2. One of the elements of the definition is that it is a contract laid before Parliament in accordance with paragraph 1(5). That sub-paragraph, in turn, requires the contract to be laid before Parliament by the Secretary of State with a statement under paragraph 1(6) that, inter alia, "the Secretary of State considers that without the contract there is a significant risk that the electricity generation to which the contract relates will not occur or will be significantly delayed". That is the source of the Key Criterion.
15. ICs involve a very significant element of State Aid falling within Article 107 of the Treaty on the Functioning of the European Union. As such, they require notification to, and approval by, the European Commission. The award of an IC is subject to receipt of the relevant State Aid clearances.
16. The award of ICs was determined by a process inelegantly termed "the Final Investment Decision Enabling for Renewables process" (sometimes referred to as the "FIDeR" or "FIDe" process), launched in March 2013. The basis on which projects would be selected for the award of an IC was set out in three successive "Update" documents. The criteria that applicants were required to satisfy were of two types: (i) pass/fail "Qualification Criteria", and (ii) "Evaluation Criteria" against which projects were scored and ranked.
17. The Qualification Criteria included the following:

"The developer is able to demonstrate to the satisfaction of DECC that:

(i) There are credible plans in place to progress the project in order to start generating electricity within the period of the First Delivery Plan, 2014/15-2018/19.

(ii) Without an Investment Contract there is a significant risk that the electricity generation to which the Investment Contract relates will not occur or will be significantly delayed.

(iii) The project is not already accredited under the RO …".

18. The Key Criterion is paragraph (ii). It will be noted that the developer is required to demonstrate to the satisfaction of DECC that the criterion is fulfilled. That is a necessary requirement if the Secretary of State is to be in a position to make the statement to Parliament that the statute obliges him to make in respect of each IC. (I have included paragraph (i) because some of the passages in Drax's submissions to which I refer come under that heading, and paragraph (iii) to underline the point that an IC is an alternative to support under the RO.)
19. The application of the Key Criterion necessarily involved consideration of a counterfactual, i.e. what the position would be if an IC were not awarded. Consideration had to be given in particular to the position if, instead of receiving an IC, the applicant either (i) waited for the full CfD regime to come into effect, or (ii) converted with support under the RO regime.
20. The FIDe process was broken down into three phases. At Phase 1, applicants were required to satisfy the Qualification Criteria. Those who failed to do so dropped out. At Phase 2, applicants who continued to satisfy the Qualification Criteria and who also met a minimum threshold when scored and ranked against the Evaluation Criteria were denoted as having "Qualifying Projects". At the third phase, each applicant with a Qualifying Project would make a "Binding Application" for an IC in respect of that project. DECC would then re-assess their applications against the Qualification Criteria and the Evaluation Criteria and would determine the projects to which ICs would be awarded. Whilst there was no set number of ICs, there was a limited budget, such that ICs would be awarded only to the highest scoring Qualifying Projects for each technology type/class. The process was therefore a competitive one. There were in fact 57 applications.
21. It was made clear at the Binding Application stage that applicants were required to explain again how they met the Key Criterion, so that this could be subject to final assessment before the determination whether to award an IC. Indeed, applicants needed to continue to satisfy the Qualification Criteria and the minimum threshold Evaluation Criteria right up to the point of signature of an IC. It was also made clear that any decision at an earlier stage that a project met the criteria was only provisional and did not give rise to any legitimate expectation of an IC. Passages in the documentation relevant to this point are quoted at paragraph 19 of Andrews J's judgment.
22. A further point to note is that applications had to be accompanied by a letter from the board of the applicant company which included a warranty that the information provided was true and accurate.

Drax's application

23. Drax made applications in respect of three of its units (Units 1, 3 and 4) but these proceedings are concerned only with Unit 3. The history of the application in respect of Unit 3 is summarised at paragraphs 25-56 of the judgment below. I need, however, to examine the material in some detail rather than simply referring to the judge's summary, because the issues in the appeal turn on the detail. The documents sometimes refer to Unit 3 as the "second Drax unit", as it was the second unit scheduled for full conversion to biomass.

Phase 1

24. The Phase 1 application was dated 30 May 2013. It was submitted with a covering letter stating that the application was authorised by the board and giving the necessary warranty. The application was stated to relate to "a project for the full conversion to biomass of the second unit at Drax (Draft Unit #3)". Relevant passages under the first main heading, "(i) Credible Plans", included the following:

"Drax has credible plans to convert three of the six coal units at Drax Power Station to biomass. Since the beginning of April we have been running our first biomass converted unit (Drax Unit #2) ….

The conversion of this second Drax unit is technically feasible during 2014. However, this is dependent on securing the early rights to sufficient sustainable biomass delivered to Drax. However, as set out in the Justification section below, the ability to contract for sufficient sustainable biomass is underpinned by the supply chain making the necessary timely investment in capacity.

…

Fuel sourcing

We continue to make progress with our negotiation with a variety of existing producers and potential suppliers for the full volume required for the second unit conversion ….

…

Timing of second unit conversion

Subject to receipt of a FIDe CfD (by October 2013), our current plan is for this second unit (Drax Unit #3) to be taken offline for the final conversion works during Q2 2014 and start generating as a fully converted biomass unit around a month later."

25. Under the second main heading, "(ii) Justification for award of an Investment Contract", the application stated:

"Without a FIDe Investment Contract there is a significant risk that the renewable generation from the second converted Drax unit will be significantly delayed in execution. There are a number of reasons for this. The most significant ones all relate to the need to secure and deliver to Drax the required sustainable biomass feedstock on the right timescales and at enduringly competitive prices.

The contractual certainty from a private law FIDe Investment Contract will provide the necessary increased confidence, above and beyond that provided by grandfathered ROCs, that our biomass supply and logistics chain is looking for in order to make the investment it needs to guarantee delivery of sufficient volumes of sustainable biomass.

…

Under the previous RO co-firing support regime incremental feedstock volumes could have been deployed progressively with little detrimental impact on the operation or economics of the station or units. However, the execution of a full unit conversion regime requires a unit's worth of biomass to be contracted and delivered to Drax with a steep ramp up and then on a continuous, predictable and evenly phased basis …. As the biomass supply market is relatively small and immature and the necessary world-wide supply chain infrastructure does not currently exist, long term guaranteed off-take contracts with Drax and others are required to develop and support the needed upstream supply chain investment.

Delayed execution of these contracts will delay the necessary development of the supply chain and carries multiple associated risks ….

The key constraint on the timing of, and generation from, coal to biomass conversions in the UK is therefore the world-wide industrial biomass pellet supply chain. We have managed to successfully contract with the existing supply chain for the ~2.3M tpa pellet volume required for our first unit conversion …. However, this volume has effectively taken up a significant part of the available output from existing pellet plants.

The additional volume of pellets required to supply our second (and indeed third) unit is around 2.3M tpa (or ~4.6M tpa in total). This represents a very significant proportion of the total world pellet production ….

…

The needed supply chain investments are in two main areas:

pelleting capacity … and

the weather-protected, storage and transport infrastructure in the USA to move the pellets to Drax ….

…

In summary a FIDe Investment Contract for the second converted unit at Drax would:

create the necessary confidence in the UK renewables support regime at both Drax and through the biomass supply chain both in the UK and elsewhere in the world to underpin the investments required;

facilitate the signing of long-term pellet contracts in 2013 to secure the full biomass supply requirements for the converted unit;

bring forward the upstream supply chain investments in pellet capacity and other necessary infrastructure; and

make the contribution of the renewable generation from Drax to the HMG 2020 targets more certain and secure.

In contrast, not granting a FIDe Investment Contract would mean a potential delay of at least 18 months in execution at this crucial stage. This would risk damaging potentially fragile supply chain confidence in the UK regime and creating a hiatus that will result in higher risk and significantly more than the 9-12 months delay in waiting for a normal CfD."

26. On 19 June 2013 DECC sought clarification of various points, including provision of "a revised programme timeline … (including clarification on when fuel supply stock build to allow full conversion needs to be complete) or alternatively clarify why not relevant", and an explanation of "why a 9-12 month delay in waiting for a formal CFD would mean a potential delay of at least 18 months in execution of the project". Drax responded with a letter dated 1 July 2013 giving details of the revised timetable and stating:

"Drax can confirm that, subject to the revised timetable and the receipt of a FIDe CfD (by March 2014), the Drax second unit biomass conversion (Drax Unit #3) could be delivered within Q2 to Q4 2014."

In response to the request for clarification on when fuel supply stock build to allow full conversion needed to be complete, Drax stated:

"It is the forward contracting of biomass fuel and establishment of a supply chain itself which is more relevant to allowing unit conversion than a stock build …. In respect to forward contracting as identified in the original submission Drax will need to contract 4.6mt of biomass per year to support the fully operational capacity of the second and third unit conversions."

27. Further clarification on the question of delay was given by email dated 19 July 2013:

"What we are saying is that it is the issues with the development of the pellet supply chain that are critical to the timing of our conversions (which we have explained in detail both in our application, and in the supplementary response), and it is this issue which will cause the 15-18 months delay. Failing to act promptly will undermine our ability to place the necessary full-chain contracts for the delivery to Drax of the full volume of pellets … required for each of these converted units …."

28. In the light of the application and the clarifications, DECC assessed the project as fulfilling the Key Criterion and the other Qualification Criteria at Phase 1. DECC's understanding of the information provided, and the basis on which it made its assessment, is set out in the witness statement of Mr Charles Pybus, Head of Final Investment Decision Enabling for Renewables. He states inter alia that DECC considered that on balance there was a sufficient implication in the Phase 1 application that an IC would allow an earlier conversion of Unit 3 than under the RO; that DECC understood Drax's position to be that, absent an IC, the conversion (despite being technically possible) could not proceed due to a lack of feedstock supply; and that DECC's decision was dependent on it inferring that an IC would allow an earlier conversion of Unit 3 than the RO (see in particular paragraphs 45, 47 and 64 of the witness statement). The specific question under the Key Criterion was of course whether generation of electricity would be significantly delayed without an IC, not whether conversion would be delayed. But DECC understood Drax's case to be that generation would be delayed because conversion could not proceed without an IC, for the reasons given in the application.
29. Andrews J considered DECC to be labouring under a misapprehension in understanding Drax to be saying that the conversion of Unit 3 could not go ahead unless and until it had secured sufficient sustainable biomass fuel supplies. She said at paragraph 38 of her judgment that whilst there were statements in the Phase 1 application that were open to that interpretation, it is not what Drax intended to convey and a more careful analysis of the totality of the information provided to DECC would have made this clear. In the same paragraph the judge sought to draw a contrast between a passage in DECC's internal assessment concerning Unit 3 and its internal assessment concerning Unit 1, seemingly to cast doubt on whether DECC did view the matter as it claims to have done. I do not think that the contrast drawn by the judge between the two assessments is a valid one and I am satisfied that there is no proper basis for going behind DECC's clear evidence as to how it understood the position at Phase 1. Whether DECC was labouring under a misapprehension in understanding the position in that way is an important issue to which I will return later in this judgment.

Phase 2

30. The covering letter to the Phase 2 application again gave the necessary board authorisation and warranty. It stated that "the board still considers that securing a FIDe Investment Contract for the second unit will significantly improve our ability to execute our plans to convert this unit to biomass and to maximise renewable output from this unit in a timely manner". The Phase 2 application document stated:

"This Phase 2 application for a FIDe Investment Contract relates to Drax's conversion of a second coal unit (Drax Unit #3, the 'Unit') out of its six coal units to biomass (the 'Project').

…

If Drax is allocated an Investment Contract the Project could be delivered between 1 April 2014 and 31 December 2014. This application assumes a 'target commissioning date' that falls between these two dates ….

…

Criterion 1 – Project Deliverability

As set out in the Phase 1 application … the conversion works for the biomass conversion for the second unit is technically feasible during 2014. However, the date on which commissioning is fully feasible depends on our ability to secure a FIDe Investment Contract and early assurance that sufficient sustainable biomass can be delivered to Drax …."

31. The application also contained several references to the effect that the award of an IC in respect of Unit 3 would ensure that the Target Commissioning Window was met. ("Target Commissioning Window" was stated to have the meaning given to it in the CfD Allocation Methodology, such window to be determined by reference to a specific target commissioning date agreed between DECC and Drax.)
32. As part of the Phase 2 application, Drax also resubmitted the Phase 1 application, as it was required to do, highlighting material changes. The only such changes were those that gave effect to the points of clarification elicited at Phase 1.
33. Given the minimal changes from the Phase 1 application, DECC assessed that a full reappraisal of the project with regard to the Qualification Criteria was not required at Phase 2 and that the project continued to meet the criteria, including the Key Criterion. Drax was informed that it had passed Phase 2 and was eligible to proceed to the submission of a Binding Application.

The Binding Application

34. There were various exchanges between Drax and DECC between the completion of Phase 2 and Drax's submission of the Binding Application.
35. First, Drax informed DECC that as a result of a slippage in the IC timetable there was a change to the target commissioning date given at Phase 2. In an email dated 21 February 2014, DECC recognised that the change arose from the revised IC timetable but said it was nonetheless a material variation and requested Drax to provide an explanation of its potential impact (if any) on the application of the Qualification Criteria and Evaluation Criteria. The email continued:

"As regards the Qualification Criteria, your explanation should include, for example, an explanation of how the project continues to satisfy the investment hiatus requirements [i.e. the Key Criterion]."

36. A letter from DECC dated 7 March 2014, communicating the deadline for submission of Binding Applications, drew specific attention to the need to continue to satisfy both sets of criteria. The letter also enclosed a form for the application which, in Section 8 of Schedule 1, required the following information to be provided:

"Please set out the reasons why you consider in the absence of being awarded an Investment Contract there would be a significant risk that the electricity generation to which it would relate would not occur or would be significantly delayed."

37. On 10 March 2014 Drax sent DECC an "eligibility update", stating that the target commissioning date was to be changed to 1 April 2015, which would also be the start of the target commissioning window. The document stated:

"We confirm that the proposed change in the TCD will not have any potential impact on the Qualification Criteria or the Evaluation Criteria for the Drax Unit #3 project. In particular, the justification for the award of an Investment Contract was to support the need for timely investment in the development of the capacity of the longer-term sustainable biomass supply chain, which remains exactly as set out in our Phase 1 and 2 submissions."

The covering email expressed the hope that DECC could assess the change and confirm that there was no impact on the Qualification or Evaluation Criteria before the deadline for Binding Applications.

38. DECC replied by email on 21 March 2014, stating:

"… We confirm that subject to confirmation of these details in your binding application and the statements below, we have provisionally evaluated this change [i.e. to the target commissioning date] as not requiring a change to the project's qualification or evaluation scoring.

We have not at this stage reassessed your project's compliance with the Phase 1 Qualification Criterion 2.ii. that without an Investment Contract there is a significant risk that the electricity generation to which the Investment Contract relates will not occur or will be significantly delayed. We will reassess this criterion based on your response to Section 8 (investment hiatus) of your binding application. In this regard, we would remind you that each application will be considered individually on its own merits and that each application should therefore state clearly the reasons why the unit conversion project concerned is at risk of delay or cancellation in line with the Phase 1 qualification criterion."

39. Drax's Binding Application was submitted on 25 March 2014. Under Section 8 of Schedule 1 it stated:

"As set out in our Phase 1 and Phase 2 submissions, the need to secure and deliver to Drax the required sustainable biomass feedstock on the right timescales and at enduring competitive prices is essential to support the conversion to biomass of Unit #3 and generation from that Unit.

We provided in our Phase 2 submission … the contracted and pipeline position for biomass supplies for Unit #3 …. As we have highlighted in our submissions … we are dependent on successful new pellet plant developments … to meet our overall biomass requirements. Hence our strategic decision to invest upstream in the supply chain as well as pursuing (simultaneously) a range of pipeline opportunities. Our contracted fuel position remains very vulnerable to any operational delay/hiatus in the development of new pellet plants.

The contractual certainty from a private law Investment Contract will provide the necessary increased confidence that our biomass supply and logistics chain is looking for in order to make the investment it needs to guarantee delivery of sufficient volumes of sustainable biomass to fuel the electricity generation from biomass conversion of this Unit …."

40. An internal DECC assessment of the Binding Application noted that it did not include a restatement of various points included in the Phase 1 and Phase 2 applications, including a statement that "there is a significant risk that the renewable generation from the second converted Drax unit will be significantly delayed in execution as a result of [the need] to secure and deliver to Drax the required sustainable biomass feedstock on the right timescales and at enduringly competitive prices". Nor had Drax restated what the impact of not having an IC would be on the timing of scheduled commissioning or on the financial viability of the project. Drax had, however, stated that the justification for the award of an IC remained exactly the same as their Phase 2 and Phase 3 submissions. The assessment stated that DECC had to decide whether that was sufficient; and if not, DECC had to decide whether to request clarification. If the Phase 2 / Phase 3 justification was not accepted as sufficient at this point and it was not considered appropriate to request more information, the project would fail to meet the Qualification Criteria based on the content of the Binding Application alone. (The assessment document refers to "Phase 3" which does not otherwise feature in the history of the Unit 3 application, but I do not think that anything turns on this.)
41. DECC decided to invite clarification. In an email dated 1 April 2014 it pointed out to Drax that the Binding Application did not repeat the statements in the Phase 1 and Phase 2 applications about delay if an IC were not granted, and that there were "no alternative statements … which address the likelihood of non-occurrence or the likelihood and extent of any delay to the conversion as referred to in Section 8". Drax was asked to clarify whether it still continued to consider the statements in the Phase 1 and Phase 2 submissions concerning the significant risk of delay and a minimum 18 months delay to be the case and, if so, how the delay continued to arise.
42. A face-to-face meeting took place on 3 April 2014 between representatives of DECC (including Mr Pybus) and representatives of Drax (Mr Koss and Mr Love), before Drax sent its answer to the request for clarification. Mr Pybus's witness statement explains what emerged at that meeting:

"Some of Mr Koss' comments at the meeting alerted me, for the first time, to the fact that Drax's case was now that a failure to award an Investment Contract 'wouldn't necessarily delay conversion'. I stressed the importance of explaining how a delay to generation arose, and, as far as possible, to explain why the RO alternative was not a viable one in the circumstances. I told them that the response should 'as far as possible scotch the RO alternative'. I can see from the note of the meeting that Mr Love stated – to the best of my recollection as a result of reviewing the draft letter that he had brought to the meeting – that the RO alternative was not mentioned in the letter. I reiterated that there needed to be a 'clear statement on delay', that the application would be 'heavily scrutinised' and that Drax needed to be 'very clear'. I felt this was as far as I could go so as to ensure that we remained even-handed in relation to all applicants" (original emphasis).

43. Drax's response to the request for clarification was sent on the following day, 4 April. Its Executive Summary confirmed that not being awarded an IC in April 2014 "would result in a significant risk that the renewable generation from the second converted Drax unit (Unit #3) would be significantly delayed in execution"; the current estimate of the delay was 12-14 months. The supporting text stated, under the heading "Rationale":

"In our Binding Application, as well as our Phase 1 and Phase 2 submissions and Eligibility Update of 10^th March, we set out clearly the reasons why we need an Investment Contract for Unit #3. In summary, they relate to the need to secure and deliver to Drax the required sustainable biomass feedstock on the right timescales and at enduringly competitive prices in order to support the full conversion to biomass of Unit #3 and secure the future generation from that Unit. In order to do that, and given the limitations that currently exist in UK, EU and worldwide biomass pellet markets, we need the Investment Contract to raise the funding to support timely investment to develop additional capacity in the medium to longer-term sustainable biomass supply chain ….

In terms of assessing the adverse impact of not being granted an Investment Contract for Unit #3, we continue to believe there is a significant risk that this would result in a material delay in delivering the renewable generation from the conversion project at a critical time for the project ….

Our current assessment is that, if Drax Unit #3 were not awarded an Investment Contract on the current timetable in April 2014, we would then have to wait to apply for an enduring CfD before being able to proceed with further investments in the supply chain and transportation infrastructure and contracting for fuel for Unit #3 beyond the short-term. As we have outlined before, security of supply of fuel for the duration of the Investment Contract is uncertain and critical for the overall delivery and viability of the project. On the current timetable, the application process for the enduring CfD might be available in Q4 2014, however we would be very vulnerable to any slippage in that timetable, particularly as regards our ability to progress fuel contracts and pellet plant and infrastructure investments.

As described in our earlier submissions, the Investment Contract would create the opportunity to raise further funds against the UK assets of the business without putting the Drax credit rating under undue pressure, as the increased financial risk would be offset by the reduced business risk (by virtue of having some downside risk protection against power price volatility). It would also improve the confidence of third party developers and their financial backers to take on additional exposure to Drax. If we were not granted an Investment Contract this would not be the case and we would either have to (1) wait for the enduring CfD to be available (and raise funding against the UK assets on a similar basis), or (2) seek to recycle capital from/raise finance against the US assets, which would be ring fenced from the UK business and therefore similarly protect the rating, both of which would have a significant timing impact.

Moreover, under scenario (2), raising finance against our US assets would not be feasible until the first new pellet plants were operational and had at least 6 months' operational data to share with potential investors. These are not expected to be completed until Q1 2015. Similarly, we would need to demonstrate a better and longer track record on Drax Unit #2, converted to biomass under the RO, to convince funders of the viability and security of the off-take. So this scenario would therefore not be possible for Unit #3, given our latest timings, until at Q3-Q4 2015.

The Investment Contract for Unit #3 will have a State Aid CP. However, as set out in our various submissions, the importance of maintaining the crucial momentum in developing the supply chain for this second unit conversion, which has proved challenging given the unexpected delay, is crucial …. As a reminder, below is a graph of our contracted position for Unit #3 from September 2013 which demonstrates how crucial the pipeline supplies are to delivering the future generation from the project ….

[The graph (or chart) is described and considered later in this judgment.]

…

If Drax Unit #3 is awarded an Investment Contract in April 2014, we are confident that there are sufficient (a) existing pellet plant facilities to secure the necessary short-term volumes to fuel the unit, and (b) potential new pellet production developments that are viable and sufficiently advanced to secure medium to longer-term sustainable biomass for Unit #3. If Drax Unit #3 is awarded an Investment Contract, this will enable us (taking state aid risk) to proceed with our investments and contracting strategy for Unit 3 immediately after contract award, which we believe will provide a vital injection of confidence to the nascent supply chain at a critical time, and for which potential investors and suppliers have been waiting patiently for some time …."

44. A DECC internal review of the application raised continuing concerns in relation to the Key Criterion, including:

"There is no reference anywhere in their clarification statement to the viability of accrediting under the RO. They do state that on a general basis not being awarded an IC, having been provisionally ranked equal first and deemed affordable, would result in a significant risk that generation would be significantly delayed in execution. However, all subsequent statements then related to the CfD as an alternative to an IC. Having revisited their Phase 1 resubmission under Phase 2 it is apparent that in that application they did compare the award of the IC with their equivalent position under the RO and this was taken into account in DECC's assessment and the subsequent pass against the qualification criteria ….

Overall, … the reviewer's assessment is that Drax have demonstrated Investment Hiatus compared to the alternative of securing a CfD but there is not clear evidence of the viability of them accrediting under the RO ….."

45. An internal meeting was held to discuss the issues concerning this application and the application in respect of Unit 1. Subsequently a note was produced which states the following in respect of Unit 3 :

"10. The binding application for unit #3 is the same as that for unit #1. The clarification letter makes the same general statements about the need for investment contract to raise the funding to support timely investment to develop the supply chain for sustainable biomass, including investment in port and rail (UK and overseas) directly and under take-off commitments.

11. For Unit #3, Drax asserts that there would be a delay of 12-14 months to the project, apparently resulting from a delay of 6-8 months for the award of a CfD under the enduring regime, and a further delay of 6 months resulting from the loss of confidence in the biomass market if Drax failed to be granted an investment contract. Little explanation or supporting evidence is given for this delay. We are not convinced that a delay until the generic CfD regime would result in a further 6 months' delay to the sourcing of biomass fuel for Unit #3 for a period from some point in 2015 onwards.

12. Drax state that – unlike for unit #1 - they are confident that there are sufficient existing pellet plant facilities to secure the necessary short-term supplies of biomass. Drax is also confident that there are sufficient viable potential new pellet plants, sufficiently advanced, to secure medium to longer term biomass supplies for unit #3. This is expressed as being conditional on the award of an investment contract for unit #3. It is not clear whether these supplies of biomass would not be available if an investment contract was not awarded (and the unit was supported under the RO instead).

13. There is a further indication that there are sufficient supplies of biomass in the short term in the statement by Drax that they would have to wait to apply for an enduring CfD before being able to invest in the supply chain 'beyond the short-term'. This implies that short term supplies do not need any further investment.

14. Drax state that they would take 'state aid risk' and proceed with their investments for unit #3 after receiving an investment contract but before State aid approval is given. It appears from this that it may therefore be possible for Drax to make these investments on the strength of the RO support which they are currently obtaining for co-firing, and could obtain for operating as a conversion in future. They do not explain why this is not the case.

15. Significant work towards converting unit #3 and sourcing fuel has already been undertaken. As set out in schedule 3 to the binding application, the unit will be co-firing for a period up to April 2015, and the full conversion appears to be being delayed until payments under the investment contract can be made. Given that some renewable energy will be produced by co-firing, and that short term supplies of biomass do not appear to be a problem, it is not clear how much generation is likely to be delayed or cancelled."

46. Mr Pybus says in his witness statement (paragraph 122) that, in summary, (a) contrary to DECC's previous understanding, it seemed unlikely that the Unit 3 conversion itself was at risk if an IC was not awarded; (b) that being the case, it was not clear what and how much generation was at risk of cancellation or delay or when; and (c) it was now very unclear how the absence of an IC would give rise to this delay as compared to the alternatives, particularly the alternative of commissioning under the RO; indeed, it appeared that the RO was implicitly recognised as a viable alternative. Those points were reflected in the subsequent decision letter, as set out below. In the result, DECC was not satisfied that the Key Criterion was fulfilled, and it was therefore decided that the application in respect of Unit 3 had to be refused.
47. Drax was informed of the intended decision on 14 April. Drax's requests to make further representations were refused.

The decision

48. The decision letter, dated 22 April 2014, referred to the Key Criterion and its importance, stated that DECC had found it to be satisfied at Phase 1 and Phase 2 on the information available at the relevant times, but that the Binding Application was materially different to the earlier submissions. It then referred to the request for clarification and the letter of clarification. It continued:

"However, your letter and binding application do not provide a cogent explanation of the risk of delay to the generation. DECC notes that:

It no longer appears from your submissions that the actual conversion of the Unit #3 plant itself is at significant risk of delay without an investment contract. This is in contrast to your submissions at Phase 1 and Phase 2 which indicated that conversion of Unit #3 depended on securing the rights to sufficient sustainable biomass.

Your recent submissions do not explain in a satisfactory manner how the alleged delays in fuel supply chain investment caused by the absence of an investment contract would prevent or delay generation. For example, if Drax is making the case that, without an investment contract, Unit #3 may convert but may not operate at full capacity, your submissions do not identify the amount of generation that might be delayed or the point at which delay might occur.

Your recent submissions do not explain why, in the absence of an investment contract, the delay referred to in your clarification letter could not be avoided by converting the plant under the Renewables Obligation (RO). This is in contrast to your submissions at Phase 1 and Phase 2 which indicated that a private law contract was important in enabling sufficient fuel to be sourced for Unit #3.

Accordingly, having carefully considered the matter, including in light of your recent submissions, DECC is not satisfied that you have demonstrated that without an investment contract there is a significant risk that the electricity generation relating to Unit #3 will not occur or will be significantly delayed."

The judgment of Andrews J

49. In the form in which the case was considered by Andrews J, Drax advanced two primary grounds of challenge, namely that:

(1) the decision that the Key Criterion was not satisfied was irrational: it had always been Drax's case that Unit 3 would convert at the same time regardless of whether it got an IC; Drax had put forward the same case at each phase; and no decision-maker could reasonably have considered that the Key Criterion was not satisfied in the light of the evidence submitted; and

(2) even if the decision was not irrational, it was vitiated by procedural unfairness: Unit 3 had been passed as satisfying the Key Criterion at Phases 1 and 2, and Drax should have been given the opportunity to respond to DECC's concerns at the Binding Application stage before a final decision was made.

50. The judge granted permission to apply for judicial review and proceeded to consider the substantive claim, first setting out the background and then turning to the legal issues.

Reasonableness: introduction

51. The first of the legal issues she considered was that of the reasonableness of the decision. At paragraph 58 she said that this was not a case in which the court should adopt a "light touch" in scrutinising its reasonableness, according a wide degree of deference to the decision-maker. The decision did not relate to matters of policy or political judgment, nor did it require the exercise of particular technical expertise. It was simply "an evaluation of whether, on the information provided, a project satisfied the stipulated pass/fail criteria". However, she considered that the standard of judicial review was unlikely to have an impact on the outcome of the claim.
52. She went on to make further observations about relevant legal principles, apparently accepting at paragraph 62 the high test of irrationality expressed by Lord Diplock in Council of Civil Service Unions v Minister for the Civil Service [1985] AC 374, at 410, and cited by Lord Mance in Axa General Insurance Ltd v HM Advocate [2011] UKSC 46, [2012] 1 AC 868, at paragraph 97 ("so outrageous in defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it").
53. She then summarised the submissions for the Secretary of State before turning to the reasons for DECC's decision, stating that the three bullet points quoted at paragraph 48 above must be the starting point for evaluation of the submissions.

The first bullet point

54. The judge dealt with the first bullet point at paragraphs 66-68. She brought in her finding that DECC had misunderstood what Drax was saying in its Phase 1 and Phase 2 submissions (see paragraph 29 above), stating that the revelation of DECC's misunderstanding was self-evidently not a reason, let alone a good one, for concluding that the Key Criterion was not met. She accepted that, if an applicant had said that the conversion would be delayed without an IC, that would be a good reason for concluding that the Key Criterion was met. If it was always planned to convert the unit whichever of the support regimes was adopted, the applicant would have to provide a cogent explanation of why the RO would take significantly longer to enable it to generate the electricity from biomass, but it did not need to establish that the entire output from the converted unit would be lost without an IC. On Drax's case, the timing of the conversion was of little or no significance. What mattered was whether there was going to be a sufficient supply structure in place to support the continuous generation of electricity after Unit 3 was converted. Drax's case was that it would be able to put that vital supply structure in place much sooner with an IC than with the RO or even a CfD.
55. At the end of the passage of her judgment concerning the first bullet point, however, the judge said that the point added nothing of substance to the second and third bullet points, on which the decision turned.

The third bullet point

56. The judge dealt next, at paragraphs 69-76, with the third bullet point, saying that it was equally easily disposed of. She described it as both inaccurate and unfair. Whilst the Binding Application and the letter of 4 April did not explicitly state that the IC would provide increased confidence "as compared with the RO", and did not expressly repeat what was said about the RO counterfactual in the Phase 1 application, it was obvious, and should have been obvious to any reasonably informed decision maker, that Drax was not departing from its previous position in that regard but was adopting it. On a fair reading there was no difference between what Drax had said at Phase 1 and Phase 2 about the importance of a private law contact in securing the necessary increased confidence that its biomass supply and logistics chain was looking for and what it was saying about it at the Binding Application stage. On one view there was an incorporation by reference of the Phase 1 and Phase 2 application documents; but at the very least, there was an adoption of everything that had been said in the earlier applications. Had there been any room for doubt, the 4 April clarification letter confirmed that Drax was standing by everything that it had said at Phase 1 and Phase 2. DECC made the fundamental mistake of believing that Drax was no longer putting forward the explanation given at Phase 1 and Phase 2 for the fact that an IC or CfD would enable it to put the requisite long term supply chain in place quicker than the RO. The explanation was being put forward and there was no good reason to have thought otherwise.

The second bullet point

57. The judge then turned to the second bullet point, which she regarded as the critical reason upon which the claim turned. She dealt with it at paragraphs 77-86. She referred first to Drax's submission that it involved the introduction of an entirely new criterion: it was no part of the published scheme that applicants would have to satisfy some threshold test as to the quantity of generation that would be accelerated by an IC, or provide a detailed explanation of the precise amount of generation and on what timescale. The judge considered that on the face of it that was a fair criticism. DECC's complaint was that Drax had not, or had not sufficiently, explained how the alleged delays in fuel supply chain investment caused by the absence of an IC would delay the generation of electricity. But she considered that complaint to be patently unsustainable. It was obvious that the less fuel one had to burn, the less energy would be generated.
58. In developing the point, the judge said that the whole aim of converting a unit was that it would be able to generate the same amount of electricity on biomass alone as it did when it was co-firing. Drax's factual case was that its existing sources of supply were insufficient to keep Unit 3 operating at full capacity beyond the short term. Therefore Drax needed to build up a reliable worldwide supply and logistics infrastructure to enable it to maintain that level of output from Unit 3; and on a proper interpretation of the Binding Application, read with the Phase 1 and Phase 2 applications, it would be more difficult (and thus take longer) for Drax to put the necessary infrastructure in place with RO support than it would with a form of CfD because of the enhanced market confidence that the latter type of financial support could bring. What Drax was saying meant that if there was conversion under the RO scheme there would be at least a serious risk of a future hiatus during which the Unit would be generating at lower capacities dictated by whatever supplies of biomass happened to be available at that time. No reasonable decision maker would be entitled to reject that explanation out of hand on the basis that the applicant had not provided statistics or a computer model estimating how much electricity the converted unit would be able to generate without an IC. If the continuous supply chain of sufficient quantities of biomass to operate the unit to its full capacity for the indefinite future was not already in place and could not be put in place without significant further investment, there would inevitably be a delay in operating the unit to its full capacity on a continuous basis until such time as the infrastructure was put in place. The necessary volume of supplies would be impossible to sustain in the medium to long term, which meant that at some point the amount of electricity that the unit could generate would drop to whatever level could be sustained by the amount of biofuel that was available to burn.
59. The judge said that Drax did not need a graph or chart to illustrate something so obvious, but the chart set out in the clarification letter demonstrated that the pipeline fuel (and thus the generation that depended on it) would be delayed without an IC. If DECC did not understand the chart, it was incumbent on them to ask for an explanation or for clarification of it. If DECC failed to have regard to the chart, they were ignoring legally relevant material.
60. Thus, she continued, if the premise was accepted that the RO route would engender less market confidence in Drax than an IC or CfD and that it would or could have a significant impact on Drax's ability to raise the necessary finance or investment to put the infrastructure in place, for all the reasons stated by Drax in its various applications, it necessarily followed that going down a CfD/IC route was likely to enable Drax to operate the converted unit consistently at full capacity much sooner than converting under the RO. That meant that without that supply chain and associated logistical infrastructure, the electricity generation to which the IC related, i.e. the same amount of electricity previously generated by burning coal in the unit, would be delayed. It therefore did not matter whether the unit could operate at 50%, 60% or 80% capacity on the basis of supplies that could be sourced without the IC, or indeed whether it could operate to 100% capacity for 2, 3 or 6 months. The difference in the amounts of energy that could be produced was immaterial: it was the likelihood of a shortfall that mattered. Likewise the date when the amount of fuel available was going to have an adverse impact on the ability to keep the unit running at full capacity did not matter.
61. Finally in relation to the second bullet point, the judge said that the only basis upon which a properly informed decision maker, having understood Drax's application, could have concluded that it did not satisfy the Key Criterion would be if it rejected the premise that the RO would engender less market confidence than a CfD or IC, and thus adversely impact on the ability of Drax to put the infrastructure in place, or if it rejected the evidence about how much biomass was needed or would be available to keep the unit running at capacity. But both these matters were accepted by DECC at Phase 1 and Phase 2 and no reason had been put forward for changing their minds about them. Moreover, the rejection of those matters played no part in the reasoning under challenge.

Conclusion on the issue of reasonableness

62. The judge concluded, on the issue of reasonableness:

"87. Although a Court will not lightly interfere with a decision of this nature, particularly when such a large sum of money is involved, and despite the attractive simplicity of Mr Chamberlain's submissions, I am driven to the conclusion that the Claimant has succeeded in discharging the onerous burden of proving that the decision was unreasonable in the Wednesbury sense and that none of the reasons given by DECC in the decision letter can possibly sustain it. When properly understood, Drax's application did satisfy the Key Criterion and no decision maker, properly informed, who accepted that Drax was telling the truth about the different impact on market confidence of a CfD or IC versus an RO, and about the need to build up the necessary continuous volume of supplies of biomass to fire the unit in future, could have concluded that it had failed to do so or that the information given by Drax was insufficient to satisfy him that it passed the test. "

Procedural unfairness

63. The judge turned to the issue of procedural unfairness, at paragraphs 88-91 of her judgment. She said that in the light of her conclusion on the first issue it was unnecessary to dwell upon this ground of challenge. She did, however, make brief observations about it. She stated that in the light of the fact that there was no "minded to" stage in the process there was no obligation on DECC to proceed as if there were; it was incumbent on Drax to put forward all material it wished to rely on, and for DECC then to evaluate it. If there was uncertainty about what Drax was saying about anything of legal relevance, it would be unfair to make an adverse decision without first seeking clarification. However, there was no obligation to seek clarification or further evidence to remedy deficiencies in the application, provided that DECC was not mistaken in characterising them as deficiencies. Likewise, if DECC had been introducing new criteria at the last stage, then it would have been procedurally unfair to determine the application without giving Drax a proper opportunity to address them. The judge continued:

"91. The real problem, in my judgment, was not so much a result of deficiencies in the procedure that was adopted, as a result of the misunderstandings about Drax's supposed change of position and the negative impact that DECC's mistake about Drax's failure to deal with the RO counterfactual obviously had upon the way in which the evaluation of whether it had satisfied the Key Criterion was then carried out. For that reason, I do not consider that the second ground of challenge adds anything of substance to the first."

The judge's order

64. By her order, the judge quashed the decision, granted a declaration that the Key Criterion was satisfied in respect of Unit 3, and remitted the application for an IC to DECC for reconsideration in the light of her judgment.

The issues in the appeal

65. The Secretary of State challenges the judge's general approach to Wednesbury unreasonableness, submitting inter alia that she should have applied a "light touch" review and that she wrongly substituted her own view for that of DECC. It is submitted that the judge was wrong in any event to find that the decision was unreasonable. Each of the three bullet points in the decision letter was correct or was at least a reasonable view to take. DECC reasonably concluded that Drax had failed to demonstrate to DECC's satisfaction that the Key Criterion was satisfied.
66. The Secretary of State submits further that, in so far as the judge found that DECC acted unlawfully in failing to seek further clarification from Drax in relation to the Binding Application, she was wrong to do so.
67. Drax supports the judge's decision on the issue of irrationality and submits further, by way of a respondent's notice, that the decision should be quashed in any event on the ground of procedural unfairness and for a failure by DECC to take reasonable steps to acquaint itself with relevant information so as to enable it to discharge its duty correctly.
68. As to relief, the parties accept that the judge's order, including in particular her declaration that the Key Criterion was satisfied, will stand if her finding of irrationality is upheld. If the finding of irrationality is not upheld but there is found to have been procedural unfairness, there is an issue between the parties as to whether the decision should be quashed and remitted for a fresh decision or whether the court should conclude, on the basis of all the evidence now before it, that the provision of further information by Drax would have made no difference and that relief should therefore be refused. In so far as permission is required for Drax to advance its arguments concerning the order, I would grant permission and deal with the arguments on their merits if and to the extent that they arise on the court's findings with regard to the substantive issues.

The reasonableness issue: discussion

General approach

69. This issue calls for no great refinement in terms of general legal approach. It is common ground that the test is that of Wednesbury reasonableness. An elementary feature of Wednesbury review is that the court is exercising a supervisory jurisdiction. The focus throughout must be on whether the view or decision of the primary decision-maker was reasonably open to it on the material before it. I stress that point only because there are places in Andrews J's judgment where she appears to look at the "fair reading" or "proper interpretation" of the documents rather than at whether DECC's understanding of them was reasonably open to it.
70. The intensity of review depends on the subject matter. The judge referred in that connection to the commentary in Auburn, Moffett & Sharland, Judicial Review: Principles and Procedure (2013), at paragraphs 17.20-17.26, concerning "light touch" judicial review. The commentary cites the judgment of Sir Thomas Bingham MR in R v Ministry of Defence, ex parte Smith [1996] QB 517, 556, as encapsulating the point:

"The greater the policy content of a decision, and the more remote the subject matter of a decision from ordinary judicial experience, the more hesitant the court must necessarily be in holding a decision to be irrational. That is good law and, like most good law, common sense. Where decisions of a policy-laden, esoteric or security-based nature are in issue, even greater caution than normal must be shown in applying the test, but the test itself is sufficiently flexible to cover all situations."

71. The present case does not involve the kind of policy-laden, esoteric or security-based decision where particular caution, or a particularly light touch, is required. On the other hand, it seems to me that the judge was unduly dismissive in describing it as "simply an evaluation of whether, on the information provided, a project satisfied the stipulated pass/fail criteria" (paragraph 58 of her judgment). It is true that satisfaction of the Key Criterion was a pass/fail matter rather than one that called for scoring and ranking of applications. But in order to pass, an applicant had to demonstrate to the satisfaction of DECC that the Key Criterion was met. In deciding whether it was so satisfied, DECC had to make an assessment as to the risk that the generation to which the IC related would not occur or would be significantly delayed in the absence of an IC. It was an assessment to be made on the basis not just of the information provided by the applicant but also of DECC's own experience in relation to the relevant renewable energy support regimes and technologies. The sophistication and technicality of the process of assessment no doubt depended on the specific features of the individual case, but the general context is one calling in my view for the exercise of a considerable degree of caution by the court in determining a challenge on grounds of Wednesbury unreasonableness.
72. An additional reason for caution is that the Secretary of State is required to lay each IC before Parliament with a statement to the effect that he considers the Key Criterion to be satisfied. As Mr Chamberlain submitted, the Secretary of State effectively delegated to DECC the assessment on the basis of which that statement would be made. The result of Andrews J's declaration in this case has been to require the Secretary of State to make a statement to Parliament to the effect that the Key Criterion is met in relation to Unit 3 even though, on the basis of the assessment made by DECC, he does not consider it to be met. There is nothing wrong in principle with such an outcome if, as the judge held, the only conclusion reasonably open is that the Key Criterion is met. It is, however, a curious position and one that serves to underline the need for caution on the part of the court.

DECC's reasoning

73. I turn to consider the reasons for DECC's decision, looking in turn at each of the three bullet points in the decision letter.
74. I do not agree with the judge's view that the first bullet point reveals a misunderstanding of what Drax was saying at Phases 1 and 2. DECC understood Drax to be saying at Phases 1 and 2 that without an IC there was a risk that the conversion of Unit 3 from co-firing to full biomass would be delayed. In my judgment, there was amply sufficient in the material submitted by Drax to justify that understanding. For example, at Phase 1 it was said that the conversion of Unit 3 was technically feasible but "dependent on securing the early rights to sufficient sustainable biomass delivered to Drax"; and the whole tenor of the argument in relation to the IC was that it would provide the increased confidence that the supply and logistics chain was looking for in order to make the investment it needed to guarantee delivery of sufficient volumes of sustainable biomass (see paragraphs 24-25 above). Similarly, the timing of the conversion of Unit 3 was stated to be "subject to receipt of a FIDe CfD [i.e. an IC]" (ibid.). Issues with the development of the pellet supply chain were said to be "critical to the timing of our conversions" (see paragraph 27 above). The Phase 2 application re-submitted the Phase 1 material and included the further statement that the conversion was technically feasible during 2014 but "the date on which commissioning is fully feasible depends on our ability to secure a FIDe Investment Contract …" (see paragraph 30 above).
75. As previously mentioned, the judge acknowledged that there were passages in the material that were open to the interpretation placed on them by DECC but said that it was not what Drax intended to convey and that a more careful analysis of the totality of the information provided would have made this clear. I do not think that anything turns on what, as a subjective matter, Drax intended to convey. What is important is DECC's understanding of what Drax was saying and whether that understanding was reasonably open to it. Nor do I accept that careful analysis of the totality of the information would have made clear to DECC that its understanding was mistaken. On the contrary, looking at the information provided as a whole, I take the view that it was perfectly reasonable for DECC to understand the position as it did.
76. Accordingly, DECC was entitled to proceed on the basis that Drax's case had changed when it appeared at the Binding Application stage that the absence of an IC would not delay the conversion of Unit 3. The point being made in the first bullet point of the decision letter was a valid one.
77. The point was not determinative but it was important. The judge herself said at paragraph 24 of her judgment that a decision by the board of an applicant company that it would make no sense economically to convert until they could be sure that the converted unit would be able to operate at full capacity in the medium to long term would be "strong evidence" that the Key Criterion was satisfied. For similar reasons, on DECC's understanding of the case advanced at Phases 1 and 2, there was strong evidence that the Key Criterion was satisfied in respect of Unit 3. But at the Binding Application stage that strong evidence had gone: it appeared that conversion to full biomass was considered by Drax to be commercially feasible without an IC. It was necessary to see whether in those changed circumstances Drax had demonstrated a causal connection between the absence of an IC and a delay in generation. The issue had to be examined from a new perspective. That takes me to the second bullet point.
78. The first sentence of the second bullet point stated that Drax's submissions did not explain in a satisfactory manner how the alleged delays in the fuel supply chain investment caused by the absence of an IC would prevent or delay generation. The second sentence stated that, "for example", if it was being said that Unit 3 might be converted but might not operate at full capacity, the submissions did not identify the amount of generation that might be delayed or the point at which delay might occur. The judge was highly critical of all of this. She seemed to accept a submission on behalf of Drax that it involved the introduction of an entirely new criterion which formed no part of the published scheme, and she thought that the answer to the "how?" question in the first sentence was given clearly in Drax's submissions. On these issues, too, I take a different view.
79. First, I do not accept that the second bullet point introduced any new criterion. The "for example" statement in the second sentence did no more than point to the absence of specific evidence that might show the impact of the alleged delays in fuel supply chain investment on the generation of electricity. It related directly to the Key Criterion, illustrating the concern expressed in the first sentence as to the absence of a satisfactory explanation of how generation would be prevented or delayed. It did not add a threshold requirement that generation had to be prevented or delayed by a specific percentage or for a specific period.
80. Drax maintains that its case was that "in the absence of an Investment Contract, Unit #3 may convert but may not operate at full capacity" (second witness statement of Mr Koss, paragraph 31). I have to say that I do not find that case spelled out clearly in the Binding Application or clarification letter, and I see why DECC was troubled about the case being advanced and was concerned that an insufficient explanation had been given. Notwithstanding the points made in Drax's submissions about the effect an IC would have on investment in the fuel supply chain and security of supply, the submissions did not contain any explicit statement that following its conversion Unit 3 would or might be unable to operate at full capacity in the absence of an IC. If Drax had decided to proceed with its conversion in any event, such a course was evidently considered to be commercially feasible even under RO support. Why was the decision taken if the unit was not expected to be able to run at full capacity under RO support? (The judge referred at paragraph 24 of her judgment to a possible explanation by reference to the introduction of the Carbon Price Floor, but that explanation emerged in the course of argument before her and formed no part of Drax's submissions at the Binding Application stage.) If the decision to convert was taken on the basis that the unit would operate at less than full capacity in the absence of an IC, what was the expected degree of shortfall, and from what date? These were legitimate questions for DECC to ask itself in assessing whether Drax had demonstrated to its satisfaction that the Key Criterion was met.
81. Unlike the judge, I do not think that it was obvious from Drax's submissions that in the absence of an IC there was a risk that Unit 3 would operate at less than full capacity post-conversion and that the generation to which the IC related would therefore be delayed. Drax was undoubtedly saying that an IC would lead to the increased confidence that the supply and logistics chain was looking for in order to make the investment it needed to guarantee delivery of sufficient volumes of biomass. But the details given in the Binding Application and clarification letter did not compel the conclusion that, in the absence of an IC, Drax was at significant risk of being unable to obtain sufficient supplies to run the unit at full capacity. It was evident that an IC would be commercially advantageous to Drax in its negotiations with its suppliers but it was not evident that the absence of an IC would risk a delay in generation. In the circumstances it was not unreasonable for DECC to take the view that a satisfactory explanation had not been given as to how the alleged delays in fuel supply chain investment would prevent or delay generation.
82. In this connection I should say a little more about the graph included in the letter of clarification (see the square bracketed sentence in the quotation from the letter at paragraph 43 above). The graph showed "contracted" and "pipeline" supplies for Unit 3, set against the capacity of the unit, for the period 2014 to 2027. Its professed purpose was to demonstrate how crucial the pipeline supplies were. In the course of his submissions Mr Chamberlain made a number of points aimed at demonstrating that the graph did not show that the unit would not operate at full capacity at any particular time: for example, nowhere did Drax say that it would be unable to secure any of the pipeline supplies, and in some years it would only be necessary to secure a portion of the pipeline supplies in order to operate at full capacity. There appeared to me to be force in those points. I think it sufficient, however, to refer to the comment at paragraph 135 of Mr Pybus's witness statement, that the graph "would be totally inadequate without further analysis and explanation to provide the cogent and quantifiable explanation of a delay to generation that DECC required …". Mr Pybus goes on to say that the delay to electricity generation can in no way be described as "obvious" from the graph, and that when account is taken of the narrative accompanying the corresponding graph in the Phase 2 application, the opposite is true: the graphs do not explain how much generation would be lost if an IC was not awarded. In my view that represents a fair appraisal of the limitations of the graph. I do not agree with the judge's assessment that the chart "clearly demonstrates that the pipeline fuel (and thus the generation that depended upon it) would be delayed without an IC" (paragraph 83 of her judgment). Nor did I understand Mr Ward to submit that the graph went that far.
83. There is a substantial overlap between the second bullet point and the third, which is really a specific aspect of the general concern expressed in the second. The specific point relates to the absence of an explanation of why the alleged delay could not be avoided by converting Unit 3 under the RO. The judge thought it obvious that Drax was adopting the position set out in its Phase 1 application concerning the RO counterfactual, and that on a fair reading there was no difference between what Drax had said at the earlier phases and what it was saying at the Binding Application stage. It seems to me, however, that DECC was entitled to view with considerable caution the difference between what had been said before and what was being said now about the effect of the RO. The Binding Application itself did not refer to the RO. The clarification letter referred to it only inferentially, in the context of the scenario of seeking to recycle capital from or raise finance against the US assets. I accept that it remained Drax's case that an IC would increase confidence as compared with (inferentially) support under the RO. But it was not unreasonable of DECC to look for an explicit statement (and evidence) that the fuel supplies needed for full generation by Unit 3 post-conversion would not be available with RO support.
84. This brings me back to the different perspective from which DECC was scrutinising the case put forward by Drax at the Binding Application stage. It now appeared that conversion of Unit 3 to full biomass was considered to be commercially feasible under the RO regime. The fact that Drax was saying that if an IC was awarded it was willing to proceed with the conversion of Unit 3 without waiting for State Aid approval, i.e. when there was no certainty that IC support could actually be implemented, also suggested that Drax was prepared to convert and operate the unit under the RO regime. It was reasonable in those circumstances for DECC to scrutinise the application rigorously for an explanation of why it was said that a delay in generation would nevertheless arise without an IC; and it was reasonable for DECC to take the view that a satisfactory explanation had not been provided.
85. In conclusion, I have reached a fundamentally different conclusion from that of Andrews J on the issue of Wednesbury unreasonableness. I have sought throughout to look at the matter from the perspective of the decision-maker and to ask myself whether its approach to relevant matters was a reasonable one and whether the ultimate decision was reasonably open to it on the material before it. I am not persuaded by the judge's reasoning or by Drax's submissions that, in deciding that Drax had failed to demonstrate to its satisfaction that the Key Criterion was met, DECC reached a decision that no reasonable decision-maker could reach. In my judgment, this is not an appropriate case for interference by the court on Wednesbury grounds.

The issue of procedural unfairness: discussion

86. This issue can be dealt with shortly. The question is whether DECC, having identified the concerns considered above with regard to Drax's Binding Application, acted unfairly in proceeding to a decision without giving Drax the opportunity to provide further clarification of its case.
87. It is common ground that the requirements of procedural fairness depend on context. Mr Ward relies on the observation by Laws LJ in Abbey Mine Ltd v The Coal Authority [2008] EWCA Civ 353, paragraph 34, that fairness requires that "an applicant be told the substance of the decision-maker's concerns about his own case"; but that observation was itself context dependent and in my view takes matters no further in this case.
88. As regards context, Mr Chamberlain emphasises that this case concerns a decision whether to award a new contract, not e.g. a decision to take away a licence or something else of value. He points out further that this was a competitive process, with a large number of applications and an obligation to treat all applicants equally; the procedure included no "minded to" stage; and it included a power but not a duty to seek clarification. As regards specifics, he points out that at the Binding Application stage DECC had given Drax three clear reminders of the need to explain how the project continued to satisfy the Key Criterion: see the email of 21 March 2014 (paragraph 38 above), the email of 1 April 2014 (paragraph 41) and what was said at the meeting on 3 April 2014 (paragraph 42). The onus was on Drax to produce a full and satisfactory explanation. If such an explanation was not forthcoming, it was neither unreasonable nor unfair for DECC to conclude that there should be no further bite of the cherry.
89. Mr Ward, by contrast, emphasises the scope allowed under the procedure documents for asking for clarification from applicants. He points out that clarification was invited from others as well as from Drax. In response to a concern mentioned in Mr Pybus's witness statement, he accepts that the "coaching" of a particular applicant would not be appropriate but submits that a further request for clarification would not have amounted to coaching; nor would it have been a breach of the principle of equal treatment. He relies on a passage in the witness statement of Drax's Mr Love where it is said that the issues identified by DECC when communicating the proposal to refuse the application would have been relatively simple to address. He submits that in circumstances where Drax had made its application on the same basis throughout but DECC raised last-minute concerns, it was unfair not to give Drax the opportunity to respond to them. He makes much the same point when he submits that if the level of detail being sought by DECC, e.g. in the second bullet point in the decision letter, was really needed, then it was unfair of DECC not to ask for it.
90. In my judgment, the decision was not vitiated by procedural unfairness. I do not accept Mr Ward's submission that what occurred was the identification of last-minute concerns in relation to what had been a consistent case throughout. As stated above, I consider that Drax's case was reasonably understood by DECC to have changed since the time of the Phase 1 and Phase 2 applications. It had been made clear in any event that the question whether the Key Criterion was met would be reassessed at the Binding Application stage. It was therefore incumbent on Drax to put forward a case at that stage to satisfy DECC on the point. It failed to do so in the Binding Application itself but was given the opportunity to submit a clarification, with a specific warning of the need for a clear explanation in relation to the Key Criterion. Even with that clarification, however, the case advanced was not sufficient to demonstrate to DECC's satisfaction that the Key Criterion was met. Fairness did not require DECC to give Drax a yet further opportunity to make good its case.
91. In so far as Mr Ward advances the distinct contention, by reference to the observations of Lord Diplock in Secretary of State for Education and Science v Tameside MBC [1977] AC 1014, 1065, that DECC was in breach of a duty to take reasonable steps to acquaint itself with relevant information to enable it to reach the correct decision, I have no hesitation in rejecting the contention. The entire procedure was directed towards the obtaining of sufficient relevant information to determine whether the various criteria were met. No further steps were reasonably required. Lord Diplock's observation was addressed to a factual situation very different indeed from this.

Conclusion

92. For the reasons given I would allow the appeal and would set aside the judge's order in so far as it quashed the decision, granted a declaration that the Key Criterion was satisfied, and made a costs order against the Secretary of State. I would order that the application for judicial review be dismissed. Costs and any other consequential matters can be addressed in written submissions by counsel if the parties are unable to reach agreement in relation to them.

Lady Justice Gloster :

93. I agree.

Lord Justice Laws :

94. I also agree.