But Mrs Justice Nathalie Lieven concluded in her ruling on Tuesday that Mr Kwarteng “erred in law” and failed to comply with his department’s national policy statement on energy when reaching the decision.
The plans will now have to go back for reconsideration by the current Business Secretary, Grant Shapps.
“The UK government is disappointed by the outcome but we will be considering the judgment carefully before deciding next steps," a government representative said.
The proposed project has had objections raised by Portsmouth MPs and the city council.
And a former energy minister recused herself from the decision-making process over funding from one of Aquind’s owners.
Aquind Limited, which is part-owned by former oil tycoon Viktor Fedotov, has donated at least £430,000 to the Conservative party and MPs, and Alexander Temerko, who is listed as a director, has given more than £730,000.
Penny Mordaunt, the House of Commons Leader who represents Portsmouth North, pledged to “fight on” in the campaign to block the project.
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“Disappointing though this decision is, I remain confident that this unwanted and unnecessary project will never happen," the former defence secretary said.
“It is hard to imagine why any investor would want to be associated with it. I believe the government’s decision was the right one and that it will stand.
“I also know that our whole community will again make the case for why this is so damaging, not just to our local area, but to the whole of the UK.
“We will fight on and we must win.”
Mr Temerko earlier threatened legal action against Ms Mordaunt, who he described as the “biggest threat to security”.
Last year he told the PA news agency that Mr Kwarteng’s decision to block the project was “unusual”.
“This is wonderful news for the Aquind interconnector project," company director Richard Glasspool said after the ruling.
"We were dismayed and disappointed when Kwasi Kwarteng refused the development consent order.
“We look forward to re-engaging with local residents, stakeholders, environmental experts and energy professionals in order to pursue the commitment to meeting the UK’s net-zero energy target.”
Mr Kwarteng was said to be unsatisfied that “appropriate alternatives to the proposed route” had been sufficiently considered in proposals, raising particular concerns over “the proposed landfall in an urban location”.
At a hearing in London in November, Aquind said he was “misled” by officials, “failed” to take account of certain evidence and adopted an unfair decision-making procedure.
Simon Bird, KC, for Aquind, told the court in written submissions that the proposed interconnector would be able to transmit up to 16,000,000MWh of electricity a year, which was about 5 per cent and 3 per cent of the total consumption of the UK and France.
It had sought consent over “marine and onshore cabling and associated infrastructure”, with the proposed UK land route running from Eastney on Portsea Island, Portsmouth, to a converter station at Lovedean in Hampshire, close to the South Downs National Park.
Mr Bird said Aquind had explained the “environmental impacts and increased costs to the consumer arising from the need for network reinforcements” as arguments against using an alternative site at Mannington in Dorset, such as the need for longer submarine cables crossing a major shipping lane.
He said it was “undeniably clear” that Mannington and other options west of Lovedean were unsuitable because of such effects, with the 2015 development refusal of the Navitus Bay offshore wind farm project that would connect to Mannington being unrelated to these “free-standing” concerns.
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Mr Bird said the minister had made no finding over whether the project “benefited from the presumption in favour of the grant of consent” and did not weigh any “adverse effects” against “the urgent and compelling national need” for the interconnector.
But James Strachan, KC, representing the government, said in written arguments that Mr Kwarteng had “adequately explained that he was not satisfied”, in light of the wind farm refusal, that it had been demonstrated that Mannington “was not an alternative which would avoid the significant harms of the proposed development”.
Mr Kwarteng concluded that the “adverse impacts” of the proposed project “were sufficient to warrant consideration of alternatives”, Mr Strachan said.
Possible effects included “heritage harm, impacts on tourism receptors, sports pitches, the Victorious Festival, private loss in the context of compulsory purchase and delay to the North Portsea Island Coastal Defence Scheme”, the court was told.
In her ruling, Mrs Justice Lieven concluded that Mr Kwarteng failed to take into account relevant evidence over the suitability of the alternative grid connection point at the Mannington substation.
She said the decision to refuse the application without making further inquiries about the feasibility of Mannington was “irrational”, and that the minister had also “failed to apply the relevant policies in a lawful manner”.
Mrs Justice Lieven said the legal challenge was “not a case which turns on any procedural unfairness, but rather with the Secretary of State’s failure to properly consider the information that he had been given”.
Berwick-upon-Tweed MP Anne-Marie Trevelyan, now a minister in the Foreign, Commonwealth and Development Office, removed herself from the decision-making process in July last year over funding received by the Northumberland Conservatives.