Europe lists concerns over Hinkley deal

03 February 2014

Details of the European Commission's specific concerns about the UK government's agreement with EDF Energy for Hinkley Point C have been released. The UK maintains its agreement meets EU law on state aid.

The deal between the British government and EDF says that the former would pay the difference between the agreed price and the market price for electricity produced by Hinkley Point C if the latter price is lower. This strike price has been set at £92.50 ($151.60) per MWh with this reducing to £89.50 ($146.72) if a further plant at Sizewell is built. If the market price is higher than these, EDF would pay the difference to the government. The arrangement is slated to run for 35 years from 2023, or the start of operation of each reactor, whichever comes sooner. It includes protection for the investors against political risks in the form of potential "nuclear taxes, uranium and generation taxes," politically motivated shutdowns or the revision of the contract for difference (CfD) scheme. Overall, EDF said the strike price should give about a 10% return on investment.

The UK government offers the same kind of mechanism to all low-carbon generating options, each with an individually set strike price. However, support for renewable generation forms is specifically allowed under EC guidelines while no such guideline exists for nuclear power.

The European Commission informed the UK on 18 December 2013 that it had initiated its investigation into the agreement for Hinkley Point C. Its 70-page letter sent to the British government at that time highlighting its specific concerns about the deal has now been published.

The commission said the UK cannot justify state aid as a service of general economic interest (SGEI) that would not otherwise be supplied without state aid since nuclear power is already being generated in the UK and because new nuclear power plants are being constructed in France and Finland without state aid.

Even if the state aid was a genuine SGEI, the commission believes that the measures proposed by the UK may not "avoid overcompensation."

It told the UK that "it has doubts on the structure of the CfD for nuclear which, by its design, duration and scope, has the potential for distorting competitive conditions." It "also doubts whether the combination of aid measures, and in particular of a CfD with inflation indexation and a credit guarantee, is proportional to the potential benefits."

The commission noted, "Especially in the context of liberalised and increasingly competitive markets, the role of state aid control is increasingly important in EU electricity markets. The commitment of the EU to promote investment into nuclear must be carried out in ways that do not distort competition. The question therefore needs to be asked, whether there is a market failure in electricity in respect of the planned measure."

It asked the UK to "submit its comments and to provide all such information as may help to assess the measure, within one month of the date of receipt of this letter."

UK confident

The UK maintains that its agreement with EDF Energy does not constitute state aid under the "Altmark" criteria set by the European Court of Justice. This stipulates that four criteria must all be met for compensation not to constitute state aid. These conditions are: the recipient has clearly defined public service obligations; the parameters on which the compensation is calculated are defined in advance to avoid giving the recipient a competitive advantage; the compensation does not exceed what is necessary to cover all or part of the costs incurred in meeting public service obligations; and, if no tender process is carried out, the level of compensation is in line with the estimated costs of meeting those obligations. 

EDF Energy said that the one-month consultation "will allow the UK government, EDF Energy and others to show that Electricity Market Reform is essential in order to give the UK the secure, low carbon electricity it needs for the future. These aims are in line with European objectives."

It added, "The contract for Hinkley Point C is the first example of a new kind of agreement to unlock investment in low carbon energy. It is right that the commission should investigate the far-reaching market reform which makes this and future contracts possible."

UK energy secretary Michael Fallon said, "This process is normal and we built it into our planning for Hinkley Point C. We'll be using the consultation period to show that this project meets state aid rules, that it will cut carbon in Britain's energy sector and improve our energy security in a way that's good value for money."

Last week, the UK and French governments said they will work together to show that the proposed Hinkley Point C nuclear power plant does not violate European rules for state aid. They have agreed to "engage constructively" with the European Commission's ongoing consultation.

There is no legal deadline by which the commission's investigation must be concluded and EDF Energy has said that it will not make an investment decision until it is completed.

Researched and written
by World Nuclear News