The European Commission has found revised UK plans to subsidise the construction and operation of a new nuclear power plant at Hinkley Point to be in line with EU state aid rules.
The announcement followed the decision of the EU College of Commissioners to approve the investment contract for EDF Energy's new build project in Somerset.
Commission Vice-President Joaquín Almunia, in charge of competition policy, said: "After the Commission's intervention, the UK measures in favour of Hinkley Point nuclear power station have been significantly modified, limiting any distortions of competition in the Single Market. These modifications will also achieve significant savings for UK taxpayers. On this basis and after a thorough investigation, the Commission can now conclude that the support is compatible with EU state aid rules."
Under EU Treaty rules, Member States are free to determine their energy mix. The UK has decided to promote nuclear energy and this decision is within its national competence, the Commission said. However, when public money is spent to support companies, the Commission has the duty to verify that this is done in line with the EU state aid rules, which aim to preserve competition in the Single Market.
The UK plans to establish a price support – the contract for difference (CfD) - ensuring that the operator of the Hinkley Point nuclear plant - will receive stable revenues for a period of 35 years. The operator will also benefit from a state guarantee covering any debt which the operator will seek to obtain on financial markets to fund the construction of the plant.
During the investigation, the UK authorities demonstrated that the support would address a genuine market failure, dispelling the Commission's initial doubts. In particular, the promoters of the project would not be able to obtain the necessary financing due to its unprecedented nature and scale, the Commission said.
The combination of the UK government's modifications "minimises the distortive effects of the support measure and ensures benefits to UK consumers," it said.
With respect to the State guarantee, the Commission found that the initial guarantee fee which the operator would have paid to the UK Treasury was too low for a project with this risk profile. The guarantee fee was therefore "significantly raised". This increase will reduce the subsidy by more than £1 billion and "procure the UK Treasury an equivalent gain."
In addition, after the Commission's intervention, the gains generated by the project will be better shared with UK consumers: as soon as the operator's overall profits (return on equity) exceed the rate estimated at the time of the decision, any gain will be shared with the public entity granting the public support; in addition, the decision defines a second, higher threshold above which the public entity will obtain more than half of the gains.
These gains will be shared with UK consumers by a decrease in the price paid by the public entity to the operator (the so-called 'strike price'). An increase in the profit rate of only one percentage point, for example, will generate savings of more than £1.2 billion. This gain-share mechanism will be in place not only for the 35-year support duration as initially envisaged, but at the request of the Commission for the entire lifetime of the project, namely 60 years. Moreover, if the construction costs turn out to be lower than expected, the gains will also be shared.
Agneta Rising, director general of the World Nuclear Association said: "Today's announcement takes the UK forward towards joining the global investment trend in a new generation of clean, affordable and reliable nuclear energy." Crucially, the move puts nuclear alongside other forms of clean generation in the CfD market mechanism, which is part of the UK government's "pioneering" Electricity Market Reform.
"The Electricity Market Reform is an innovative approach to encourage the decarbonisation of the electricity supply system in a deregulated market. The decision will be welcome by all those planning new nuclear build projects in the EU and similar markets," she said
The UK's Nuclear Industry Association (NIA) said "questions had been raised" about whether the CfD regime conformed with EU competition rules and stressed that today's announcement approving the project is the result of 12 months' investigation by the EU’s Competition Commissioner.
John Hutton, NIA chairman, said: "This is an important step in securing the UK's home-grown low-carbon electricity generation while adding jobs and prosperity to the economy. Reaching this decision has been a long process, but it was right the Commission should thoroughly review all the relevant issues. We look forward to EDF Energy taking its Final Investment Decision with the interested investors. This will set in train an important time for the nuclear sector in the UK as new build projects get under way to replace the current ageing generation. It also gives certainty to other European countries looking at the UK system of contracts for difference as a mechanism to secure their own supply."
Hinkley Point C will be the first new nuclear power station built in the UK in almost 20 years. The nuclear industry generates a fifth of all electricity used in the UK.
Work to be done
The Department of Energy and Climate Change (DECC) said that, "while there is much work still to do" before a final contract can be signed, today's announcement is a boost to its efforts to ensure Britain has secure, affordable low carbon electricity in the 2020s.
"After a thorough, detailed and independent analysis of our proposed project with EDF, this decision shows the European Commission agrees that this is a good deal for consumers and enables us now to proceed to the next stage."
Hinkley Point C represents the start of investment in a new fleet of nuclear power plants replacing old, polluting power plants and supporting a skilled, low-carbon future with increased energy security and resilience from a safe, reliable, home-grown source of electricity, DECC said.
EDF Group and other investors will be responsible for funding the project, which will be paid for through energy bills like all other electricity supplies.
Building a new fleet of nuclear power stations could reduce household bills by around £95 in 2030, DECC said.
"Moreover, for the first time ever, the operator of the plant will be responsible for the full costs of decommissioning and its share of the costs of waste management."
Researched and written
by World Nuclear News