Commission: UK State Aid Measures for Hinkley Point Nuclear Power Plant Compatible with EU Rules

In a landmark ruling, the European Commission has today decided that state aid proposed for the new UK nuclear power plant at Hinkley Point is compatible with European state aid rules.

The decision is likely to be controversially discussed in the coming months, and will materially influence the national and European legal state aid discussion in the wider energy area.

The decision came after the Commission had initiated an in-depth investigation into the project on 18 December 2013. The Commission had voiced doubts that the project suffers from a genuine market failure. Many details of the concern are contained in the publicly available official letter to the UK government. The Hinkley Point opening decision was taken on the same day as the Commission decided to open in-depth inquiry into the German EEG 2012 support for energy-intensive companies benefitting from a reduced renewables surcharge.

In a press conference document, Commissioner Joaquin Almunia pointed out that the choice to promote nuclear energy is a choice by the UK.  As under Article 194 of the TFEU Member States are free to determine their energy mix, choosing to support nuclear energy lies within national competence. However, for the enforcement of state aid rules, the Commission has to ensure that public support measures do not endanger competition in the Single Market.

For nuclear power, the Commission assess each specific case directly under the TFEU rules. Commissioner Almunia expressly noted that there are no specific guidelines specifying how the Commission is to assess state aid measures in favour of nuclear energy investment projects, as the Commission had decided not to include this matter in the recent guidelines on state aid for energy and the environment from April.

Commissioner Almunia summarised key elements of the decision as follows:

  • Total costs of the Hinkley Point power station will amount to 34 billion of pounds, including 24.4 billion for building the plant
  • Construction is foreseen to last almost 10 years
  • The plant will be operational for 60 years and it will produce 3.3 GW of electricity, corresponding to 7% of UK capacity
  • State aid granted to the project will consist of two components:
    • A state guarantee covering any debt which the operator will seek to obtain on financial markets to fund the construction
    • A price support mechanism – called the “contract for difference” – ensuring that the operator of the Hinkley Point plant will receive stable revenue for a period of 35 years, paid for by UK consumers. The support is the difference between market price and a strike price, set in order to guarantee a reasonable return on investment.
  • The UK authorities convincingly demonstrated that the construction of this nuclear power station could not be achieved by market forces alone. There is a market failure here, in particular because the project would not raise the necessary financing on the market due to its unprecedented nature and scale.
  • The Commission’s assessment then focused on whether the state aid foreseen by UK authorities was proportionate to achieving the desired objective.
  • Following discussions between the Commission and the UK, the UK agreed to modify the support measures. The changes include the following:
    • The fee remunerating the granting of a State guarantee was significantly increased, in order to accurately reflect the risk profile of the project. This increase will reduce the subsidy by more than 1 billion pounds (about €1.3 billion). This will reduce any distortions of competition created by the aid and will also benefit UK taxpayers.
    • As regards the price support mechanism, additional safeguards were added: any higher profits of the project than those expected today will be shared with UK consumers and tax-payers.
    • A two so-called “gain-share” mechanisms were put in place: The first one will be triggered if the construction costs are lower than expected, and the other, if the overall profits of the operator – in other words, the return on equity – are higher than those estimated today. If they materialise, all these gains will be shared between the plant operator and the public entity. This will happen through a decrease of the price paid by the public entity to the operator – the so-called “strike price”. The higher the return on equity, the more the gains will be shared. For example, an increase in the profit rate of one percentage point would generate savings of more than 1.2 billion pounds (about €1.5 billion) to UK consumers. The Commission made sure that this mechanism would apply during the entire lifetime of the project, namely 60 years, instead of the 35 years originally foreseen.
  • In summary, the Commission’s decision made sure that the aid remains limited to what is necessary to carry out the project minimising the distortive effects of the public support and reaching a better deal for consumers and taxpayers.

Based on those considerations the Commission concluded that the aid measures foreseen by the UK are in line with EU state aid rules.

Commissioner Almunia finally assured in the press conference document that the decision will not create any kind of precedents, and that possible new nuclear energy investment cases will be assessed on their own merits.

An initial FT press reports mentions that four EU Commissioners unusually voted against the decision, and that a lawsuit may even be prepared by Austria.

The full text of the Commission’s decision is not yet available. It will surely be closely reviewed by many, and provide further input for the European energy and state aid debate.

Source: Press conference document European Commission

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