European Commission estimates public subsidy for nuclear plant could total £17bn, as it opens state aid investigation

EDF's Hinkley Point C

The European Commission has confirmed it will open an in-depth investigation into the UK government’s deal with EDF to subsidise the construction of Hinkley Point C nuclear power plant to determine whether is breaks state aid rules.

Announcing the state aid probe today, the EC said it estimated that the total public subsidy going to EDF could be as much as £17bn.

In October, EDF and the government announced they had finally reached an agreement for a guaranteed price for the electricity from the plant, with the deal widely seen as opening the door to a new generation of nuclear power plants.

Under the deal, the government has guaranteed a price of £92.50/Mwh for the electricity from Hinkley - more than twice the current price of electricity - for 35 years.

This will fall to £89.50/Mwh if EDF moves ahead with a second plant, Sizewell C in Suffolk.

EDF has said it will not give the project the green light until Brussels has given state aid clearance to the deal.

The EC said today that it “has doubts that the project suffers from a genuine market failure” that would require that it receives state assistance, adding: “The Commission will assess whether the construction of a nuclear power station could not be achieved by market forces alone, without state intervention.”

The EC probe will now investigate the strike price agreement; the UK Guarantee being given by the government to help underwrite the risk in building the scheme; and the overall level of public money being used to support it.

Joaquín Almunia, vice-president of the European Commission in charge of competition policy, said: “The UK has notified a mechanism which is explicitly aimed at attracting investment in nuclear energy.

“It is a complex measure of an unprecedented nature and scale. The Commission therefore needs to investigate thoroughly its impact on the UK and the EU internal energy markets, and is requesting all interested parties to submit their observations.”

Speaking at a press conference in Brussels, Almunia said he had “reasonable doubts” that the strike price deal was compatible with state aid rules.

“I have heard and read many comments of the excessive length of this 35 year period,” he said.

But he added he would not pre-judge the outcome of the investigation.

Energy secretary Ed Davey said: “This announcement from the Commission is standard for large investment projects and was always part of the process for Hinkley.

“We will use this period to demonstrate how the project meets state aid rules and provides good value for consumers while cutting carbon in the energy sector.”

In a statement to parliament, Davey said the contracts for difference, like the one offered to EDF, were “less distortive and less generous to generators than some other interventions, which have previously been approved by the Commission”.

He added: “I have no doubt that we will be able to provide robust responses to any lines of inquiry which the Commission sets out as part of its opening decision on Hinkley.”

Alasdair Reisner, chief executive of the Civil Engineering Contractors’ Associations, said: “It has not been an easy process to get to this point. Very clearly the deal is just about the only deal that will ensure the project will get done so if it’s not this deal does that mean that no deal at all?”

He added it was right that the EC enforce state aid rules to stop abuse, but that support for nuclear power was important for the UK.

He said: “I struggled to find a more strategic issue for the country than keeping our lights on”.

Tim Fox, head of energy and environment at the Institution of Mechanical Engineers, said: “We really do need to be getting on with building this.

“We have been waiting to make a start on this programme for many years now and we just want to see construction begin. We think it’s unfortunate that there’s another delay.”

European Commission statement on Hinkley

The European Commission has opened an in-depth investigation to examine whether UK plans to subsidise the construction and operation of a new nuclear power plant at Hinkley Point in Somerset are in line with EU state aid rules.

In particular, the Commission has doubts that the project suffers from a genuine market failure. The opening of an in-depth inquiry gives interested third parties an opportunity to comment on the measure. It does not prejudge the outcome of the investigation.  

The UK has notified plans to establish a feed-in tariff ensuring that the operator of the Hinkley Point nuclear plant will receive a stable revenue for a period of 35 years despite the volatility of the wholesale electricity price.

When the market price at which the electricity is sold is lower than the strike price, the Government will pay the difference between the strike price and the market price. Conversely, when the market price is higher than the strike price, the operator will be obliged to pay the difference to the Government (under the so-called “contract for difference”).

In either case, the nuclear plant operator will ultimately receive a fixed level of revenues and will therefore not be exposed to market risks for the duration of the scheme. 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.

Member States are free to determine their energy mix but 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 Commission will assess whether the construction of a nuclear power station could not be achieved by market forces alone, without state intervention. The Commission will examine the “contract for difference”, the credit guarantee as well as the planned level of public support, which is based on many assumptions about the future market situation, and may reach up to GBP 17 billion depending on future electricity prices and the operator’s actual capital cost.

During the in-depth inquiry, the Commission will analyse whether the measure involves state aid in the meaning of the EU rules and, in the affirmative, whether it is compatible with common EU rules that authorise state aid for certain objectives of common interest.