EC approval for Hinkley Point C subsidies clears EDF’s path to invest

Revised and rebased cost estimate shows EDF investment could reach £34bn.

Hinkley Point C - as proposed by EDF

The European Commission this week agreed that revised plans by the UK government to subsidise the construction and operation of a new nuclear power plant at Hinkley Point in Somerset were now in line with EU state aid rules. 

Following a year long investigation and, according to the Commission, the UK government’s subsequent decision to “significantly modify the terms of the project financing”, the path is now clear for French state-owned utility EDF Energy the developer to progress the project.

The final hurdle for the long delayed project is for the EDF’s board to commit to the £17bn debt financing needed to build out the project – a decision expected by the end of the year. 

“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." European Commission Vice-President Joaquín Almunia

Having already invested an estimated £1bn into developing the project this is thought a formality. 

However, approving the deal, EC Commissioners revealed that the long delayed project will actually cost EDF some £24.5bn to build as the £16bn previously stated was in 2012 prices and did not include interest payments during construction.

In addition the Commission highlighted that this cost rose to £34bn when provision for construction problems was factored in the scheme.

Hinkley Point C will be the first new nuclear power station built in the UK in almost 20 years and the twin reactors are expected to generate 3.3GW of power - 7% of the UK's total electricity - when fully operational in 2023 and for the station’s 60 year lifespan. 

The new generation reactors will use Areva’s European Pressurised Reactor (EPR) technology which is not yet operational anywhere in the world. Currently there are three projects which will use this technology under construction in France, Finland and China.

EU commissioners voted 16 to 5 in favour of approving the UK's plans for the new reactors under slightly revised terms that include a sweetened “gain share” mechanism requiring EDF to pay back any excess profits to government and increasing the state guarantee that it pays to Treasury.  

This 35 year deal now says that 60% of any profit above a 13.5% return on investment will be passed back to the UK taxpayer – a higher than the originally agreed deal to share 50:50 any profit above 15%.

However under the agreement, the UK government will still pay a guaranteed £92.50 /MWh “strike price” for electricity generated by the new plant over the 35 year subsidy deal – roughly twice the current wholesale price of power.

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." 

The Commission set out the two main modifications to the deal, which it said “minimises the distortive effects of the support measure and ensures benefits to UK consumers”.

  1. 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 £1bn and procure the UK Treasury an equivalent gain.
  2. 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 £1.2bn. 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.

The decision was welcomed by the Nuclear Industry Association which described the deal as 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”, said Lord Hutton of Furness, Chairman of the Nuclear Industry Association. 

“We look forward to EDF Energy taking its Final Investment Decision with the interested investors,” he added. “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.”

"It's such a distortion of competition rules that the Commission has left itself exposed to legal challenges" Greenpeace EU legal adviser Andrea Carta

However, environmental campaigners and the anti-nuclear lobby – including the Austrian EC Commissioner who has vowed to take legal action against the decision – rejected the deal.

According to Greenpeace, the European Commission decision was “an enormous set-back for the country's development of a sustainable and clean energy future”.

It added that this new focus on nuclear power in the UK and across Europe threatened to silence discussion about energy efficiency and renewable energy sources and could therefore stall the development of these emerging technologies in large parts of Europe for the next decade.

Greenpeace EU legal adviser Andrea Carta, insisted: "It's such a distortion of competition rules that the Commission has left itself exposed to legal challenges. There is absolutely no legal, moral or environmental justification in turning taxes into guaranteed profits for a nuclear power company whose only legacy will be a pile of radioactive waste."

There are 132 operating reactors in 14 EU Member States

Belgium: 7 reactors (2 nuclear power plants (NPP))

Bulgaria: 2 reactors (1 NPP)

Czech Republic: 6 reactors (2 NPPs)

Finland: 4 reactors (2 NPPs)

France: 58 reactors (19 NPPs)

Germany: 9 reactors (12 NPPs, 17 reactors, 8 were shut down after Fukushima)

Hungary: 4 reactors (1 NPP)

The Netherlands: 1 reactor (1 NPP)

Romania: 2 reactors (1 NPP)

Slovakia: 4 reactors (2 NPPs)

Slovenia: 1 reactor (1 NPP)

Spain: 8 reactors (6 NPPs)

Sweden: 10 reactors (3 NPPs)

United Kingdom: 16 reactors (10 NPPs)

Lithuania: 2 reactors under decommissioning (1 NPP)

Four reactors are under construction

Finland: 1

France: 1

Slovakia: 2

Planned reactors:

Bulgaria: 1

Czech Republic: 2

Finland: 2

France: 1

Lithuania: 1

The Netherlands: 1

Poland: 2-3

Romania: 2

United Kingdom: 4

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