Hinkley Point B. Photo: Ken Grainger / geograph.org.uk via Wikimedia Commons.
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European Commission: Hinkley C subsidies are unfair State Aid
Greenpeace UK & The Ecologist
11th March 2014
The European Commission has launched its public consultation over the UK's proposed state aid to the proposed Hinkley C nuclear plant in Somerset - and in the process delivered a mighty broadside against the UK Government's plans.
A support mechanism which is specific to nuclear energy generation might crowd out alternative investments in technologies or combinations of technologies, including renewable energy sources.
The European Commission (EC) has delivered a fiercely sceptical initial take on the UK Government's deal with French state owned EDF to build the first new nuclear reactor in the UK for a generation, concluding the measures definitely categorise as state aid.
In its initial analysis - just published on the Commission Official Journal - the EC suggests that the deal may not be proportionate and risked substantially over-compensating EDF - or rather, its UK subsidiary NNGB.
Indeed the Commission says that additional support to EDF (on top of market prices) could wind up between £5bn and £17.6bn (in NPV terms, a variation of £13bn).
A full investigation
The Commission has now launched a full investigation into the package of measures supporting Hinkley including an investment contract providing a fixed price for power, guarantees for lending to the project and political guarantees.
The UK Government hopes the EC will report in the summer. However the strongly sceptical and tightly argued nature of the initial analysis, and the wide-ranging and comprehensive nature of the objections, suggests the EC will not approve the deal without major changes - in effect throwing Government-EDF negotiations back to square one.
In particular the Commission is fiercely critical of the Contract for Difference (CfD) awarded to Hinkley, which removes most of the ordinary commercial risk that energy providers face, distorting competition, and appears to over-compensate EDF.
Construction credit guarantees
It is also uneasy about the construction finance guarantees offered up to £10 billion of construction cost. In principle the UK Government is allowed to charge for these guarantees at market rates, however it has not made clear on what basis the guarantees will be sold to EDF, or how the risk involved is to be priced.
However a repeated message is that credit guarantees are in principle an acceptable mechanism to overcome any 'market failure' in nuclear power - while revenue support in the form of a CFD is not.
Sean Morris of Nuclear Free Local Authorities commented: "The question the Competition Commissioner must surely answer is whether the subsidies to Hinkley Point C are required in order for the UK to meet its energy security and climate change objectives? The answer is clearly no.
"In which case, is spending money on the subsidy the most cost efficient way of reducing carbon emissions? Again the answer is no - it would be better to spend the money elsewhere.
"Finally, does awarding subsidies to one form of low carbon technology constitute unfair treatment of other forms of low carbon technology which might be available from elsewhere in Europe? The answer is clearly yes."
Key points and arguments from the Commision's document follow below.
Assessment of the measure
"The Commission believes that the measure involves State aid within the meaning of Article 107 (1) of the TFEU, since the measure does not involve a genuine Service of General Economic Interest and favours an undertaking selectively, threatening to distort competition and affect trade between Member States.
"The Commission has serious doubts on whether the measure can be deemed to pursue the common objective of security of supply, and that it can pursue decarbonisation. The Commission also has serious doubts on the need for State aid in relation to nuclear energy, and the fact that the combination of credit guarantee and CfDs are an appropriate instrument.
"Also, based on the assessment conducted, the Commission has serious doubts on 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 of the aid.
"Finally, the Commission believes that the measure has the potential to seriously distort competition and trade between Member States. In the light of the foregoing considerations, the Commission, acting under the procedure laid down in Article 108(2) of the Treaty on the Functioning of the European Union, requests the United Kingdom to submit its comments and to provide all such information as may help to assess the measure."
The support may be needless
"according to the UK's own assessment ... private investors are forecast by both Redpoint and by DECC to invest in nuclear energy by 2027 and by 2030 respectively in the absence of CfDs or Investment Contracts.
"the UK explained that the nuclear plant would be constructed under market conditions at a later stage, while the UK wishes to incentivise its construction at an earlier stage.
"It would appear to be only sensible, if this is the logic behind of the UK measure, to shorten the period of payments. Indeed, the closer the date of effective construction of the nuclear plant to the date when it would have been constructed anyway, the more limited the incentive effect and the necessity of the aid.
"Moreover, making the realisation of the project subject to a certain end date [there is none in the agreement] is rather typical for the granting of investment aid or structural funds."
But is expensive
"The measure, moreover, could hardly be argued to contribute to affordability - at least at current prices, when it will instead and most likely contribute to an increase in retail prices ...
"The notified measure would seem to be able to contribute to affordable prices only under very specific conditions which can only materialise far away in the future. The contribution to higher prices, however, would be very much in the short and medium term ...
"The NPV of difference payments, which is the most direct measure of the overall amount of aid disbursed, is highly sensitive to wholesale electricity prices and discount rate assumptions.
In particular, with a price of GBP 89.50 per MWh and everything else being equal to NNBG's baseline scenario, the (post-tax, nominal) NPV of difference payments is GBP 4.78 billion when using the medium prices of the UK notification forecasts and assuming rising carbon prices ("Central fossil fuel price and rising carbon price"), GBP 11.17 billion when using the medium prices of DECC's forecasts ("DECC central"), and GBP 17.62 billion when using the medium prices of the UK notification forecasts and assuming constant carbon prices ("Central fossil fuel price and constant carbon price").
"In other words, the overall amount of aid can vary by as much as GBP 13 billion depending on the assumptions taken."
But investors are protected from risks with a guarantee
"Finally, the Commission notes that NNBG will also obtain a State credit guarantee. Such guarantee is bound to lower the costs of financing the plant, hence the discount rate, which links back to the uncertainty highlighted above.
"It is however unclear, at this juncture, what the impact of the guarantee will be, since the financing structure of NNBG is not complete and the amount of debt, the amount of the guarantee and the rate paid are not yet known.
"The UK claims that NNBG will pay a commercial rate for the guarantee, however this cannot be verified at the moment, because no data are available on the guarantee, and because it is not clear that a definite benchmark exists for the type of financing needs which the plant will need ... the current approach seems lenient and incomplete."
Which means that along with the investment contract the UK may be paying too much for the plant - because EDF can borrow money more cheaply.
"Based on the information set out above, the Commission considers that NNBG might face a lower cost of capital than the one proposed by the UK, as a result of the combined effect of the credit guarantee and the CfD."
So the EDF may be over-compensated by bill and tax payers
"Depending on the evolution of wholesale electricity prices in the post-CfD period, NNBG's profits might be substantially higher than those resulting from the negotiated rate of return.
"In particular, the Investment Contract might result in a substantial transfer of wealth from consumers to NNBG if the actual cost of capital for nuclear energy turned out to be lower than the one the UK authorities have negotiated.
"The terms of the Investment Contract communicated to the Commission do not contain a correction mechanism that would take account of the effect of developments after the end of the CfD in order to ensure that no overcompensation has taken place overall.
"As the Investment Contract does not contain any correction mechanism, it does not account for that uncertainty and does not ensure that the even for the duration of the Investment Contract, the project will not yield more than a reasonable rate of return on capital."
No open tender for Hinkley allowing other low carbon technologies
"From this perspective, the Commission notes that tendering for low-carbon generation sources in a technologically neutral does not appear to have been considered as a realistic alternative ... The lack of a tender could also lead to violation of Article 8 of the Electricity Directive 2009/72/EC. The Commission would require further clarification in this respect."
Keeping the lights on?
"the UK's main argument to claim the existence of a SGEI is that the Investment Contract will provide incentives for NNBG to build the nuclear plant under a specified timeline.
"In particular, it appears difficult to argue that the measure can help the UK achieve security of supply, given that the plant will not be operational before 2023 (assuming the Investment Contract is concluded in 2013 and no delay occurs in the construction,) and that capacity levels are forecast by Ofgem to be relatively low before 2020."
What about interconnectors?
"Great Britain has currently around 4 GW of interconnection, equivalent to a total of 5 per cent of installed generation capacity. The UK is considering several project which might result in over 10 GW of additional interconnection by around 2020, equivalent to around 12 per cent of installed generation capacity.
"The Commission notes that the UK has not taken into account future interconnection capacity in its modelling work, based on the fact that it believes that the flows will be difficult to predict.
"The Commission questions this approach and invites comments from third parties on the degree to which interconnection can play a role, and how its contribution to the objectives being sought by the UK can be quantified over the time scale being considered for the HPC project.
"Aid to NNBG is also likely to displace the exchange of large quantities of electricity between the UK and its neighbours, i.e. through the interconnectors which are in place. Aid to NNBG might also change the incentive framework which might lead to more investment in interconnection in the future."
Crowding out investment in renewables
"Firstly, the UK argues that the emission level of 220g of CO2 per kWh in 2030 is not in line with their objectives in terms of decarbonisation of the electricity system. However, such an objective has not yet been set.
"The measure is argued to contribute to the objective of decarbonisation, but it would merely do so on a different time scale compared to the one which would be provided by the market according to DECC's own forecasts - which are based, among other things, on a government-set price of carbon, which could therefore, and in principle, be an equally effective, and more market-oriented, instrument to achieve the same result ...
"The Commission notes in this regard that a support mechanism which is specific to nuclear energy generation might crowd out alternative investments in technologies or combinations of technologies, including renewable energy sources.
"The Commission notes that the UK has not taken into account future interconnection capacity in its modelling work, based on the fact that it believes that the flows will be difficult to predict."
"Also, aid to NNBG will displace both revenues, hence profits, from existing plants, as well as investment in new plants which would otherwise compete with NNBG.
"In particular, it may displace substantial investment into new low-carbon technologies, including renewable technologies, that would otherwise also contribute to the objectives pursued through the notified measure.
Distorting the market and taking a huge amount of risk away from EDF
"The Commission believes that such an instrument is capable of severely distorting market dynamics, precisely because it shields the beneficiary from risks which other market operators need to face.
"If the CfD is provided together with a credit guarantee, in addition to a compensation for political risk and the indexation of the cash flows to the consumer price index, as the UK intends to do, it can be safely concluded that the activity undertaken by the beneficiary, NNBG, is not far from being risk-free at the level of operations."
Is nuclear power immature enough - after 50 years?
"It is not clear to the Commission that nuclear technology is immature enough to warrant State aid, or that it is characterised by specific market failures or other features which make State aid in the form of revenue support, or revenue certainty, necessary.
"As discussed above, nuclear technology might involve such high levels of capital investments that it might face issues in raising financing. Apart from that, however, it is not clear that the technology itself warrants the provision of State aid in the form which the UK has chosen.
"However at the same time the Commission understands that the EPR technology power plants in Flamanville and Olkiluoto have been undertaken without any support. The Commission cannot at this stage explain why the HPC project should be fundamentally different from the two EPR plants currently being constructed."
If aid is given, a credit guarantee alone is enough
"However, to the extent that any such market failure arises, the Commission would in principle consider that the provision of a credit guarantee could address it, and in fact might remove altogether any existing market failure in investments in nuclear energy, in particular in the post-construction period and when the plant becomes operational."
"Finally, the Commission has doubts that the notified measure can be declared compatible under Article 107(3)(c) TFEU and in particular that it effectively addresses a market failure and is appropriate. It also questions whether the notified measure can be deemed to have an incentive effect, to be proportionate, and is concerned about its distortive effects on competition."
This article is based on a Greenpeace briefing, 'European Commission decision on UK state aid for Hinkley Point C nuclear plant', that has been further supplemented by The Ecologist with additional material.
The European Commission's review of the Hinkley C subsidy package is published on its Journal.
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