WIREDGOV

The European Commission has found revised UK plans to subsidise the construction and operation of a new nuclear power plant at Hinkley Point in Somerset to be in line with EU state aid rules. During the in-depth investigation (see IP/13/1277), the UK has agreed to significantly modify the terms of the project financing. As a result, the state aid provided will remain proportionate to the objective pursued, avoiding any undue distortions of competition in the Single Market. The modifications also reduce UK citizens' financial contribution to the project.

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. 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" - 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.

Furthermore, the combination of the following modifications minimises the distortive effects of the support measure and ensures benefits to UK consumers:

• 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 GBP 1 billion (about €1.3 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 GBP 1.2 billion (about €1.5 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.

Background

The new Hinkley Point C nuclear power station will require debt financing of GBP 17 billion (around €21.6 billion) and will eventually have a capital of about GBP 34 billion (around €43 billion). The construction costs are estimated at GBP 24.5 billion (around €31.2 billion). Start of operations is scheduled for 2023 with an expected operational lifetime of 60 years. The two reactors will produce in total 3.3 GW of electricity - the largest output produced by a single plant in the UK and representing 7% of UK electricity generation. The UK will need about 60 GW of new electricity generation capacity to come online between 2021 and 2030 due to the closure of existing nuclear and coal power plants. The Hinkley Point nuclear power station will use the EPR technology which is not yet operational anywhere in the world. There are only three projects currently under construction in France, Finland and China which will rely on this technology.

Public interventions in favour of companies can be considered free of state aid within the meaning of EU rules when they are made on terms that a private operator would have accepted under market conditions (the market economy investor principle – MEIP). If the MEIP is not respected, the public interventions involve state aid within the meaning of EU rules (Article 107 of the Treaty on the Functioning of the European Union – TFEU), because they confer an economic advantage on the beneficiary that its competitors do not have. The Commission then proceeds to assess whether such aid can be found compatible with the common EU rules that allow certain categories of aid. Without these common rules, competition within the EU's Single Market would be distorted by a 'subsidy race' between Member States to the benefit of particular companies.

The non-confidential version of the decision will be made available under case number SA.34947 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. The electronic newsletter State Aid Weekly e-News lists the most recent decisions on state aid published in the Official Journal and on the website.