On 18 December 2013, the European Commission announced that it was opening an in-depth state aid investigation into the Government’s package of financial support for the proposed Hinkley Point C (HPC) new nuclear generating station.  On 31 January 2014 the Commission published a version of the letter setting out its reasons for launching a detailed investigation and the points on which it requires to be persuaded of before giving state aid clearance to the package.

What does the letter tell us?  It is a fairly closely-argued 67 pages, so it will take more than one post to cover it.  Today, we begin by setting the scene. 

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The potential of HPC – an image from gov.uk

The critical tone of parts of the Commission’s analysis has been noted in a number of reports, but this is perhaps not the most surprising feature of the letter if one considers its context.

  • The package of support for HPC inevitably treats new nuclear as to some extent a “special case”.  State aid policy is administered on the principle that free markets are best and that claims that a particular industry is somehow “special” are to be treated with scepticism – even if that industry is one in which there is already massive state intervention in various forms. 
  • The European Commission’s decision-making on state aid cases has sometimes been criticised for being too politically expedient.  Here we have a case where the UK Government has invested huge political capital and the aid is going to a subsidiary of a company 84% owned by the French state.  Even if the Commission is ultimately minded to approve the HPC support package it cannot afford to be seen to have given it anything less than an economically rigorous evaluation.
  • In 2007, the Commission ruled on alleged state aid for the Olkiluoto 3 nuclear plant, to be built in Finland with French technology.  The issue was whether a guarantee given by the French state gave Areva an unfair competitive advantage over other potential suppliers.  The guarantee was found to have been given on market terms, so that there was no aid under the state aid rules.  However, the proceedings still lasted three years and the Commission went through an in-depth investigation before reaching a final decision. 
  • In 2006, the Commission approved the arrangements for setting up the Nuclear Decommissioning Authority (NDA).  Although the Commission acknowledged that the purposes behind the creation of the NDA were fully in line with the objectives of the Euratom Treaty, it was also very concerned about potential distortions of competition arising from it.  For example, notably tight controls were set on the pricing of electricity sold by the UK’s Magnox nuclear plants, to be run by the NDA, for the few remaining years of their life.
  • Most recently, the Commission decided that aid granted by Slovakia in relation to nuclear decommissioning was compatible with the state aid rules.  In doing so, the Commission emphasised that the aid related to plants that had already been shut down; that it did not subsidize current electricity production; and that it was “strictly limited to what is necessary to cover the costs of decommissioning historic nuclear facilities, for which no adequate provisions were created in the times of a centrally-planned economy”.  Moreover, the Slovak scheme was unlike “the numerous schemes of compensation for stranded costs, public service obligations and support schemes for renewable electricity, where the Commission has found that the financing of the support scheme through a levy has a protective effect of national electricity production”.
  • The HPC support package is the kind of arrangement that is intrinsically harder for the Commission to get itself comfortable with than the Okiluoto or NDA measures.  It explicitly and intentionally provides, under the Contract for Difference (CfD) mechanism, a guaranteed level of price for electricity and therefore a degree of revenue security which the market would not provide.  It can therefore be characterised as “operating aid” (as opposed to “investment aid”), which the state aid regime regards as particularly problematic – since it shields operating businesses from normal market risks.
  • Although there is an entire EU Treaty devoted to the promotion of nuclear power, it is politically controversial within the EU, and there are those who will take any opportunity to put the case, whether in administrative or judicial proceedings, against the adoption or approval of any measure that brings a “nuclear renaissance” in the EU closer.
  • There are undoubtedly some features of the support package for HPC which, at least at first sight and taken in isolation, appear very generous.
  • The Commission is in the process of “modernising” the state aid framework and has just published draft Guidelines on environmental and energy aid.  The Guidelines do not cover nuclear projects, but take a notably tough line on e.g. support for renewables, even though the deployment of renewables is mandated by EU law in a way that nuclear power is not.  Anything other than a searching approach to scrutiny of the HPC package would be out of keeping with the general thrust of current Commission policy in this area.
  • Whatever the ultimate outcome of the Commission’s evaluation of the HPC support package, the final decision can only be robust against potential challenge if it has clearly stated the potential objections to what the UK Government is proposing.

The UK public may have been encouraged to think that the hard part of HPC was over once development consent, a nuclear site licencemarine licence and other environmental permits were granted, and agreement on the strike price had been reached.  But obtaining state aid clearance in this case was always going to be a challenge.  And for all sorts of reasons, it is not surprising if at this stage the Commission has stated the “case for the prosecution” in clear and strongly worded terms.  In future posts, we will examine some of the Commission’s arguments a little more closely, consider the possible outcomes of the Commission’s investigation into the HPC support package, and look at what the Commission’s letter indicates about the prospects for state aid clearance of the rest of the Electricity Market Reform (EMR) package.