On 18 December 2013, the European Commission decided to investigate alleged state aid by the UK into the nuclear new build project at Hinkley point in Somerset. How has the UK responded to the opening of the investigation?

First, the UK states that it fully supports achieving the common EU objectives of decarbonisation, security of supply, and diversity of supply at the lowest cost; but like many member states, we face unprecedented challenge in achieving these objectives. As the UK has concluded that new nuclear will help it achieve these objectives, it is an important part of our future energy mix.

However, the UK has also identified that there are genuine market failures. This means that optimal delivery of these objectives will not happen without state intervention to bring forward new nuclear capacity.

This investment - which has been notified to the European Commission under the state aid rules - is therefore considered necessary in order to incentivise investment in a new nuclear power station. In the UK's view, the Contract for Difference (CfD) is a targeted measure, aimed at creating the right incentives for investment by reducing uncertainty over the price per MWh that the generator will receive, and thereby mitigating the risk of unhedged wholesale price volatility. This is achieved by setting a strike price reflecting the lifetime costs of constructing and operating the plant. The CfD also mitigates the risk that future legal or policy changes will reduce returns on investment. The strike price has been set as low as possible in order to incentivise investment.

At the same time, the UK's view is that the CfD is market-based, incentivising generators to sell electricity on the market in the normal way: the difference payment is capped at the difference between the strike price and a market-based "reference price" based on actual market prices. The result is that the generator will not realise the full strike price if it sells its output at below the market reference price, or has to buy back power at above the reference price to manage unplanned outages.

Overcompensation (at which the state aid rules are aimed) is avoided, says the UK, by the fact that payments are only made to generators when the reference price is below the strike price. When the reverse is true, reverse payments are made; this makes the CfD preferable to the standard Feed-in Tariff.

The CfD also contains other mechanisms aimed at avoiding overcompensation. It can be argued that this form of investment incentive is preferable to a Feed-in Tariff as this is paid regardless of the market price achieved leading to potential overcompensation.

The UK takes the view that the measure will not significantly affect competition or trade between member states (one of the conditions which must be met in order for a measure to confer illegal state aid). Furthermore, the measure minimises any impact on competition by preserving the generator's exposure to market forces and to competition in the wholesale electricity market under similar conditions to other operators. Similarly, the UK says that the CfD does not relieve the developer/investor of key project and investment risks and will not lead to higher retail prices, nor significantly distort competition, in the retail markets as well as in the wholesale.

The UK has underlined its continued commitment to interconnection and has said that the addition of Hinkley Point C to our generation assets would not have any significant impact on interconnector flows or to incentives to invest in interconnectors. It concludes by underlining its continued commitment to addressing the market failures impacting on energy efficiency, and that Hinkley Point C would not have any significant impact on incentives to invest in it.