State aid approval for Hinkley Point nuclear power station

On 8 October the European Commission confirmed that revised UK government plans to subsidise the construction and operation of a new nuclear power plant by EDF at Hinkley Point comply with EU state aid rules. This decision concludes the Commission’s in-depth investigation which began in December 2013.

Commission Vice President and Competition Commissioner Joaquin Almunia, 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 reiterated that Member States are free to determine their energy mix and that the UK’s decision to promote nuclear energy is within that national competence. Hinkley Point C will be the first new nuclear plant in the UK in almost 20 years and will eventually produce approximately seven percent of the UK’s electricity generation.

The Commission accepted that the UK government had demonstrated that the support would address a genuine market failure, in particular that the project would not be able to obtain the necessary financing on the open market, due to its unprecedented nature and scale.

The details of the proposed supports have been amended as a result of the investigation. The UK government plans to establish a contract for difference, which will ensure a stable revenue for the operator of the nuclear plant for 35 years. The resulting gain share mechanism – where the public entity granting the support receives a share of the gain as soon as the operator’s overall profits (return on equity) exceed the rate estimated at the time of the decision – will extend for the full 60 year projected lifetime of the project. The strike price on which the gainshare mechanism is based will be modified. A second threshold will be introduced above which the public entity granting the support will obtain more than half of the gains. The operator will also benefit from a state guarantee covering any debt which it may seek to obtain on the financial markets to fund the construction of the project. The Commission notes that the guarantee fee has been raised significantly as a result of its intervention, lowering the subsidy initially proposed by more than GPB 1bn, thus reducing any distortions of competition created by the support.

Welcoming the Commission’s decision, the UK government noted that it is continuing to work with EDF to finalise the Hinkley project, including the full terms of the Contract for Difference and the financing arrangements for the project. DECC’s press release also contains a useful summary of the main terms proposed.

The decision has met with predictably mixed reactions. While some Member States regard this as good news, potentially reinforcing some ground rules to make it easier for other projects to be examined and cleared, at the other end of the spectrum lies a threat from one European government to challenge the decision in the EU General Court.

A non-confidential version of the decision will be made available on the DG Competition website in due course.

Please visit our website for an update on state aid in the energy sector in summer 2014.