Hinkley Point C: the EU energy market will not be the same after this

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Joaquín Almunia (photo Europe by Satellite)

Joaquín Almunia (photo Europe by Satellite)

The European Commission has, to the outrage of many, given a historic green light to an unprecedented £34 billion (€43 billion) state aid package for nuclear power in the UK, the first case of its kind in Europe. Energy Post’s Brussels correspondent Sonja van Renssen discusses the case .- and the many questions that it raises about the EU’s energy policy and the internal market.

Few believed that the European Commission would dare to turn down the UK government’s request to give state support to a £34 billion (€43 billion) new nuclear power plant at Hinkley Point C in Somerset. With the UK’s EU membership on less than solid ground, it seemed politically impossible to reject the request outright; better accept it, albeit with conditions. After all, Germany’s lavish renewables subsidies were also approved by Brussels earlier this year.

Nevertheless, the Commission surprised stakeholders back in March with a sharply worded list of objections to the UK proposal. What the UK wants to do, is subsidise the construction and operation of a new nuclear plant with a minimum guaranteed price of £92.50 per MWh – roughly twice the current wholesale electricity price – paid out to operator EDF for a duration of 35 years from when the plant starts running. On top of that, the government wants to give EDF and its Chinese partners a £10 billion credit guarantee to help them raise additional funds on the market.

“New nuclear power stations like Hinkley will be vital in the next decade for Britain’s energy security. New nuclear power stations will also be key to cutting the carbon emissions from Britain’s electricity industry.” –Ed Davey, UK Energy & Climate Minister, October 2014 

Most of the total cost is construction, now estimated at a whopping £24.5 billion and due to take ten years. The 3.3GW plant would represent 7% of UK of electricity generation and run for 60 years.

The UK government believes it has good arguments for the nuclear power plant. It estimates that it faces a 60GW gap between demand and supply in the decade from 2020-30 due to old coal and nuclear plants coming offline. It argues that plans for a capacity market to keep some of these ageing fossil fuel plants online and spur the construction of new – especially gas – plants are inadequate to ensure security of supply. Nor do a burgeoning renewables industry and demand response suffice, since they may not supply the baseload power the UK needs. Nor are there enough interconnectors to the continent planned for the coming years. On top of which, nuclear is a great decarboniser.

“Serious doubts”

Yet the Commission was not convinced by the UK scheme. Back in March, it said it had “serious doubts” about whether the UK’s proposal for Hinkley Point C “can be deemed to pursue the common objective of security of supply, and that it can pursue decarbonisation”. It had the same “serious doubts” on the “need for state aid in relation to nuclear energy” and on “the fact that the combination of credit guarantee and contracts for difference are an appropriate instrument”. It concluded that “the measure has the potential to seriously distort competition and trade between member states”.

Between March and October, these “serious doubts” were apparently assuaged, however, so that on 8 October, Competition Commissioner Almunia stood before journalists in Brussels and said: “The aid foreseen by the UK is in line with EU rules. The European Commission has found that that it will not lead to undue distortions of competition in the single market.” The UK proposal was not approved unanimously and had to be put to a vote: 16 for, 5 against and 1 abstention.

“How can you imagine I would support a proposal for a decision of the college without complying with EU rules?” – Joaquín Almunia, 8 October 2014 

With the final text of the decision yet to be published, it is difficult to follow the Commission’s precise path to this conclusion. What Almunia did highlight on 8 October, is two changes the UK made to its proposal to address the EU’s concerns: a lower overall subsidy and a smaller share of windfall profits to operator EDF:

  • One, the Commisson found that the initial fee the operator would need to pay to the UK Treasury was “significantly increased” to better reflect the risk profile of the project. This will reduce the subsidy by more than £1 billion (€1.3 billion), Almunia said.
  • Two, if profits are higher than expected, they will be shared with UK consumers and taxpayers. There are two instances in which this could happen: one, if construction costs are lower than expected and two, if the profits of EDF and its partners are higher than expected.An increase in the profit rate of one percentage point would generate savings of more than £1.2 billion pounds (€1.5 billion), Almunia said. He emphasised that these “gain-share” mechanisms will apply throughout the plant’s lifetime, i.e. 60 years, rather than 35 years as originally foreseen.

Unanswered questions

Despite these changes, fundamental questions remain. Some of them were already raised by the Commission itself in March, others are new. Pending a full analysis of the decision’s text,  Energy Post sets out some of the most controversial elements of Almunia’s argumentation – and suggests what others make of them.

“The choice to promote nuclear is a choice by the UK. This choice lies within its national competence.” But are choosing an energy source and explicitly promoting an energy source the same thing? The EU promotes renewables through its 2009 renewable energy directive, which requires a 20% share of renewables in the EU energy mix by 2020, but it does not have a policy of promoting nuclear. Nevertheless, here it is offering the same kind of subsidies to nuclear as exist for renewables.

Almunia did not comment on the distinction between “choosing” and “promoting”, emphasising simply that member states can choose how they generate their energy. But he did acknowledge that the EU explicitly promotes renewables and said: “If you compare the public support received by renewables with this you will immediately come to the conclusion that public support for renewables is quite high, much higher than for this project.” That is true for the minimum guaranteed power price (strike price) plus the proportion of construction costs covered by public support, Almunia said.

Others argue that comparing nuclear and renewables is comparing apples and oranges: “Nuclear should be considered a so-called mature technology that should be excluded from state aid,” said German Green MEP Reinhard Bütikofer in a press release.

“[This] is the most outrageous EU Commission decision of the last 15 years. It is economic nonsense.” – Claude Turmes, Green MEP, 8 October 2014 

“During the investigation the UK has convincingly demonstrated that the construction could not be achieved by market forces alone. There is a market failure here.” The market failure is that the project could not be built without public support, Almunia explained. This in turn, is in part due to its “unprecedented nature and scale”, he added. But the question behind the question is: how did the UK convince Brussels the plant was needed in the first place? Almunia said that the UK had convinced Brussels there was no cheaper or less risky alternative to it.

Once a market failure, has been established, the Commission also needs to assess that the aid proposed is proportional, appropriate and does not distort market competition, Almunia continued. On all counts, the Commission gave the UK plan the thumbs up. “We don’t think this project will distort any kind of programme of investment in renewables. We consider that this project will not create difficulties for ongoing projects to better interconnect the UK and we consider that the market power of the new plant will not create distortions of competition given it will represent 7% of generating capacity.”

Hinkley Point

Existing Hinkley Point power station

This is a far cry from the Commission’s concerns back in March, when it said: “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. The measure is argued to contribute to the objective of decarbonisation, but it would merely do so on a different time scale [to what the market would deliver]. 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.” It would contribute to affordable prices “only under very specific conditions which can only materialise far away in the future”. The final decision is a far cry from these concerns, as UK Climate and Energy Minister Ed Davey illustrates: “this decision shows the European Commission agrees that this a good deal for consumers”.

“We would never have accepted a kind of project with a candidate as investor that was there because other possible candidates were foreclosed.” Almunia denied that other market players had not been offered a fair chance to propose alternatives to Hinkley Point C. The UK authorities launched a “call for interest”, he said, for investments in baseload electricity generation over the next decade to fill the forecast 60 GW gap. The Commission’s legal service has confirmed the full legality of this procedure (although some are still arguing that if there was a true call for tender, it should have been published in the EU’s official journal six months before closure of the call – the Commission responds that the EU Electricity Directive says an “equivalent procedure” will do and if that is not a “call for tender” as such, it doesn’t need to be published in the official journal).

“This decision bears witness to the competitiveness of Areva’s EPR technology, its answer to the highest safety requirements and its ability to conquer export markets.” – French Economy Minister Emmanuel Macron

“I can assure you that waste management issues are included. The cost of £34 billion is not only the cost of building a plant.” The UK government made the point that “for the first time ever, the operator of the plant will be responsible for the full costs of decommissioning and its share of the costs of waste management”. This did not stop Greenpeace from saying there was no mention of how much EDF would pay towards waste disposal and the decommissioning of radioactive nuclear waste. Others said the Hinkley decision was irresponsible without a UK nuclear waste plan in place.

“I can assure you this decision will not create any kind of precedent. Possible [other] cases will be discussed on their own merits.” Despite Almunia’s insistence on this point, nuclear proponents and opponents either welcomed or worried about a precedent. “Westinghouse recognises the important precedent for not just the UK but for all other EU nuclear projects,” the company said in a press release. According to Reuters, CEZ’s chief executive Daniel Benes already told the Hospodarske Noviny newspaper last month: “It is always good when someone clears the way for you.”

Meanwhile, Austrian Chancellor Faymann and Vice-Chancellor Mitterlehner made it clear that Austria would “not accept” the decision and challenge it at the European Court of Justice. For Austria, the decision is a “negative precedent because until now feed-in tariffs were reserved for renewables. Against this, we will act and issue a complaint.” The tariffs are almost twice as generous as for wind and they also last much longer (35 vs. 13 years), the Austrians said.

“Hinkley Point C represents the start of investment in a new fleet of nuclear power stations.” – Ed Davey, UK energy & climate minister 

Energy companies were relatively quiet on 8 October, but with a big push from their side for more market and less regulation – Eurelectric issued a report on exactly the same day about better integrating renewables into the market – it will be interesting to hear what they make of this new dawn of regulated profits.

“I cannot share your view that the decision adopted today will put any kind of obstacle for this Energy Union project.” As Vice-President for Energy Union candidate Alenka Bratušek was voted out by the European Parliament and indeed a question mark hung over the very portfolio, Almunia insisted the Hinkley decision did not pre-suppose the next Commission would fail to complete the EU internal energy market. So far there is no Energy Union, he said, but added that he hoped it would materialise. If Europe were better interconnected, countries could benefit from one another’s energy mixes for security of supply. The EU wanted to complete its internal energy market by this year – a progress report next week will assess how far it’s come.

Some, such as Mark Johnston, Senior Advisor to think tank the European Policy Centre, argue that the Hinkley decision is a clear blow to the EU internal energy market. The Austrian energy trade association takes the same line. “It opens the door to an endless subsidy race for all technologies and the discussion over cost-efficiency and fair electricity prices is severely damaged,” said Barbara Schmidt, Secretary-General for Oesterrichs Energie, in a statement.

“The figures are the ones we have been working with for one year in this investigation: £24.5 billion for construction and until £34 billion in total.” There is confusion over the numbers. The total construction cost was quoted as £16-17 billion until 8 October, when Almunia said construction would cost £24.5 billion. The Commission’s press release still says investors will need to go to the market to find £17 billion however. Meanwhile, EDF issued a press release which stuck to £16 billion as the total cost for getting the plant built, adding for for extra clarity: “These numbers haven’t changed.” How much will it cost? If the experiences of Flamanville and Olkiluoto are anything to go by, the initial figure still has plenty of time to creep up.

After all the talk about how to share the gains of unexpected profits, there is no change in conditions foreseen if construction is delayed by up to four years. EDF is well-protected, also standing to receive compensation if Hinkley is cancelled in a “political shutdown” or if there is an increase in insurance costs.

I hope I will not be in prison for this! – Joaquín Almunia, 8 October 2014 

On 8 October, Almunia made a historical announcement: for the first time ever, the EU had approved state aid for a new nuclear power plant. The decision came after a serious investigation and analysis of some two dozen scenarios, the commissioner said. And yet, the decision comes as Rosatom readies to build a new nuclear plant in Finland, subsidy-free (Fennovoima), renewables are being told to get off feed-in tariffs and face the market, and the European single market for energy is supposed to be reaching completion. Hinkley Point C will cost almost as much as the EU’s entire regional development budget for sustainable energy projects from 2014-20, €38 billion. Proponents of nuclear  power welcome it – but given its price tag it may do more damage than good to the nuclear cause. It’s a big decision for an outgoing Commission and the EU court will have its say. In the meantime, EDF started preparing the construction site back in March and plans for a final investment decision as soon as possible.

Comments

  1. says

    It is amazing that the same people who ask tough questions for nuclear development, are no where to be found when much worse is going on with wind and solar. See WiseEnergy.org for a scientific assessment of the energy situation.

  2. Paul Hunt says

    The best observation I’ve come across on this fiasco is from Nils Prately of the UK Guardian in response to the web of lies, half-truths and fictions Ed Davey, the UK Secretary of State for Energy and Climate Change, was trying to spin.

    ‘What Davey should have said is this: “The EC has agreed the UK has the right to pay massive subsidies for nuclear power because its energy policy has been a shambles for 30 years.”’

    http://www.theguardian.com/business/nils-pratley-on-finance/2014/oct/08/power-struggles-hinkley-point

  3. says

    I agree with Paul’s comments. Couple of factual points Sonia, the EC response to DECC’s Hinkley dossier went to DECC in Dec 2013, with the letter plus supporting report becoming available in Feb 2014. It made entertaining reading

    In terms of Almunia and ““How can you imagine I would support a proposal for a decision of the college without complying with EU rules?” – well quite easy really – he is leaving & the ECJ/new EC will “pick up the pieces”. Rumour is that Barroso leant on everybody (Jose has form in this respect).

    The argument regarding “RES subs are higher than Nuke subs” – is comical. Who in the UK sets the RES subs? DECC. What happened last year wrt PV? DECC set a higher sub than the industry asked for. Who in the UK sets nuke subs? DECC. Is DECC pro-nuke?

    “Almunia said that the UK had convinced Brussels there was no cheaper or less risky alternative to it”

    Nye Bevan speaking at the time of the Suez crisis (1956) observed of the then PM – Eden – (initiator of said crisis) – “if he sincerely believes this – and I believe he is sincere – then he is too stupid to be prime minister”. Ditto Almunia – the only question left is – does it take practise for Almunia to be this stupid?

    This is a serious question. In the 1970s east coast USA, a company faced 2 options – build power station & get paid for power or……. The “or” (which was chosen) was energy efficiency. Taking an average of (say) 50GW demand in the UK there is certainly the potential to reduce this by 3.3GW (7%) & before anybody says “heat pumps” I’ll say “Surface Power” (Solar Thermal for space heating). Spending £14bn (or £16bn or £24bn or…. whatvere) buys you quite a lot of energy efficiency, or CHP, or mCHP etc etc.

    The “deal” looks very very expensive. The question left is, who, apart from the French government (aka EdF) is making money out of this – step forward the Tories favourtite, the (sh)city of London.

  4. Craig Morris (@PPchef) says

    Sonja, Germany does not have “lavish renewables subsidies.” 1) They are not lavish. The target return is 6% aside from offshore wind. The target return at Hinkley was reduced from 15% to 11.4%; see http://www.renewablesinternational.net/eu-approves-state-aid-for-new-nuclear-in-uk/150/537/82286/. Furthermore, the cost of RE goes down, not up, while Hinkley goes up with inflation, see http://energytransition.de/2014/10/price-of-new-nuclear-revisited/. The FITs for wind and solar in Germany are already lower than the FITs will be for Hinkley; the UK has higher rates for wind because corporations demand higher profits, and community wind is marginal in the UK. 2) FITs are not subsidies any more than British healthcare or US medicare is, see: http://www.energypost.eu.gridhosted.co.uk/get-germany-generous-subsidies-renewables/.

    More importantly, though Sonja does not say so, the EU just approved Germany switching from FITs to auctions by 2017, not keeping FITs. The Commission is thus pushing renewables out of FITs but allowing nuclear to slip into them.

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