European Commission will decide fate of UKs new nuclear ambition
A new nuclear deal is imminent, the government continues to promise. Much of the media coverage in anticipation of the deal has focused on whether or not it will be value for money for the UK taxpayer, who will ultimately foot the bill. But beneath the contractual wrangling is another potential stumbling block: whether or not the deal is legal.
The European Union (EU) has a swathe of guidelines in place to stop governments unfairly favouring particular industries. Because the UK’s nuclear deal could have knock-on effects for European competition, it will have to pass muster with the European Commission. As is often the way with EU regulations, navigating the rules and regulations is a complex business.
Five criteria
It all comes down to whether or not the European Commission deems the nuclear contracts for difference to be ‘state aid’. If it does, the UK would have to return to the drawing board and find a new way to fund new nuclear. If not, it could open the door for a swathe of new investment across Europe.
The government is set to offer french energy company EDF the same type of energy contract to build the nuclear plants that it will offer renewable generators – known as contracts for difference (CFDs). For nuclear, the contracts are expected to be longer – EDF is set to receive a 30 to 40 year contract, with a guaranteed price for the electricity the nuclear plants will generate – known as the strike price – of between £80 and £115 per megawatt hour, according to reports.
A new report released today from energy consultants Mycle Schneider Consulting is adamant CFDs will constitute state aid: the strike price arrangement “does clearly benefit nuclear power and it is granted by the State”, it says.
But Kirsty Alexander, the Nuclear Industry Association’s Head of Communications, doesn’t think it’s so clear cut. She says we simply “can’t second guess the outcome” of any European Commission review.
State aid
Looking at how the European Commission decides these matters might make depressing reading for the nuclear industry.
The EU assesses state aid claims according to five criteria, says Maria Klies from non-profit energy advisors, the Regulatory Assistance Project (RAP):
(1) Does the money come from public funds?
(2) Does it give the beneficiary a competitive advantage?
(3) Is the aid selective?
(4) Will the aid affect competition?
(5) Will the aid affect the European market?
If the answers to these are yes, the European Commission will consider the deal state aid.
So, how does the UK’s nuclear deal fare against the criteria? Our first impression is: not that well.
The strike price would be paid by the government via a levy on consumer bills. That’s pretty obviously public money, which means the first test is pretty obviously met. It also gives the nuclear industry an advantage according to the European Commission’s terms, as the Mycle Schneider Consulting’s report points out.
While nuclear will get the same sort of deal as renewables, it will still have an advantage over fossil fuels – which are part of the energy industry, after all. And CFDs are selective by their very nature – they are only going to be applied to low carbon technologies. So the European Commission could decide CFDs selectively benefit the nuclear industry at the expense of competitors.
It’s also pretty clear CFDs will give nuclear an advantage in the UK market – this one is “very easily established”, Kleis says. Simply put, the government is giving nuclear – and EDF, as it’s the only company building new nuclear – a leg up. That’s the whole point of the CFDs.
But the European Commission doesn’t just look at the UK market, it’s concerned with European-wide competition. If the UK government is giving aid to build more capacity, it means it can sell the subsequently generated electricity, and doesn’t have to import as much from other EU member states – so the European Commission is likely to take a dim view on that count too.
So it looks entirely possible the UK’s prospective nuclear deal could be deemed to be state aid.
Exemptions
But that’s not the end of the matter. The European Commission could exempt nuclear power from the rules.
The European Commission can exempt certain deals from the state aid rules if they are considered to be for the greater good of the European Union. As the nuclear deal looks likely to hit all the criteria of state aid, the government is presumably hoping it can get nuclear CFDs exempted.
Mycle Schneider Consulting’s report says there is increasing “pressure to change the EU guidelines on state aid for nuclear power so that it can be subsidized in the way that renewables and energy efficiency are subsidized”.
Renewable energy subsidies – while clearly state aid – are exempted through an ‘environmental protection’ clause. In other words, they’re good for the environment because they’re low carbon. They are exempted because they fit with the EU’s goals of reducing greenhouse gas emissions by 80 per cent by 2050, and providing for 20 per cent of energy consumption from renewables by 2020.
That target was set back in 2007, and the exemption allowed additional support for the young renewables industry to develop. As the nuclear industry is neither young nor a renewable energy source, it doesn’t qualify for the exemption. But if the European Commission revises the clause – which it is considering – nuclear could be exempted on the same grounds, even though it is a much more mature technology and not a renewable energy source.
Alternatively, if the government can show the nuclear deal helps a particularly underdeveloped part of the UK or provides a lot of employment it could get an exemption.
EDF expects to employ 5,000 people from the area around Hinkley in the construction phase, and 900 people over the course of the reactors’ 60 year lifetimes. The government claims the full 16 gigawatts of new nuclear it wants to build could provide 29,000 to 41,000 jobs – but that would rely on the EDF deal being exempted first. It is unclear if that will be enough to push the European Commission into ruling in the government’s favour.
The nuclear deal could also be exempted if the government can show it is key to EU energy security – one of the European Commission’s core goals. CFDs are designed “to ensure the UK can meet long term climate and energy security goals as cost effectively as possible”, Alexander says. If the government or nuclear industry can show this also helps EU energy security, the Commission would have full discretion to evaluate the deal, Kleis says.
So the UK’s new nuclear deal ultimately rests in the hands of the European Commission and whether or not it considers it vital for the economy or Europe’s energy security. That’s if it’s deemed to be state aid in the first place, of course.
Delays
The EU member states are divided over whether the European Commission should change the state aid rules to allow nuclear support. According to news service the ENDS Report, the UK France, Czech Republic and Hungary are all in favour of a rule change. But Austria and Germany – which has a commitment to phase out nuclear power altogether by 2022 – oppose the revision.
At this stage, it really is impossible to predict whether or not the UK’s supposedly imminent deal with EDF will get past the European Commission. This creates an interesting situation where the government is busy negotiating a deal which may or may not turn out to be legal. Kleis sums up the current uncertainty, saying:
“I’m not sure that it will not be exempted. It all depends on how the Commission views nuclear energy… There are so many nuances of this which need to be taken into consideration.”
It promises to be big news when the government announces the details of its contract with EDF, but that will only be the beginning of a process which could take up to 18 months.
That could mean construction stalling until 2015, assuming the government and EDF sign a contract any day now.