Brussels launches probe into UK nuclear guarantee offered to EDF

Brussels has launched a full investigation into whether Britain is providing up to £17bn of potentially illegal public guarantees for the first nuclear power plant in a generation.

The European Commission will examine the contract between the UK government and French utility EDF for Hinkley Point C nuclear power station in Somerset, which aims to provide 7 per cent of the country’s electricity.

The inquiry, expected to last at least six months, is justified on the grounds that the commission “in particular has doubts that the project suffers from a genuine market failure”.

This puts into question the rationale for the UK offering support such as a guaranteed price for nuclear power and a financing guarantee to entice the private sector into building a series of nuclear reactors.

Brussels estimates total government support would amount to almost £17bn, depending on future electricity prices and the actual capital costs of the operator. This figure was not disclosed at the time when the contracts were unveiled by Ed Davey, the energy secretary.

The EU’s competition chief, described the UK effort to attract investment in nuclear as “complex” and of an “unprecedented nature and scale”. “The commission therefore needs to investigate thoroughly its impact on the UK and the EU internal energy markets,” he said.

The Brussels investigation is expected and the UK has negotiated the contract with EU state aid restrictions in mind. But any disagreement with Mr Almunia over the contract terms could force a substantial renegotiation with EDF or put the entire project into doubt.

The commission said it would examine the UK government’s main support mechanism for low-carbon power – the contract for difference, or CFD.

This stabilises revenues for generators at a fixed price known as the “strike price”: when the market price drops below it, generators receive a top-up payment from suppliers but if it rises above the strike price, they must pay back the difference. The CFD is the centrepiece of the coalition’s energy bill, a series of reforms to the UK electricity market designed to unlock some £110bn in investment in the country’s ageing energy infrastructure.

EDF is the only company to have negotiated a CFD with the government – the investment contract for Hinkley Point C establishes a strike price of £92.50 – roughly twice the current wholesale price of power.

As the EU’s top competition authority, Brussels is empowered to police state support for private companies to ensure the interventions are necessary, proportionate and not harmful to the broader market.

State aid probes have no formal deadline and can take months or even years. But UK officials are hopeful the case will be concluded promptly. EDF said:”This announcement shows that the inquiry is proceeding as expected and in time for a decision in the summer of 2014″

The length and intensity of the negotiations has resulted in a fair and balanced agreement,” EDF added. “The scrutiny applied to the project at every stage ensures that agreements reached are durable and robust and are compliant with state aid requirements.”

EDF has made clear it cannot make a final investment decision on Hinkley or bring in co-investors – two state-owned Chinese groups, China General Nuclear Power Group and China National Nuclear Corp have expressed an interest in taking a stake – before state aid clearance is received.

The probe will be a crucial test case in a bitterly contested area of policy. There is uncertainty over how state aid rules will be applied to plans for Europe’s next generation of power plants, especially any new nuclear reactors.