Why the beastly EU has cried foul on nuclear state aid

Sometimes the pieces I do for this esteemed journal are, I like to think, about subjects of reasonable significance, and sometimes, I admit, they are about obscure footnotes of dubious significance. Well here’s a piece that is both obscure AND significant. I’m referring to the very recent (and densely unreadable) 70 page ‘letter’ sent to the UK by the European Commission. This particular letter sets out the Commission’s reasons for launching a formal state aid investigation into the arrangements for underwriting (or rather subsidising) the Hinkley C nuclear power plant.  EC documents are usually quite obscure but I think this one is quite significant, because it doesn’t just set out some ‘questions to clear up’ about the structure of investment instruments, 35 year contracts for difference and credit guarantees that make up the deal on the building of Hinkley C power station (and by implication the rest of the future nuclear programme). Instead it systematically dismantles the arguments put forward by the UK government on the issue, and then asks for comments within one month on the pile of rubble that remains.

It is apparent from the document that on this one, they really have got our number. And the document doesn’t spare in levering open the contradictions in the initial UK position: how can the new reactor contribute to security of supply and widening capacity by 2020 if it is not coming on stream until 2023? How will the plant contribute to affordability when the agreed strike price is overwhelmingly likely to contribute to higher energy prices rather than lower them?  How can a deal that was not tendered against anything else reasonably be seen as competitive? How can the deal make a known contribution to decarbonisation when it was concluded before any targets for the decarbonisation of UK supply had been made? Why is all this support necessary when the department itself indicates that nuclear plants could be built without subsidy by the early 2020s anyway? And is the support required really to address ‘market failure’ or to secure a plant (or plants) possibly at the expense of other low carbon investments?

The difficulty of the UK position is, of course, that we are facing two ways on the process. For public consumption in the UK it is not a subsidy issue, because, as the coalition has always famously maintained, new nuclear plants will only be built ‘provided that they receive no public subsidy’.

However for Commission consumption the position is different. There are the UK submits, public subsidies, but these are justified, the argument goes, because the new plant performs a ‘service of general economic interest’. It is this contradictory position that the EU document skewers and then pulls to pieces.

For the time being though, it is business as usual at DECC. Here’s what Michael Fallon, energy minister had to say about the EU letter when questioned about it at Energy and Climate Change Select Committee:

‘The Commission is fully entitled to look at the detail behind the heads of terms and to set out the various questions that need to be answered and they’ve done that now publicly…It’s a perfectly normal process under the state aid rules and I’m confident that when we’ve gone through that process we will, in the end, obtain clearance.’

On the basis of the Commission’s critique, it is difficult to see the investigation will be the ‘perfectly normal’ process the minister asserts. Instead there could be the danger that, in sticking to its contradictory position, the government will not be able to adequately meet the points raised. And it’s possible that situation could seriously set back the process of commissioning and building some or all of the UK’s new nuclear fleet, because at some stage, the government will have to start again with different and more coherent arrangements for support.  Worse, by sticking with the elision of nuclear and renewable within the contract for difference and investment instrument processes, future renewable underwriting risks becoming dragged down into a protracted nuclear state aid judgement process. If it was separate, as it was originally under the Renewable Obligation, it would be clearly derogated from further state aid examination.  Something has to give, I think, and it won’t be just about ‘going through the processes’.

The final irony of all this is that by the time a nuclear plant does actually come on stream, it probably could have been built using a variety of supportive measures on planning, sitting and development assistance that do not constitute subsidy or state aid, as the Department itself sets out. Perhaps the coalition should have stuck to its original intentions.

This article was first published in Business Green. 

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