Brussels says state aid deal for Hinkley Point is illegal

Sunday, February 2, 2014

Plans by EDF Energy to build Britain's first nuclear reactor for a generation were in disarray last night after Brussels said that the controversial subsidy deal agreed with the Government could amount to illegal state aid.

In a withering initial assessment, the European Commission said that consumers would end up paying up to £17.6 billion of "super-normal" subsidies via their energy bills to EDF Energy, which is controlled by the French Government.

Its most damning objection was that the subsidies were entirely unnecessary, since nuclear power would become economic by the end of the next decade, according to the Government's own forecasts.

Ed Davey, the Energy Secretary, announced an agreement in October to guarantee paying almost twice the market rate of electricity for 35 years to EDF Energy to build the Hinkley Point reactor project at a cost of £16 billion.

During the preceding year of tortuous negotiations, the French had threatened to walk away several times. In the end, most of their demands for subsidies and government loan guarantees were met, but the full terms remain a secret.

The Somerset project can go ahead only if the Commission gives it the green light after carrying out a state aid investigation, which will take at least until the summer to conclude.

The highly critical 70-page report, which is subject to consultation, will trigger a furious behind-the-scenes twin lobbying effort in Brussels by ministers and officials from Britain and France.

Peter Atherton, an analyst at Liberum Capital, said that it was now primarily down to the French Government, which owns 85 per cent of EDF Energy's parent company, to wield its political influence to rescue the deal.

"It's hard to see how the Commission can get from this initial assessment to green-lighting the subsidy contract as it's written at the moment," he said. "This may end up being a political decision - the French have their ways of operating in Brussels."

The Commission said that subsidies that already exist, such as the carbon tax, would make nuclear economic by 2027, only four years after the first reactor at Hinkley Point is due to come on stream.

According to its assessment, the new subsidies may be illegal under state aid rules because they favour a specific technology, rather than allowing other low-carbon types of power station such as biomass to bid for the funding.

As well as distorting the market, they could result in a "substantial transfer of wealth" from consumers to EDF Energy.

The report challenged the Government's own calculation that EDF Energy would need to be allowed to make a 10 per cent return in order to invest in Hinkley Point, which the Commission said was not justified.

Including the profits that Hinkley Point would make over its full 60-year lifetime, the Commission said that "over-compensation" was possible and that subsidies paid by consumers could total £17.6 billion.

The assessment also shot down another of the Government's justifications for subsidising Hinkley Point, which was that it would avert blackouts.

David Cameron assured MPs last month that he had "looked energy companies in the eye" when seeking assurances that they would keep the lights on, despite the generating reserve rapidly shrinking in the next several years. However, the Commission said that Hinkley Point would come online much too late to avert the looming generation crunch.

Michael Fallon, the Energy Minister, said that the Government had expected a full-scale competition inquiry from the Commission. "This process is normal and we built it into our planning for Hinkley Point C.

"We'll be using the consultation period to show that this project meets state aid rules, that it will cut carbon in Britain's energy sector and improve our energy security in a way that's good value for money."

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