Platts Power in Europe, 2014-02-17 The
EU State Aid implications of the UK's new nuclear support program took
shape January 31 with the European Commission's reasoning on its
decision to proceed to an in-depth investigation into EDF Energy's
Hinkley Point C project in Somerset.
The
full extent of that impact will not be known, however, until the EC has
received, studied and ruled on the UK's back-end nuclear management
plans – which are yet to be notified to Brussels.
The
UK's Department of Energy and Climate Change told Platts February 5
that back-end nuclear waste management plans for new-build reactors have
yet to be notified to the European Commission for State Aid clearance.
A
notification relating to the Hinkley Investment Contract, ancillary
agreements and state credit guarantee was submitted by the UK to the EC
on October 22, 2013. It is this notification that the EC has decided to
put through an in-depth State Aid investigation.
Meanwhile
the UK government is still preparing a separate notification to the EC
of how it intends to share the costs for managing and disposing nuclear
waste from Hinkley Point C and other new nuclear power plants, DECC
said.
"The
nuclear waste transfer contract (which is wider than just Hinkley) is a
separate notification [to the October Hinkley submission]," a DECC
spokeswoman said in an emailed answer to questions. "This has not yet
been submitted."
The
EC's guideline for the duration of in-depth investigations is six to 18
months. If this second submission also proceeds to an in-depth
investigation, EDF Energy's Hinkley Point C nuclear power project could
be facing fresh regulatory delays.
Whether
the EC would adopt a similarly tough line on the waste transfer
contract as it is doing on the Hinkley Investment Contract "remains to
be seen," said Norton Rose Fulbright competition lawyer Totis Kotsonis.
"It
should be appreciated that there is an unspoken dimension to the
current investigation, namely the political one, and much as the
European Commission would need to focus its analysis on the strength of
the legal arguments and available evidence in doing so it will be all
too mindful of the political tensions that surround nuclear energy", he
said.
The
UK's nuclear waste transfer contract is to cover both spent fuel and
intermediate level waste, the DECC spokeswoman said. "We have published a
waste transfer pricing methodology, which provides details of our
policy in this," she said.
Operators
of new nuclear power stations "must have arrangements in place to meet
the full costs of decommissioning and their full share of waste
management and disposal costs," the methodology says.
The
policy, to be implemented through the 2008 Energy Act, requires
operators of new nuclear power stations to have a Funded Decommissioning
Program approved by the Secretary of State in place before construction
can begin.
"The
Government does not consider that taking title to radioactive waste,
including spent fuel, for a fixed price is a subsidy to new nuclear
power, provided that the price properly reflects any financial risks or
liabilities assumed by the state," it says.
In
its December 18, 2013 decision to open an in-depth State Aid
investigation into Hinkley Point C, details of which have only recently
been released, the European Commission notes that the costs of managing
and disposing of nuclear waste are difficult to quantify.
The
UK plans to build a geological disposal facility for the permanent
disposal of spent fuel and nuclear waste, something which does not yet
exist anywhere in the world, the EC says. "This project is part of the
UK's set of initiatives to facilitate investment in nuclear energy, in
particular given that the use of the facility will require operators of
new nuclear plants to pay a price which will be subject to a maximum
value, to be set in advance of construction and based on a cost model
which takes into account all available information," it says.
Once
notified of the UK's backend fuel management plan, the EC said it would
"assess whether it involves aid and whether, if it does, such aid can
be deemed to be compatible with EU rules."
On
the Hinkley Contract for Difference, meanwhile, the EC on January 31
detailed strong reservations on State Aid compatibility grounds.
In
particular, the EC notes that by its very design, duration and scope,
the contract had the potential "for distorting competitive conditions."
The
CfD for Hinkley gives the operator, NNB Generation Company Limited (EDF
Energy and partners Areva, China General Nuclear Corporation and China
National Nuclear Corporation), a guaranteed, index-linked strike price
for output from the facility over 35 years.
“The
Strike Price [agreed at £92.50/MWh] will be fully indexed to the
Consumer Price Index from the date of signature of the contract. Based
on current assumptions, this would translate into a nominal Strike Price
of GBP 279 per MWh in 2058, the last year of application of the CfD
scheme,” the EC said.
If
the market reference price is below the strike price, then the
government pays NNBG the difference. If the reference price rises above
the strike price, NNBG is obliged to pay back the difference to the
government.
"The
CfD implies that there will likely be an interaction between the strike
price and the wholesale electricity prices," the EC said. "The UK has
provided no evidence on the potential impact which the government-set
strike price might
have on trading conditions and ultimately on retail prices.”
Neither
was it clear what the market reference price would be or how it will be
calculated, with the UK suggesting it might be the season-ahead, moving
to the year-ahead, wholesale price of baseload electricity generation.
Depending
on how the reference price is calculated, the CfD “might create an
incentive for NNBG, or EDF, to behave strategically to influence the
reference price,” the EC said.
“All
other things being equal, NNBG, or more broadly EDF, will be interested
in keeping the reference price low, in order to maximise the difference
payments,” it said.
It
was unclear how the operator might react to incentives to direct sales
towards reference markets and away from other markets, the EC said.
For
example, if the reference price is calculated based on the daily price
averaged over a longer period of time, NNBG would have an incentive not
to participate in longer term markets. If based on the month-ahead
baseload price, then NNBG would have an incentive to participate in
month-ahead markets only, “to the extent that it can lower the average
price which is formed in them,” the EC said.
“For
nuclear energy, in practice this could mean selling more in the
season-ahead forward market, and less on the spot market or over the
counter, compared to a situation without CfDs," the EC said. "A related
question is how EDF, as a vertically integrated operator which is active
in both generation and supply, might react to such an incentive
framework.”
The contract could have knock-on effects in the retail market too, the EC said.
Its
design “relies on the twin premises that electricity suppliers fund
difference payments to generators, whichthey are most likely to pass on
to customers, but also that they will pass on to customers any
difference payments paid by generators when the reference price is
higher than the Strike Price, the EC said.
“It
is not clear to the Commission that such an arrangement might not
result in larger profitability margins for suppliers. Suppliers might
simply decide not to pass on lower generation prices, in the form of
difference payments from generators, or they might be only willing to do
so partly or with a time lag compared to the payments. In such cases,
the aid provided by the UK government would indirectly benefit suppliers
in addition to direct beneficiaries.
In
addition to its market concerns, the EC was not convinced of the
environmental case for new nuclear support. A nuclear-specific CfD
“might crowd out alternative investments in technologies or combinations
of technologies, including renewable energy sources, which may have
occurred in the absence of the notified measure,” it said.
It
was not clear at this stage, then, that the notified measure “can be
argued to be aimed at a common EU objective in terms of environmental
protection in general, and decarbonisation in particular.”
Finally,
the EC noted that the UK had not taken into account future
interconnection capacity in its modelling work, based on the fact that
it believes flows will be difficult to predict.
“The
Commission questions this approach and invites comments from third
parties on the degree to which interconnection can play a role, and how
its contribution to the objectives being sought by the UK can be
quantified over the time scale being considered for the HPC [Hinkley
Point C] project.”
In
summary, Norton Rose Fulbright competition lawyer Totis Kotsonis said
the UK would "need to come up with robust evidence and arguments that
back up its case and respond adequately to the Commission’s concerns.
Alternatively, it would be necessary for the UK to make key changes to
the proposed support measures. Absent one or both of the above, the
notified State aid measure faces a real risk of being rejected as
incompatible with EU State aid rules.”
Independent
analyst and EC policy expert Mark Johnston said the EC has no choice
but to defend core single market principles. “If it doesn’t, who will?
If the UK sets a bad example by disregarding the law, and the EC does
not act swiftly to quash that, then others will follow suit.”
There
are indications that Poland and Hungary are lining up similar projects,
Johnston said. PGE’s Opole coal plant could go ahead on the UK contract
model, a long term PPA – it’s uneconomic otherwise,” Johnston said. “If
the EC lets the UK get round market rules for Hinkley, then the Poles
could follow with Opole.”
How
Hungary intends to pay for the two-unit Paks II nuclear extension is
less clear, but another long term contract is in the offing. The project
is to be financed with the help of a 30-year interstate loan of up to
€10 billion provided by Russia, with the signing of a deal with vendor
Rosatom in January overriding earlier plans for an international tender.
“How
the interstate loan is to be repaid and how cost recovery is
distributed among customers, and not taxpayers, remains to be seen,”
Johnston said.
“The
law is clear but the politics are wide open on Hinkley,” Johnston
concluded. “Since December 2011, when David Cameron vetoed the EU’s
fiscal pact, the UK electricity story and the UK membership story have
been inter-twined. We’ve seen this train wreck coming down the line
since 2010, when the incoming UK coalition government agreed to proceed
with new nuclear. In Brussels we’ve all been scratching our heads and
asking how are they going to do that?"
As
well as the EC's electricity and gas market rules, Europe has a
harmonized carbon mitigation scheme in the form of the Emissions Trading
System, Johnston said. "I accept that there is a wider debate about
securing investment, but at least let's have it in a structured way
rather than ‘anything goes’," he said.
Meanwhile
the EC is reported to have voiced its concerns that UK projects lined
up for early state CfDs (Final Investment Decision Enabling for
Renewables) may also contravene State Aid rules. The Financial Times
reported February 13 that informal talks are focusing on the nine
projects the government wants to award early stage CfDs to in April.
These include biomass projects at Drax (two units), Teesside and
Lynemouth; offshore wind projects at Burbo Bank, Dudgeon, Hornsea and
Walney; and onshore wind at Beinn Mhor and Heckington Fen. The EC is
concerned that contracts are to be awarded without a price auction or an
open technology neutral tender. Brussels has informally warned the UK
that the projects appear to involve heavy subsidies that may be
overgenerous and harmful to competition. The UK government has yet to
submit a formal application for the schemes.
Munir
Hassan, head of clean energy at law firm CMS said it was not clear why
the UK government “has waited so long before formally seeking clearance
of the proposed investment contracts for renewables projects. The lack
of momentum behind the process means that there will be a period of
uncertainty for projects until we have formal confirmation of the
Commission’s position. It is not clear that any of the Commission’s
comments to date [on Hinkley] should automatically affect the terms of
the proposed contracts for renewables projects, which are granted for a
much shorter period.” |