The Hinkley Point C project in Somerset, west England, was dependent on EC acceptance of the UK government’s proposed Contract for Difference (CfD) scheme.

By Jason Deign

EDF Energy’s plans for a new reactor in the UK have cleared a major hurdle with European Commission (EC) approval of the funding mechanism involved.

The Hinkley Point C project in Somerset, west England, was dependent on EC acceptance of the UK government’s proposed Contract for Difference (CfD) scheme.

Over the last year the EC has led a probe into whether the CfD concept, which would guarantee EDF an income of GBP£92.50 (USD$155/€112) per megawatt-hour for the 35-year contract term of the plant, constituted state aid.

“The Commission found that the long-term contract and the guarantee constitute an appropriate and proportionate way for the UK to meet its need for secure, low carbon energy,” said EDF in a press release.

In theory, the ruling clears the way for EDF and its project partners to make a final funding decision, which is expected to happen before the end of this year.
 

Legal challenges

Meanwhile, however, the non-nuclear Republic of Austria and Ecotricity, a UK renewable energy supplier, are both said to be pondering legal challenges to the EC decision, according to press reports.

Austria’s opposition to the funding mechanism was made public before the outcome of the EC investigation. A source at EDF said the company had not yet seen any further evidence of the lawsuits.

It is understood any parties wishing to contest the EC finding would first have to demonstrate that they would be directly affected by the decision.

Whether or not the legal threats translate into formal lawsuits remains to be seen; neither the Austrian government nor Ecotricity responded to requests for information from Nuclear Energy Insider. It is also unclear whether other parties will come forward to challenge the EC finding.

In the meantime, though, a number of parties in the UK and elsewhere in Europe are also said to be watching developments with interest, but with a possible view to using similar funding arrangements elsewhere.
 

CfD scheme

“We understand that other countries in Europe, such as Poland, have already expressed an interest in the CfD scheme,” says Dr Jonathan Cobb, senior communication manager at the World Nuclear Association in London.

“Existing measures, such as the carbon price floor or the Emissions Trading Scheme, do not adequately meet the market failure which exists in the UK market. Where similar market failures exist elsewhere in Europe, the CfD scheme will be one option to address these failures.”

Similar schemes could be applied to funding for nuclear, or indeed a range of low-carbon generation projects, elsewhere in Europe, Cobb points out.

“Although this judgement relates only to the Hinkley Point C project, the approval establishes the CfD as a valid option for such projects.”

For now, EDF is preparing for the outcome of the final investment decision later this year.
 

Preparation work

The company is already carrying out some preparation work on site, including road improvements and engagement with suppliers, although EDF Energy emphasises that this is “at their own commercial risk.”

Pending a positive go-ahead on investment, EDF says Hinkley Point C, which is forecast to cost expected to be £14bn in 2012 money, is still on track for commissioning in 2023.

In parallel, the EC and the UK Secretary of State will need to approve waste transfer contract arrangements. EDF also hopes the European decision could spell good news for its next new-build project, Sizewell C, which too is expected to rely on CfD funding in order to be viable.

If this second project goes ahead then EDF has agreed with the UK government that the CfD ‘strike price’ for both plants will drop to £89.50 per megawatt hour.

In addition, says EDF: “As proposed in October 2013, the Contract for Difference already contained a series of ‘gainshare’ mechanisms in which customers would benefit if the project construction costs or equity returns were more favourable than forecast.
 

Gainshare mechanisms

“The Commission, the UK Government and EDF have accepted reinforcement of the ‘gainshare mechanisms’ in the package approved by the Commission.”

Other winners will likely include the local supply chain, with EDF estimating that 57% of the work involved in building Hinkley Point C could go to UK suppliers.

Therefore, it seems that while the EC decision might not be to everyone’s taste, for nuclear interests at least it is a great step forward, potentially opening the door to new-build projects not just in the UK, but elsewhere in Europe.

“The review process established that this CfD will not have any significant effect on the competition or trade between Member States,” Cobb concludes. “The CfD instrument itself minimises any possible impacts on competition between generators.

“The CfD will not reduce consumer welfare, lead to higher retail prices or significantly distort competition. It will not crowd out investment either in other nuclear projects or other low carbon energy projects.”

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National Audit Office commercial contract investigation for Hinkely Point C in progress

The financial watchdog, which scrutinises public spending on behalf of parliament, said it would be checking whether the guaranteed prices of £92 a megawatt hour – reportedly double the current cost of electricity – represented “value for money”, according to media reports.

The UK government has already agreed the key commercial terms for a deal with EDF Group, the project promoters, including the price that it will receive for the power generated by the plant over 35 years from the date of its commissioning, known as the “strike price”.

The proposed contract will be subject to State Aid approval, Royal Assent for the Energy Bill and agreement on financing.

“It is not the NAO’s role to question the merits of the Government’s policy objectives or to be part of the government’s executive decision-making in regard to the proposed contract,” said the Audit body in a statement.

“Our work will cover the Department’s commercial approach to securing this deal and the proposed terms of the contract, to report to Parliament on value for money and the resulting risks which the Department must manage. We will also wish to identify lessons learned to inform decisions on future ‘contracts for difference’”.