The UK new nuclear deal
The UK government has guaranteed EDF, the French nuclear corporation, an index-linked price of £92.50 – twice the current market price of electricity – for each megawatt-hour over a 35-year locked-in contract period. These subsidies will be funded through levies on all UK consumer energy bills. The UK Treasury has also offered a credit guarantee to underwrite up to £10bn of debt on the construction project.
The EC Competition Directorate-General’s initial view
Early last year, the European Commission’s Directorate-General for competition said that the deal provides utmost certainty of a stable revenue stream under lenient conditions by eliminating market risks from the commercial activity of nuclear electricity generation for the very long 35-year contract length. They went on to say that the deal seemed incompatible with EU State aid rules, and the proposed Investment Contract would provide EDF with a clear selective advantage.
The EC Competitions Directorate-General’s final decision on the deal
Late last year, the Commission concluded that the ‘modified’ UK measures for Hinkley Point nuclear power plant are compatible with EU rules. This seems interesting – as there have been no real ‘modifications’ in the UK position.
So what happened?
Well, maybe the Commission doesn’t want to be seen to be determining UK energy policy. Perhaps the Commission made the decision because of Eurosceptic undercurrents in the UK Coalition government – knowing that their decision has substantial flaws, especially in terms of energy market distortion? In other words, it could be that the Commission made this decision, knowing that it was open to legal challenge.
Why is it so important?
The EC decision sets an important precedent and could have significant consequences across Europe. It directly informs the future direction of EU energy policy. Annually, billions of euros rest on the result of this policy appraisal and it sends important signals internationally. Europe can overestimate its role in setting global norms – but many countries still look to Europe as a laboratory for low-carbon transition. This is because EU structural energy reform informs the kind of robust international energy regimes needed to combat ramping climate change.
The Austrian Legal Challenge
In response, Austria, quite properly and transparently, signalled and declared a clear intention to challenge the Commission’s decision to allow UK subsidies for new nuclear through the Court of Justice of the European Union.
Without knowing the details of the Austrian case, it seems likely that the key reason for this challenge is that the UK nuclear deal distorts both UK and pan-EU electricity markets – because vendors require large-scale pre-emption of the wholesale market in order to accept the commercial risks of construction.
UK targeted state aid to new nuclear construction through the Investment Contract and Loan Guarantees seem specifically designed to develop nuclear at the expense of other low carbon investments. This level of financial support and length of contract are not available to other low-carbon technologies. Because of this, there will be substantial repercussions on pan-EU trade and competition and state aid regimes. And given the risk profile of this project, the fees for the Loan Guarantees being offered to EDF by the UK government are well below the commercial rates – given the scale of risk in the light of current experience of constructing the French EPR Areva reactor planned for the UK.
So there seems to be a clear market competition failure here, and UK plans to provide operating State aid through price support mechanism to guarantee profitability seem incompatible with EU State aid rules.
The UK threatens Austria
It may not be cricket – but early this year, a leaked memo from Vijay Rangarajan, a Senior UK Foreign Office official, stated that the UK will take “every opportunity to sue or damage Austria if Vienna does not drop a legal challenge… The U.K. will take every future opportunity to sue Austria in areas that harm or that have strong domestic political implications”. However, the Austrian Environment Minister Andrae Rupprechter said that
“We won’t let ourselves be intimidated… No subsidies for atomic power”.
The UK refuses public access to information on key reports
Now, Nuclear Transparency Watch is a European network that promotes a citizen watch on nuclear safety and transparency. Here, its important to know that the UK government has refused public access to information on key reports about the economic case for new nuclear subsidies, including studies by energy consultants: a study by KPMG on potential distortions to competition; a study by Oxera on market failures, proportionality and potential distortions of competition; a study by Pöyry on potential distortions to the internal market and alternatives to new nuclear; a report by Redpoint on the evolution of the UK electricity sector; and details of the Cost Discovery and Verification process, compiled by KPMG and LeighFisher.
Without question, all these documents will be subject to access to information requests to the Commission as the court case unfolds.
Areva and safety flaws in their EPR reactor pressure vessels
Unfortunately, Areva, the French nuclear corporation hoping to build their EPR in the UK, has just issued its fifth profit warning in seven months, saying it expected to report a 4.8 billion euros loss for 2014 as cost overruns ballooned on key European nuclear build projects. Areva has cut its wage bill 15% as prospects worsen – weighed down by heavy debt and suffering from an industry slowdown, a lack of orders, and legal troubles over huge costs over-runs and delays at the EPR nuclear builds in Finland, France and China. Their shareholders equity is ‘close to zero’.
Added to this, it has recently been revealed that there are significant flaws in the bottom and top of the reactor pressure vessels already installed at Flamanville in France and Taishan 1 and 2 in China. These flaws are serious and inevitably mean more significant delays, cost over-runs, or worse.
The flaws also put into question Areva’s quality assurance protocols and further damage the reputation of their reactor, the EPR – since, if there’s one place you really don’t want any faults, it’s the reactor pressure vessel. For there to be serious flaws in these components means that an unthinkable error has occurred in construction – and puts at risk the basic safety case for this reactor.
Well, between a lengthy EU court case and trying to negotiate around the important safety flaws found in the reactor planned for the England, things don’t look good for new nuclear projects anytime soon in UK. And given a significant aspect of the UK’s energy policy and carbon budget is built around subsidising new nuclear, this could even mean a sea change in energy policy – which, all things considered, is no bad thing.
Dr Paul Dorfman of the Energy Institute at University College London, is member of Nuclear Transparency Watch. He founded the Nuclear Consulting Group and is Nuclear Policy Research Fellow. He is Executive Board member of the International Nuclear Risk Assessment Group (INRAG), member of the European Network of Scientists for Social and Environmental Responsibility (ENSSER) and Advisory Group Member of the UK Ministry of Defence (MoD) nuclear Submarine Dismantling Project (SDP). He served as Secretary to the UK government scientific advisory Committee Examining Radiation Risks from Internal Emitters (CERRIE) and led the European Environment Agency (EEA) response to Fukushima in ‘Late Lessons from Early Warnings’ Vol 2.