Update 5 September 2015
In light of EDF’s announcement on 4 September 2015 that it was no longer able to say that Hinkley Point C would start generating electricity in 2023 and that the start date could not now be specified, we thought it might be opportune to add an update on the issues raised at the April 2014 Seminar.
The Hinkley Point C project survived its first two legal skirmishes, but only at some cost. First, the CJEU decided the Aland Vindkraft case without declaring Directive 2009/28, and thus all support schemes based on it, to be invalid, although it did so in a way that explicitly protected only ‘renewable’ methods of producing electricity, not nuclear power. Secondly, the Commission granted the Hinkley Point C project state aid clearance, but, as we foresaw, the Commission was concerned that EDF had struck a deal too favourable to itself. The Commission required the UK government to charge a higher fee for its credit guarantee and to limit the profits NNBG’s equity holders could make from the deal from, for example, re-financing debt after the end of the construction phase of the project (a common manoeuvre in PFI deals).
It is also worth noting that the UK government failed in its contention that the scheme did not constitute ‘state aid’ in the first place. The Commission said that it is ‘state aid’, albeit one justified by the need, recognised, or so it claimed, in the Euratom treaty, to promote a ‘powerful’ nuclear industry. This is an uncomfortable result for the two former Secretaries of State whose position was that they would only support nuclear power if it was not subsidised.
More importantly, the legal proceedings about state aid are far from over. Austria, supporting a number of NGOs and commercial companies, has filed an action against the Commission. Among the issues at stake will be whether the Commission was justified in arguing that the fact that no market-based financial products exist appropriate for 40 year-long projects itself constitutes a ‘market failure’. The counter-argument is that the lack of such products is not so much a ‘failure’ of the market as a judgment by it. As we pointed out, given the possibilities of fundamental legal change, contracts of many decades in length make little sense and very long term projects are better dealt with by a series of shorter deals – for example separating construction from operation. An IPPR report came to a similar conclusion purely on cost grounds, arguing that a two-stage contracting process might save £2.5-3.7 billion over the first 20 years of the project. The UK’s obsession with single very long-term PFI-style contracts might also have something to do with the result obtained in an IEA and NEA-commissioned report that UK nuclear costs are the highest in the world.
Another issue will be whether the costs of the subsidy are proportionate given the benefits obtained in terms of lower carbon electricity. One of the problems the UK government faced was that, according to the Commission’s initial estimates, the UK government’s own figures implied that nuclear power would be commercially viable without subsidy by 2027. As a result, the subsidy would only be buying four years’ worth of supply that would not have happened anyway. The UK government managed to persuade the Commission, on the basis of repeated modelling of various scenarios, that the date could be anywhere between 2031 and 2049, although the scenarios that seem most likely (e.g. high fuel costs) produce the earliest dates. The Commission seems to be arguing that the wide range of the possible dates itself shows that immense uncertainty attaches to the issue and that therefore the subsidies buy something valuable in the form of an increase in certainty. But this is a very odd argument that is sure to be challenged in the forthcoming case. Anyone can generate any number of implausible scenarios producing ever wider ranges of dates, but what counts is the probability of these scenarios coming to pass, not the imaginative powers of the modellers in concocting very low probability events. It is also significant that EDF has not announced a new date for the project to be completed. Doing so would, no doubt, merely create a better defined target for those arguing that the benefits are insufficient.
At this stage we do not know for certain the precise reasons EDF has announced that the project is to be delayed. Renewed safety concerns about EDF’s equivalent EPR project at Flamanville, which has produced serious increases in estimates of costs as well as delays, are said to be the main factor. It is noticeable, however, that EDF has failed to come to agreement with its Chinese investors about the size of their equity shares. It may well be that the renegotiation of rates of return for equity investors required by the Commission has had an effect on those investors’ willingness to participate. The fact that EDF’s own equity share is now much higher than previously announced is an indication in that direction. More generally, legal uncertainty, both in the short term, but also in the long and very long terms, might seem an even bigger issue now than it did last year.
Professor David Howarth and Professor Simon Deakin, Professors in Law and Co-chairs, Public Policy Strategic Research Initiative