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Brussels decision could deal major blow to energy policy

New nuclear power in the UK is big business. The proposed Hinckley C power station would power 5m homes, create 25,000 construction jobs and cost £14bn.

The European Commission, however, has commenced an investigation that has the power to flick off the switch to new UK nuclear. Pending the outcome, it is worth considering what the potential consequences are.

The commission is investigating whether the contractual arrangements for Hinkley C constitute ‘state aid’.

In simple terms, state aid is where an EU member country provides assistance of any kind which favours certain business, in turn affecting competition and trade between EU countries. It’s all about creating a level playing field.

Twin focus

The commission has two state aid matters under the microscope: the ‘strike price’ and the credit guarantee.

“Without nuclear power, capacity shortfall would be a major issue to be addressed”

The strike price is a deal by which the power station operator receives guaranteed revenues. Power generated is to be sold on the market and if the market rate for that electricity is lower than the strike price, the UK government will pay the operator the difference.

The credit guarantee, offered under the UK Guarantees scheme, is a government guarantee in case the power station operator doesn’t make loan repayments and makes a lending decision much more attractive.

Wider agenda

The investment at stake is immense. Hinkley C is to deliver 3.2 GW, but the UK nuclear pipeline is much larger.

Horizon Nuclear Power has plans for 7.8 GW of new nuclear capacity in Anglesey and also at Oldbury. EDF also has a further 3.2 GW planned for Sizewell in Suffolk. Another key player is NuGen, which has 3.6 GW planned in Cumbria.

We should consider the impact on national energy policy and security. A substantial amount of coal-fired generation capacity is being removed from the UK market as a result of tougher emissions controls. That capacity needs to be replaced.

“The investigation has the potential to affect UK’s attractiveness to infrastructure investment”

Imported gas will be important but does leave the UK exposed to security of supply issues and price volatility. Renewables are also to play a part, as are measures to improve energy-efficiency.

Without nuclear power, however, capacity shortfall would be a major issue to be addressed.

Potential setback

The UK government anticipated the investigation but if the matters referred to the commission’s investigation are found to be unlawful, UK energy policy will have suffered a major setback.

This is against that backdrop of nuclear power being controversial across Europe and following the UK government having had success to date in attracting investment in the nuclear sector.

The investigation has the potential to affect UK’s attractiveness to infrastructure investment. The UK is typically seen as a good and safe place to invest, with a stable economy, manageable public and private sector debt and, in London, a major world financial centre.

The UK has both a well-educated workforce and a capacity to adopt and adapt new technologies. Complementing all this, the UK has long been applauded for its legal system.

In this instance, then, a timely and just outcome of the commission’s investigation is awaited – much depends upon it.

Matthew Jones is a partner in the construction and engineering team at international law firm Taylor Wessing

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