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Policy & Regulation Market view New nuclear in limbo Maxine Symington and Christopher Brennan examine the impact of the European Commission's decision not to automatically exempt nuclear new-build from EU rules prohibiting state aid. H aving stated its intention that the state aid regime should continue to apply to nuclear, the European Commission announced at the end of last year that it had opened an in-depth investigation into whether or not aid to develop the next- generation nuclear plant at Hinkley Point adhered to European Union rules. The process of kick-starting the building of new nuclear plants in the UK has been tough. The first new site licence for a UK nuclear power station in 25 years was granted (at Hinkley Point) just over a year ago by the Office of Nuclear Regulation (ONR), and March 2014 will mark the first anniversary for planning permission being granted to EDF Energy at the site. These milestones signal progress on a very long path for the UK nuclear industry. But the sector's ambition to develop 16GW of nuclear power by the middle of the next decade is not without its challenges. Raising finance has been one of the biggest challenges. Most nuclear power stations historically have been funded either by governments or on the balance sheet of a utility company. As with other very long-term infrastructure projects, deep- ocketed invesp tors look for a degree of certainty for their investment. So what the market needs is clarity and certainty as to where the financing of nuclear infrastructure stands when it comes to state aid. However, in October 2013, the European Commission made it clear that it would be omitting nuclear from its Guidelines on Environmental and Energy Aid for 2014-20. There is a debate among commentators about whether its exclusion from the guidelines is good or bad news for the nuclear industry. It can be argued that the absence of guidelines specifically for the nuclear industry means the current body of laws and regulations surrounding state aid provides, in the first instance, sufficient visibility on the regulation of the industry. At the same time, guidelines specifically addressing state aid for nuclear new-build programmes could be seen as potentially problematic. For example, it could encour- age a "gung ho" approach to the delivery of nuclear facilities by member states who might, perhaps, be inclined to see a relaxed state aid regime as an opportunity to pay less attention to complying with EU procurement rules, which can themselves help minimise the risk of unfair advantage to particular contractors. It appears the UK government is phlegmatic on the issue. According to Reuters, the response from the Department of Energy and Climate Change was: "The Commission's draft guidelines have not been published yet. It is already possible to seek approval for aid for new nuclear, whether this is explicitly provided for in the new guidelines or not." So should these latest developments be a cause for alarm? The Commission's investigation to assess whether the Hinkley Point project suffers from genuine market failure or not, and therefore whether it is eligible to receive state aid or not, is putting the financing of nuclear new-build under the spotlight. In a statement on 18 December 2013, EDF Energy said: "This investigation gives the government and others the opportunity to show that Electricity Market Reform in the UK is essential to deliver the investment needed for the country's low-carbon energy future at a price that is fair for customers. Without this reform, the investment will not take place." The rationale for the investigation, in part, centres on UK plans to establish a feedin tariff ensuring that the Hinkley Point operator receives a stable revenue for 35 years despite volatile wholesale electricity prices. When the market price at which the electricity is sold is lower than the strike price, the government proposes to pay the difference. When the market price is higher, the operator must pay the difference to the government. In either case, the operator will ultimately receive a fixed level of revenue and will not be exposed to market risks for the duration of the scheme. The operator will also benefit from a state guarantee covering debt that the operator may seek to obtain from financial markets to fund construction of the plant. The question is, how will the Commission interpret these arrangements? Illegal state aid is prohibited by the EU Treaty and is, in essence, any form of subsidy that gives selective advantage to certain commercial operators as opposed to others, and which affects (or has the potential to affect) trade between EU member states. Member states found to have provided state aid in violation of the prohibition are required to recover it, with interest, from the recipient. Any aid proposed in relation to a particular project must first be cleared by the Commission after notification by the member state concerned. There are certain limited circumstances where subsidies, which would otherwise be illegal under EU law, may be permissible. It has been reported that in an internal draft of the regulations, Brussels considered including nuclear projects as potentially legitimate recipients of aid by virtue of the Euratom Treaty. It was reported that the consultation paper stated that investment in nuclear energy "is an objective covered under Article 2(c) of the Euratom Treaty and therefore the Commission does not question that such support measures are aimed at a common EU objective". However, the Commission's investigation now sends a clear signal that the possibility of state aid to the nuclear industry remains very much alive – and actively on its radar. In-depth state aid investigations can take long time to conclude, and we are unlikely to have a final decision from the Commission for many months. If the decision is an adverse one, the consequences for the UK's nuclear programme could be far-reaching. Not only could it lead to a significant political tussle with Brussels, but it could also have consequences for the nuclear programmes of other EU countries with not dissimilar nuclear aspirations of their own. The EU's investigation is therefore likely to spark intense interest, and probably its fair share of reaction from a multitude of stakeholders and commentators. Maxine Symington and Christopher Brennan are directors at Wragge & Co LLP UTILITY WEEK | 24th - 30th January 2014 | 19