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20 | 24Th - 30Th OcTObEr 2014 | UTILITY WEEK Finance & Investment Analysis O n Wednesday 8 October, the European Commission, by a very narrow major- ity, approved the UK's state aid pack- age for EDF's proposed 3,200MW nuclear plant at Hinkley Point C. There were a few adjustments to the terms of the deal, but although the modifications pare back the projected long-term rate of return, they do not constitute a deal-breaker. For both the British government and EDF the ruling brought mighty relief, but there remain further hurdles to surmount before construction can begin in earnest. Crucially, as EDF digests the implications of the approval, it still has to make an irrevo- cable investment decision. Much will depend on the proposed Chinese partners, CNNC and CGN, and their readiness to provide invest- ment funds. As for the financial markets, there was little obvious reaction to the Commission's ruling. For varying reasons, notably the European Central Bank's continued disin- clination to provide stimulus to the weaker eurozone economies, leading European shares dried downwards last week. EDF's shares followed this trend. Furthermore, the Commission's ruling had been widely flagged for some weeks and, of course, it is just one element of a complex jigsaw to deliver the UK's first new nuclear plant for a generation. Nonetheless, the scale of the project is vast, even with substantial Chinese partici- pation. Hence, any material financial devel- opments may well have an impact on EDF's share price, although its key driver remains the operating returns from EDF's French- based nuclear fleet. The total cost over the estimated ten-year construction period is now £24.5 billion. This sum includes both interest and inflation. Compared with previous figures, which were essentially construction costs, this latest esti- mate represents a substantial upli. Undoubtedly, the European ruling is con- troversial, since the inflation-proof 35-year £92.50 per megawatt-hour price guarantee – almost twice the prevailing unit price for electricity – represents a monumental long- term subsidy. Not surprisingly, Greenpeace has expressed its unequivocal opposition to the ruling. Its legal adviser, Andrea Carta, stated that "there is absolutely no legal, moral or environmental justification for turning taxes into guaranteed profits for a nuclear power company". Within mainland Europe, the Austrian government has indicated its intention to refer the contentious ruling to the European Court of Justice. In effect, it argues that, com- pared with the financial support available to renewable projects, the state aid for the Hin- kley Point C project is manifestly wrong. The Czech Republic and Poland, with further nuclear ambitions of their own, will be monitoring developments closely, espe- cially in respect of the amount of state aid regarded as permissible. Irrespective of the robustness of the stra- tegic case for new nuclear, the fact is that £24.5 billion for 3,200MW of new capacity is horrendously expensive, and certainly com- pared with the construction cost of 3,200MW of gas-fired capacity. Whether the Hinkley Point C state aid package is over-generous will only become apparent over time, assuming that EDF takes the critical decision to invest. Nigel Hawkins, director, Nigel Hawkins Associates C for contentious? Nigel Hawkins looks at the European Commission's approval of state aid for Hinkley Point C and its implications for EDF. Who said what on the announcement of European approval for Hinkley's state aid package "After the commission's intervention, the UK measures in favour of hinkley Point nuclear power station have been significantly modified, limiting any distortions of competition in the single market. These modifications will also achieve significant savings for UK taxpayers." Joaquín Almunia, vice president, European Commission "[hinkley Point c] represents a real opportunity for growth, with the potential to create tens of thousands of jobs for people – not just in the local community but up and down the whole country." John Cridland firector general, CBI "We will hold the government to account on the assurances given while the Energy Act was going through Parliament that new nuclear deals will be subject to thorough scrutiny to ensure value for money." Tom greatrex, shadow energy minister "Today's announcement takes the UK forward towards joining the global investment trend in a new generation of clean, affordable and reliable nuclear energy. The move puts nuclear alongside other forms of clean generation in a market mechanism called contract for difference, which is part of the UK government's pioneering Electricity Market reform." Agneta Rising, director general, World Nuclear Association "This is a world record sell-out to the nuclear industry at the expense of taxpayers and the environment. It's such a distortion of competition rules that the commission has left itself exposed to legal challenges." Andrea Carta, environmental legal adviser, Greenpeace Reaction 26.0 25.5 25.0 24.5 24.0 23.5 2 Oct 3 Oct 6 Oct 7 Oct 8 Oct 9 Oct 10 Oct 13 Oct 14 Oct 15 Oct euro EDF share price