Hinkley Point C – as things stand

On 21 September 2015, George Osborne announced during a visit to China that the UK will provide a £2 billion guarantee to encourage Chinese investors to commit to a deal to build Hinkley Point C (HPC) nuclear power station. It has been reported that the guarantee will be provided by the UK Government’s Infrastructure UK Scheme. Mr Osborne hopes that Xi Jinping, the Chinese president, will finally sanction the commercial terms of the HPC deal on behalf of EDF’s Chinese backers when he visits the UK next month.

This new guarantee seems to be in addition to the existing state aids for HPC approved by the European Commission in October 2014. This is significant as the Commission’s decision (the decision) approving the existing state aid package for HPC contains a caveat: “if the final financing documents contain further State aid elements then, rebus stantibus, they cannot be approved since the present package of State measures represents all the aid that is necessary to allow the HPC investment project to be undertaken.” Whilst no doubt designed to provide a further commercial incentive for hitherto uncommitted investors, the new guarantee may in fact create additional legal obstacles for HPC’s ongoing state aid approval process. Austria, Luxembourg and a group of German and Austrian energy companies are currently attempting to annul the decision.

Rebus standibus is Latin for “as things stand”. So, how do things currently stand?

In 2014, the core justification for state aid for HPC was that it was necessary to fill the UK’s energy gap, considered by EDF and the Commission, to be about 60GW. Recital 510 of the decision states: “Finally, the Commission modelled alternative scenarios where the HPC project does not take place. The results of this analysis suggest that the displacement of alternative investments is limited. In particular, the forecasts of shrinking supply leave ample room for other generators and generation technologies to enter and/or expand capacity regardless of investment in HPC, in particular given the timing of the closure of existing nuclear and coal plants. The UK will need about 60 GW of new generation capacity to come online between 2021 and 2030, of which HPC will provide 3,2 GW. It would be impossible for low-carbon sources only to fill this gap.

In August 2015, Amber Rudd, the UK’s Energy and Climate Secretary, endorsed the logic of the decision, justifying the case for both new nuclear and HPC on necessity grounds, “We have to secure baseload electricity“. However the position in Germany, a country with a far larger industrial base and manufacturing economy than the UK, raises serious questions about the validity of the decision and Ms Rudd’s argument. Specifically, the claim that it would be impossible for low-carbon sources only to fill the UK’s energy gap and that new nuclear power stations are necessary to secure baseload electricity.

Germany has decided to fill its energy gap without new nuclear power stations. Instead it has adopted a policy based on micro-generation and micro-ownership known as “energiewende” or “energy transformation“. At the heart of a policy designed to transform the German energy system is the recognition that flexible, quickly dispatchable power generation is needed and not the baseload supply that a conventional nuclear power station would deliver: “What do you do when the sun is not shining and no wind is blowing? Outside Germany, it is often said that conventional power plants will be needed as bridge technologies as we switch to renewables this century. In particular, there is talk about the need for baseload power, which fluctuating wind turbines and solar panels cannot provide. Germany already gets so much of its power from wind and solar that it has a different viewpoint. To the surprise of many foreign onlookers, Germans realize that baseload power demand will soon be a thing of the past. What is needed is flexible, quickly dispatchable power generation, not baseload.”  http://energytransition.de/2012/10/flexible-power-production-no-more-baseload/

Jeremy Corbyn was unexpectedly elected to be the leader of the Labour Party on 12 September 2015. One of the policies that Mr Corbyn put forward during his campaign was that the UK should develop an energy market similar to the German “energiewende” model based on the municipal ownership of energy suppliers.

Earlier this month, EDF announced that HPC would be delayed and will not come on line until after 2023. Mr Osborne was also criticised after defending government subsidies for HPC as being “substantially cheaper than any other low carbon technology,” during a House of Lords Economic Affairs Committee hearing. A claim later described as “patently untrue” by Mr Jonathan Gaventa, director of E3G, a London-based environmental think tank.

The fact that, immediately prior to the Chinese president’s scheduled visit to the UK, the Chancellor has had to take direct ownership of the HPC problem and, together with Ms Rudd, has made a personal visit to China in order to make this announcement underlines the fact that the commercial terms of the HPC deal are far from straightforward. Economic considerations aside, in terms of legal risk, if the decision is annulled the state aid would have to be repaid. It is difficult to see how investors in HPC could rely upon contractual provisions to manage this risk.

The challenges to the state funding allocated to the HPC project are far from over.  It remains to be seen whether this latest announcement provokes a wider debate as to the most appropriate type of energy mix for the UK, bearing in mind the high costs of nuclear.