The European Commission has opened an in-depth investigation to examine whether UK plans to subsidise a new nuclear power station at Hinkley Point are in line with EU state aid rules, which aim to preserve competition.

EDF Energy, which plans to built two EPR reactors at Hinkley Point C in Somerset, said that the announcement shows the ‘inquiry is proceeding as expected,’ and in time for a decision in the summer of 2014 – when it expects to make a final investment decision on the project.

The EC said it "doubts that the project suffers from a genuine market failure," and will now investigate whether Hinkley Point C could be built without state intervention.

The Commission will examine the contract for difference mechanism, credit guarantees as well as the planned level of public support for the project. This could reach up to £17 billion depending on future electricity prices and the actual capital costs of the project.

In October, the UK government agreed a deal with EDF Energy that offers the firm a guaranteed price for electricity for a period of 35 years. This agreed ‘strike price’ is set at £92.50 per MWh for electricity from the new reactors at Hinkley. However, it would fall to £89.50/MWh if EDF proceeds with construction of a second nuclear station at Sizewell C in Suffolk.

Under the so-called ‘contract for difference,’ when the electricity market price is lower than the strike price, the government will pay the difference between the strike price and the market price. Conversely, when the market price is higher than the strike price, the operator will be obliged to pay the difference to the UK government.

In either case, the Commission said the nuclear plant operator "will ultimately receive a fixed level of revenues and will therefore not be exposed to market risks for the duration of the scheme."

Commission Vice-President Joaquín Almunia, in charge of competition policy described the mechanism as "complex" and "of unprecedented nature and scale."

"The Commission therefore needs to investigate thoroughly its impact on the UK and the EU internal energy markets, and is requesting all interested parties to submit their observations," he said.

UK reaction to state aid investigation

The UK government described the investigation as ‘standard.’

"This announcement from the Commission is standard for large investment projects and was always part of the process for Hinkley," said Secretary of State for Energy and Climate Change, Edward Davey

EDF Energy said it is looking forward to engaging fully with the Commission and interested parties during the course of the investigation.

"As part of a far-reaching reform of the UK energy market, it is right that the European Commission should examine the contract and highlight potential challenges," EDF Energy said in a statement.

Photo: Hinkley Point C (Credit: EDF Energy)