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Re: State Aid SA 34947 (2013/C) (ex 2013/N) – United Kingdom Investment Contract (early Contract for Difference) for the Hinkley Point C New Nuclear Power Station

A submission to the European Commission Competition Directorate by Stephen Tindale, Associate Fellow, Centre for European Reform, 14 Great College Street, London SW1P 3RX

Summary

The proposed investment contract is necessary if the nuclear power station is to be constructed. No nuclear power station has been constructed without some form of government support. New nuclear power stations are necessary for decarbonisation, an objective of common interest. The Emissions Trading System (ETS) is not providing a carbon price anywhere near high enough to overcome market failures.

As the Stern Review demonstrated, controlling climate change by switching to low-carbon energy will be less expensive than continuing with high-carbon economies and paying to deal with the consequences of climate change[1]. But this does not mean that low-carbon energy will be cheap. Renewables, carbon capture and storage (CCS) and nuclear projects will in most cased require public financial support. So they will require state aid.

The Commission should give state aid approval to the United Kingdom’s Contract for Difference for Hinkley Point C (HPC).

The intervention is aimed at an objective of common interest

Climate mitigation is an objective with clear common European interest, since greenhouse gas emissions in one member-state affect all other member-states (and indeed the entire world).

Nuclear power is low-carbon, even when its full life cycle is taken into account. The carbon footprint of nuclear is similar to that of wind, and well below the footprints of marine renewables, solar PV and biomass.  [2]

Market failure is seriously blocking attainment of this common objective

Lord Stern has described climate change as “a result of the greatest market failure the world has seen”.[3]  State aid measures can help correct market failures. They are not the only measures that can do this. But attempts to control climate change need to use all available policy instruments: regulation, market mechanisms and state aid.

Intervention is necessary to overcome market failure

Paragraph 10 of the Commission document notes the UK government’s assessment, based on modelling, that most of the new investment in electricity generation before 2027 or 2030 would be in gas-fired plants, and in particular Combined Cycle Gas Turbines.  In climate policy terms, this would be a market failure. Gas generation emits lower carbon dioxide levels than coal generation but, on a lifecycle basis, a hundred times the level of nuclear  generation (~5gCO2eq/kWh for nuclear; ~500gCO2eq/kWh for gas[4]).

Many leading economists, including Dieter Helm[5], argue that a carbon tax would be an effective market mechanism to achieve decarbonisation. It is in theory be possible to introduce an EU  carbon tax which was high enough to prevent the expansion or continuation of high-carbon energy and so address the market failure. But this will not happen in practice. Tax proposals require unanimity in the Council of Ministers. Commission president Jacques Delors proposed a carbon/energy tax, but this was rejected by the Council, primarily on subsidiarity grounds. A Commission proposal for a carbon tax in 2014 would have even less chance of passing the Council: in addition to the subsidiarity concerns, the measure would be opposed by  Poland and other member-states which rely on coal.

Following Delors’ unsuccessful attempts to introduce a tax, the EU adopted the ETS.  The ETS has succeeded in keeping emissions below the cap level (though that has had more to do with economic recession than with climate policy). But it has had no impact on investment in energy efficiency or low-carbon generation, and will not have such an impact unless the EU introduces a rising price floor[6].  Until the ETS has been structurally reformed, financial support for energy efficiency and low-carbon generation will be unavoidable. And the EU cannot wait until such reform has been agreed and implemented before making more significant progress with decarbonisation. If it did wait, the objectives of the 2050 energy roadmap would be unachievable.

The UK does have a carbon price floor. The Government introduced this in 2013, at a rate of £16/tonne. The Government said that this would increase annually, to £30/tonne in 2020. However, in the March 2014 Budget Chancellor George Osborne announced that it would be frozen from 2015 to 2020 at a rate of  £18/tonne. So the carbon price floor will be 40% lower in 2020 then previously expected.

A rising carbon price floor was one of the assumptions in the UK assessment to which the Commission refers, in paragraph 107: ”according to the UK’s own assessment…private investors are forecast by both Redpoint and by DECC to invest in nuclear energy by 2027 and by 2030 respectively in the absence of CfDs or Investment Contracts”. The freezing of the carbon price floor means that these Redpoint and DECC assessments are no longer relevant.

Supporting nuclear power is an appropriate intervention

In paragraph 240, “the Commission notes that while Art 191 TFEU establishes that the preservation, improvement and protection of the environment must be regarded as objectives of EU policy, it is unclear whether such objective can be immediately applicable to low-carbon generation as defined by the UK. In particular, while certain generation technologies emit less carbon emissions, their impact on the environment might nonetheless be considered substantial. This seems to be particularly true of nuclear generation, due to the need to manage and store radio­active waste for very long periods of time, and the potential for accidents.”

No generation technology is without impact on the environment. Radioactive waste does need to be managed, but has been stored for over half a century without significant damage to health or the environment. Greenhouse gases – another form of waste – cannot be managed once emitted. Wind turbines have a visual impact. Bioenergy causes direct and indirect land-use change when grown, and toxic pollution when combusted. Solar panels require rare earth minerals – which have to be mined – and produce toxic waste.

Accidents are possible at nuclear power stations. However, no energy source has no risk of accident. People constructing wind turbines get killed in industrial accidents. People putting solar photovoltaics on their roof fall off and die. In recent years there have been fatal coal mine accidents in Poland, Romania, Slovakia and Spain, killing 82 people. The 2011 Fukushima nuclear accident killed nobody directly. And a recent report from the United Nations Scientific Committee on the Effects of Atomic Radiation (UNSCEAR) concludes that there will be no increase in cancer rates resulting from Fukushima[7].

Scientist James Conca has considered health studies of the World Health Organization, the Centers for Disease Control, the National Academy of Science and many others, and calculated that deaths per (US) trillion kilowatt hours generated are:

Energy source	Deaths per trillion kilowatt hours
Coal	170,000
OIl	36,000
Bioenergy	24,000
Natural Gas	4,000
Hydro	1,400
Solar   (rooftop)	440
Wind	150
Nuclear	90

Conca’s calculations include direct deaths from accidents, and deaths from toxic pollution, based on epidemiological studies .[8] They do not include climate change. If this was taken into account (as it should be by the Commission), nuclear power’s relative safety would be even more apparent.

The intervention provides the right incentive effect

 No nuclear power station has been built without some form of state intervention. The Olkiluoto and Flamanville construction projects do not have long-term contracts with the governments, but they do have low-cost loans and loan guarantees from the governments. Given the nature of a nuclear power station, with lengthy construction time and high capital cost, to be paid before any revenue is received, no nuclear power station has been built or will be built without arrangements to lessen the developer’s exposure to the market.[9]

Paragraph 317 states that “it is not clear to the Commission that nuclear technology is immature enough to warrant State aid”. Nuclear technology has been used to generate electricity for over 60 years. Wind technology has been used to generate electricity for over 120 years[10]. In both cases, the technology has evolved and improved. Nuclear technology is only ‘mature’ if it is regarded as a single type of reactor. In reality, there are many types. No European Pressurised Reactor is in operation anywhere in the world, though one in China is due to be opened this year. So the EPR cannot realistically be described as a mature technology.

Paragraph 330 states that “tendering for low-carbon generation sources in a technologically neutral does not appear to have been considered as a realistic alternative”. The UK government aims to move towards technology-neutral auctions for CfDs. Its energy policy – supporting renewables, nuclear and CCS – is more technology-neutral than that of many member states. Hence the UK’s opposition to the Commission proposal for a renewable energy target in 2030.

The intervention is proportionate and will avoid overcompensation

 CfDs are proportionate. Each year, if the reference price (based on electricity from fossil fuels without CCS) would have been cheaper, the low-carbon generator will receive public money to cover the difference. If the cost of unabated fossil fuel generation is higher, the low-carbon generator will pay money to the government to cover the difference.

 The contract for Hinkley Point C would be for 35 years, whereas contracts for renewables will only be for 15 years. However, the nuclear station would operate for 60 years, while the renewables for 20-25 years. So the nuclear plant would be subsidised for a lower proportion of its operating life than the renewable technologies will. And the price per unit of electricity generated would be lower for nuclear than for renewables.

Nuclear costs are hard to predict. Paragraph 333 notes that radioactive waste management and disposal costs are “difficult to quantify”.  Flamanville and Olkiluoto have been more expensive to construct than expected. If Hinkley Point C were constructed under budget – which is not impossible, but not likely – critics would argue that EDF energy had been overcompensated. A more likely scenario is that costs are higher than expected. CfDs protect the Government from having to pay these increased costs.

The benefits of intervention substantially outweigh the minimal distortions of trade and competition

 Nuclear power stations generate large quantities of baseload low-carbon electricity. This has substantially reduced greenhouse gas emissions, and so contributed to pollution reduction, and saved lives. In 2013 James Hansen and Pushker Kharecha, of NASA’s Goddard Institute, published a paper which calculated that the use of nuclear power rather than fossil fuels has prevented about 1.84 million deaths, from air pollution and climate change. They estimate that nuclear power could save a further 7 million lives between 2013 and 2050, if it replaces coal.[11]

The Commission should recognise that the UK government’s proposed contract with EDF energy is necessary to get a new nuclear plant built, that nuclear power is necessary to meet the common European interest of climate protection, and therefore that the contract meets state aid rules.

 

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