What will Europe think?

From nuclear subsidy to capacity payments, energy policy iniatives may fall foul of European rules, says Megan Darby.

A nuclear deal between the government and EDF Energy is “extremely close”, energy secretary Ed Davey says at the time of writing. Is anyone else getting a sense of déjà vu? The latest reports claim that the two sides have agreed a strike price of between £90 and £93/MWh for the proposed Hinkley Point C power station.

Let us suppose this is true and that the years of wrangling between the two sides will soon be concluded. Perhaps the long-anticipated agreement has even been announced by the time you read this. That milestone is only the end of the beginning. The British government must then convince the European Commission to accept the package – a process that threatens to be every bit as protracted and obscure.

It emerged last week that the Commission has rejected moves to set out criteria for nuclear in updated state aid guidelines due out for consultation next month. That does not make it illegal for member states to offer financial incentives for new nuclear. It does, however, place the onus firmly on the UK government to justify its plans. Rather than set a policy for the UK to follow, the Commission has set up Hinkley Point C as a test case for the rest of Europe.

This politically charged decision will be taken by commissioners, appointed (not elected) by member states, on the basis of technical analysis by officials at the ­Directorate-General for Competition. The to-ing and fro-ing over guidelines has exposed ­tensions within the Commission over nuclear power. National governments have also made their feelings known, with countries such as Germany and Austria taking a hostile line.

Nick Mabey, chief executive of Europe-based sustainable development think-tank E3G, says: “It would really surprise me if we got nuclear through state aid [rules]. It would take an enormous political push from [prime minister David] Cameron and there would be a price for that. The result will be delay, even if they [government] can agree something with EDF.”

Nuclear power is just one of several elements of the government’s Electricity Market Reform (EMR) package that will be subject to state aid scrutiny. The interlinked nature of the reforms would make it hard to approve one part without the others, says Peter Willis, a competition law expert at Bird & Bird. “I am not sure whether you could split out the support for renewable generation from the support for nuclear. It would be quite difficult to disentangle the two,” he says.

The UK may not start implementing any part of the policy until it gets clearance from the Commission. Any controversy surrounding nuclear power therefore risks holding up the entire programme.

The capacity market part of EMR could also raise issues. The UK is one of a dozen countries proposing some form of capacity mechanism to ensure security of supply. Again, a Europe-wide policy has yet to be established and there could be pushback on the grounds that such mechanisms promote fossil fuel generation, counter to the bloc’s drive to decarbonise.

The Department of Energy and Climate Change aims to get state aid approval before late spring 2014, so it can lay final regulations before Parliament. That allows six months at most from Royal Assent of the Energy Bill, expected at the end of 2013. E3G’s Mabey notes that it took six months to clear the Green Investment Bank and he thinks Electricity Market Reform could take twice as long.

Gordon Downie, EU competition lawyer at Shepherd and Wedderburn, is more optimistic. “The UK will be working hard to engage the services of the Directorate-General for Competition… The Commission can act very quickly when it needs to.”

Willis says the lack of clear guidance on nuclear power is “an inconvenience” to the government but “unlikely to be a significant obstacle”. He adds: “It just means they have got to do more work and it exposes it [the package of reforms] to more scrutiny”.

To the utilities and developers waiting for a firm policy framework to invest against, it will be more than an inconvenience if that scrutiny means more delays.