Most commentary about the Government’s Electricity Market Reform (EMR) has focused on its complexity. But a much more fundamental issue is yet to be resolved – that of European State Aid approval. And, if recent developments are anything to go by, for nuclear in particular this could be a very lengthy process.
I recently attended a workshop in Brussels to discuss the European Commission’s latest thinking about State Aid. Under normal conditions, this would not be the most enthralling way to spend a day. But, considering the central importance of these deliberations for the UK’s EMR programme and the increasing levels of concern among some other EU Member States about the wider consequences of what the UK is proposing, there was quite a buzz in the packed conference room.
The workshop was called so that the Commission could feed back on the results of a consultation they held earlier this year. The consultation outlined plans to update the guidance on exemptions from the need to notify State Aid proposals to the Commission, as well as changes to the Environmental Guidelines that govern how such proposals will be evaluated.
This is an interim step in the process which will see formal drafts issued in July of this year and implementation of the final versions by the beginning of 2014. This is very significant for the EMR process since even the draft proposals will be a material consideration in any assessments of State Aid notifications carried out by the Commission. There was consensus amongst those I spoke to that the early notifications will take much longer to process since the Commission will be keen to ensure it does not set any awkward precedents and that it is seen to properly evaluate and explain the approach it takes for the benefit of future applications.
Anyone hoping that the EMR proposals will be dealt with quickly is likely to be disappointed. Unfortunately, this impacts on Investment Contracts (ICs) – the Government’s planned interim measure to keep investment flowing while Contracts for Difference (CfDs) are being developed – just as much as it does on CfDs. This single point of failure means that the ICs are not a suitable contingency to deal with investor concerns about delays which could stop project development.
The potential for lengthy, detailed scrutiny will apply even more to nuclear proposals, which could include EdF’s nuclear project at Hinkley Point, since there does not appear to be a legal basis for their inclusion in either the revision of the exemption regulations or the environmental guidelines; they would still have to be notified and evaluated on the basis of the original treaty. While this does not mean an automatic rejection – CCS was dealt with in this way – it does raise serious issues for the Commission since the type of nuclear plant under consideration in the UK is no infant technology, no matter what new packaging is put around the outside of it. The Commission seems to have recognised this and has introduced the concept of a maturity check in the process.
Other difficulties for nuclear would arise because it is being decided on the basis of bilateral negotiation with one organisation, one project and one technology and now even the tentative link that had been drawn between CfD support for nuclear and renewables has been broken. Indeed, the nuclear CfD now really looks like an annual premium feed-in tariff – the irony of which is not lost on us since we have been proponents of this approach for renewables from the start.
It is probably also worth noting the apparent animosity towards the idea of any State Aid consideration being given to nuclear from some of the Member States – this became very clear during the course of the event. Fortunately, the question of State Aid approval for renewables has been decoupled from that of nuclear. At least that means that not all investment will be mired, as nuclear could be, in years of delay within the European institutions and in legal challenges from the environmental campaign groups (some of whom have already fired a number of warning shots).
It was an illuminating day’s discussion, but one which will have offered little encouragement to those hoping for quick progress on the UK’s much-talked-about nuclear rennaissance. Delays for renewables also seem inevitable, which strengthens the case for extending the existing support mechanism - the Renewables Obligation - to prevent the current investment hiatus from worsening further.