EN Official Journal of the European Union L 317/45

COMMISSION DECISION (EU) 2017/2112

of 6 March 2017

on the measure/aid scheme/State aid SA.38454 — 2015/C (ex 2015/N) which Hungary is planning to implement for supporting the development of two new nuclear reactors at Paks II nuclear power station

(notified under document C(2017) 1486)

(Only the English version is authentic)

(Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) thereof,

Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments (1) and having regard to their comments,

Whereas:

1. PROCEDURE

(1) On the basis of press articles and informal contacts with the Hungarian authorities, on 13 March 2014, the Commission started a preliminary investigation into possible State aid involved in the construction of Paks II nuclear power plant (‘Paks II’) under the case number SA.38454 (2014/CP).

(2) After several exchanges of information and formal meetings, the Hungarian authorities notified the measure for legal certainty on 22 May 2015 stating that the project involved no State aid within the meaning of Article 107 of the Treaty on the Functioning of the European Union (‘TFEU’).

(3) By letter dated 22 May 2015, Hungary notified the Commission a measure to provide financial contribution for the development of two new nuclear reactors in the Paks site.

(4) By letter dated 23 November 2015, the Commission informed Hungary that it had decided to initiate the procedure laid down in Article 108(2) TFEU in respect of the measure (the Opening Decision). This Commission Decision was published in the Official Journal of the European Union (2). The Commission invited interested parties to submit their comments.

(5) Hungary sent its comments on the Opening Decision on 29 January 2016.

(6) The Commission received comments from interested parties. It forwarded them to Hungary, which was given the opportunity to react. Its comments were received by letter dated 7 April 2016.

(7) Further information was submitted by Hungary on 21 April, 27 May, 9 June, 16 June, 28 July 2016, 16 January 2017 and 20 February 2017.

(8) On 12 September 2016 the Hungarian authorities provided a language waiver and agreed that the decision will be adopted in English as the authentic language.

2. DETAILED DESCRIPTION OF THE MEASURE

2.1. DESCRIPTION OF THE PROJECT

(9) The measure consists of the development of two new nuclear reactors (units 5 and 6) in Hungary, whose construction is fully financed by the Hungarian State for the benefit of the entity Paks II (MVM Paks II Nuclear Power Plant Development Private Company Limited by Shares) that will own and operate the new reactors.

(10) The Russian Federation and Hungary concluded an intergovernmental agreement (IGA) on a nuclear programme on 14 January 2014 (3). Based on the IGA, both countries shall cooperate in the maintenance and further development of the current Paks nuclear power plant (Paks NPP). This includes the design, construction, commissioning and decommissioning of two new power units 5 and 6 with VVER (water-cooled water moderated) type reactors with installed capacity of each power unit of at least 1 000 MW (4) in addition to the existing power units 1-4. The operation of units 5 and 6 is intended to compensate for the loss in capacity when units 1-4 (2 000 MW altogether) retire. Hungary submitted that units 1-4 will be in operation until the end of 2032, 2034, 2036 and 2037 respectively, without envisaged prospect of further lifetime extension.

(11) Pursuant to the IGA (5) both Russia and Hungary would designate one experienced State-owned and State-controlled organisation which would be financially and technically responsible for fulfilling its obligations as contractor/owner in relation to the Project.

(12) Russia has appointed Joint-Stock Company Nizhny Novgorod Engineering Company Atomenergoproekt (JSC NIAEP) to construct the new reactors (units 5 and 6) and Hungary has appointed MVM Paks II Nuclear Power Plant Development Private Company Limited by Shares (1) (‘Paks II’) to own and operate the two reactors.

(13) Whilst the IGA sets out the general rights and obligations of nuclear cooperation between the two countries, the detailed implementation of the IGA is to be specified in separate agreements called the ‘Implementation Agreements’ (6) as follows: (a) the engineering, procurement and construction contract for the construction of the two new VVER 1200 (V491) units 5 and 6 at the Paks site is to be called the ‘EPC Contract’; (b) the contract stipulating the terms and conditions for the cooperation on operation and maintenance of the new reactors is to be called the ‘O&M contract’; (c) the agreement on the terms for fuel supply and management of spent fuel.

(14) JSC NIAEP and Paks II concluded the EPC Contract on 9 December 2014, which stipulates that the two new units 5 and 6 are meant to start operation in 2025 and 2026 respectively.

(15) Separately, Russia undertook to provide Hungary with a state loan to finance the development of Paks II. This loan is governed by a Financing Intergovernmental Agreement (the Financing IGA) (7) and provides a revolving credit facility of EUR 10 billion which is limited to the sole use of the design, construction and commissioning of power units 5 and 6 at Paks II. Hungary will use this revolving credit facility to directly finance the investments in Paks II necessary for the designing, construction and commissioning of the new power units 5 and 6, as set out by the Financing IGA. Further to the Financing IGA, Hungary will provide an additional amount of up to EUR 2,5 billion from its own budget to finance the investment at Paks II.

(16) Other than the investment support outlined in recital 15, Hungary does not intend to grant any other financial support to Paks II once power units 5 and 6 have been constructed. The new units will operate under market conditions without any fixed amount of revenues or guaranteed price. Hungary considers that at this stage raising any debt directly by Paks II will not be necessary.

2.2. OBJECTIVE OF THE MEASURE

(17) As explained in the Opening Decision, Paks NPP is the only nuclear power plant operating in Hungary. It belongs to the 100 % State-owned electricity trader and power producer Magyar Villamos Művek Zártkörűen Működő Részvénytársaság (‘the MVM Group’) (8). Its four units have a total installed capacity of 2 000 MW, each one of which is currently equipped with Russian technology (VVER-440/V213). The units will be gradually phased out by 2037 (see recital 10).

(18) Electricity generation from nuclear sources plays a strategic role in Hungary’s energy mix, as approximately 50 % of the overall domestically generated electricity comes from the existing four reactors at Paks NPP (9).

(19) Based on the following objectives: — maintaining a sensible share of national resources, and — reducing Hungarian dependence on imports whilst remaining consistent with national climate policy, the Government requested MVM Group to investigate the alternatives to the expansion of electricity production in nuclear power plants. A Feasibility Study was prepared by MVM Group that explored the implementation and financing of a new nuclear power plant that could be integrated into the electricity system and that could be operated in an economical, safe and environmentally friendly way. Based on this Feasibility Study presented in 2008 by the MVM Group, the Government proposed the project to the Hungarian Parliament, which consented to the start of preparatory work for the implementation of new nuclear power plant units at the Paks site (10). This was supported by calculations which showed that the retirement of 6 000 MW from the 8-9 000 MW gross installed capacity was forecast by 2025 as a result of the shutdown of the obsolete power plants. These plants were due to be partly replaced by the expansion of the Paks NPP.

(20) In 2011 the National Energy Strategy for the period up to 2030 was implemented (11). That strategy focusses on a Nuclear-Coal-Green scenario for Hungary. The Hungarian Transmission System Operator (the ‘TSO’), MAVIR, projects that there will be a need for at least 5,3 GW of new generation capacity in Hungary by 2026, and somewhat more than 7 GW by 2031 as a result of future demand and the retirement of existing generation capacity in Hungary (12). MAVIR also forecasts that almost all of the current coal generation fleet will have retired between 2025 and 2030, and that the installed capacity of Hungary’s gas-fleet will have declined by approximately 1 GW, as shown in Table 1 submitted by Hungary on 16 January 2017. Hungary explained that MAVIR’s study does not take into account any imports, or new installed capacities in the projection of the required 7 GW of new capacity. Table 1 Expected phase-outs of domestic installed capacities by 2031 MW Existing Phase-out Nuclear 2 000 Coal 1 292 1 222 Natural gas 3 084 960 Oil 410 Intermittent renewables/weather-dependent 455 100 Other renewables 259 123 Other non-renewables 844 836 Sum 8 344 3 241 Source: Hungarian authorities (Mavir)

(21) Hungary and Russia signed the IGA with the objective of developing new capacities at the Paks site. Hungary explained that by keeping nuclear generation in the fuel mix, it could address the need to replace phased-out capacity, to develop new capacities and to meet Hungary’s target as regards Union climate objectives (especially those related to the anticipated decrease of CO2 emissions).

2.3. DESCRIPTION OF THE NEW UNITS — THE TECHNOLOGY TO BE DEPLOYED

(22) The new units 5 and 6 at Paks II NPP will be equipped with VVER 1 200 (V491) technology and will be more advanced Generation III+ reactors. Hungary explains that the technical specifications of the units to be deployed at Paks II will give rise to notable advantages over the current Paks NPP units such as increased efficiency, and more economic operation in addition to enhanced safety features.

(23) Apart from the significantly higher installed capacity of VVER 1 200 (V491), there is also a material difference in the envisaged operating lifetime (60 years for VVER 1 200 units as opposed to 30 years for the existing units of Paks NPP) and wider manoeuvrability, which allows for the capacity of each unit to be adjusted according to demand on the grid within a certain range.

(24) The reduction in the amount of fuel required by the new units also reflects technological improvements in recent years. Instead of the existing 12-month fuel cycle, the new units can operate on an 18-month cycle. This means that the new units will require fewer shut-downs per year for fuel reloading and the plant will be able to operate for longer on average each year and not lose production time.

(25) The technical specifications also indicate that the power density, which will be provided by the new fuel assemblies, will be significantly higher than the existing fuel assemblies. This in turn means that a higher output can be achieved per unit mass of fuel material, which may improve the economics of the plant.

2.4. THE BENEFICIARY

(26) As explained in Section 2.3 of the Opening Decision, the beneficiary of the measure is the company Paks II, currently owned by the Hungarian State. The shareholder rights are exercised by the Prime Minister’s Office. Paks II will own and operate the reactors units 5 and 6 that are paid for by the Hungarian State.

(27) Recital 19 of the Opening Decision explains how the shares of Paks II held originally by the MVM Group were transferred to the Hungarian State (13). According to the information submitted by Hungary on 30 January 2016, the purchase price of the transfer was HUF 10,156 billion, which equals approximately EUR 33 million.

2.5. FINANCING STRUCTURE OF THE PROJECT AND RIGHTS AND OBLIGATIONS UNDER THE EPC CONTRACT

2.5.1. FINANCING INTERGOVERNMENTAL AGREEMENT (THE ‘FINANCING IGA’)

(28) Within the framework of the IGA (14), Russia provided Hungary with a state loan in the form of a revolving credit facility of EUR 10 billion to finance the development of nuclear power units 5 and 6 in Paks. The interest rate of the loan ranges between 3,95 % and 4,95 % (15). The loan is earmarked for the design, construction and commissioning of those new power units.

(29) Pursuant to the Financing IGA, the loan must be used by Hungary to finance 80 % of the value of the EPC contract for the execution of works and services and delivery of equipment, while the balance of 20 % of the EPC contract shall be paid by Hungary (see recital 15). The loan must be used by Hungary by 2025.

(30) The loan must be repaid by Hungary within 21 years as of 15 March or 15 September following the date of commissioning of both of the new nuclear power units 5 and 6, but not later than 15 March 2026 (16).

(31) Payments under the Financing IGA may be made only once a request by the Ministry for National Economy of Hungary and a notice of approval by the Ministry of Finance of Russia have been issued.

2.5.2. THE EPC CONTRACT

(32) According to the EPC contract, JSC NIAEP must deliver the two reactors as set out in the detailed technical specifications by the agreed dates and for the agreed lump sum price (EUR […] (*1) billion). Every cost previously undefined is deemed to be included in this price […] (17).

(33) The contract provides for liquidated damages (18) to be paid in specific circumstances, […].

(34) […]

(35) […]

2.5.3. RELATIONSHIP BETWEEN THE STATE AND THE BENEFICIARY

(36) Initially, Hungary had envisaged that Paks II would remain a 100 % subsidiary of MVM Hungarian Electricity Ltd, which itself is owned by the Hungarian State and municipalities. Since November 2014, Paks II is no longer a subsidiary of MVM Hungarian Electricity Ltd or part of the MVM Group but is a 100 % directly State-owned company that currently has no legal relationship with the MVM Group.

(37) As regards the activity of Paks II, in particular the sale of electricity, Hungary stated that no separate power purchase agreement with a separate supplier is in place or is envisaged at this stage. The Hungarian authorities envisage that the electricity generated by Paks II would be sold on the market and to electricity consumers in accordance with typical market practice base-load power sales agreements. According to the Hungarian authorities, Paks II, as a base-load generator for an anticipated long period of operation, would be a price taker similar to existing nuclear power generators in Europe.

(38) Paks II will be the owner of the Paks II nuclear power plant and, during the construction phase of the two reactors, it will be fully equity financed by the Hungarian State. The Hungarian authorities consider that raising any debt directly by Paks II will not be necessary at this stage.

(39) Hungary will not transfer the funds required to transfer the purchase price for the Paks II nuclear power plant onto the accounts of Paks II. The largest part of those funds will be held by the Bank for Development and Foreign Economic Affairs of Russia (Vnesheconombank). For each milestone event that is considered fulfilled, Paks II will file a request to Vnesheconombank to pay 80 % of the amount due directly to JSC NIAEP. It will also file a request to the Government Debt Management Agency of Hungary to pay the remaining 20 %.

(40) The rest of the financial requirements of Paks II during the construction phase will be ensured through equity from the Hungarian State budget. The initial amount earmarked during the construction phase will be up to EUR […] billion (difference between the amount of EUR 12,5 billion set for the nuclear project in the IGA and the actual purchase price of the Paks II NPP amounting to EUR […] billion). This is considered by Hungary to represent a cap on the State resources that can be drawn for the construction of the Paks II nuclear power plant, at least without further assessment. In the event that the equity requirements exceed such an amount, however, Hungary claims it will invest more if its assessment at the time concludes that it is economically reasonable for it to do so.

(41) Hungary claims that a sensitivity analysis on possible extra costs incurred by Paks II during the construction phase concluded that its costs would have to be multiplied by 10 for the expected IRR to decrease by 1 %. Therefore, Hungary expects the impact of costs increases to be minor.

2.6. THE HUNGARIAN ELECTRICITY MARKET

2.6.1. DESCRIPTION OF THE HUNGARIAN ELECTRICITY MARKET

(42) The current structure of the Hungarian electricity market was formed around 1995, when the majority of large power plants and public utility suppliers as well as distribution companies were privatised. The State retains a dominant position in the sector through the State-owned vertically integrated energy company MVM Group.

(43) The Study of MAVIR referred to in recital 20 explains that the total domestic consumption increased by 2,7 % since 2014 reaching a total domestic consumption of 43,75 TWh in 2015. Out of this consumption, domestic production amounted to 30,06 TWh, equalling 68,72 % of the total electricity consumption (see Figure 1). Imports amounted to 13,69 TWh corresponding to 31,28 % of the total consumption. As generator, the State-owned MVM Group has a significant market presence, due to its main generation asset, Paks NPP which provided 52,67 % of domestically generated electricity in 2015, as Figure 1 shows. Mátra Power Plant is a lignite fired power plant which is owned primarily by RWE Power AG (50,92 %) whereas the MVM Group also owns 26,15 % of its shares. The additional bigger (többi nagyerőmű) and smaller (kiserőművek) power plants play a modest role in the overall generation structure of the Hungarian market. In addition, MVM Group’s vertically integrated wholesaling arm, MVM Partner, holds a dominant position in the wholesale electricity market (19). Figure 1 Composition of total electricity consumption in Hungary in 2015 Source: Medium and long-term development of generation assets of the Hungarian electricity system (Mavir, 2016) ( 20 ). Figure 2 Gross domestic electricity production in Hungary in 2015 Source: Medium- and long-term development of generation assets of the Hungarian electricity system (Mavir, 2016).

(44) In Hungary, the most common transactions of wholesale are concluded via bilateral power purchase agreements (PPAs) where generators agree to sell a minimum pre-defined volume to wholesale traders and where traders are obliged to purchase a minimum volume. The PPAs are mostly concluded under the standards set out by the European Federation of Energy Traders.

(45) The Hungarian Power Exchange Company Ltd (HUPX) started operating in July 2010 as a subsidiary company of the TSO, MAVIR. It offers day-ahead trades as well as physical future trades. Day-ahead trade starts at 11 am every day on the basis of offers and bids to be placed for each hour for the following day. Trading closes at 11:40 am at the latest. Physical future trades can be made for 4 front weeks, 3 front months, 4 front quarters and 3 front years. There are designated trading days for such transactions where offers and bids are made within a certain time interval. Since March 2016 on the HUPX Intra-day Market, both 15 minute products and 1 hour blocks are tradable. In addition to the organised day-ahead and intra-day markets, HUPX has cooperation agreements with two broker companies providing a service of submitting over-the-counter (OTC) deals for exchange clearing for common clients.

(46) In addition to the day-ahead auctions not organised by HUPX, electricity is also traded on exchanges based in the EU or OTC platforms as well as via direct bilateral deals (see recital 44).

(47) As seen from Figure 1 in recital 43, Hungary is a net electricity importer with imports accounting for circa 30 % of Hungarian electricity consumption. As Figure 3 shows, wholesale electricity price has been the highest in Hungary in the interconnected region neighbouring the country (i.e. excluding Poland or Slovenia). Figure 3 Monthly average day-ahead baseload prices in the CEE region (including Hungary) and Germany (2010-2016) Source: European Commission.

(48) The short term projection of base-load prices in the region suggests the same trend, i.e. that Hungarian base-load prices will be the highest in the region (see Figure 4). Figure 4 Regional base-load futures prices for January-June 2017 Source: European Commission (based on the data published by the Central European Power Exchange) (https://www.pxe.cz/Kurzovni-Listek/Oficialni-KL/).

(49) The country is well interconnected with neighbouring countries — interconnection capacity for electricity was 30 % in 2014, above the 2020 target (21). In 2014 the Czech-Slovak-Hungarian-Romanian market coupling became operational, resulting in an increase in the liquidity of HUPX and a decrease in price volatility. Figure 5 summarises the data of electricity exchange with neighbouring countries in 2014. Figure 5 Electricity exchange between Hungary and neighbouring countries Source: Data of the Hungarian Electricity System (Mavir, 2014).

2.6.2. DESCRIPTION OF THE ENVISAGED EVOLUTION OF THE HUNGARIAN ELECTRICITY MARKET

(50) On the basis of the study referred to in recital 20 issued by MAVIR (22), almost all of the coal generation fleet will have retired between 2025 and 2030 and the installed capacity of Hungary’s gas-fleet will have declined by 1 GW. When compared to its estimates of peak demand growth, available generation capacity from domestic power producers is expected to fall below peak load by 2021. As a result, the TSO estimates that the Hungarian market will require at least 5,3 GW of additional new electricity generation capacity by 2026 and somewhat more than 7 GW by the end of the forecast period in 2031. This is depicted in Figure 6 below which shows that a significant amount of installed capacity beyond the growing Peak Load will be required. Hungary explained in its submission dated 16 January 2017 that it is required to ensure a certain level of remaining capacity reflecting the industry standard practices of ENTSO-E TSOs. The remaining capacity is the difference between the domestic reliable available capacity plus the national generating capacity plus peak load and the system services reserve. Remaining capacity is the part of the national generating capacity left in the system to cover any programmed exports, unexpected load variation, system services reserve and unplanned outages at a reference point. Figure 6 Additional capacity requirement in the Hungarian electricity sector Source: Medium- and long-term development of generation assets of the Hungarian electricity system (Mavir, 2016).

(51) Hungary sets out that despite claims about the relatively large requirement for new generation capacity, the data from Platts Powervision suggests that relatively little new capacity is actually being built, as shown in Table 2. Hungary also contends that according to Platt’s data, a 44 MW waste-to-energy plant is the only power station which is currently under construction in Hungary. Hungary further explains, that while there are investor plans to build larger (gas-fired) plants, none of those projects can be considered confirmed, as investors have not yet incurred substantial irrecoverable expenses such as construction costs, which would demonstrate commitment to actually undertake the project. Table 2 New capacities to be built in the Hungarian electricity sector Plant Plant Type Primary Fuel Nameplate MW Online Year Status Dunaujvaros Chp Waste Biomass 44 2016 Under Constr Szeged Ccgt CC/Cogen Natural Gas 460 2017 Advan Develop Szeged Ccgt CC/Cogen Natural Gas 460 2017 Advan Develop Csepel III CC/Cogen Natural Gas 430 2018 Advan Develop Tolna Wind Wind 260 2018 Early Develop Gyor Region Wind Wind 300 2019 Early Develop Szazhalombatta — Dunai Refinery CC Natural Gas 860 2020 Advan Develop Almasfuzito Coal Coal Generic 435 2020 Proposed Source: Platts Powervision, data accurate as of September 2015.

2.7. GROUNDS FOR INITIATING THE PROCEDURE

(52) In May 2015, Hungary notified the Commission its plans to invest in the construction of the two new nuclear reactors at the Paks site for legal certainty and claimed that the measure involved no State aid, as the State is acting as a market investor seeking a reasonable profit. In the Opening Decision, the Commission expressed concerns that the measure would entail State aid within the meaning of Article 107 TFEU, based on the information available at that stage. In particular, the Commission expressed serious doubts as to whether the measure entailed a selective advantage to Paks II, as Hungary did not object to the existence of the other elements of State aid during the notification phase.

(53) The grounds for doubts derived from the result of the Market Economy Investor Principle (‘MEIP’) test, which assesses whether a market investor would have invested in the project under the same terms and conditions as the public investor at the time the decision to make the public investment was taken (23). The MEIP test is also recognised by case law (24).

(54) In formal terms, the MEIP test sought to justify whether the expected internal rate of return (‘IRR’) of the investment would be higher than a purely market-based benchmark of the weighted average cost of capital (‘WACC’) for the project subject to the investment (25). While Hungary estimated the IRR of the project to be larger than a purely market-based benchmark WACC, the Commission raised doubts as to whether the WACC was to be considered higher.

(55) In light of doubts as regards the existence of State aid, the Commission further examined whether any possible State aid measures could be considered to be compatible with the internal market. However, given that the Hungarian authorities considered the measure to be free of State aid, the Hungarian authorities had not submitted, in the preliminary phase, any reasons as to why the measure would be compatible with the internal market. The Commission also expressed doubts that the measure did not fall within the scope of the Communication from the Commission — Guidelines on State aid for environmental protection and energy 2014-2020 (26), since those Guidelines do not cover measures in the field of nuclear energy and radioactive waste. Although the Commission concluded that no other Guidelines were applicable for the assessment of the notified measure, the Commission also concluded that it may declare a measure directly compatible under Article 107(3)(c) TFEU, if the measure aims to achieve an objective of common interest, if it is necessary and proportionate and where the positive effects of achieving the common objective outweigh the negative effects on competition and trade.

(56) The Commission expressed doubts as to whether the measure could be considered to be proportionate, that is to say, whether the measure was limited to the minimum level of investment support necessary to enable the successful construction of the additional electricity generating units for the attainment of the common objective pursued. The beneficiary would receive generation assets without facing any particular risk linked to refinancing costs which other market operators would face. The Commission was not provided with any evidence as to how Hungary would prevent such overcompensation.

(57) The Commission emphasised that the Hungarian electricity generation market is characterised by a relatively high market concentration, with the existing Paks NPP providing some 50 % of domestic generation. In the absence of new capacities, electricity generation by Paks NPP and Paks II would be likely to provide an even greater portion of the supply market, which may have a distortive effect on the Hungarian electricity market. Hungary did not provide detailed evidence to the Commission as to how it would ensure the continuous independent operation of the existing and new generating assets.

(58) Finally, the Commission noted that due to the particularities of the Hungarian electricity market, the operation of Paks II may also cause a wholesale market liquidity risk by limiting the number of supply offers available in the market. Depending on the way the electricity produced by the new reactors is sold on the market, liquidity could be significantly affected, barriers to entry could be raised and competition could be reduced at various levels of the market. Hungary did not provide a detailed explanation as to how electricity would be traded by Paks II and how market liquidity would be ensured.

(59) Therefore, the Commission expressed doubts that the measure could comprise State aid within the meaning of Article 107(1) TFEU.

(60) In the absence of sufficient evidence, the Commission was also unable to reach any conclusions on the compatibility of any such measure, with the internal market under Article 107(3)(c). In addition, based on the doubts raised in the Opening Decision and given the lack of compatibility arguments from Hungary at that time, the Commission explored a series of competition distortion concerns and possibilities that Paks II might be overcompensated.

(61) As regards the doubts on proportionality expressed in recital 56 above, the Commission examined whether Paks II could, as a result of the aid, reinvest any profits that are not paid to the State in the form of dividends in order to develop or purchase additional generation assets and thus, strengthen its position on the market.

(62) As regards the doubts on proportionality expressed in recital 56, the Commission also investigated Hungary’s intended dividends policy, in particular whether it would request dividends (at its discretion depending on the profit achieved by Paks II) or rather leave profits with Paks II. The Commission was concerned that Paks II could use its profits to reinvest by developing or purchasing additional generation assets and further distort competition.

(63) As set out in recital 57, due to the relatively high concentration level of the Hungarian electricity generation market and with the current nuclear power station Paks NPP (MVM Group) providing some 50 % of domestic generation, the Commission had concerns whether Paks NPP and Paks II would be held separately and could be considered independent and unconnected. The fact that Paks II is currently legally independent from the MVM Group was insufficient for the Commission as it did not receive any information during the notification phase as to whether the Paks NPP and Paks II would continue to operate fully separated legally and structurally. Such clarifications appeared necessary in order to minimise the risk of a further increase of market concentration.

(64) Furthermore, as explained in Section 2.6, the most common transactions in the Hungarian wholesale power sector are concluded by way of bilateral PPA’s and that the Hungarian Power Exchange (‘HUPX’) has not yet triggered an adequate level of liquidity. As the Hungarian notification did not refer to the expected methods of electricity sales of electricity from Paks II, the Commission investigated the effect of Paks II on Hungary’s current liquidity levels within the wholesale power sector.

(65) Considering the market liquidity doubts presented in recital 58, the Commission wanted to ensure that a wide range of supply offers are available on the market, particularly in light of MVM Partner’s dominant position on the electricity wholesale market (27). The Commission was concerned that liquidity levels could be significantly affected and that the costs of downstream rivals may be raised by restricting their competitive access to an important input (input foreclosure). This could happen if the electricity produced by Paks II was sold primarily by way of long term contracts to only certain suppliers, thus converting Paks II’s market power in the generation market to the retail market.

(66) The Commission, therefore, sought additional information in relation to Paks II’s power output trading strategy, with special attention as to whether it would be at arms-length terms by offering its electricity on the exchange or any other transparent trading platform.

3. THE POSITION OF THE HUNGARIAN GOVERNMENT

3.1. HUNGARY’S POSITION ON THE EXISTENCE OF AID

3.1.1. ECONOMIC ADVANTAGE

(67) Hungary claims in the notification that the investment does not constitute State aid within the meaning of Article 107 TFEU as it does not confer an economic advantage to Paks II. Hungary supports this claim by indicating that the Paks II investment complies with the MEIP test (see recitals 53 and 54).

(68) In particular, Hungary claims that the MEIP test is satisfied in two ways (28). Firstly, the WACC of the project is found to be lower than its IRR. Secondly, it is argued that the levelised cost of electricity (‘LCOE’) is sufficiently low to make nuclear competitive with respect to other generation technologies and to offer reasonable returns under prevailing electricity prices (29).

(69) The following studies and supporting documentation were submitted by Hungary to support its view: (a) The Market Economic Investor Principle substantiating analysis (‘MEIP Study’, 18 February 2015), (b) Economic analysis for the Paks II nuclear power project (‘Economic Study’, 8 October 2015) (30), (c) Letters to the Deputy Director-General for State aid reflecting on the preliminary analysis of the Commission (Clarifying Letters) — First letter (‘First clarifying letter’, 16 October 2015), — Second letter (‘Second clarifying letter’, 29 October 2015), (d) Submissions reflecting on the Opening Decision (Response to the Opening Decision) — Letter to the Deputy Director-General for State aid following the publication of the Opening Decision by the Commission on 3 December 2015 (‘Letter acknowledging the Opening Decision’), — Submission by Hungary to the Commission on 29 January 2016 (‘Submission reflecting to the Opening Decision’), (e) The Government of Hungary’s response to third party comments on the State aid Opening Decision on 7 April 2016 (‘Response to Third Party Comments’), (f) Response to the request for information dated 18 March 2016 on 21 April 2016 (‘Further Clarifications’).

(70) Furthermore, the Hungarian Government also submitted a financial model that was used to compute the IRR figures for the project. Two versions of the model were submitted to the Commission: (a) Original version on 16 March 2015 (‘Preliminary Financial Model’) (b) Final version on 16 October 2015 (‘Financial Model’).

(71) Except for the ‘Further Clarifications’, the documents listed in recital 69 address the topic of WACC and IRR computation, albeit with various levels of detail. The IRR of the project is computed by using the Financial Model (31). The LCOE approach is discussed in the Economic Study and in the ‘Further Clarifications’ (see recital 69).

(72) In terms of analysis by Hungary, the documents listed in recital 69(c)-(f) include various updates of the figures submitted in the MEIP study, and subsequently in the Economic Study. In particular, some updates are dated after the signing date of the EPC contract on 9 December 2014, i.e. the initial investment decision.

(73) The Opening Decision provides a detailed evaluation of Hungary’s position on each key issue as reflected in its submissions up to the date of the Opening Decision (32). The remainder of this section provides an overview of Hungary’s position on the key issues raised following the publication of the Opening Decision. In particular, the application of the WACC and IRR, as well as the LCOE will be presented separately.

3.1.1.1. Hungary’s position on the WACC

(74) In its Response to the Opening Decision, Hungary reiterated its estimated range of between 6,2-7,7 % for the WACC as in its previous submissions. It also reiterated on its earlier arguments set forward in the Clarifying Letters and noted that the Commission did not assess these arguments in the Opening Decision.

3.1.1.2. Hungary’s position on the IRR

(75) This section reviews Hungary’s position in relation to the calculation of the IRR which used the Financial Model to compute future free cash flows for the project and determine the its IRR. The main elements of the Financial Model are: (1) various long-term electricity price forecasts, and (2) various operational assumptions for the nuclear power plant.

(A) Electricity price forecasts

(76) The price forecasts used by the Hungarian Government were reviewed in the Opening Decision. In its Response to the Opening Decision, Hungary criticised the Commission for using just one price forecast curve (based on the International Energy Agency’s World Energy Outlook 2014 (IEA WEO 2014) publication to calculate the IRR of the project (33). In particular, it pointed out that all of the price forecasts submitted in the Economic Study should be used to assess the IRR.

(B) Operational assumptions

(77) The operational assumptions for the Financial Model and the IRR calculations were provided by Paks II’s technical team. Although originally no details were provided to justify those operational assumptions, Hungary subsequently submitted background information on those assumptions in its responses to information requests by the Commission. A key submission in this regard is the Further Clarifications submitted in response to a Request for Information following the Opening Decision and the third party comments.

(C) The IRR of the project

(78) In the Response to the Opening Decision, Hungary reiterated the results of its earlier computations of between 8,6-12,0 % for the IRR of the project.

(79) Hungary’s Response to the Opening Decision criticised the Commission’s assessment of the impact of a delay on the project’s IRR (a decrease of 0,9 % for a delay of 5 years). The figure was calculated by assuming delays during the operational period. However, Hungary argued that a delay in the construction period could increase the IRR of the project where there would be a delay in incurring costs also.

3.1.1.3. Hungary’s position on the LCOE

(80) This section reviews Hungary’s position on the LCOE for Paks II (34).

(A) The Economic Study

(81) Hungary argued in the Economic Study that the LCOE of Paks II is sufficiently low to make it competitive with other generation technologies. In particular, the study presented three estimates of the LCOE in respect of a nuclear project in Hungary. The first estimate of EUR 70/MWh, was based on a discount rate of 7 % (the upper limit of the estimated WACC presented in the same Economic Study) and was taken from a joint OECD/IEA/NEA 2015 publication ‘Projected Costs of Generating Electricity’ (‘OECD/IEA/NEA 2015 study’) (35). The second LCOE estimate of EUR 50-63/MWh was based on a study by Aszodi et al. (2014) which uses a discounted rate based on the interest rate of the Russian loan, falling within the 4-5 % range (36). The third LCOE estimate of EUR 58-120/MWh (2013 real prices) was calculated by way of a benchmark analysis based on figures published by various international agencies which offers a potential range for the LCOE (37). The study concluded that the LCOE for a Hungarian nuclear power plant falls within the range of between EUR 50,5-57,4/MWh (2013 real prices) l where the two end values were calculated by taking an interest rate equal to the two end-points of the WACC range (6,2 % and 7,0 %) reported in the same Economic study (38). When compared to the future electricity prices from the same Economic Study, the Hungarian nuclear power plant project can be argued to be profitable, and as such, Hungary argues that a private investor would feel it reasonable to undertake the project.

(B) Further clarifications

(82) In Response to the question by the Commission on how the LCOE range of between EUR 50,5-57,4/MWh in the final conclusion of the Economic Study can be reconciled with the range of between USD 89-94/MWh set out in the OECD/IEA/NEA study, Hungary explained in the ‘Further Clarifications’ that the difference was due to very different assumptions being used in the Economic Study and the OECD/IEA/NEA study, e.g. the difference in the assumed capacity factor (85 % vs 92 %) for nuclear power plants and in the commissioning dates (2020 vs 2025).

3.2. HUNGARY’S POSITION ON THE POSSIBLE COMPATIBILITY OF THE MEASURE WITH THE INTERNAL MARKET

(83) Although in its response to the Opening Decision Hungary emphasised that the measure did not involve State aid, it submitted comments to address concerns raised by the Commission with regard to the possible compatibility of the measure with the internal market, expressed in the Opening Decision in the event that the Commission came to the conclusion that State aid did exist.

3.2.1. POSITION ON THE OBJECTIVE OF COMMON INTEREST

(84) In its response to the Opening Decision, Hungary set out several policy considerations which it deemed relevant to define the objective of common interest based on the following: (a) Hungary’s energy policy; (b) Euratom Treaty (39) objectives; (c) Gap in future installed capacity; (d) Diversification of energy sources; (e) Decarbonisation; (f) Job creation; (g) Affordability.

(85) Hungary emphasised that, on the basis of Article 194(2) TFEU, each Member State has the sovereign right to choose its energy mix and it refers to its National Energy Strategy 2030 (see recital 20) which identifies a nuclear-coal-renewable path as mid-term energy strategy of the country.

(86) Hungary also refers to Article 2(c) of the Euratom Treaty which states that the Euratom Community shall facilitate investment and ensure the establishment of the basic installations necessary for the development of nuclear energy in the Euratom Community. Hungary emphasises that the provisions of the Euratom Treaty, which bind each signing Member State, are to be understood as a common objective of the Union.

(87) In addition, Hungary explains that there is a projected growth of approximately 4 % in electricity demand expected by the TSO by the year 2030 principally due to the proposed electrification of Hungary’s transport, industry and heating systems. The same study of the TSO concludes that many of Hungary’s existing older coal and gas plants are becoming obsolete and are expected to shut down by 2030. The study also found that very few newly installed capacities are expected to come on stream within the same timeframe. This will lead to a forecasted 32 % decrease in the existing capacity and Hungary argues that the construction of Paks II will be a well targeted response to this envisaged gap in future generation capacity.

(88) Furthermore, Hungary emphasises that its dependency on imported gas is higher than the EU 28 average. More than 95 % of the gas utilised in Hungary is imported and principally from Russia. It argues that without nuclear in the energy mix, Hungary’s dependence on oil or gas would significantly increase. This would be particularly the case following the phasing out of the existing operating units of the Paks NPP where other additional electricity generating units would have to use such fuels to bridge the future gap in overall national installed capacity described in recital 50. Consequently, Hungary considers that the measure would contribute to the diversity of fuel sources in the energy mix and the security of the country’s energy supply.

(89) Hungary argues that the project will contribute to the Union’s 2020 objectives of a reduction of greenhouse gases as nuclear fission is considered as a low carbon source of energy. The Hungarian authorities argue that the country’s topographic and geographic location does not allow for the deploying of offshore wind or hydropower plants. The remaining renewable electricity generation options are from onshore wind, solar and biomass, however the deployment of such technologies would not be sufficient to cover the envisaged gap in future capacity mentioned in recital 50 before where no additional generation from nuclear is foreseen. Consequently Hungary argues that the project is pursuing the objective of decarbonisation.

(90) The Hungarian authorities allege that the project (both during and after the construction) will lead to significant job creation. This would be particularly important given the geographical location of the Paks II nuclear power plant, which lies in a NUTS II-region, with a GDP of less than 45 % of that of the EU average per capita. As such, Hungary considers that the implementation of the project would pursue an objective of growth and significant job creation in multiple sectors.

(91) Finally, Hungary argues that the investment in new nuclear generation capacity will directly translate into lower industrial and consumer electricity prices, which is in accordance with an EU-wide objective of affordability of services. Hungary also states that the fact that no support shall be granted to Paks II during its operation supports the argument of affordability.

3.2.2. POSITION ON THE NECESSITY OF THE MEASURE

(92) Hungary explains in light of the growing generation gap which Hungary faces, that a significant amount of investment in generation capacity is required, with the quantum of such investment required being greater than the projects which are currently under construction or in development.

(93) For these reasons Hungary had engaged Nera Economic Consulting to analyse the development of the Hungarian and neighbouring countries’ electricity markets and the appropriate market definition for the Paks II project when it becomes operational (the ‘NERA Study’). This study suggests that building the new units 5 and 6 at Paks II could be commercially preferable to other types of energy generation investments based on Hungary’s market conditions, such as a similar capacity provided by open cycle gas turbines (‘OCGT’s’) and CCGT’s. Hungary concludes that there is thus no possible counterfactual that meets the policy objectives.

3.2.3. POSITION ON THE PROPORTIONALITY OF THE MEASURE

(94) Hungary reiterates that it expects to receive full compensation from the investment in the Paks II nuclear power plant from both capital appreciation and dividends.

(95) In addition, in its submission of 28 July 2016, while maintaining that the project would not involve State aid and that it was in line with the MEIP, Hungary provided additional information in response to the concerns raised in Section 3.3.6 of the Opening Decision regarding proportionality should the Commission find that State aid would arise in the notified project.

(96) According to its submission Hungary states that Paks II shall use all of the profits deriving from the activity of units 5 and 6 of Paks II only for the following purposes: (a) The Paks II project, which is defined as the development, financing, construction, commissioning, operation and maintenance, refurbishment, waste management and decommissioning of two new nuclear power units with VVER reactors 5 and 6 in Paks, Hungary). Profits shall not be used to fund investments in activities that are not within the scope of the above defined project. (b) The payment of the profits to the Hungarian State (for example by way of dividends).

(97) Hungary also confirmed that Paks II shall refrain from (re)investing in the extension of Paks II’s own capacity or lifetime and the installation of additional generation capacities, other than those of reactors 5 and 6 of Paks II. Should such new investment be made, Hungary shall notify it to the Commission for a separate State aid approval

3.2.4. POSITION ON THE EFFECT OF THE MEASURE ON THE INTERNAL MARKET

(98) The Hungarian authorities put forward that where any distortive effects occurred, these would be limited in duration to the period of overlap between the phasing out of the existing reactors at Paks NPP and the coming into operation of the two new reactors of Paks II. Hungary considers it unreasonable to assume that Paks NPP’s lifetime could exceed 50 years, therefore the overlapping period would be very short.

(99) Furthermore, in Hungary’s view the overlap period is needed and reasonable bearing in mind the need that Paks II is operational at the time Paks NPP will approach the end of its extended lifetime, and that Paks II’s development and commissioning may be subject to delays due to the technical complexity that the commissioning of a new nuclear power plant involves and to external factors outside the control of parties (e.g. change in legislation, safety requirements, regulatory environment). Hungary also submitted that some units equipped with VVER Generation III and III+ technology faced or are envisaged to face delays compared to the planned construction time of Paks II, as expressed in Table 3 below. Table 3 Accumulated construction delays of VVER Generation III and III+ units Site (country) Delays (years) Status Kudankulam — 1 (India) +5,8 completed Kudankulam — 2 (India) +7,0 ongoing Novovoronezh II.-1 (Russia) +1,5 completed Novovoronezh II.-2 (Russia) +2,5 ongoing Leningrad II.-1 (Russia) +2,0 ongoing Leningrad II.-2 (Russia) +2,5 ongoing Source: Hungarian authorities.

(100) In addition, Hungary highlights that Paks NPP and the two new reactors of Paks II are owned and operated by separate entities and that the MVM Group is not related in any way to the Paks II project or to Paks II. It also maintains that, if a concentration between Paks II and the MVM Group were to be considered, such a concentration would be subject to the merger control rules.

(101) Hungary argues that the fact that the two companies are both State owned does not prima facie call into question their commercial autonomy. On the contrary, the companies can be proven to be independent of one another where each company has independent decision-making powers.

(102) Hungary contends that the MVM Group and Paks II are independent and unconnected on the following grounds: (a) They are managed by different government departments (the MVM Group by the Ministry of National Development through the Hungarian National Asset Management Inc. and Paks II by the Prime Minister’s Office); (b) There are no shared or common directorships on the governing board of each company; (c) There are existing safeguards to ensure that commercially sensitive and confidential information are not exchanged between the companies; (d) The decision making powers of each company are separate and distinct from one another.

(103) Hungary criticises the Commission’s findings in the Opening Decision regarding the calculation of MVM Group’s market share in the Hungarian electricity supply market. Hungary argues that the market share was not examined in comparison with other producers present in the Hungarian market and that the market share of the MVM Group was calculated in view of domestically generated electricity only, excluding imports.

(104) On the basis of the NERA Study Hungary alleges that any possible distortions of competition must be interpreted in a market context that is larger than the State of Hungary. The NERA Study takes into account the following inputs in its market assessment: (a) Existing generation capacities and technical capabilities (e.g. efficiencies, start-up costs); (b) Committed expansions in generation capacity (e.g. plant under construction and new renewables); (c) Committed retirements of existing units (e.g. due to the LCPD); (d) Interconnector capacities; (e) Generator fuel, CO2 and variable operating and maintenance costs; (f) Fixed operating and maintenance costs that would be avoided if a unit shuts; (g) The costs of new entry.

(105) The basis of the argument why the market to be assessed is larger than Hungary is that imports of electricity from neighbouring countries accounted for 31,4 % of Hungarian electricity consumption in 2014. Hungary also argues that this high level of interconnection with neighbouring countries will increase further as a result of new interconnectors which will become operational between 2016 and 2021 between Slovakia (2 × 400 kV and 1 × 400 kV) and Slovenia (1 × 400 kV). In the submission of Hungary dated 16 January 2017, Hungary provided more details on the upcoming projects of cross-border transmission lines, according to which another interconnector of 2 × 400 kV will be built with Slovakia by 2029 and a 1 × 400 kV one with Romania by 2030. The expected total interconnection capacities for imports and exports are shown in Tables 4 and 5. Table 4 ENTSO-E Projections of Installed Interconnection Capacities for Import in Hungary Austria Slovakia Romania Croatia Serbia Ukraine (*2) Slovenia (*3) Total 2015 600 800 1 000 1 200 1 000 450 0 5 050 2016 720 1 040 1 080 1 360 920 450 400 5 970 2017 840 1 280 1 160 1 520 840 450 800 6 890 2018 960 1 520 1 240 1 680 760 450 1 200 7 810 2019 1 080 1 760 1 320 1 840 680 450 1 600 8 730 2020 1 200 2 000 1 400 2 000 600 450 2 000 9 650 2021 1 200 2 000 1 400 2 000 600 450 2 000 9 650 … 2030 1 200 2 000 1 400 2 000 600 450 2 000 9 650 Table 5 ENTSO-E Projections of Installed Interconnection Capacities for Export in Hungary Austria Slovakia Romania Croatia Serbia Ukraine (*4) Slovenia (*5) Total 2015 600 800 1 000 1 200 1 000 450 0 5 050 2016 640 1 040 1 060 1 360 920 450 340 5 810 2017 680 1 280 1 120 1 520 840 450 680 6 570 2018 720 1 520 1 180 1 680 760 450 1 020 7 330 2019 760 1 760 1 240 1 840 680 450 1 360 8 090 2020 800 2 000 1 300 2 000 600 450 1 700 8 850 2021 800 2 000 1 300 2 000 600 450 1 700 8 850 … 2030 800 2 000 1 300 2 000 600 450 1 700 8 850

(106) The study also identifies a successful energy supply market coupling with Slovakia, the Czech Republic and Romania and refers to ENTSO-E’s proposals published in October 2015 which defined Hungary as a part of a single Central and Eastern Europe coordinated capacity region with several countries with which it does not yet have coupling arrangements, including Austria, Germany and Poland (40). Hungary argues that, relative to other Member States, Hungary is already a highly integrated electricity market within the European Union, with interconnection capacity standing at approximately 75 per cent of total installed domestic generation capacity, i.e., roughly 8 times higher than the EU target for Member States by 2020 and 5 times higher than the EU target for Member States by 2030. In Hungary’s view, this is a sufficient reason to consider possible distortions of competition at a larger scale.

(107) As regards the deployment or new technologies both in the factual scenario and in the absence of Paks II, the NERA Study envisages CCGTs or OCGTs as entrant technologies whereas it presumes that the entry and exit of other technologies, such as renewables, coal and nuclear is unlikely purely on an economic basis for the following reasons: (a) The current and historical entry decisions of renewable plant depend crucially on government subsidy programmes, rather than market prices. Accordingly, models that simulate market fundamentals are not able to determine whether renewable plant would enter or exit in practice. (b) Due to climate change concerns, the installation of unabated new build coal and lignite plants in the EU is now highly contentious, with many projects subject to challenge through agency or court processes. It is therefore unclear to what extent new build projects are any longer feasible in the EU. (c) The development of new build nuclear power plant in the EU is also dependent on an energy strategy that includes nuclear power and requires significant government and regulatory interface in the planning and permitting process. For nuclear power plant, planning and development is a significantly larger undertaking than for gas CCGTs and OCGTs and the outcomes are much more dependent on national policies and regulatory discretion. It is therefore assumed that no new nuclear power plant is constructed other than those in countries that already have pro-nuclear energy policies and only for active projects that are already under-construction and/or have EPC contracts in place.

(108) The NERA Study shows that in the factual scenario (construction of Paks II), the following conclusions can be drawn: (a) Electricity demand in Hungary is expected to grow significantly until 2040; (b) Hungary is currently in a supply deficit and must import significant amounts of electricity. This deficit widens further between 2015 and 2025; (c) Despite Paks II coming online in 2025, Hungary remains in a net import position throughout the overlap period with the currently operating units of Paks NPP, and then again begins to become more and more import dependent thereafter; (d) Renewable resources in Hungary increase in the initial years of the factual scenario based on ENTSO-E projections, hitting the 2020 renewables target of 10,9 % of electricity consumed that Hungary adopted in its National Renewable Energy Plan. Figure 7 Projected output per technology and national demand until 2040 (factual scenario) Source: NERA Study.

(109) As explained above in recital 93, the NERA Study reiterates that in the absence of the construction of Paks II, the similar capacity commercially preferable to other types of energy generation investments based on Hungary’s market conditions would be provided by OCGT’s and CCGT’s. The NERA Study suggests that despite replacing most of the capacity of the Paks II plant with new gas capacity in Hungary, Hungary remains heavily dependent on electricity imports throughout the modelling period in the gas counterfactual scenario (see Figure 8). Figure 8 Projected output per technology and national demand until 2040 (counterfactual scenario) Source: NERA Study.

(110) Furthermore, Hungary contends that because of the strong convergence between market prices in neighbouring countries and Hungary, competitors are likely to be able to hedge their risks by trading electricity in neighbouring markets, without the need to trade Hungarian electricity directly. Hungary claims, based on the modelling in the NERA study, that the base-load electricity price in the regional market would remain the same in the counterfactual scenario (see Figure 9). Figure 9 Difference in Hungarian Base load Prices between base case and the counterfactual Source: NERA Study.

(111) Hungary emphasises that it has assessed Paks II’s possible effects in a wider market context. It argues on the basis of the NERA Study that, as Slovakia is the smallest of the neighbouring markets with which Hungary is currently market-coupled, the possible effects of Paks II would be the most perceptible in this country. It argues that Paks II’s market presence in this coupled market would remain at the level of approximately 20 % until 2040.

(112) The NERA Study also considers a possible wider coupled market (Hungary + Slovakia + Romania) arguing that these are the immediate neighbouring markets with which Hungary is currently market-coupled. On the basis of this, Hungary argues that even the combined market shares of MVM Group and Paks II (of between 10 and 20 %) in the coupled market of Hungary + Slovakia + Romania would be well below the threshold which would signify the possibility of dominance (see Figure 10). Figure 10 Combined market shares of MVM Group and Paks II by production (MWh) on the markets of Hungary + Slovakia + Romania Source: NERA Study.

(113) In addition, Hungary highlights that, both in summer and winter, the price setting technology would be lignite and coal fired power plants with higher marginal costs than Paks II, which means Paks II is expected to remain a price taker rather than a price maker even during the overlapping operating period of Paks NPP and Paks II when the probability of nuclear being the price setting technology will stay well below 5 % of all hours (see Figure 11). Figure 11 Price setting fuel in the Hungarian power market Source: NERA Study.

(114) Hungary also states in opposition to the Commission’s findings in recital 144 of the Opening Decision, that the Paks II nuclear power plant will not cause any wholesale market liquidity risk by limiting the number of supply offers. It contends that as a separate generating unit, the new power plant should enhance liquidity and diversity of generation supply. Hungary also notes that Paks II does not currently have a customer base to sell power directly to without market trading.

(115) Hungary relies upon a number of arguments presented by the United Kingdom in the Hinkley Point C case (41) on possible competition distortions and states that they would also apply to Paks II. Those arguments are set out as follows: (a) The measure would preserve the beneficiary’s exposure to market forces and offer incentives to it to compete in the wholesale electricity market. Hungary maintains this argument and adds that it would offer no operating support in the form of Contracts for Differences (‘CfD’) for Paks II; (b) The measure would not have any significant impact on interconnector flows and incentives to invest in those interconnectors with neighbouring countries. Hungary reiterates that the Hungarian electricity market is already a well interconnected market and that there are four interconnection projects under development; (c) The measure would have no impact on price differentials between Hungary and neighbouring markets which are currently connected by way of interconnectors.

(116) In addition, Hungary in its submission of 28 July 2016, provided additional information to address the concerns raised by the Commission in Section 3.3.7 of the Opening Decision regarding the overall balancing of any distortive effect of the measure on the internal market should the Commission find that the measure would comprise State aid.

(117) In this submission Hungary states that Paks II, its successors and affiliates shall be fully legally and structurally separated, shall be subject to independent power of decision within the meaning of paragraphs 52 and 53 of the Merger Jurisdictional Notice (42) and shall be maintained, managed and operated independent and unconnected from the MVM Group and all of its businesses, its successors and affiliates and other State controlled companies active in the generation, wholesale or retail of energy.

(118) In addition, as regards the sale of electricity from Paks II, in the same submission Hungary shows that Paks II’s power output trading strategy will be an arms-length commercial profit-optimising strategy which is carried out through commercial trading arrangements concluded through bids cleared on a transparent trading platform or exchange. Hungary also submits that the strategy for trading of Paks II’s power output (excluding own consumption of Paks II) shall be devised as follows: (a) Tier 1: Paks II shall sell at least 30 % of its total electricity output on the day ahead, intraday and future markets of the Hungarian Power Exchange (HUPX). Other similar electricity exchanges can be used subject to the agreement or consent of the Commission’s services to be granted or refused within 2 weeks from the request by the Hungarian authorities. (b) Tier 2. The rest of Paks II’s total electricity output shall be sold by Paks II on objective, transparent and non-discriminatory terms by way of auctions. The conditions for such auctions shall be determined by the Hungarian energy regulator, similar to the auctioning requirements imposed on MVM Partner (decision 741/2011 of the Hungarian Regulator). Hungary confirms that the Hungarian energy regulator shall also oversee the conduct of these auctions. Hungary also confirmed that the auction platform for this Tier 2 shall be operated by Paks II and it shall be ensured that offers and bids are equally available to all licensed or registered traders on the same market terms. Hungary commits that the bid clearing system shall be verifiable and transparent and no restrictions shall be imposed on the final use for the electricity purchased.

3.3. FURTHER COMMENTS PUT FORWARD BY HUNGARY IN RESPONSE TO THE OPENING DECISION

(119) Hungary states, that to the extent the project falls within the scope of the Euratom Treaty (e.g. Article 41 and Annex II, Articles 52 to 66 and Article 103), the Government of Hungary does not consider that TFEU and, in particular, the State aid rules in Article 107 and 108 TFEU are applicable to it. It alleges that the Euratom Treaty is lex specialis to TFEU. Therefore where the exercise of powers under the Euratom Treaty would be impeded by the exercise of powers deriving from TFEU, the provisions in the Euratom Treaty prevail. To support such a claim, Hungary relies upon the Commission Decision Kernkraftwerke Lippe-Ems GmbH (43).

(120) Hungary notes that although the Euratom Treaty does not establish a particular set of rules relating to State aid, point (d) of Article 6 and Article 70 of the Euratom Treaty illustrate that there is no general prohibition against State aid and that in specific cases subsidies from the Member States are encouraged.

(121) Hungary stresses that the financing of the project in the nuclear industry should fall under a notification obligation within the meaning of Article 43 of the Euratom Treaty. It further argues that pursuant to Commission Regulation (EC) No 1209/2000 (44) the data on the methods of financing should be provided in the event of any new project by the given Member State. Hungary argues that it had provided all the necessary information under Articles 41 and 43 of the Euratom Treaty and as the fuel supply agreement (45) was approved by the European Supply Agency in April 2015, Hungary believes that the Commission could not now claim that the financing of the project could be unlawful.

(122) Hungary compares the Euratom Treaty with the ECSC Treaty on the basis that they both are of sectorial nature and it argues that the ECSC Treaty contains a far reaching prohibition against State aid which was, in practice, aligned with Article 107 TFEU by virtue of Article 67 and Article 95 of the ECSC Treaty. Hungary states that in applying the rules on State aid laid down in the TFEU the Commission would misconstrue the regulatory goal pursued by the drafters of the Euratom Treaty which lacks any specific State aid provisions.

(123) Hungary further notes that no other equity investment in the construction of a nuclear power plant in the Union has ever been subject to a State aid investigation by the Commission, including those at Flamanville or Hanhikivi. In Hungary’s view the investment at Hinkley Point C was subject to State aid scrutiny only because it had specific financial characteristics (such as a State credit guarantee and the CfD) unlike other investments in Europe.

4. COMMENTS FROM INTERESTED PARTIES

4.1. COMMENTS ON THE EXISTENCE OF AID

(124) The comments received by the Commission from the following third parties contained quantitative information and analysis in relation to the existence of measures: — Submission by Hungarian Member of the European Parliament (MEP), Mr Benedek Jávor (‘Jávor submission’), — Submission by Green Peace (‘GP submission’) including a study prepared by its economic advisors, the Candole Partners (‘Candole Study’) (46), — Submission by EnergiaKlub (‘EK submission’) including a study prepared by Mr Balazs Felsmann (‘Felsmann study’) (47).

The Jávor submission

(125) The Jávor submission concentrates on owner costs which are costs that are not included in the EPC contract (see Section 2.5.2 of this Decision), and claims that those costs may be heavily underestimated. In particular, the submission makes the following claims: (a) As the EPC contract for Paks II was made on the basis of the ‘Leningradskaya design (48)’, it is reasonable to believe that an additional investment in safety system will be required that would cost at least EUR 1 billion. (b) The direct fresh water cooling system is insufficient to cool down the water in case of the parallel operation of Paks NPP and Paks II during hot summer days. This would put an extra burden on the environment, and would require investment in a more efficient cooling tower based cooling system which is about 40 % more expensive than a direct cooling system. (c) The amount envisaged to be deposited in the Central Nuclear Fund is unlikely to be sufficient for the storage of radioactive waste and the decommissioning. In particular, the interim storage, the final depository for nuclear waste and the decommissioning would cost at least as much as EUR 150 million, EUR 1,54 billion and EUR 1,734 billion respectively. (d) The grid upgrade required for the integration of the new nuclear power plant blocks, including investments both in the 400 kV cable-system and the 120 kV auxiliary high voltage cable can cost as much as EUR 1,6 billion. (e) Investments needed to comply with the actual grid regulation, both in the form of a pumped storage power plant and additional generation units providing the security reserves, required by law to be equal to the biggest national electricity generating unit, would cost EUR 1,2 billion. (f) Losses from reduction of operation of one of the two neighbouring nuclear power plants for system balance reasons could imply a total financial loss of around EUR 1,2 billion. (g) Various taxes and duties not included in the EPC contract may add up to an additional EUR 1,8 billion.

(126) The submission argues that the cost items listed in recital 125 should be added to the costs of the project, which in turn would dramatically reduce the project’s IRR. It also points out that delays and shorter lifetime of the plant would further reduce the project’s IRR.

The Candole study

(127) The Candole study uses the assumptions and information included in the Economic Study and looks at the viability of the Paks II project. In particular, it argues that the price forecasts used by the Economic Study may be overly optimistic and that more realistic price forecasts would make the project loss-making even if the operational assumptions of the Economic Study are accepted.

(128) To illustrate this point, the Candole study develops its own long term electricity price forecast. In particular, it forecasts future long term electricity prices by using coal, oil and gas price forecasts from the 2015 edition of the International Energy Agency’s World Energy Outlook (IEA WEO 2015) and calculates the marginal cost of production for various types of generators (49). Furthermore, it also constructs separate forecast for different future scenarios considered in the IEA WEO 2015 publication, i.e. (i) ‘New Policy Scenario’, corresponding to policies and implementing measures affecting energy markets that had been adopted until a few months before the IEA WEO 2015 publication went to press, together with relevant declared policy intentions, (ii) ‘Current Policies Scenario’, corresponding to policies enacted within a few months before the Candole Study’s publication went to press, and (iii) ‘Low Oil Price Scenario’ that explores the implications of sustained lower prices (coming from lower oil prices) on the energy system (50). The following graph illustrates the derived long term electricity price forecasts for each of the three scenarios. Figure 12 Long-run electricity price forecast curves (EUR/MWh) Source: Candole Partners.

(129) The figure illustrates that the Current Policies Scenario implies slightly higher future prices for electricity, whereas the Low Oil Price Scenario implies substantially lower future electricity prices than the central New Policies Scenario, the one used in the submissions by Hungary.

(130) In addition to the forecasts in Figure 12, the Candole study also compares IEA WEO 2015 Low Oil Price Scenario-based long-term electricity price forecast with the future contracts traded (as of February 2016) in the German and Hungarian electricity exchanges. Those curves are presented in Figure 13 below. Figure 13 Long-run electricity price forecast curves (EUR/MWh) Source: Candole Partners.

(131) The figure points out that up to 2022, when German-Austrian contracts can be traded, that German futures contract prices are below the IEA WEO 2015 Low Oil Price scenario price forecast. The same is true for the Hungarian exchange futures contracts that can be traded up until 2019 (51).

(132) Based on those considerations, the Candole study argues that under long-term electricity price forecasts as shown in the Economic Study, the Paks II project would be loss-making even if the operational assumptions of the Economic Study are accepted (52).

The EK submission

(133) The EK submission identifies potential shortcomings in the Commission’s Opening Decision as well as problematic points in Hungary’s Economic Study. It also highlights some risks that the project would face. Finally, it submitted the Felsmann study, as a quantitative analysis of the viability of the Paks II. The study calculates the net present value of the Paks II project by using the operating costs of the current Paks NPP and finds that in the majority of the considered scenarios the project would be loss-making.

(134) In relation to the Opening Decision, the EK submission points out that some cost items had been left out from the assessment presented in the Opening Decision or were not considered in their entirety. For example, it claims that it is not clear to what extent the amount in the EPC contract included the potential extra costs of nuclear safety, the costs of grid development required by the integration of the two new reactors of Paks II into the system or the construction of an appropriate cooling system. The submission also raises doubts whether the costs of preliminary studies, permits, communication have been accurately reflected.

(135) Furthermore, the submission argues that the cost figures of EUR 2,1-2,7/MWh for waste and decommissioning may be underestimated as this figure is EUR 4,5/MWh for the current Paks NPP. In addition, it also highlights the negative impact of the project for future central government budgets, which it claims would conflict with the statistical accounting system and the debt-increasing rule of the Union (53). Finally, the submission highlights the corruption risk, mostly associated with the size of the project and the information advantage of the supplier and owner (54).

(136) In relation to the Economic Study prepared by Hungary, the submission questions the high load factor (92 %) used in the calculations, especially during the operation in parallel of Paks NPP and Paks II, during periods of low demand as well as the validity of the price forecasts used in the study.

(137) In relation to various types of risks for the project, the EK submission highlights the potential impact of project delays and of cost overruns as well as the necessity of further state supports during the lifetime of the project.

(138) To support its concerns regarding the viability of the Paks II project, the EK submission makes reference to the Felsmann study. This study calculates the net present value of the Paks II project by using the operating costs of the current Paks NPP (that includes a major mid-term overhaul for the plant) and a number of alternative figures (i.e. 75 %, 85 % and 92 %) for the utilisation rate with some electricity price forecasts based on publicly available international sources (e.g. the US Energy Information Administration and the UK National Grid). The study finds that in a majority of the considered scenarios the project would be loss-making, implying the existence of State aid.

Government of Austria

(139) Austria contends that the construction and operation of nuclear power plants is unprofitable, given all the related costs which must be internalised under the ‘polluter pays’ principle. Austria considers that the MEIP principle is not complied with as regards Hungary’s investment in Paks II. Austria argues that there is no evidence that the economic studies submitted by Hungary to the Commission have been carried out with due diligence or that the costs considered for the calculations contain all possible costs in compliance with the ‘polluters’ pays’ principle.

(140) Austria also claims that the remaining conditions for the existence of State aid are met.

Other submissions on the existence of aid

(141) Paks II argued that the Opening Decision incorrectly used a single price forecast curve, especially considering the long time span of the project. It is also noted in some its observations that the Commission is incorrect to use the operation and maintenance costs (the ‘O&M costs’) of the current Paks NPP to justify O&M costs of the new Gen III+ units 5 and 6. Furthermore Paks II stresses that whilst their initial investment decision was made at the time of the signing of the EPC Contract and that such commitment was made only to the development stage of the expenditure as Paks II’s final commitment to construction period expenditure occurs at a defined point in the future. Paks II states that up until this future point, the company may decide, where the economics of the project are varied due to external market changes, not to progress with the project, however this possibility is rather unlikely. Paks II also refers to the report prepared by Rothschild & Co for the Hungarian Government (‘the Rothschild Study’) (55) which concludes that the IRR range could reach 12 % which is significantly higher than the range of between 6,7-9 % referred to by the Commission in the Opening Decision. Finally, Paks II notes that the WACC and IRR ranges calculated by the Commission overlap and therefore the project can be expected to provide appropriate remuneration.

(142) Enersense Group alleges that the WACC formula used by the Commission is not accurate insofar as the Commission used overly conservative factors in determining it. In its view, the appropriate cost of debt that should be applied to the WACC element of the MEIP assessment is 4,5 % pre-tax, or 3,6 % post tax with minor scheduled adjustments over time. It argues that as the Russian supplier provides approximately 80 % of the funding of the contract price, the return on investment should be based on a leverage of 80 % to reflect the source of funds of investment, in line with other nuclear power plants. Enersense Group states that when one assumes an 11 % cost of equity and a 3,6 % cost of debt post tax and apply an 80 % reduction on basis of leverage, the WACC should be 5,1 %. Furthermore it argues that this would rise to 6,2 % where a reduction on the basis of 65 % leverage was applied. As a conclusion it notes that the return on investment would be improved considerably by the choice of market based cost of debt and leverage factor.

(143) Further arguments were put forward by interested parties that the WACC is reduced significantly once the plant is connected to the grid whilst the enterprise value increases. Therefore parts of or the entire plant could be sold at a price comparable with other nuclear power facilities currently in operation. It is argued that the Commission’s calculations in the Opening Decision do not reflect such investment flexibility.

(144) The Commission also received observations on the importance of fully assessing and including the opportunity costs of excluding nuclear technology in the national energy mix in the context of significant changes to the existing power generation capacity portfolio. According to those observations in addition to models on ‘return on investment’ or ‘discount cash flow’, it is important to consider that the Paks II project is a substantive investment in an existing sector which adds real value, not simply a ‘portfolio investment’ opportunity or by way of a short-term speculation. They argue that those features should also be reflected in the calculations of the Commission as to the project’s viability.

(145) Several observations refer to the conclusion in the Rothschild Study that the project can be viable solely based on market terms, even where it is underpinned by very pessimistic assumptions. Some also argue that the key assumptions as regards future electricity prices are quite moderate and that those prices are expected to increase after 2025. On that basis Paks II would not receive an advantage.

(146) According to some observations the fact that the project is carried by way of an EPC agreement on a turnkey basis, that would make it attractive to any market economy investor and therefore Hungary would be investing also on market based terms.

4.2. COMMENTS ON THE POSSIBLE COMPATIBILITY OF THE MEASURE WITH THE INTERNAL MARKET

4.2.1. COMMENTS AS REGARDS THE OBJECTIVE OF COMMON INTEREST

(147) Austria, IG Windkraft, Oekostorm AG and other third parties contend that subsidising the construction and operation of new nuclear power plants is not provided for, under the principles laid down in Article 107(3) TFEU as being compatible with the internal market. Nuclear power would not be a new, innovative or sustainable technology for electricity generation which could contribute to achieving a goal of the Union of increasing the proportion of energy generation by renewable technologies. Therefore, the project should not be able to receive temporary support until it achieves market maturity.

(148) Austria claims that Article 2(c) and Article 40 of the Euratom Treaty do not allow for the promotion of new nuclear investments to be considered an objective of common interest due to the fact that no common interest within the meaning of Article 107(3) TFEU can be interpreted from the Euratom Treaty. In addition, such an objective would be in conflict with other objectives of the Union under TFEU, namely the precautionary principle under Article 191 and the sustainability principle under the Horizon 2020 programme (56).

(149) According to several submissions, the project would contribute to the Europe-wide objectives of deployment of nuclear installations as well as nuclear research which are also recognised by the Euratom Treaty.

(150) Many observations argue that the fact that nuclear energy would provide a clean, low-carbon source of energy should be recognised by the Commission as a common objective of the Union that justifies the investment.

(151) Some of the observations refer to Article 194(2) TFEU which permits Member States to determine their energy generation mix. The observations point out, that Hungary’s envisaged energy generation mix forms part of its the National Energy Strategy and follows a nuclear-coal-green path. On this basis the investment could be justifiable.

(152) The Commission also received comments which point out that nuclear energy provides a very long term, safe and reliable source of energy in the Union energy generation mix. Those comments stated that electricity generated from nuclear sources, typically at high capacity levels (between 85-90 %) could contribute significantly to a long term security of supply. Other interested parties submitted that, due to the significant gap in future installed capacity expected to occur by 2030 with the phasing out of the existing units at Paks NPP and due to the reliance on electricity imports, the project could be an ideal option to ensure security of supply for Hungary and reduce fuel dependency.

(153) Arguments were submitted to the Commission that the completion of the project would contribute to growth in the region mainly by creating jobs. Additionally, some observations point out that there is a substantial opportunity for companies in the Union of all sizes to participate in the completion of the project thereby boosting the business supply chain. Those observations suggest that such envisaged growth is a common interest that could justify the completion of the project.

4.2.2. COMMENTS AS REGARDS THE APPROPRIATENESS OF THE MEASURE

(154) IG Windkraft and Energiaklub argue that the measure is inappropriate given the expense of the project when compared to the possible alternatives that would target the electricity gap in future installed capacity. A similar amount of subsidy could produce a much higher annual amount of electricity when invested in other sources of electricity, such as renewable technologies.

4.2.3. COMMENTS AS REGARDS THE NECESSITY OF THE MEASURE AND THE INCENTIVE EFFECT

(155) Austria claims that the Commission has incorrectly defined the relevant market in order to assess whether or not there may be an existence of a market failure, i.e. the nuclear power market in Hungary. Austria claims that the correct relevant market would be the liberalised internal electricity market of the Union. Austria further argues that there is no market failure in respect of electricity generation and supply on the internal market in electricity. On the contrary, electricity prices would be falling, due, in part, to sufficient generating capacities. Moreover, Hungary is well interconnected to the grids of neighbouring Member States.

(156) Austria and IG Windkraft argue that where Hungary was to face a security of supply issue, nuclear power plants may not be the appropriate means to address that issue. They argue that more environmentally friendly, flexible and cheaper energy sources in small, decentralised units may be more appropriate. Austria further argues that nuclear power plants are sensitive to heat waves due to cooling requirements and that Member States are almost 100 % dependent on imported uranium ore.

(157) Third parties have also argued that the market alone would deliver the construction of new generation capacities, in the electricity generation sector. The fact that Hungary is dependent on electricity imports would not constitute a market failure and, in particular, not one that a new nuclear power plant would address. The comments put forward show that imports of cheaper electricity from other Member States are a normal and acceptable effect of a functioning market and not a market failure. This simply indicates the ability to buy commodities at the lowest market price. According to the comments received, power prices are determined by many factors including commodity prices, supply and demand. In Europe, in particular, declines in the prices of electricity would be a reaction to chronic generation over capacities. Since this could be considered a reaction of an efficient functioning market, it could not be argued that the decrease in market energy prices as a result of imports would represent a market failure as a justification for the construction of new nuclear capacity.

(158) According to the comments received, even where there was a market failure in the electricity generation sector, Hungary should consider more options in a transparent and non-discriminatory manner.

(159) Other observations suggest that although the challenges for investment in nuclear power, including the large upfront capital investment and the need for public and political support are well known, recognising those difficulties is not equivalent to establishing that nuclear power development is associated with a market failure. The same observations highlight that whilst the Commission concluded that there was market failure in the case of Hinkley Point C, it should not be assumed that all nuclear investments could only be realised with subsidy regimes or that there are grounds to assume generic nuclear market failure.

4.2.4. COMMENTS AS REGARDS THE PROPORTIONALITY OF THE MEASURE

(160) Austria argued that since State aid must always be limited to the minimum amount required. In this instance, where the construction of the proposed project is being made without a call for tender, it could not be determined whether the total costs of the project would be limited to the minimum amount required.

(161) Energiaklub claims that the Hungarian authorities did not investigate the minimum level of financial support that would make the project deliverable. Instead the Hungarian authorities sought to finance the project in its entirety, possibility also including operational costs as well. Energiaklub also stresses that according to the calculations which Hungary has provided, State aid would not only be limited to the implementation of the investment but it would also be granted to the operation of the project which may overcompensate Paks II.

4.2.5. COMMENTS AS REGARDS THE EFFECT OF THE MEASURE ON THE INTERNAL MARKET

(162) Austria claims that State aid for a technology, which is not in itself profitable within the liberalised internal market for electricity, leads to excessive distortions of competition. In addition, it may prevent new, sustainable and more cost-effective market participants from entering the market or force those market participants out of the market. Austria argues that NPPs are deployed to cover high base load capacity and that is capacity is given priority when connected to a grid, since NPPs can only slightly vary their capacities. Whilst they have high construction and decommissioning costs, they have low operating costs which allows them to enter the merit order.

(163) The Austrian authorities and IG Windkraft argue that the construction of the new NPPs will create a significant market power for the operators of the power plants at the Paks site by increasing market concentration and, possibly, leading to an abuse of a dominant position under Article 102 of the TFEU.

(164) The MVM Group and Paks II argue that, following the 100 % sale of the shares of Paks II to the State by the MVM Group, the two companies became completely independent of one another. They highlight that the MVM Group has no control, directly or otherwise, over the management and operation of Paks II. They also stress that MVM Group and Paks II are two separate power generation companies, like any other competitors, and there is no reason to assume any coordination or activities or that the two companies would be combined. Moreover, the MVM Group argues that its own strategy includes possible investments that may compete with Paks II into the future.

(165) Paks II argues that the project is intended to be replacement capacity for the current four units of Paks NPP. Those current units are expected to be phased out by the mid 2030’s, whilst the new units 5 and 6 (the Paks II project) would not be operational until the mid-2020’s. Paks II argues that therefore the evaluation of market shares and claims of dominance are unfounded and cannot be considered at this time.

(166) Several interested parties stressed that that the energy market to be examined would be larger than the individual State’s territory where there are a number of international competitors, given the large scale of Hungary’s electricity imports and the country’s very good interconnection level with neighbouring countries.

(167) Some parties explicitly argue that the project could have a potential downward impact on regional electricity markets, such as Germany where the annual base load price would be expected to fall by up to 0,6 % by 2025, by up to 1,1 % by 2030 and by up to 1,2 % by 2040. On the other hand, some parties also argue that renewable installations in Germany would earn lower revenues due to the new reactors of Paks II and that the burden for taxpayers to finance German renewable aid schemes would increase whilst suppliers of ‘grey electricity’ could face a saving of up to 1,02 % by the year 2030.

4.3. ADDITIONAL COMMENTS RAISED BY INTERESTED PARTIES

(168) Several observations highlight that the details of the project were not entirely shared with the public in Hungary. They also argue that the decision on Paks II is technically unjustified, as there were no preparatory investigations made about how an investment in energy efficiency measures and renewable energies on the same scale would help security of supply. Those observers therefore make the point that given the lack of wide public and professional involvement, the project should not go ahead.

(169) Certain submissions point to the potential danger of nuclear power plants. Some observations express concerns regarding Hungary’s and Paks II’s ability to deal with nuclear safety incidents, including the safe disposal of nuclear waste.

(170) Some observations stressed the absence of a tender process in the appointment of the constructor of the new generating units, which they believed, would conflict with the provisions of Union law. In addition, MEP Jávor alleges that the presumed violation of Union public procurement rules is inherent and intrinsically linked to the measure as, he believes Russia would not have granted a loan to Hungary for the Paks II project without securing the investment for Rosatom which would avoid Union public procurement rules. He concludes that the assessment of whether the use of the Russian loan constitutes an unlawful State aid could not be separated from the avoidance of public procurement rules, they are intrinsically linked and their effect should to be assessed together.

(171) Several comments were made objecting to the fact that the project is being carried out by way of a Russian loan. They argue that it would promote fuel and financial dependence whilst contravening the EU’s Energy Security Strategy by curtailing Union market players from the development of a Union-wide energy network and infrastructure.

(172) Some interested parties allege that where Hungary decided that it needed new electricity capacities for the future, it should have complied with Article 8 of the Directive 2009/72/EC of the European Parliament and of the Council (57). In this instance there was no tendering procedure or any equivalent procedure in terms of transparency and non-discrimination providing for any new capacity. Thus, in their view, the Paks II investment could violate Union law.

(173) Some parties argue that State aid is not appropriate to be used in cases where it would relieve the polluter of the burden of paying for the cost of its pollution within the spirit of the Community Guidelines on State aid for environmental protection (58).

4.4. RESPONSE OF HUNGARY TO THE COMMENTS RAISED BY INTERESTED PARTIES

(174) Hungary submitted its response to third party comments on the State aid Opening Decision (‘Response to third party comments’) on 8 April 2016.

(175) In particular, Hungary strongly disagrees with the comments received from the Government of Austria, Greenpeace Energy, Energiaklub and MEP Benedek Jávor, where the various third parties alleged that costs relating to safety and environmental regulations, debt financing, insurance, safety, waste disposal, decommissioning, transmissions connections and retrofit investments had not been included in Hungary’s analysis, saying that those parties were misinformed and that their claims unfounded.

(176) The response includes a detailed rebuttal of the comments submitted by MEP Benedek Jávor. In particular, Hungary points out that: — the costs of all the necessary safety investments are included in the EPC contract; — the choice of the direct cooling system is supported by the Environmental Impact Assessment of the project; — the cost figures related to waste management and decommissioning were computed by the Agency of Radioactive Waste Management on the basis of Act CXVI of 1996 on Atomic Energy; — the costs related to the grid connection for Paks II are included in the financial analysis of the project; — there will be no reduction in the operation of either of Paks NPP and Paks II during low demand hours as Paks II should be replacing older and existing generation capacities that would be phased out; — being a Generation III+ modern technology, it is safe to assume a relatively high (90+%) utilisation rate during the lifetime of Paks II; — the 60 years operational period is widely accepted internationally as it is a standard assumption even for the more inferior Generation III plants; — the project is VAT-neutral and as a large part of services will be provided by EU-localised suppliers, the presumption/calculation of custom duties is inaccurate.

(177) Hungary argues that they conducted extensive sensitivity analysis to consider the impact of assumptions and variables such as plant lifetime, O&M costs, waste management and decommissioning costs, load factors, macroeconomic factors such as foreign exchange and inflation, different market price scenarios, delays, etc. on the business case and this sensitivity analysis would fully support its conclusion that the measure would not amount to State aid.

(178) As regards the observations received on the possible compatibility of the measure, Hungary reiterates several arguments put forward in relation to the free choice and diversification of the generation mix, the need for replacement capacity, decarbonisation, job creation, affordability and claimed multiplier effects.

(179) Hungary states that the argument of the Government of Austria that the Euratom Treaty objective regarding the ‘development of nuclear energy in the Community’ is ‘already achieved and cannot be used in support of a common interest within the meaning of Article 107(3) TFEU due to the developed technically and numerous nuclear power plants that have been built in Europe’ is flawed. The argument, in Hungary’s view, confuses the objective of developing nuclear generation with the concept of technology which cannot be claimed to have been a static. Hungary argues that the Euratom Treaty continues to form part of the constitutional arrangement of the Union and that this has not been repealed. Finally, Hungary stresses that Austria and Greenpeace did not bring forward any case-law to suggest that the objectives of common interest matters are necessarily finite or limited in duration.

(180) As regards the diversification of the energy generation mix, Hungary refutes Austria’s and the Austrian Wind Energy Association’s allegations about a Union-wide uranium dependency and stresses that there is wide diversity and availability of uranium from significant unmined sources. It also argues that the mere fact that a resource is finite would not mean that its use is unsustainable and replies upon commentaries made by energy economist Loreta Stankeviciute on behalf of the International Atomic Energy Agency (IAEA) (59) according to which ‘nuclear energy compares favourably across many sustainability indicators’.

(181) Hungary highlights that some of the arguments put forward in relation to the need for decarbonisation through the use of nuclear sources of energy are valid as renewable technologies have high costs and they are intermittent in the type of energy generation. It also argues that fixed renewable subsidised tariffs are inconsistent with allowing free market conditions and quotes Greenpeace who argued that fixed power purchase price agreements would be less advantageous in scenarios of lower market prices, though this is not how Paks II would sell its electricity.

(182) Hungary recites several sources which claim that the measure will not unduly distort competition and highlights that the Commission did not have doubts as regards the compatibility of the measure with the internal market (as Greenpeace suggested) but rather on the question of the existence of aid.

(183) In the same scope (possible distortions of competition), Hungary refutes the arguments put