EN Official Journal of the European Union L 109/44

COMMISSION DECISION (EU) 2015/658

of 8 October 2014

on the aid measure SA.34947 (2013/C) (ex 2013/N) which the United Kingdom is planning to implement for support to the Hinkley Point C nuclear power station

(notified under document C(2014) 7142)

(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 pursuant to those provisions (1), and having regard to their comments,

Whereas:

1. PROCEDURE

(1) Following pre-notification contacts, the United Kingdom notified measures in support of the new nuclear power station Hinkley Point C (‘HPC’) on 22 October 2013 by electronic notification, registered by the Commission on the same day.

(2) The Commission opened a formal investigation on the notified measures on 18 December 2013, on the ground that it had serious doubts as to their compatibility with State aid rules.

(3) The Commission decision to initiate the procedure (‘Opening Decision’) was published on the Directorate-General for Competition website on 31 January 2014, and in the Official Journal of the European Union on 7 March 2014. The Commission called on interested parties to submit their comments.

(4) The UK sent its comments on the Opening Decision on 31 January 2014.

(5) The Commission received comments from interested parties. It forwarded them to the UK, which was given the opportunity to react; its comments were received by on 13 June and 4 July 2014.

2. DESCRIPTION OF THE MEASURES

2.1. CONTRACT FOR DIFFERENCE

(6) The notified measure consists, first of all, of a Contract for Difference (‘CfD’) providing revenue support during the operational phase of HPC. The UK had initially notified an Investment Contract, which was defined as an early form of CfD. Due to the fact that negotiations went on for longer than anticipated between the UK and the company fully owning the beneficiary at the time of this decision, EDF Energy plc (‘EDF’), the Investment Contract was fully replaced with a CfD. EDF is the UK subsidiary of the French electricity company Electricité de France.

(7) The beneficiary is NNB Generation Company Limited (‘NNBG’), which at the time of the decision is fully controlled by EDF. The CfD is a private law agreement between NNBG and the CfD Counterparty, Low Carbon Contracts Company Ltd. A separate agreement will be signed between the Secretary of State and the shareholders of NNBG. This separate agreement will only relate to parts of the terms of the transaction, in particular those related to potential shutdown events and gain-share mechanisms.

(8) Under the CfD, NNBG will receive an amount of revenues which is determined by the sum of the wholesale market price at which it sells electricity and a difference payment corresponding to the difference between the pre-determined Strike Price (‘SP’) and the Reference Price (‘RP’) observed in the previous reference period.

(9) When the RP is lower than the SP, the CfD Counterparty will pay the difference between the SP and the RP, ensuring that NNBG will ultimately receive relatively stable revenues, subject to its selling strategy and the amount of output it produces. Conversely, when the RP is higher than the SP, NNBG will be obliged to pay the difference to the CfD Counterparty. Also in this case, therefore, NNBG will receive relatively stable revenues.

(10) The RP is a weighted average of wholesale prices which the UK sets for all CfD-supported operators. In the case of NNBG, the relevant RP is the Baseload Market RP, which applies to all baseload generation operators. (2)

(11) In particular, the Baseload Market RP is currently set so as to use daily price data reported by the London Energy Broker's Association (LEBA) and the Nasdaq OMX Commodities exchange, in relation to the price for the purchase of electricity one season (i.e. six months) ahead of delivery, or a ‘season-ahead’ price. (3)

(12) The Baseload Market RP is calculated once per season, and immediately prior to each season, when the arithmetic mean of the daily season-ahead prices published each day of the previous season is taken. This average is weighted in order to ensure that the volume traded on each reference index is given proportionate influence.

(13) NNBG will be obliged to maintain a predetermined minimum level of performance but is not committed to produce a predetermined output level. In particular, the plant will be expected to operate at 91 per cent load factor. If NNBG does not achieve this load factor, it would implicitly fail to achieve the level of revenues which it is expecting to receive from the project.

(14) NNBG will receive difference payments based on its metered output up to a maximum level of output (‘cap’), which will be set in the CfD. No payments will be made for the output sold on the market above the cap. The electricity produced by NNBG will be sold into the market.

2.1.1. Overall functioning of the CfD mechanism

(15) The CfD will be concluded with the CfD Counterparty, i.e. an entity to be funded through a statutory obligation on all of the licensed suppliers collectively.

(16) Entry into the final contract is dependent on EDF/NNBG's final investment decision, as well as an agreement of the financing arrangements (including the terms of a UK Government debt guarantee), and the parties' final approvals.

(17) Under the CfD framework, licensed suppliers are collectively liable for any obligations arising from the contract, and the Counterparty to the contract is liable only to the extent that funds have been transferred to it from licensed suppliers, or from the UK government. Each supplier would be liable based on its share of the market, defined by metered electricity use. Under this framework, in case of non-compliance with payment obligations, the Secretary of State would designate a different counterparty, collect payments from other suppliers, or pay generators directly.

(18) Separately, the Counterparty will entrust a Settlement Agent with revenue raising power (i.e. the power of collecting payments from suppliers) on the one hand, and the obligation to make payments to, and receiving payments from, generation operators on the other hand. The UK Government intends to designate a subsidiary of Elexon (i.e. the body currently acting as settlement agent in the UK, and fully owned by the UK's Transmission System Operator — ‘TSO’ — National Grid) as the Settlement Agent.

(19) The Counterparty to the generation operator under the CfD will be enabled to take decisions and exercise discretion, for example by deciding that a generation operator is fulfilling its obligations, or needs to post collateral to guarantee its payments under the scheme, or waive certain requirements, depending on the specific market conditions. The UK Government intends to provide further guidance on the parameters which might limit the discretion of the Counterparty to take decisions in relation to the CfD operation.

(20) Figure 1 explains what the respective roles are for each of the agents envisaged in the functioning of the CfD system. Figure 1 Roles and responsibilities in the operation of the CfD Source: UK authorities.

2.1.2. Terms of the CfD agreement

(21) The UK and EDF have agreed the terms of the CfD. These terms will be translated into a long-form contract prior to final signature of the agreement and the Final Investment Decision by EDF.

(22) Many of the terms agreed reflect those of the CfD for other technologies, and in particular renewable energy technologies. Such terms are public (4). Other terms are specific to the CfD for HPC.

(23) Under the terms agreed, the SP will be set at GBP 92,50 per MWh in 2012 nominal prices. If an investment decision to build the Sizewell C new nuclear power station is taken, using the same design and allowing for the opportunity to share some costs for the HPC reactors, the SP will be changed to GBP 89,50 per MWh, again in 2012 nominal terms.

(24) The SP will be fully indexed to the Consumer Price Index (‘CPI’), as for other CfDs. The CPI adjustment will be annual with a base date of November 2011. Each year, the SP will be adjusted on the first day of the season with reference to the latest available CPI Index as published by the Office of National Statistics (ONS) for February.

(25) The duration of the CfD will have as ultimate starting date the Target Commissioning Window for each reactor, which is […] (5) years from the agreed Target Commissioning Date. After that date, the term of the CfD will start running regardless of whether or not the plant is operational.

(26) The Longstop Date is the […] anniversary of the last day of the Target Commissioning Window for the second reactor. If neither reactor has been commissioned on or before the Longstop Date, the CfD Counterparty may terminate the contract. The Longstop date may be extended for force majeure or connection difficulties.

(27) There will be two ‘gain-share’ mechanisms. The first will be on construction costs (6) and will provide that: (i) the first […] of construction gain (nominal value) will be shared on a 50:50 basis with 50 per cent of the gain going to the CfD Counterparty and 50 per cent to NNBG; and (ii) any construction gain in excess of […] (nominal value) will be shared on a 75:25 basis with 75 per cent of the gain going to the CfD Counterparty and 25 per cent to NNBG.

(28) The second gain-share arrangement is on the rate of return on equity. Two thresholds were set (6):

(29) A first threshold set at the level of forecast equity IRR level produced at the time of this decision by the latest Financial Model (7), or 11,4 per cent on a committed equity basis and in nominal terms. Any gain above and beyond this level would be shared by the CfD Counterparty for 30 per cent and by NNBG for 70 per cent.

(30) A second threshold set at the higher between 13,5 per cent in nominal terms or 11,5 in real (CPI-deflated) terms, based on the same model as in point a above. Above this threshold, any gain would be shared by the CfD Counterparty for 60 per cent and by NNBG for 40 per cent.

(31) There will be two opex reopener dates. The first will be 15 years after, and the second will be 25 years after, the date of start of the first reactor. The opex reopeners provide a way of mitigating long-term cost risks for both sides and will lead to changes in the SP in both directions. The mechanism would allow for an increase or decrease of the SP on the basis of known actual costs and revised predictions of future costs for the following operational cost line items, in each case wholly and exclusively as required for the continuing operation of the generation facility: (a) nuclear fuel front end refuelling; (b) insurance; (c) ONR fees; (d) business rates; (e) certain transmission charges; (f) changes to the costs of Intermediate Level Waste (ILW)/spent fuel disposal due to changes to the waste transfer price under the waste transfer contract; (g) changes in spent fuel management and decommissioning costs; (h) operation and Maintenance costs; (i) refurbishments and cash operating costs expensed through the Generator's income statement in accordance with IFRS and all capital expenditure incurred.

(32) Any costs relating to matters related to the design, operation other than to a reasonable and prudent standard, availability or capacity of the generation facility, non-maintenance capital expenditure, expenditure on a new structure (not within an existing building), financing, and certain waste transfer costs will be excluded from the reopeners.

(33) The revised cost estimates used in the opex reopeners will be based on a report prepared by NNBG and agreed by the CfD Counterparty, taking into account benchmark costs taken from other nuclear power stations using EPR technology and other nuclear power stations using pressurised water reactor technology in North America and the EU in each case operating to a reasonable and prudent standard. The SP adjustment will be calculated by reference to the top half of the benchmark costs.

(34) The SP will be reduced (or a lump sum or series of annual payments made to the CfD Counterparty) to reflect changes in the amount of tax payable by NNBG in circumstances relating to the shareholder funding and tax structuring of NNBG. No increase will be allowed in this respect.

(35) There will be a one-off forward-looking adjustment to the SP for Business Rates following the official reassessment by the Valuation Office after the plant operations start. Subsequent changes to Business Rates will take place through the opex reopeners.

(36) In addition to the provision of information contemplated in the generic CfD standard terms, NNBG will be required to provide certain warranties in respect of the information contained in the data and models provided to the UK Government in respect of the costs of the project. The contract will make provision for the use of an agreed Financial Model to determine the various SP and other adjustments required by its terms.

(37) NNBG will be protected and may recover some costs for Qualifying Changes in Law (‘QCIL’).

(38) A QCIL is a Discriminatory Change in Law, a Specific Change in Law, a Specific Tax Change in Law, an Other Change in Law, or a Change in Regulatory Basis, in each case which is not foreseeable.

(39) A Discriminatory Change in Law is a change in law the terms of which specifically (and not merely indirectly or consequentially or by virtue of the disproportionate effect of any Change in Law that is of general application) apply to the project, the generation facility or NNBG, but not otherwise.

(40) A Specific Change in Law is a change in law the terms of which specifically (and not merely indirectly or consequentially or by virtue of the disproportionate effect of any Change in Law that is of general application) apply to nuclear generation facilities, or generation facilities subject to a CfD.

(41) A Specific Tax Change in Law is (i) a change in, or new, tax imposed on uranium; or (ii) a change in law or HMRC practice which results in NNBG's tax treatment being less favourable than those set out in certain specific tax clearances from HMRC.

(42) A Change in Regulatory Basis is where (i) the ONR (or successor regulator) no longer regulates the generation facility by assessment of whether a sacrifice required for risk reduction would be grossly disproportionate to the benefit that would be achieved; or (ii) the relevant Environment Agency (or successor regulator) no longer assesses a risk reduction option in respect of the generation facility as an acceptable environmental risk by reference to whether the costs of implementation are disproportionate to the environmental benefit it realises.

(43) Compensation in respect of QCILs will only be payable once the aggregate amount of all QCIL claims exceeds GBP 50 million in 2012 nominal and indexed terms. Double recoveries will not be permitted. The SP will be adjusted once only for any particular QCIL during the remaining term of the contract, using the agreed Financial Model, or by calculating the net present value of the adjustment required.

(44) NNBG will, subject to conditions, receive compensation in the event of a ‘political’ shutdown of HPC (by either a UK, EU or international competent authority) other than for certain reasons including health, nuclear safety, security, environmental, nuclear transport or nuclear safeguards (Qualifying Shutdown Event).

(45) Compensation will also be available if the generation facility is shut down due to nuclear third party liability insurance circumstances including as a result of the UK Government not approving alternative insurance arrangements proposed by the Generator when the UK Government ought reasonably to have done and there being no other approved insurance options open to the Generator.

(46) The Qualifying Shutdown Event protections include the right to transfer NNBG to the UK Government (and for the UK Government to call for transfer) in addition to the payment of compensation by the CfD Counterparty or the UK Government.

(47) Termination events apply only to NNBG. It is the CfD Counterparty's decision whether to terminate the contract upon the occurrence of a matured termination event.

2.2. CREDIT GUARANTEE

(48) The HPC project, and NNBG in particular, will not only benefit from the CfD but also from a State Credit Guarantee on the debt it issues (the ‘Credit Guarantee’).

(49) Bonds to be issued will be supported by the Credit Guarantee. The latter could be seen as an insurance contract, guaranteeing the timely payment of principal and interest of qualifying debt, which could reach up to 17 billion pounds. (8)

(50) The Credit Guarantee will be provided by the Infrastructure UK (‘IUK’), a Unit within the UK Treasury which oversees the administration of the UK Guarantees scheme. The Credit Guarantee is a whole-business style debt platform for the long-term financing of HPC.

(51) IUK considers that transaction has been structured in a manner that justifies a classification at a BB+/Ba1 equivalent risk category for HPC. The Guarantee fee will have a level of 295 basis points.

(52) Under the scheme, the Bonds to be issued as part of the financing structure will be supported by a guarantee to be issued by the Lords Commissioners of the UK Treasury (the Guarantor). A construction bridge facility to be provided by commercial banks (and not guaranteed under the UK Guarantees Scheme) is also included. The remainder of the capital committed to the transaction will be provided by the shareholders. Other sources of capital may be added to the financial structure with the consent of the Guarantor.

(53) The funding sources at the time of the decision are planned as follows: (a) Base Equity of GBP […] (b) Contingent Equity of GBP […] (c) Construction Bridge Facility up to GBP […] (d) Bonds for GBP […].

(54) The financing structure is set-up so that the Base Equity suffers a total loss before the Bonds suffer any loss. The Contingent Equity provides additional comfort that the date on which the Guarantor is satisfied that, among other things, HPC has been commissioned and is operational and on which all required reserves are fully funded will occur (‘financial completion’).

(55) The obligations of the shareholders relating to Equity will be set out in an equity contribution agreement to which the Guarantor will also be a party so that it receives undertakings in relation to the provision of the Equity.

(56) To ensure that Equity provides the loss absorption characteristics described above, if an event of default occurs, the parties have set-up two conditions (the Base Case Condition (9) and the FFS Failure Condition (10)) which allow for the Guarantor to require that the Base Equity is accelerated, or respectively, that the Contingent Equity is accelerated, i.e. immediately provided and applied to discharge the Bonds and the amounts due to the Guarantor. This combination of provisions is intended to ensure that the Shareholders and not the Guarantor retain the principal exposure to the viability of the EPR technology until such time as there is objective evidence for confidence through the success of precedent projects such as Flamanville 3 and Taishan 1.

(57) During the period up to the Base Case Condition being met there is a cap on the amount of debt drawn being the minimum of: the debt milestone cap for the relevant project milestone and […] per cent of the Base Equity less development equity, i.e. GBP […] billion. Table 1 shows a practical example on loss absorption characteristics of Equity: Table 1 Base Case Drawdown Profile and Base Case Condition Not Met Source: IUK submission of 12 September 2014. Base Case Drawdown Profile GBP bilion Total Commited Development Equity 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Cashflow Base Equity 9,23 1,69 — — — — — — 2,10 2,52 2,09 0,83 Contingent Equity 8,00 N/A — — — — — — — — — — Bonds 16,00 N/A 1,50 1,95 2,40 2,90 3,35 2,65 1,25 — — — Balance Sheet Base Equity 1,69 1,69 1,69 1,69 1,69 1,69 3,79 6,31 8,39 9,23 Contingent Equity — — — — — — — — — — Bonds 1,50 3,45 5,85 8,75 12,10 14,75 16,00 16,00 16,00 16,00 Memo item Undrawn Base Equity 7,53 7,53 7,53 7,53 7,53 7,53 5,43 2,92 0,83 — Undrawn Committed Equity 15,53 15,53 15,53 15,53 15,53 15,53 13,43 10,92 8,83 8,00 Source: UK Base Case

Base Case Condition Not Met (by 31 December 2020) Total Development Equity 2015 2016 2017 2018 2019 2020 Cashflow Base Equity 1,69 1,69 — — — — — — Contingent Equity 7,97 N/A — — — 1,97 3,35 2,65 Bonds 6,87 N/A 1,50 1,95 2,40 2,90 — — Balance Sheet Base Equity 1,69 1,69 1,69 1,69 1,69 1,69 Contingent Equity — — — 1,97 5,32 7,97 Bonds 1,50 3,45 5,85 6,78 6,78 6,78 Memo item Undrawn Base Equity 7,53 7,53 7,53 7,53 7,53 7,53 Cumulative Cap on Debt 1,50 3,43 5,85 6,78 6,78 6,78 Source: UK Base Case

(58) After the Base Case Condition is satisfied, the Guarantor's principal protection during the construction period is the quantum of Contingent Equity, which can be drawn to meet cost overruns together with the project milestones limiting the amount of debt in any period.

(59) The commitments of the shareholders in respect of Base Equity and Contingent Equity will be fully credit-supported by way of instruments including, without limitation, parent company guarantees, letters of credit or other credit support, that are acceptable to the Guarantor.

(60) The shareholders will grant fixed (11) and/or floating (12) security (13), including a qualifying floating charge (14), over all of their assets, properties and undertakings to support their obligations to NNBG and the obligations of NNBG. NNBG and the issuer of the Bonds, a newly incorporated special purpose company, will each grant comprehensive fixed and/or floating security, including a qualifying floating charge, over all their assets, properties and undertakings to support their obligations. The security will be supported by direct agreements with the contracting parties in respect of certain important contracts.

(61) Due to the special nature of the transaction and the high importance of safety, enforcement of the security will take into consideration the consent of the UK safety regulator and the fact that disposal can only be made to an entity that has or will have a nuclear site licence for the HPC site.

(62) The security granted by the shareholders, NNBG and the issuer are meant to ensure that the secured parties (15): (i) have a maximum priority over the claims of unsecured creditors of the relevant debtor in the event of that debtor's insolvency; (ii) preserve the possibility for the secured parties to dispose of the secured assets and apply the proceeds of such sale towards the satisfaction of the outstanding secured liabilities, should this represent the best way of maximising recoveries and (iii) exert maximum control in case of the insolvency of any of the chargors and achieve the management purpose of security by means of appointment of an administrative receiver over the relevant debtor's business and assets.

(63) The Bonds will be unsecured obligations of the issuer and will not share in any security to be granted by the issuer or any other member of the HPC corporate group.

(64) In terms of creditor ranking, the proceeds of enforcement of the security granted by NNBG will in practice be applied in the following order of priority: (1) Creditors preferred by law. (2) Enforcement costs (i.e. costs of the security trustees and any insolvency appointee). (3) FDP Creditors (16). (4) Construction bridge providers. (5) Bonds and Guarantor. (6) NNBG's unsecured creditors. (7) NNBG's shareholders.

(65) This order of priority in the enforcement proceeds cannot be changed without the consent of the Guarantor.

(66) The funding of the transaction is split into phases by reference to the achievement of milestones in the realisation of the project.

(67) In the period after the date on which the maximum amounts of Bonds (other than an SZC Bond) has been issued, Base Equity will be provided in accordance with a schedule with Contingent Equity meeting any cost overruns relative to that schedule.

(68) Dividends to shareholders are not allowed prior to financial completion.

(69) The UK authorities argue that after financial completion, the Credit Guarantee continues to be protected by many structural and covenant based mitigants including significant restrictions on when dividends may be paid and a […]-month debt service reserve (which may be funded by cash, standby letters of credit or acceptable guarantees) which could amount to GBP […] billion. Reportedly, the market standard in in project finance would be a 6 months debt service reserve.

(70) A call on the Credit Guarantee after financial completion will, supposedly, only arise if: (a) there is a very material deviation in operating performance and consequent reduction in cash flow available for debt service from that expected; and (b) this deviation exhausts the substantial debt service reserve provided for in the structure and referred to above.

(71) If the debt service reserve is called upon (to any extent) it must be fully replenished before any dividend payments may be made.

(72) The UK authorities argue that given the range of structural protections against default and the presence of trigger events and potential remedies ahead of default, the need to enforce should occur in narrow and unlikely circumstances. However, if enforcement would be necessary the circumstances are likely to be unexpected and serious, for which a fixed enforcement action will not be appropriate. IUK considered that it requires flexibility to consider its options in the light of events as they occur so that it can protect better its interests. Therefore, IUK chose to have a maximal and flexible suite of enforcement options along with discretion to determine the most appropriate manner of enforcement at the relevant time.

(73) The Commission has been provided, for assessment, with the financing head of terms agreed to date as regards the project financing of HPC. These contain the agreement of the parties over the main terms and conditions of the financing documents, without the final form legal drafts being available as of the date of this Decision. The United Kingdom authorities declared that the rest of the terms and conditions as well as the final financing documents will contain standard clauses that any investor would seek for a similar project. As the Commission did not have the opportunity to verify this, in case the final documents amend the measure as currently presented to the Commission in any respects, they will have to be notified by the United Kingdom authorities to the Commission.

2.3. SECRETARY OF STATE AGREEMENT

(74) The CfD provides that NNBG's investors will be entitled to compensation should the UK Government decide to shut down HPC on political grounds (and not on health, safety, security, environmental, transport or safeguards concerns). These payments would be funded in the same way that payments under CfDs are funded (i.e. through the supplier levy). The CfD will be accompanied by a Secretary of State Agreement to be concluded between the Secretary of State and the investors in NNBG.

(75) The agreement provides that if, following a political shutdown, the Counterparty Body was to default on compensatory payments to NNBG's investors, the Secretary of State would pay the agreed compensation to the investors. The agreement does not provide for additional compensatory payments to NNBG or its investors.

3. COMMENTS FROM INTERESTED PARTIES

(76) The Commission received a very large number of responses during the consultation on the Opening Decision, which lasted until 7 April 2014. Please see below a description of the comments relevant for the State aid assessment.

(77) The comments from interested parties will be addressed in the relevant parts of the assessment without specific mention being made to the specific comment.

(78) Given the number of responses, they will be described by grouping them by topic.

3.1. COMMENTS RECEIVED ON THE MEASURES AS A SERVICE OF GENERAL ECONOMIC INTEREST

(79) One respondent agreed with the UK government that no State aid is involved in the measures, citing the evidence provided by the UK in support of their SGEI assessment.

(80) One party argued that HPC delivers an SGEI because it provides a PSO to ensure that energy demand is met in the short, medium and long run, and that the project is being carried out in a clear and transparent manner, not resulting in an economic advantage for any of the participating companies. HPC would also improve security of supply, by reducing reliance on imported fuels and reducing the use of fossil fuels.

(81) Among the parties opposing the UK's view that the measure does not involve State aid, one respondent observed that the measure does not comply with the Altmark criteria, because the CfD represent only the compensation for the fulfilment of a Service of General Economic Interest (‘SGEI’).

(82) Several respondents observed that no other companies were able to tender for the project.

(83) Several parties argued that the notified measure does not fall under the EU SGEI framework, since the UK failed to clearly define the public service obligation (‘PSO’) for which it would grant compensation, and did not comply with the conditions for the entrustment of the public service mission, as set out in Article 3(2) of Directive 2009/72/EC.

(84) Several parties commented that the aid measures are incompatible with the Altmark criteria, whereby electricity generation would be a standard economic activity and thus nuclear energy should compete with other electricity sources in a liberalised internal electricity market; the measure lacks an objective of common interest; there appears to be no objective criterion for justifying the duration of 35 years; it treats differently nuclear power and renewable energy sources; it is based on unknown parameters and there is a lack of a cost-benefit analysis. Furthermore, the fact that nuclear power can only produce baseload electricity would make it impossible for it to be a SGEI. Finally, the potential for overcompensation would be substantial.

3.2. COMMENTS RECEIVED ON THE EXISTENCE OF AID

(85) Several respondents argued that the measures constitute State aid as they entail bilateral agreements between the State and a company; the payments are specifically targeted to the objective of generating nuclear energy; the State budget is directly involved in the payments; and the contract provides support and special conditions for nuclear energy, which would exceed any support for renewable energy sources.

(86) One respondent observed that the move to a maximum cap on the Waste Transfer Price, from a ‘per unit’ of waste payment, will involve aid and a further subsidy to new nuclear operators.

3.3. COMMENTS RECEIVED ON THE OBJECTIVES OF COMMON INTEREST, THE MARKET FAILURES AND THE NEED FOR STATE INTERVENTION

(87) Among the positive responses, one respondent observed that nuclear power can be a major contributor to the production of low-carbon electricity and can help diversify the electricity generation sector. It also commented that while not capable of providing all of the additional capacity needed over next decades in the UK, it is likely to play a critical role in replacing retiring nuclear capacity and meeting future demand.

(88) Several respondents argued that the UK is in a different position from other EU MSs, being an island and having a more limited potential for interconnectors. Any comparison with Finland or France would be inappropriate due to their significantly different market structure and the presence in those MSs of long-term economic agreements to support the construction of nuclear plants. Moreover, the UK would not be able to manage the intermittency of renewables by importing large amounts of power from its neighbours when renewables are not generating and dumping the problems caused by excess generation when they are. The market failings in the UK with regard to any single European electricity market will therefore always be greater than on the European mainland and will require more measures to correct them. Moreover, support to nuclear energy would increase diversification of energy supply, thereby strengthening the resilience of the UK's energy system.

(89) One respondent pointed to specific market failure for nuclear energy, in particular its long construction time and operation lifetime leading to investment return above 30 years, well beyond 2050. Also, lessons learned from blackouts in certain MSs would show that reliance on cross-border interconnection is limited, and that no single TSO is able to guarantee interconnection capacity in the same way as capacity within the domestic meshed grid. State aid for the HPC project might be less distortive to competition compared to the introduction of other measures such as capacity markets.

(90) One respondent argued that HPC would not be detrimental to the objective of ensuring environmental protection, as its operations will be closely scrutinised by relevant institutions, such as the Office for Nuclear Regulation. Also, HPC would be satisfying the Environmental Permitting Regulations 2010.

(91) Several parties submitted that technologies to safely store nuclear waste currently exist.

(92) Several parties commented that the current combination of policies is insufficient to drive investment in nuclear power, in particular since the ETS carbon price is too low; the UK's Carbon Price Floor will not drive carbon prices high enough to incentivise investment in nuclear; and the UK Guarantee Scheme is not enough on its own to support investment, since it does not address the long-term economic viability of nuclear power. Finally, the carbon footprint of nuclear would be similar to that of wind, and well below the footprint of marine renewables, solar PV and biomass technologies.

(93) One party argued that the UK supports renewable energy sources but that such technologies are not suitable for the provision of baseload electricity, while at the same time relying on gas would make the UK dependent on fossil fuels and subject to geo-political risk.

(94) One respondent argued that the Commission should assess the net environmental benefit of HPC in comparison to the current energy mix in the UK. Assessed against these criteria, HPC would clearly provide a significant environmental benefit.

(95) Several parties argued that MSs should be free to choose their own energy mix, and provide the necessary incentives without which efficient long-term private investment in low-carbon generation capacity would be held-up. The Commission would not have any remit to impinge on such decisions. Also, nuclear plants would have high upfront capital costs and low marginal operating costs, which together with the lack of correlation between operating costs and electricity market prices determines the existence of a risk which cannot be efficiently transferred to consumers without State intervention.

(96) Several parties criticised point 337 in the Opening Decision, in particular since no investment in new nuclear power plants has taken place in the UK since the liberalisation of the energy market 20 years ago. Also, the threat of changes in government policies other political risks would make such investment difficult for private investors.

(97) Several parties argued that capital costs account for about 75 per cent of the levelised cost of electricity (17), compared to 10 to 15 per cent for unabated gas. It also observed that the cost-effective to decarbonisation under its own modelling implied a level of 50 gCO2/kWh by 2030, compared to the current levels of around 500 gCO2/kWh, which would be achieved at lowest cost only if new nuclear capacity achieved significant penetration rates (e.g. 11 to 18 GW). The present value benefit of a large-scale nuclear programme would be GBP 23 billion. Also, a long-term contract on nuclear would preserve efficiency in electricity dispatching, something which would be relevant for both nuclear and renewable technologies, given their low marginal cost.

(98) One respondent submitted that failure to support the early development of a new technology such as EPR would lead to diminished investor appetite for that technology, both inside and outside the UK.

(99) One respondent submitted that the Euratom Treaty cannot be applied independently of the current Commission policies, given that Article 40 of the Treaty would require the Commission to periodically publish targets for nuclear energy, and that the objectives of the Treaty can only be pursued in accordance with the other provisions of the Treaty.

(100) One respondent noted that pre-liberalisation, investment in nuclear was made possible through tariff-funded projects, which eliminated investment risks.

(101) One party said that the source of nuclear fuel is diverse and has a very high rating in respect to energy security.

(102) One party observed that there would be no proven low-carbon baseload technologies other than nuclear which are deployable at the same capacity levels. Also, given the profile of political risk across the European Union, investors would be increasingly wary of committing extremely large capital to the new order of electricity generation. Finally, the Commission forecast of investment in new nuclear in 2027-2030 would be questionable due to uncertainty.

(103) Several parties observed that the UK would not have a mechanism similar to the Finnish Mankala company model (a joint investment by energy generation companies and energy-intensive industries), under which the asymmetry between the risk of the upfront capital cost and the long-run instantaneous electricity price could be managed.

(104) One party observed that most renewable technologies would have been invented by the early 1900s, making support to them less justified than support to nuclear on technology maturity grounds.

(105) Several parties commented that the reactors will not be operational until 2023 at the earliest, making the plant unable to address the security of supply challenge highlighted by the UK as a justification for the measures.

(106) One party commented that nuclear technology does not provide security of supply, as it makes energy production dependent on imports of fissile nuclear material. Another party commented that reliance on imported fuels should be decreased to improve security of supply.

(107) One respondent commented that the UK Government's energy policy is politically biased and limits the development of onshore wind farms and solar plants.

(108) Several respondents commented that nuclear technology worsens security of supply, since it lacks the flexibility needed for balancing supply and demand on the grid, due to unscheduled failures, reduced capacity rates or routine maintenance. Nuclear would also be associated with unpredictable shocks which require large amounts of back-up, in contrast with the variability of wind which is described as being to a large degree predictable in advance. Finally, for the same respondents nuclear is also a poor means of cutting emissions, based on research which would show that the nuclear cycle produces between 9 and 25 times more CO2 than wind power.

(109) Several respondents observed that the contribution of nuclear technology to decarbonisation is not substantial, based on comparative statistics.

(110) Several parties observed that the measure would provide no energy security, as it would not replace retiring capacity fast enough and would be reliant on uranium reserves, which may run out.

(111) Several respondents argued that subsidies would lead to foreclosure of other, more innovative and environmentally less harmful production technologies, and that they are not justified and incompatible with the ‘polluter pays principle.’ Future generations would bear the costs stemming from the long-term measure.

(112) Several respondents wished to emphasise that a number of Member States (‘MSs’), and in particular Germany, Austria, Ireland, Italy and others, would be against nuclear energy, and that other MSs, such as Portugal, Denmark, Estonia or Greece would not have nuclear energy, hence there could not be a common objective in relation to nuclear energy.

(113) Several respondents observed that a technology which needs subsidies for 60 years and is exempted from all direct and indirect costs it induces, as well as requiring a 35-year guaranteed contract, cannot be seen as a viable one.

(114) One party argued that there is no satisfactory way to address the need to dispose of radioactive waste.

(115) One respondent submitted that the UK is favouring new nuclear energy excessively, by accommodating the many uncertainties around disposal and providing certainty to investors.

(116) Several respondents criticised the risk assessment carried out by the UK, stating that it failed to conceive or capture the cascade of unexpected ‘beyond design-base’ accidents that occurred in Fukushima and other major nuclear accidents. It also criticised the claims that for the very worst reasonably foreseeable accident/incident at HPC (including terrorist attack), the maximum rate of release in the form of a containment bypass would not exceed 0,03 per cent of the reactor core inventory per day.

(117) Several respondents observed that it was unclear whether the UK had taken into account the development of new technologies that improve the flexibility of the power grid (e.g. dynamic pricing, contracts for interruptible load or a dynamic load limiter in industry, aggregation of services and demand optimisation of households).

(118) One respondent criticised the importance the UK places on baseload electricity generation, given the changes that are happening in the energy sector, which would make it questionable whether, by the mid-2020s, baseload will still be as relevant as it is today. In particular, system flexibility would become increasingly important.

(119) Several parties observed that HPC would not be a first of a kind (‘FOAK’) plant, but rather a fifth or sixth of a kind, given the plants in Finland and France, and the two more which have been built in China. Moreover, similar reactors were ordered without granting State aid in Finland and France.

(120) One party argued that the solar industry would have the capability to deliver the same amount of electricity every year as is expected to be produced by HPC and at a comparable cost, and that offshore wind could be cheaper than nuclear by 2020 or not long after.

(121) One party argued that the UK Government's own figures would show that new nuclear was not necessary, contrary to several documents and speeches which would incorrectly assert that electricity demand may double or even triple against the Government's own research regarding long-term electricity demand and regarding capacity needs up to 2025.

3.4. COMMENTS RECEIVED ON THE APPROPRIATENESS AND THE INCENTIVE EFFECT OF THE MEASURES

(122) Among the positive responses, several respondents observed that nuclear power can be a major contributor to the production of low-carbon electricity and can help diversify the electricity generation sector. They also commented that while not capable of providing all of the additional capacity needed over next decades in the UK, it is likely to play a critical role in replacing retiring nuclear capacity and meeting future demand.

(123) Several respondents argued that without government intervention, private investment would focus only on short-term returns, which would make new nuclear impossible.

(124) One respondent argued that without aid, operators would have no incentive to invest in new nuclear plants, and that the successful accomplishment of the first project would significantly reduce the cost of new projects. It also argued that the third generation reactors cannot be compared with existing plants, and that without a long-term time horizon of price stability it would be impossible to have private investment in nuclear energy.

(125) Several respondents claimed that the UK nuclear new build programme would result in significant employment benefits to the UK and to Europe.

(126) Several respondents observed that the aid would enable a highly specialised, skilled work force to maintain their skills and develop new techniques, something which would be vital also for decommissioning the nuclear reactors in operation today. They also commented on the positive impact which the aid would provide to the supply chain operators.

(127) Several respondents pointed out that UK businesses would strongly favour a diverse energy mix, and that they would support in particular nuclear, wind, and hydropower. The UK programme would bring more a stable investment environment for businesses, especially large electricity users.

(128) Several respondents observed that the proposed mechanism, as compared to the green certificate system that is currently used exclusively for renewable energies, has the advantage of limiting overcompensation.

(129) Several parties observed that the State has an obligation to incentivise investors' diversification decisions, since liberalised markets cannot internalise the benefits of a MS' security of supply.

(130) One party criticised the Commission's view that CfDs eliminate most market risks, since feed-in tariffs are widely used in many Member States to support renewable energy sources, and there would be no ground for the different treatment of nuclear power.

(131) Several respondents argued that nuclear technology would not be environmentally friendly, would not be renewable but finite, and would be extremely expensive despite being a mature technology with no learning effect.

3.5. COMMENTS RECEIVED ON THE PROPORTIONALITY OF THE MEASURES

(132) One party commented that the CfD mechanism mitigates risk while still exposing NNBG to basic risk, and preventing overcompensation because payments are only made when the RP is below the Strike Price. Also, the equity gain-share arrangement would limit overcompensation and NNBG would not be guaranteed a fixed level of revenues or profits. Finally, the CfD would stabilise prices, leading to a better investment environment.

(133) Several parties argued that the SP should be compared to that of other low-carbon technologies and not to the costs of gas plants, and consider future price levels rather than current ones.

(134) Several parties commented that the CfD for HPC would last for 35 years, whereas contracts for renewable energy sources only for shorter durations and typically not for longer than 15 years. However, the nuclear station would operate for 60 years, while renewable installations for 20-25 years, resulting in a lower subsidy proportion of the operating life. CfDs would protect the UK from having to pay for higher construction costs.

(135) One party provided a cost assessment suggesting scope for costs to fall significantly after the first plant, down to GBP 60-75 per MWh by 2030. It also argued that the SP of the notified measure would fall within the range suggested by its analysis, i.e. GBP 85 to 100 per MWh.

(136) Several parties suggested that only a small number of technologies, none of which can provide for significant quantities of electricity in the future, are at present considered cheaper.

(137) Several parties observed that when the full system costs of renewable energy sources are taken into account, nuclear power would be a much cheaper option at the SP notified by the UK.

(138) One party argued that a Commission decision to exclude nuclear projects from using CfD-type mechanisms could have significant potential impacts on NDA's ability to implement a solution for dealing with the UK's civil plutonium. It also submitted that the burden to tax payer of waste-related costs is minimal/remote, because the UK government.

(139) Several respondents commented that investment aid is not deducted from operating aid.

(140) One respondent commented that all agreements, and any modifications to them which impact on the funding, or the practical arrangements concerning decommissioning, waste and spent fuel management and disposal, must be open for public information and Parliamentary scrutiny. It also commented that key information on cost modelling has not been made public.

(141) Several parties voiced concerns that the UK might be granting additional aid to NNBG, including in the form of a regime that limits liability of nuclear operators. Some parties also considered that technologies alternative to nuclear would bear full liability, while nuclear technology would enjoy a limited liability regime.

(142) Another type of support which was indicated as potentially being excluded from the notified aid would be the underestimation of the cost of the management and disposal of nuclear waste under the Waste Transfer Contract into which the UK intends to oblige new nuclear operators to enter. Similarly, some parties commented that the alleged lack of full account of decommissioning costs would breach the ‘polluter pays principle.’

(143) One respondent voiced concerns over potential cost overruns, based on the experience with the European Pressurised Reactor (‘EPR’) models in Finland and France.

(144) Financial support to existing nuclear operators in the UK would already be provided through a number of financial instruments, including limitations on liabilities, underwriting of commercial risks, subsidies for nuclear waste disposal costs and subsidies towards ant-terrorist costs.

(145) Several parties commented that the aid will result in economic risk being transferred from the undertaking to taxpayers and a lock-in which will increase energy prices for the next 35 years.

(146) Several parties argued that the SP is too high, with HPC being the most expensive power station ever built. Distortions would lead to additional costs.

(147) One party commented that the proportionality assessment cannot be conclusive until the gain-share and cost re-opening provisions are fully notified.

(148) One party offered that the SP would be more than what Germany pays for its onshore wind energy.

(149) One party commented that it would be fair to assume that there is no reasonable expectation that the costs of the EPR would significantly decline if supported and that the said reactor would not qualify as an emerging technology.

(150) Several parties argued that several emergent renewable energy technologies may prove much more cost-effective than HPC, and that a recent report by Carbon Connect (18) estimates that returns to EDF and other investors in HPC would be much higher than for other projects, with expected equity returns at around 19 to 21 per cent, higher than expected equity returns on Private Finance Initiative projects. Also, if the cost of full insurance against nuclear disasters were taken into account, the economic case for nuclear power compared to other low-carbon sources would be substantially weakened. Finally, a recent report by the UK House of Commons Committee of Public Accounts and Nuclear Decommissioning Authority would point to nuclear legacy costs of over GBP 2,5 billion a year, or 42 per cent of DECC's total budget.

(151) Several parties argued that there was a reasonable suspicion of overcompensation.

(152) One party calculated that if the SP over 35 years is converted to an equivalent 15-year SP, it would be of approximately GBP 117 per MWh in 2012 real terms, or more than 20 per cent higher than onshore wind and 10 to 15 per cent higher than biomass conversions. Also, one could assume that onshore wind costs would have decreased further by 2023 due to increased levels of deployment, making the difference even more notable.

(153) Several parties commented that prices for alternative technologies, and renewable ones in particular, would likely fall n the future, resulting in relative overcompensation of the HPC project.

(154) One party submitted that the UK would not have gone out to the market seeking equivalent capacity or output for the same time period. In France and Finland the prices of nuclear-produced electricity are in the range of EUR 45 to 50 per MWh. Financial analyst reports would indicate that EDF would make an annual equity IRR of between 25 and 35 per cent. Finally, CfDs would make it easier for nuclear to achieve the RP than for renewable energy sources, and a combination of the Carbon Price Floor and the Capacity Market would support investment in new nuclear.

3.6. COMMENTS RECEIVED ON POTENTIAL DISTORTIONS TO COMPETITION AND TRADE BETWEEN MEMBER STATES

(155) Among the positive responses, several parties argued that the measure would result in no significant effect on competition or trade between MSs because it would not significantly impact on consumer welfare and would not lead to higher retail prices. Also, NNBG would be exposed to market forces and incentives to compete in wholesale electricity market.

(156) Several parties argued that a level playing field should be established between all low-carbon technologies, hence subsidies to new nuclear would be consistent with current support policies for renewable energy sources. Several parties argued that technological neutrality should be preserved, hence nuclear technology should not be discriminated against.

(157) Several parties observed that the measures could not crowd out investment in renewable energy sources, since they too are supported by CfDs. Some parties further argued that the aid would to the contrary act as a catalyst for new investment in energy generation technologies.

(158) One party observed that HPC is expected to have installed capacity just over 3 GW, whereas the UK market as a whole would soon reach 80 GW. In this light, the market distortion of the aid would not be significant (e.g. 4 per cent).

(159) Several parties observed that gains from alternatives to new nuclear would not be capable of providing a high enough level of capacity to be considered as viable options. In particular, gains from demand-side response cannot be considered certain, energy efficiency would require additional policies, and interconnection would provide a key contribution to efficient resource utilisation, but the main obstacles to it would be political and regulatory.

(160) Several respondents argued that the measures would distort competition. This would happen by crowding out alternative technologies, and in particular by discriminating against, or displacing, investment in renewable technologies. There would also be distortions to trade in the internal market, as importers would not be able to compete against the subsidised price of nuclear energy, which would lead to artificial surpluses in other MSs.

(161) One respondent pointed out that the aid would distort competition between existing nuclear plants and new nuclear plants, as the latter receive operating aid while the former do not. Another party commented that technological neutrality needed to be preserved, hence nuclear energy should not be discriminated against.

(162) One party observed that nuclear subsidies would be likely to reduce the size of the available market for renewable energy technologies to participate in, and increase the difficulty of establishing new renewable generation capacity across the EU.

(163) One party criticised the Expert Study by Prof. Green and Dr Staffell, in particular because their methodology would be inappropriate to run welfare analyses or distortion assessments; their assumptions would be inappropriate to deal with the existence of financial market failures; the assumption of WACC exogeneity would have no justification; and the study would ignore learning, carbon externalities, diversity of supply, and market power.

(164) One party commented that the aid would make the imbalance between the full cost of other energy technologies and nuclear technology to the detriment of consumers and tax amounts considerably larger. Also EDF would achieve a dominant position in the GB energy market, in particular if an extension in the economic life of existing nuclear plants were granted.

(165) One party submitted that paying CfDs differences by metered output could create distortions to the market, since generators could even sell electricity at negative prices and rely on the CfD to earn positive revenue.

(166) One party argued that the scale of the aid would undermine investment in future interconnectors, including interconnectors between Scotland and Iceland (geothermal electricity) and between England and Nordic countries (geothermal, wind, tidal electricity).

3.7. COMMENTS RECEIVED ON THE CREDIT GUARANTEE

(167) Several respondents commented that overcompensation could not be excluded given that the aid package includes a Credit Guarantee in addition to the CfD.

3.8. OTHER COMMENTS RECEIVED

(168) Several respondents referred to wild hogs which in March 2013 would have contained large amount of radiation, 27 years after the Chernobyl accident. Several respondents asked for a second consultation to be carried out, when the notified measure would be finalised.

(169) Several respondents pointed out that the UK government would have promised that there would be no public subsidy for nuclear in their pre-election manifesto.

(170) One party observed that the UK would continue to rely on what it calls successful completion of processes connected with new build but would ignore the significant uncertainties over siting, establishing and operating a geological disposal facility in order to make plans and determine its costs. It also criticised the current UK proposals on management and disposal of nuclear waste.

4. COMMENTS RECEIVED FROM THE UNITED KINGDOM

(171) The UK sent its response to the Opening Decision on 31 January 2014. The UK's response provided several analyses, including the following ones: (a) modelling work by DECC and analysis of counterfactual scenarios; (b) a report by Oxera on market failures, proportionality and potential distortions of competition; (c) a study by Pöyry on potential distortions to the internal market and alternatives to new nuclear; (d) a report by Redpoint on the evolution of the UK electricity sector; (e) a description of the Cost Discovery and Verification process, which involved KPMG and LeighFisher; (f) a report by KPMG on potential distortions to competition (g) benchmarking work on the rate of return

(172) In its response, the UK broadly reiterates the same position that it set out in the notification. In particular, new nuclear would be an important part of the UK's energy mix, which would help achieve a decarbonised, secure and diverse electricity supply at an affordable cost.

(173) The UK's arguments will be outlined in more detail below.

4.1. COMMENTS RECEIVED ON THE EXISTENCE OF STATE AID AND SGEI

(174) The UK maintained that the notified measure does not constitute aid, under the Altmark criteria for the CfD and under the Guarantee Notice (19) for the guarantee. Alternatively, the UK continued to consider that the aid would be compatible under the SGEI Framework. (20) Failing this, the aid would be compatible under Article 107(3)(c) TFEU.

(175) Regarding the first Altmark condition, i.e. the existence of a service of general economic interest (‘SGEI’), the UK authorities claim that the construction of HPC within a specified time schedule and its operation within the framework of the CfD constitutes an SGEI in order to achieve the UK Government's general interest objectives.

(176) The UK authorities clarify the definition of the SGEI. The SGEI allegedly consists of ensuring the investment in new generation nuclear capacity to be delivered within a specific time-frame. Reportedly, no private investor operating under current market conditions would invest in a new generation nuclear plant within the time-frame specified in the CfD. The UK authorities claim that there are important market failures as regards the construction of new nuclear which justify the set-up of the SGEI.

(177) According to the UK authorities, the Electricity Directive (21) recognises that the public service obligations under Article 3(2) may take into account the need to provide capacity on a long-term basis to ensure security of supply. Supposedly, there is no reason to limit this basis to public service obligations in relation to the provision of reserve generation capacity. Allegedly, HPC will contribute to the UK's long-term planning for security of supply by providing significant generation capacity on a long-term basis as envisaged by Article 3(2) of the Electricity Directive, namely for the 35 year term when the difference payments will be paid under the CfD. The fact that the coming online of HPC may not be sufficiently timely to address potentially low levels of capacity before 2020 would not be determinative in light of the long-term as opposed to short-term orientation of the general interest objective. Supposedly, fact that the UK may face capacity constraints before the HPC plant is active does not undermine the rationale for the project. Moreover, without further intervention, the UK would continue to face capacity constraints throughout the 2020s and beyond and would need to design an energy mix to meet those challenges on a continual basis.

(178) Allegedly, by contributing significantly towards the UK's security of supply of low-carbon electricity on a long-term basis, the investment in new nuclear generation capacity to be delivered and operated within a specific time-frame and its operation within the framework of the CfD is directed towards achieving a general or public interest that is capable of being designated an SGEI. According to the UK Government, new baseload capacity and in particular nuclear projects will not be provided by undertakings operating under normal market conditions in a timescale sufficient to meet the UK's general interest objectives.

(179) The UK authorities put forward that the CfD is to be viewed as imposing specific public service obligations on NNBG. The precise definition and compulsory nature of the public service obligation under the SGEI stem from the combination of stringent clauses designed to ensure that NNBG will meet the specified time-frame and the fact that once NNBG is engaged in the construction there will be ‘no way out’ in light of the extremely high sunk costs which it will incur.

(180) As regards the second Altmark condition, the UK authorities claim that the parameters for the calculation of the RP and the potential adjustments to the SP have been agreed in principle and will be set out in the CfD in an objective and transparent manner before it enters into force.

(181) As regards the third Altmark condition, the UK authorities claim that pursuant to the case-law, in light of the discretion enjoyed by a Member State in defining an SGEI mission and the conditions for its implementation, the scope of control by the Commission as regards the necessity and proportionality of the compensation for the purposes of the third Altmark condition is also limited to that of manifest error (22). The UK authorities consider that the measure is proportionate and that the CfD mechanism automatically minimises the level of State support since the difference payment is only paid when the market RP is below the SP and a reverse payment is made when the market RP is above the SP. The CfD will contain a number of safeguards against over-compensation.

(182) With reference to the fourth Altmark condition, the UK authorities consider that this criterion is designed to ensure that the compensation granted for the provision of an SGEI corresponds to what would be normal market consideration for such a service. Supposedly, in the case at hand, the lack of an existing adequate benchmark should not render the fourth Altmark condition incapable of application. The Commission should, allegedly, assess the existence of an advantage by reference to the objective and verifiable elements which are available in this case. The UK authorities consider that the Cost Discovery and Verification work that has been carried out by external advisers in order to ensure that NNBG's cost estimates for providing the SGEI are reasonable should suffice for the fourth Altmark condition to be considered met.

(183) As regards the Credit Guarantee it is the opinion of the UK authorities that it will not confer an advantage on an undertaking since it will be offered on commercial terms in accordance with the market economy investor principle (‘MEIP’). The UK Government considers the Credit Guarantee and the terms of the CfD serve different purposes. The purpose of the CfD would be to provide a long term contractual arrangement to reduce uncertainty in wholesale market prices subject to the performance of the underlying asset. The Credit Guarantee, as with commercial Credit Guarantees from financial insurers, would facilitate wider access to the long-term debt capital markets. The pricing and approval of the Credit Guarantee critically depends on the risk within the whole underlying project including the terms of the CfD. However, the reverse would not be true: the presence of a guarantee reallocates the risk profile between debt investors and the guarantor rather than altering the project risk profile. The UK Government does not consider that the project company would receive any additional support from the combination of a CfD and a Credit Guarantee.

(184) As regards the Secretary of State agreement on compensation for political shut down, the UK claims that all CfDs will include provisions on compensation for the investors in the case of a ‘qualifying shutdown event’, for example a change in law that permanently shuts down the whole facility (depending on the technology) or a refusal by the UK Government to consent to any restart of the facility after a specified period after shutdown. The direct agreement between the Secretary of State and NNBG's investors is an additional and separate agreement intended to function as a back stop to the qualifying shutdown event provisions. The agreement ensures that if, following a political shutdown, the Counterparty Body was to default on compensatory payments to NNBG's investors, the Secretary of State would pay the agreed compensation to the investors. It does not provide for additional compensatory payments to NNBG or its investors.

(185) The UK authorities further argue that the agreement was necessary as nuclear energy bears special risks in regard to political shutdown.

(186) The UK authorities claim that it is not their intention for every CfD Agreement to be accompanied by a Secretary of State agreement as this should be addressed on a case by case basis for each project. However, they allege that, it is possible that the rationale for a direct agreement might apply to other projects, including to other technologies – specifically where they are particularly large, controversial; and/or have similar arrangements relating to decommissioning.

(187) According to the UK authorities, the compensation payments would be effectively intended to reinstate NNBG's investors to their initial position and should not be regarded as State aid.

(188) The UK authorities further claim that if the measure does involve State aid it would be compatible with the internal market under the SGEI Framework.

(189) Allegedly, the investment in new generation nuclear capacity to be delivered and operated within a specified time-frame and its operation within the framework of the Investment Contract for a difference payment period of 35 years constitutes an SGEI. Moreover, the CfD arrangements have the necessary elements for an entrustment act and set out the relevant public service obligations and the compensation levels.

(190) Allegedly, as the entrustment period of 35 years (representing the difference payment period) is shorter than the full period of depreciation for HPC of 60 years, the duration of the entrustment period is justified given the SGEI in question.

(191) As regards public procurement requirements, UK Government argues that the Commission ought to assume regularity in the selection and negotiation process unless the investigation shows that the process was flawed. The UK considers the public procurement rules in Directive 2004/17/EC of the European Parliament and of the Council (23) or Directive 2004/18/EC of the European Parliament and of the Council (24) on the award of public works, supply and service contracts would not be applicable to the measure at hand, as it does not involve any procurement of supply, works or services for the benefit of the UK Government or any state body within the meaning of these directives. Allegedly, for the same reasons, the UK Government considers Article 8 of the Electricity Directive would not be applicable to the Notified Measure. Nevertheless, the UK authorities state that the procedures followed to date by the UK Government when identifying suitable investors under the EMR programme have been based on a clear, transparent and non-discriminatory framework, equivalent to a tendering procedure in terms of transparency and non-discrimination. Moreover, allegedly, the detailed conditions of a contract like the one concerning HPC must be individually negotiated in order to reflect the characteristics of the specific investment.

(192) As regards discrimination, reportedly, were the UK Government to entrust the same SGEI for new nuclear electricity generation capacity to another undertaking, it would ensure that the same methodology would be used to calculate the RP and the SP. However the exact conditions of each investment contract may vary due to the unique product characteristics. Nevertheless, such possible variations would be objectively motivated and would not constitute discrimination.

(193) As regard the requirements concerning the compensation, the UK authorities allege that the SP has been calculated on the basis of NNBG's projected construction and operating costs, including a non-guaranteed reasonable profit, with NNBG's costs having been substantiated and independently verified.

(194) The UK authorities consider that no additional requirements would be necessary as regards the measure as it does not fall in any of the cases provided by the SGEI Framework and, there are, allegedly, no grounds for concluding that the measure will result in serious distortions of competition in the internal market, or affect trade between Member States to such an extent. Reportedly, similar services are not being provided in competition with the SGEI, nor are they expected to be provided by the private sector in the near future. Allegedly, the Commission has acknowledged in a previous decision that public support in favour of the electricity sector in a geographically isolated country (Ireland), with limited interconnection with other energy networks, has limited effect on trade and is not contrary to the interest of the Community (25). The same would allegedly apply to the UK electricity sector.

(195) Additional comments in the submission of the UK authorities: (i) The UK authorities make clear in several parts of their submission that the aim of the measure is to incentivise or unlock investments into low-carbon generation, in particular into new nuclear. (ii) The HPC CfD has been designed to enable barriers to the project to be tackled as efficiently as possible, including some protection against certain risks, most notably around the uncertainty over future electricity prices. (iii) There are many ways in which NNBG's costs may be higher than expected or its revenues may be lower than expected (for example if it does not achieve planned levels of generation or if its realised prices for the sale of electricity are lower than the market RP). (iv) NNBG will be free to sell its electricity into the market either on a spot or contract basis. There is no requirement that NNBG sells only into the spot market.

4.2. COMMENTS RECEIVED ON THE OBJECTIVES OF COMMON INTEREST

(196) The UK claims that it pursues the common EU objectives of decarbonisation, security of supply and diversity of supply at the lowest cost, and that it faces, like other MSs, a challenge in achieving them.

(197) The UK observes that energy efficiency, demand side response, interconnection and improved functioning of balancing markets are important but cannot achieve those objectives on their own, despite the fact that they are being deployed. At the same time, the UK claims that competence to determine the energy mix belongs to MSs, and that it has decided that nuclear should be part of its energy mix.

(198) Nuclear would help achieve decarbonisation as it is a low-carbon technology, and the UK's assessment would show that it is an element within the most cost-effective pathway to decarbonisation, together with renewable energy sources and CCS-equipped generation plants.

(199) Relying on other technologies only would be risky. In particular, the UK estimates that in the absence of nuclear it would need either 14 GW of onshore wind, 11 GW of offshore wind or 5 GW of CCGT plants (26) on top of existing or currently planned capacity to meet demand in the same timescale.

(200) The UK also believes that a diverse generation mix is required in order to have a reliable and balanced electricity system.

(201) Finally, the UK states that its policy on nuclear energy is consistent with the pursuit of an objective of common interest under the Euratom Treaty.

4.3. COMMENTS RECEIVED ON THE MARKET FAILURES AND THE NEED FOR STATE INTERVENTION

(202) The UK claims that there are a combination of market failures affecting electricity generation, low-carbon generation more specifically, and new nuclear generation in particular.

(203) In particular, the UK submits the following market failures which would be characteristic of electricity markets in general: (a) Residual carbon externality. Current policies (including the Emission Trading Scheme (‘ETS’) due to its low level of carbon allowance price) would not provide sufficient long-term certainty or strong enough price signals to internalise fully the negative externality characterising electricity production (i.e. the simultaneous production of carbon emissions), thereby making it difficult to facilitate new nuclear investments; (b) Positive externalities leading to under-provision of security and diversity of supply by the market. Availability of electricity would have public good features, leading to incorrect pricing of scarcity and ultimately ‘missing money’ — i.e. under-provision of generation and security of supply. This is because private investment decisions in electricity generation takes into account neither the social costs of potential outages nor the impact of generation availability on the network and on other users of the network, hence the risks and benefits of individual technologies would not be aligned with the social optimum, with gas being naturally hedged and all other technologies being penalised, ultimately leading to lower diversity of supply; (c) Insufficient incentives to achieve the learning benefits of deploying new and immature technologies. This would lead to an under-provision of investment in FOAK and new technologies; and (d) Financial market failures which restrict the funds available to energy infrastructure projects. There would be no project finance available for nuclear energy generation, since risk transfer markets would be incomplete and there would be no instruments to hedge against these risks. Long-term contracts for electricity supply would be on shorter time horizons compared to investment levels, while price volatility would be very large and long-term price forecasts would be subject to a high degree of uncertainty.

(204) The UK also submits that certain additional market failures exist in particular for nuclear energy and exacerbate barriers to investment in this technology: (e) exposure to political risk; and (f) unhedged exposure to electricity price risk, which would be a more acute version of the broader market failure highlighted under point d above due to the extremely high levels of investment needed in nuclear energy generation.

(205) The UK observes that these market failures are not purely theoretical, as would be proven by the fact that no investment in new nuclear power stations has taken place in the UK since market liberalisation.

(206) The UK states that modelling work referred to in the Opening Decision, and in particular the Redpoint and the UK Department for Energy and Climate Change (‘DECC’) forecasts, which indicated that new nuclear would come online by 2027 or 2030, is not reliable.

(207) The UK has updated its modelling with more recent data, which would point to new nuclear coming forward on a commercial basis in 2032 at the earliest, and possibly not before 2050. The UK stresses that modelling work necessarily simplifies reality and cannot take account of all the risks and uncertainties facing investors in the real world.

(208) The UK concludes that relying on market forces alone would imply running the risk of postponing the contribution of new nuclear to achieving the UK objectives for several years and at a potentially higher cost. Even short delays of three to four years would impose a welfare loss which the UK estimates at up to GBP 30 billion.

(209) Finally, the UK disputes that other projects in similar markets would be deployed without some level of State intervention or support.

4.4. COMMENTS RECEIVED ON THE APPROPRIATENESS AND THE INCENTIVE EFFECT OF THE MEASURES

(210) In its response to the Opening Decision, the UK maintains its view that the CfD is the most appropriate instrument to bring forward investment in new low-carbon generation, and in new nuclear in particular.

(211) The CfD would remove the inability to share efficiently, or transfer, price volatility risk due to incomplete risk transfer markets and the lack of adequate market-based hedging instruments. CfDs would mitigate against the risk of unhedged wholesale price volatility by reducing uncertainty over the sale price of the electricity generated which NNBG will receive. In so doing, the CfD provides confidence that an acceptable level of return will be realised post-investment.

(212) The UK observes that the CfD would address the market failures highlighted at a lower cost to consumers compared to alternative mechanisms such as a standard feed-in premium, since it caps price levels and thus reduces state support when wholesale prices are higher than the SP. Whereas a fixed feed-in premium regime would pay the same amount for each unit of electricity regardless of the wholesale price level, CfDs would mitigate the risk of overcompensation in high wholesale price scenarios.

(213) The UK also emphasises that the CfD would be a market-based instrument, given that it requires the beneficiary to sell into the market at the prevailing wholesale prices. It therefore would retain commercial incentives on NNBG to sell its electricity consistent with standard market functioning. In particular, if NNBG were to deviate from the RP, for example by selling electricity at below the RP, it would lower its revenues since the difference payment will be calculated based on the RP. Beneficiaries would still be subject to some degree of competitive pressure from other market participants.

(214) The UK Government also maintains the view that the combination of the CfD and the Credit Guarantee is the appropriate instrument.

(215) In the UK's view, a Credit Guarantee on its own would not reduce investors' uncertainty about future wholesale prices, which the UK considers would lead to the need for higher support levels, hence higher costs to consumers. The Credit Guarantee would be aimed at addressing difficulties in raising debt in the capital markets at the substantial levels required by investment in new nuclear.

(216) The Credit Guarantee would not offer additional protection to equity holders from the project risks compared to what the market would be likely to offer, and hence does not address the need to find equity investors. Investors would not be prepared to commit very large sums of money, as both equity and contingent equity, without the revenue certainty provided by a CfD.

(217) Finally, the UK observed that the HPC project was the only nuclear project in the UK at an appropriate stage for discussions, hence it would have been impractical to set up a genuine competitive process.

4.5. COMMENTS RECEIVED ON THE PROPORTIONALITY OF THE MEASURES

(218) In its response the UK maintained its view that the SP was set at the minimum level possible to incentivise the investment sought, and on the basis of a rigorous cost discovery and verification process, an assessment of the level of returns that would be reasonable for investors to seek in relation to the HPC project, and a challenging set of negotiations with EDF.

(219) The UK claimed that, under the CfD, investors in HPC retain substantial risks, in particular construction cost risks but also some operating risks and volume risk on availability. Investors would bear the risk of construction costs overruns and delays, as the CfD remuneration will only start when electricity is sold, i.e. when the plant is operational. Should NNBG not construct the plant within the pre-determined target commissioning windows, it would also run the risk of the shortening of the CfD duration, which is calculated from that date. If construction were not completed by the long stop date, the UK would have the right to terminate the CfD unilaterally.

(220) Moreover, the Credit Guarantee would still require investors to contribute significant equity to the project and to cover cost overruns, with equity left unprotected by the guarantee in relation to such risks.

(221) The SP level would have been calculated by reference to NNBG's expected costs for the project, allowing for a reasonable profit. However, the UK submits that costs may be higher or revenues lower than expected, which would expose NNBG to profit risks.

(222) The UK observes that the CfD protects against overcompensation, given that when wholesale market prices are higher than the SP generators will make a payment to suppliers. It also points to further safeguards against overcompensation, in the form of the construction and equity gain-shares, which would ensure that any upside for NNBG would be shared with suppliers and ultimately consumers, while at the same time leaving sufficient incentives for NNBG to seek to realise those upsides. However any downside would be borne solely by NNBG.

(223) The UK maintains that future adjustments to the SP, such as those following a QCIL and the opex reopeners, would apply only in limited and pre-determined circumstances and relate to selected costs. Opex reopeners would also function as a limit on overcompensation, as the SP would be adjusted downwards if those costs turned out to be lower than estimated.

(224) The UK reiterates its view that the guarantee will be provided on commercial terms, hence it would not involve State aid.

4.6. COMMENTS RECEIVED ON THE POTENTIAL FOR DISTORTIONS TO COMPETITION AND TRADE BETWEEN MEMBER STATES

(225) The UK maintained that the CfD has no significant effect on competition and trade between MSs, and provided reports by KPMG, Oxera and Pöyry in support of its claim.

(226) The CfD instrument would minimise any distortion to competition between generators by preserving NNBG's exposure to market forces and incentives on it to compete in the wholesale electricity market. NNBG would not be guaranteed to achieve the RP and would have to sell its output competing for the best possible price, facing the same incentives as other market participants.

(227) The UK claimed that the CfD does not give rise to any significant distortion of competition, as NNBG or EDF would be unlikely to have the incentive or the ability to engage in a strategy to influence the RP according to which difference payments are calculated. If NNBG were to try to strategically reduce the RP, it would deviate from its risk minimising strategy, i.e. seeking to realise the RP. The UK also questions whether there would be benefits to NNBG in the upstream market, or to NNBG or EDF in the downstream retail markets, from engaging in such a strategy. The UK mentioned that regulators under the UK and EU regulatory regimes, would also prevent NNBG to act strategically and influence the RP.

(228) The CfD would also not reduce consumer welfare or lead to higher retail prices, and it would actually make it less likely that supplier might pass on only cost increases since it stabilises wholesale prices.

(229) The UK claimed to remain committed to interconnection, and that the CfD would not have any significant impact on interconnector flows and incentives to invest in interconnectors, since these would be driven by price differentials between the UK and other markets.

(230) The Pöyry's analysis would indicate that HPC will have a limited impact on price differentials between the UK and those neighbouring markets which are currently connected to the UK via interconnectors, hence the project would not distort trade between MSs.

(231) The UK also considered that the small reduction in retail prices which might be caused by the deployment of HPC would not substantively change incentives for energy efficiency, and that the potential energy savings offered by alternatives to new nuclear, such as demand-side response or energy efficiency, would not be not high enough to be considered a realistic option.

5. COMMENTS RECEIVED FROM EDF

(232) EDF, jointly with EDF S.A. and NNBG, submitted its response on 7 April 2014. In its response, EDF provides substantial additional evidence and analysis in support of their argument that none of the doubts raised by the Commission in its Opening Decision would not be founded.

(233) The main arguments provided by EDF will be briefly described below, again grouped by the principles of State aid assessment.

(234) EDF claims that the CfD meets the Altmark criteria and thus the measure does not constitute State aid under Article 107(1) TFEU.

(235) As regards the first Altmark criterion, they argue that the HPC SGEI does not encompass the provision of baseload electricity by NNBG. Rather, the SGEI consists in investing in a new generation nuclear plant to be delivered within a specific time-frame. The concerns expressed by the Commission as to whether the provision of baseload electricity may be regarded as a SGEI are not, therefore, relevant.

(236) HPC is allegedly necessary to address the objectives of decarbonisation, security/diversity of supply and energy affordability.

(237) As regards the three last Altmark criteria, allegedly NNBG will not derive any advantage from the measure. The parameters for calculating the compensation will be set out in the CfD. Overcompensation is avoided by way of several methods and, in particular, by way of the formal cost discovery and verification process that was undertaken before the SP was determined. Moreover, reportedly, the detailed analysis of the financial parameters of the HPC CfD carried out by the UK Government should address any concerns that the level of compensation is based on an analysis of the costs which a typical undertaking, well run and adequately provided with the necessary means would have incurred.

(238) In relation to the Credit Guarantee, EDF claims that is does not entail State aid as it meets the MEIP.

(239) As regards the Secretary of State agreement concerning the risk of political shut down EDF claims that the provisions dealing with the risk of political shutdown do not constitute aid.

(240) According to EDF, the general principles underpinning UK and EU law give rise to a right to compensation where there has been deprivation of a property right. These general principles apply to all market operators, although certain routes to make compensation claims are available only to market operators from EU Member States or from States which are members of the Energy Charter Treaty. The relevant provisions of the CfD allegedly give contractual certainty to the operation of the general principles. On this basis, EDF concludes that the agreement cannot qualify as State aid.

5.1. COMMENTS RECEIVED ON THE OBJECTIVES OF COMMON INTEREST

(241) EDF maintained that the UK would need around 60 GW of new generation capacity to come onto the system between 2021 and 2030 in order to address the energy gap deriving from the closure of existing fossil fuel and nuclear power stations. According to EDF, this gap would not be addressable by increases in interconnection and energy efficiency alone, but would require the construction of a significant amount of new generating capacity.

(242) EDF noted that modelling by DECC would show that generation adequacy issues will arise in the early 2020s, and that HPC, which is expected to start generating in 2023, would contribute to addressing that energy gap.

(243) EDF observed that the new capacity will mainly have to be low-carbon to deliver decarbonisation targets which are consistent with the Commission's Energy Roadmap 2050 (27). New nuclear would be a critical component in the cost effective decarbonisation of the electricity sector.

(244) Finally, HPC would also assist in the goal of achieving further diversification of energy supplies by limiting European reliance on gas imports from outside the EU. This would be consistent with the right of the UK to exercise its discretion under Article 194 TFEU to include nuclear in the future energy mix, together with other forms of low-carbon generation.

(245) This strategic decision would also be consistent with the Euratom Treaty.

5.2. COMMENTS RECEIVED ON THE NEED FOR STATE INTERVENTION AND MARKET FAILURES

(246) EDF submitted that the market alone could not deliver these common objectives, as the investments required represent twice as much investment which was delivered in the two decades after privatisation in 1990.

(247) In particular, a combination of residual market failures would arise in relation to electricity generation and nuclear energy in particular. A report by Compass Lexecon was submitted to further elaborate on these market failures (28): (a) Carbon emission market failure, as carbon emissions would not be adequately priced under the ETS and the Carbon Price Floor would not be sufficient given political risk that rates will be lowered in the future. (b) Security and diversity of supply market failures, due to the fact that the social benefits from security and diversity would not be adequately valued by investors. Investments in large scale generation assets would not be made based on anticipated returns in the highest price periods, given their unpredictability, leading to ‘missing money’ problem and a lack of diversity in the energy mix. (c) Incomplete risk transfer markets, given that there would be no certainty that wholesale electricity prices will be correlated with the fixed costs of low-carbon generators. The resulting price volatility risk would not be a failure in and of its own, but it becomes one if risks could be transferred, shared or pooled in an efficient way, which current market conditions would not allow. (d) Political and ‘hold-up’ risks, due to the considerable political and regulatory risks that may significantly affect the returns that investors can make from the project, exposing investors in new nuclear to a potential ‘hold-up’ problem, i.e. the risk that having made the investment investors would be prevented by government action from realising a return from it. (e) Financing risks, due to constraints arising in current financial market conditions, where lenders would be risk-averse in relation to new nuclear.

(248) EDF concludes from the arguments above that State aid is necessary to deliver the objectives of common interest.

5.3 COMMENTS RECEIVED ON THE APPROPRIATENESS AND THE INCENTIVE EFFECT OF THE MEASURES

(249) EDF considered that the public invitation issued by the UK in December 2011 to developers of new low-carbon capacity to enter into discussions with DECC about potential investment contracts, where NNBG was the only developer of a new nuclear power station responding, would make the negotiation process followed by the parties adequate. The UK would have completed significant due diligence on the project through a cost discovery and verification process lasting 18 months.

(250) Also, the CfD would not insulate NNBG from market risks. NNBG would continue to sell electricity into the wholesale market. The difference payment would represent a fair amount calculated on the basis of the costs of the project. NNBG would be incentivised to sell its output into the market in order to achieve the RP and would take the risk that it is unable to do so or is unable to generate as much electricity as planned.

(251) In addition, NNBG would retain substantial risks including construction risks, operating risks, financial risks and waste and decommissioning risks. Cost overruns would not be transferred to consumers and would be borne by NNBG.

(252) Finally, the CfD would be an appropriate instrument as it wold provide a long-term contract offering price stability, while at the same time being more cost effective than feed-in premium instruments with a fixed premium. Also, the combination of the CfD and the Credit Guarantee would be necessary, since the CfD would address HPC's project risk, while the guarantee would facilitate NNBG's access to credit, while being provided on commercial terms.

(253) EDF submitted that investment in new nuclear generation in general, and HPC in particular, would not be realised without the CfD and the Credit Guarantee, and welcomed the Commission's preliminary finding that the incentive effect of the notified measure is plausible.

5.4. COMMENTS RECEIVED ON THE PROPORTIONALITY OF THE MEASURES

(254) EDF submitted that difference payments would not exceed the level necessary to render the HPC project sufficiently profitable. The target internal rate of return (‘IRR’) of [9,75 to 10,25] per cent would be in line with the investment criteria of the EDF group and appropriate given the risks involved in the project, as well as in line with the returns accorded to other CfD beneficiaries.

(255) EDF considered that the 35-year duration of the CfD would be the minimum required to enable the project to be financed. Any reduction would lead to changes in the debt financing structure, the profile of the funding arrangements for decommissioning and the level of revenue and political risk.

(256) Finally, EDF submitted that the CfD would contain contractual mechanisms designed to prevent NNBG and its investors from being overcompensated, in particular as gain-share clauses.

5.5. COMMENTS RECEIVED ON THE POTENTIAL FOR DISTORTIONS TO COMPETITION AND TRADE BETWEEN MEMBER STATES

(257) EDF considered that the CfD would not crowd out private investment in other forms of generation capacity, including renewables, due to the relatively small proportion of the capacity commissioned.

(258) Any displacement of new fossil fuel generation investment would in EDF's view only achieve the measure's intended objectives of common interest. In the absence of HPC, the UK may increase the level of support for other low-carbon technologies, but EDF considered that such a scenario would be less efficient, as such technologies are a more costly and more uncertain way to meet the UK's decarbonisation targets.

(259) The impact on interconnection capacity would also be limited, since HPC would not affect investment incentives for interconnector projects, would not reduce investment in demand-side response, which would be primarily driven by the structure of tariffs, nor would it reduce investment in energy efficiency, which would rely largely on specific grants and financing support.

(260) EDF also posited that the CfD would not provide an advantage to EDF or NNBG which is unavailable to other power generators. Competitors could apply for a CfD, and the CfD would not remove NNBG's incentive to take efficient dispatch and cost-reducing decisions.

(261) Finally, the CfD would not provide NNBG with the ability and the incentive to manipulate the RP or foreclose EDF's competitors, given that the reference market would be very liquid and NNBG's seasonal output would account for only a small proportion of the volumes traded. Also, CfDs would provide safeguards against any distortion of the RP. Foreclosing competitors' access to HPC's baseload capacity would not be acceptable to NNBG's shareholders other than EDF, nor would it be acceptable to the UK as guarantor under the Credit Guarantee or to the lenders to the project.

6. RESPONSE OF THE UNITED KINGDOM TO THE COMMENTS SUBMITTED BY INTERESTED PARTIES

(262) The UK sent its response to the comments by interested parties on 13 June and 4 July 2014.

(263) Overall, the UK found that the majority of comments were positive, and that the vast majority of the issues raised had already been addressed in its prior submissions. The main arguments provided by the UK in response to the key concerns raised by interested parties will be highlighted below. Only the responses to the most relevant comments in relation to the State aid assessment will be highlighted.

6.1. EXISTENCE OF AID AND SGEI

(264) The UK reiterated its view that Member States have a wide margin of discretion in defining an activity as SGEI. Supposedly, Article 8 of the Electricity Directive would not be applicable to the notified measure.

(265) The UK also considered that even in the absence of a formal tendering process, it widely advertised the opportunity for developers to come forward to discuss the Investment Contracts or early CfDs for low-carbon generation.

(266) In relation to the Credit Guarantee, the UK continued to argue the absence of aid as it would be provided on market terms and would be available to other projects as well. The UK argues that the IUK guarantee scheme is open to large investment projects in UK, including investments in renewable energy projects as well as nuclear projects.

(267) As regards the compensation, the UK authorities claim that the SP has been set on the basis of: (i) a rigorous Cost Discovery & Verification process to assess the costs of the HPC project conducted with support from external financial and technical advisers; (ii) a thorough assessment of the level of returns that would be reasonable for investors to seek in relation to the HPC project through benchmarking against other similar projects; and (iii) a challenging set of negotiations that were underpinned by an analysis on the upper level of the SP that the UK Government considered appropriate for HPC comparing it also with the costs of other forms of electricity. The UK Government also conducted a value-for-money assessment which allowed it to co