FI Euroopan unionin virallinen lehti C 69/60

VALTIONTUKI – YHDISTYNYT KUNINGASKUNTA

Valtiontuki SA.34947 (2013/C) (ex 2013/N) Investointisopimus (hinnanerosopimuksen varhainen muoto) uuden Hinkley Point C -ydinvoimalaitoksen hyväksi

Kehotus huomautusten esittämiseen Euroopan unionin toiminnasta tehdyn sopimuksen 108 artiklan 2 kohdan mukaisesti

(ETA:n kannalta merkityksellinen teksti)

2014/C 69/06

Komissio ilmoitti 18. joulukuuta 2013 päivätyllä, tätä tiivistelmää seuraavilla sivuilla todistusvoimaisella kielellä toistetulla kirjeellä Yhdistyneelle kuningaskunnalle päätöksestään aloittaa Euroopan unionin toiminnasta tehdyn sopimuksen, jäljempänä ’SEUT-sopimus’, 108 artiklan 2 kohdassa tarkoitettu menettely, joka koskee edellä mainittua toimenpidettä.

Asianomaiset voivat esittää huomautuksensa kuukauden kuluessa tämän tiivistelmän ja sitä seuraavan kirjeen julkaisemisesta. Huomautukset on lähetettävä osoitteeseen

European Commission Directorate-General for Competition State aid Registry Rue de la Loi/Wetstraat, 200 1049 Bruxelles/Brussel BELGIQUE/BELGIË Faksi: (+32-2) 296 12 42 Sähköposti: stateaidgreffe@ec.europa.eu

Huomautukset toimitetaan Yhdistyneelle kuningaskunnalle. Huomautusten esittäjä voi pyytää kirjallisesti henkilöllisyytensä luottamuksellista käsittelyä. Tämä pyyntö on perusteltava.

Kuvaus toimenpiteestä, jota koskevan menettelyn komissio aloittaa

Yhdistynyt kuningaskunta aikoo taata yksityiselle sijoittajalle varman tulon ja antaa luottotakauksen, joka liittyy Hinkley Point C:hen rakennettavaan uuteen ydinvoimalaitokseen. Toimenpide perustuu Yhdistyneen kuningaskunnan hallituksen ja mainitun sijoittajan (Electricité de Francen kokonaan omistama yritys NNBG) väliseen yksityiseen sopimukseen. Sopimus on alustava, ja yksityiskohtainen sopimus tehdään myöhemmin. Sopimukseen ja erityisesti hinnanerosopimukseen, jolla NNBG:lle taataan tietty tulo, kuuluvat toimenpiteet perustuvat energialakiesitykseen sisältyvään välineeseen. Esitys julkaistiin 29. marraskuuta 2012, ja siitä käydään parhaillaan keskustelua Yhdistyneen kuningaskunnan parlamentissa. Siihen sisältyy säännöksiä sellaisen johdetun lainsäädännön hyväksymiseksi, jolla myöhemmin vahvistetaan hinnanerosopimusjärjestely. Johdettu lainsäädäntö hyväksytään vasta, kun energialaille saadaan hallitsijan vahvistus (Royal Assent), joka annettaneen vuoden 2013 lopussa. Yhdistynyt kuningaskunta on vahvistanut, että tulevaisuudessa komissiolle ilmoitettaviin yksittäisiin investointisopimuksiin sisältyvät maksut edellyttävät komission hyväksyntää, mikäli niihin liittyy valtiontukea.

Tuen myöntävä viranomainen on Yhdistyneen kuningaskunnan hallitus ja erityisesti energia- ja ilmastonmuutosministeri.

Tuella on kaksi muotoa. Hinnanerosopimuksen varhaisen muodon, investointisopimuksen, mukaan NNBG saa tuotoksestaan kiinteän määrän tuloja eli toteutushinnan. NNBG saa mitatun tuotoksensa perusteella erotuksesta maksut tiettyyn investointisopimuksessa vahvistettuun enimmäismäärään saakka. NNBG:n tuottama sähkö myydään markkinoille. Kun viitehinta, jolla sähkö myydään, on alempi kuin toteutushinta, valtio maksaa viite- ja toteutushinnan välisen erotuksen ja varmistaa näin, että NNBG saa lopulta kiinteän määrän tuloja toteutushinnan ja tuotoksensa tason perusteella. Sen sijaan kun viitehinta on toteutushintaa korkeampi, NNBG on velvollinen maksamaan erotuksen valtiolle. Myös tällöin NNBG:n tulotaso on kiinteä ja perustuu toteutushinnan ja tuotoksen erotukseen.

Investointisopimus muuttuu hinnanerosopimukseksi heti, kun Yhdistynyt kuningaskunta on ottanut johdetun lainsäädännön käyttöön. Investointisopimus ja hinnanerosopimus ovat voimassa 35 vuotta ydinvoimalaitoksen ensimmäisestä toimintapäivästä. NNBG:n saama toteutushinta on 92,50 Englannin puntaa megawattitunnilta, se on sidottu kuluttajahintainflaatioon, ja sen nimellinen tuottoprosentti verojen jälkeen on 9,87.

Yhdistyneen kuningaskunnan mukaan sillä on kolme tavoitetta. Ensimmäinen on toimitusvarmuus, sillä Yhdistynyt kuningaskunta uskoo tulevan toimitustason olevan uhattuna, kun vanhoja voimaloita suljetaan ja siirrytään vähähiilisiin voimaloihin. Toinen on hiilidioksidipäästöjen vähentäminen, sillä ydinvoimalaitokset pystyvät tuottamaan perussähköä vähäisin hiilipäästöin. Kolmas on energianlähteiden monipuolistaminen. Lisäksi Yhdistynyt kuningaskunta katsoo, että toimenpide on Euratomin perustamissopimuksen mukainen.

Tuen kokonaismäärä riippuu tulevien tukkuhintojen taustaoletuksista ja alennuksesta, ja se voi olla 0–17,6 miljardia Englannin puntaa.

Toimenpiteen arviointi

Komissio uskoo, että toimenpiteeseen liittyy SEUT-sopimuksen 107 artiklan 1 kohdassa tarkoitettua valtiontukea, sillä kyseessä ei ole aito yleistä taloudellista etua koskeva palvelu, ja toimenpide kohdistuu valikoituun yritykseen, uhkaa vääristää kilpailua ja vaikuttaa jäsenvaltioiden väliseen kauppaan.

Komissiolla on vakavia epäilyjä siitä, tavoitellaanko toimenpiteellä toimitusvarmuuden yhteistä tavoitetta, ja siitä, voidaanko sen avulla vähentää hiilidioksidipäästöjä. Komissiolla on vakavia epäilyjä myös siitä, tarvitaanko ydinenergialle valtiontukea ja onko luottotakauksen ja hinnanerosopimuksen yhdistelmä asianmukainen väline.

Komissiolla on tehdyn arvioinnin perusteella vakavia epäilyjä siitä, onko tukitoimien ja erityisesti inflaatioon sidotun hinnanerosopimuksen ja luottotakauksen yhdistelmä oikeasuhtainen tuen mahdolliseen hyötyyn nähden. Komissio uskoo myös, että toimenpide saattaa vääristää vakavasti kilpailua ja kauppaa jäsenvaltioiden välillä.

Komissio pyytää esitetyn perusteella SEUT-sopimuksen 108 artiklan 2 kohdassa määrätyn menettelyn nojalla Yhdistynyttä kuningaskuntaa toimittamaan huomautuksensa ja toimittamaan sille kaikki tiedot, joista voi olla apua toimenpiteen arvioinnissa.

KIRJE

The Commission wishes to inform the United Kingdom that, having examined the notification supplied by your authorities on the measure referred to above, it has decided to initiate the procedure laid down in Article 108(2) of the Treaty on the Functioning of the European Union in respect of the notified measure. 1. PROCEDURE (1) Following pre-notification contacts, the UK notified its proposed measure on 22 October 2013 by electronic notification, registered by the Commission on the same day. 2. DESCRIPTION OF THE CONTEXT 2.1. Background and objectives (2) Under the umbrella of the Electricity Market Reform (‘EMR’), the UK government envisages implementing a diverse range of measures with three explicit objectives: (i) decarbonising the electricity sector by 2050; (ii) safeguarding security of supply; and (iii) ensuring diversity and affordability of electricity supply. (3) The EMR is a plan to restructure the UK energy sector, which aims to assist with the switch to low-carbon electricity generation, decrease reliance on fossil fuels and ensure adequate supply of electricity. (4) The notified measures are part of a government initiative to facilitate investment in new nuclear energy plants in the UK, in particular by implementing Contracts for Difference ('CfDs'), i.e. a mechanism similar to a feed-in tariff allowing for payments to generators to guarantee them a fixed level of revenues. The UK intends to set CfDs to support a range of electricity-generating technologies, notably nuclear energy and renewable energy sources. The notification relates to an early form of a Contract for Difference (the "Investment Contract", see also Section 3.1) and to a credit guarantee by HM Treasury under its UK Infrastructure Guarantees scheme. (5) The economic and business reality in which the EMR situates itself is complex. Like many other Member States, the UK is going through a challenging transition from a carbon-intensive to a low-carbon economy, among other things by adopting policies in support of renewable energy sources. (6) The UK electricity sector is currently reliant on a high-carbon energy mix. There are around 100GW of installed electricity generation capacity. Of these and in 2011, 40 per cent comprise installations using gas and 30 per cent installations using coal. (7) About 8.1 GW of current capacity is scheduled to close by 2020, including 3.9GW of nuclear-produced electricity. By the end of 2023 all but one of the existing nuclear power stations (i.e. Sizewell B) are due to close. About 4.2 GW of mainly coal-produced electricity are due to retire by 2015. (8) The difficulty of this transition is compounded, from the UK government’s point of view, by the trend volatility of energy fuel prices, and has led over time to shrinking levels of supplied capacity. Private investors are currently not deploying enough generation installations to cope with predicted demand at the same time when older, carbon-intensive power stations are due to be phased out. (9) This means that the UK is forecasting that its margin of excess supply of electricity, for which before liberalisation a level in excess of 20 per cent would have been considered common, might decrease to below 10 per cent in 2022 in a base case scenario. (1) Some forecasts are considerably more pessimistic. The de-rated capacity margin, i.e. the average excess of available supply over winter peak demand, is forecast by the Office of Gas and Electricity Markets ('Ofgem') to decrease to below 5 per cent in 2015. (2) (10) Modelling undertaken by the UK government's Department for Energy and Climate Change ('DECC') points to the fact that new nuclear plants would not be an attractive commercial proposition in the absence of government intervention before 2027 or 2030, depending on the model used. (3) It also shows that capacity margins would be likely to stay at lower levels than those the UK government considers acceptable, while most of the new investment in electricity generation would be in gas-fired plants, and in particular Combined Cycle Gas Turbines ('CCGT'). (11) The UK’s plan to facilitate investment in nuclear energy is therefore partly aimed at addressing a perceived generation adequacy problem, while also aiming to reduce carbon emissions, given that nuclear power plants are characterised by very low carbon emissions. (4) 2.2. Old and new nuclear in the UK (12) There are currently nine nuclear power stations in England, Scotland and Wales, with combined generation capacity of around 9.2 GW. In 2011, nuclear power accounted for 19 per cent of all electricity generated in the UK. (13) Nuclear power in the UK started with the Magnox stations during the decade starting in 1950, almost all of which have been closed after their 40 year design life (one reactor at Wylfa remains but is due to close by 2014). The next generation of nuclear was the Advanced Gas-cooled Reactor, of which 8 stations were built between 1966 and 1988 with an operational life of 35 years. The last nuclear plant was built at Sizewell based on the Pressurised Water Reactor design, with construction starting before the privatisation of the UK electricity market and ending in 1995. (14) All of the nuclear power stations still operating in the UK were developed by the Central Electricity Generating Board within the framework of a nationalised industry. The Board was broken into four separate companies in the 1990s, two of which were subsequently merged into a new private company founded in 1996 and named British Energy. British Energy is now a subsidiary of EDF Energy Holding Limited, following the latter's acquisition of the former in 2008 and named EDF Energy. (15) Successive UK governments have publicly consulted on their plans to both consider nuclear energy and provide support for it. The consultation process assessed, among other things, the lifetime carbon emissions, costs, and characteristics of new nuclear power stations, as well as an assessment of the potential environmental costs linked to nuclear energy. (16) In particular, the UK government undertook a consultation in May 2007, setting out the case for a policy framework considering the full range of low-carbon options, including nuclear energy. The conclusions of the consultation, following consideration of the responses to it, were published in January 2008, and stated the UK government's view that nuclear energy should play a role in the future low-carbon economy, and that the absence of nuclear energy would increase the costs of achieving the policy objectives mentioned above. (17) The following 2008 Nuclear White Paper reiterated this view, setting out the UK government's position that decarbonisation and security of supply would require investment in new nuclear power stations. (5) (18) The need for new nuclear was further examined and subjected to public consultation and parliamentary consideration in the development of national policy plans relating to energy in 2009. The outcome of that consultation was the 2011 Final Over-arching Energy National Policy Statement, which established that "new nuclear power therefore forms one of the three key elements of the UK Government's strategy for moving towards a decarbonised, diverse electricity sector by 2050: (i) renewable; (ii) fossil fuels with CCS; and (iii) new nuclear". (6) 2.3. National consultations (19) The UK government publicly consulted also in relation to the broader issues of what energy policies would be necessary to achieve decarbonisation and meet rising demand levels in the coming decades. (20) In particular, DECC put to public consultation in July 2010 a paper outlining different paths to decarbonisation up to 2050. (7) The options considered included demand-side management and the provision of interconnection capacity. However the UK government concluded that the range of options considered would be unlikely to allow Great Britain to meet forecast demand levels due to the increase in the use of electricity for domestic and industrial heating. (8) (21) The UK government subsequently consulted on the main provisions of the EMR, which includes CfDs for different types of low-carbon generation, and in particular those in support of nuclear energy. (9) A White Paper was published on 12 July 2011, which sets out in more detail how the different instruments would be designed, and provided further information on CfDs and a proposal to set up a capacity mechanism in the UK. (10) The CfD was chosen as an instrument over the alternatives because, in the UK authorities' view, it would be more cost-effective. (22) A Technical Update to the White Paper was published on 15 December 2011 and invited prospective investors to enter in discussions with the UK government with a view to investing in CfDs in low-carbon electricity generation. (11) The UK confirmed that this invitation to discuss did not consist in a formal tender, in particular in relation to prospective investors interested in negotiating CfDs. The UK considers that a tender would not be appropriate as there is not sufficient competitive pressure to make it effective. This is however a position which the UK links also to the timeframe chosen to bring forward investment in new nuclear energy. 2.4. Hinkley Point C (23) The nuclear power plant which is the object of this decision would be located at Hinkley Point C (throughout this decision, 'HPC' will be used to refer to the plant). (24) HPC is an EPR (European Pressurised Reactor, a design developed mainly by Framatome, now Areva NP, and Electricité de France in France, and Siemens AG in Germany, based on the Pressurised Water Reactor design), two-reactor plant producing a total of 3.2 GWh, or 1.6 GWh per reactor. During its operational lifetime of 60 years it is expected to produce around 26TWh per year of electricity supply, or about 7 per cent of Great Britain's electricity demand as forecast in the 2020s. (25) There is currently no EPR plant in operation anywhere in the world. The first two projects, Olkiluoto in Finland and Flamanville in France, the construction of which started in 2005 and 2007 respectively, have faced construction delays and cost overruns. Construction of two more EPR plants has started in China at Taishan in 2009 and 2010, where Areva is working with China Guangdong Nuclear Power Company (the latter will operate the plant). (26) The UK believes that failure to bring forward HPC might translate into a complete lack of investment in new nuclear plants, as it might undermine the confidence of potential investors and industry about the feasibility of carrying out a project of such a financial scale. (27) HPC is one of eight sites in the UK that has been identified as suitable for new nuclear power stations. It is located at 12km from the town of Bridgewater in Somerset, comprises a development site of about 175 hectares, and is next to the two existing nuclear power stations of Hinkley Point A and B. (28) The new nuclear power station is to comprise two EPR reactor units (Units 1 and 2) and shared infrastructure and facilities. Heat generated from the reactors would be used to generate steam which will power turbines directly connected to a generator. The generator is designed to be capable of producing approximately 1,630 MW of electrical power per reactor, giving a total site capacity of up to 3,260 MW. The power station would have a permanent workforce of around 900 staff. (29) Each reactor would have an estimated operational life of 60 years, with the decommissioning period forecast to start in the 2080s and estimated to last for 20 years. Construction is expected to take place over approximately 10 years. Unit 2 would be completed 12 to 18 months after completion of Unit 1. Assuming the Investment Contract is concluded in 2013, the two reactors are expected to become operational between 2023 and 2025 according to the proposed timeline. 2.5. Legal basis (30) The draft Energy Bill was published on 29 November 2012 (12) and is at the time of writing going through Parliamentary debate. It passed the third reading in the House of Commons on 31 July 2013 and is now under discussion in the House of Lords. (31) The draft Energy Bill includes provisions to enact subordinate legislation, which at a later stage will be used to establish the CfD regime. In particular, Schedule 2 of the Bill relates to investment contracts and Chapter 2 of Part 2 relates to CfDs. (32) Any subordinate legislation will only be enacted after Royal Assent of the Energy Bill, which is expected by the end of 2013. (33) The UK confirmed that any payments under individual Investment Contracts, which might be notified to the Commission in the future, will be conditional on Commission approval, provided that they involve State aid. 2.6. The beneficiary (34) The notified measures concern an Investent Contract to be entered into with NNBG and a credit guarantee to be provided to NNBG. (35) NNBG, or NNB Generation Company Limited, was incorporated in 2009 as a private limited company. NNBG is a wholly-owned subsidiary of NNB Holding Company Limited. Until February 2013 NNB Holding Company Limited was a joint venture between EDF Energy Holdings Limited (which owned 80 per cent of the equity) and Centrica plc through its subsidiary, GB Gas Holdings Limited (which owned the remaining 20 per cent). (36) In February 2013 Centrica announced that it no longer wished to pursue its investment in HPC and sold its stake to NNB Holding Company Limited, which is therefore now a wholly owned subsidiary of EDF Energy Holdings Limited. (37) EDF Energy Holdings Limited ('EDF') is a fully owned subsidiary of EDF Energy, which in turn is a subsidiary of EDF International SA, a company fully owned by Electricité de France SA. (38) The UK government and EDF have announced that they expect other investors to join the joint venture and that NNBG's equity would be shared between the EDF Group, Areva, China General Nuclear Corporation, China National Nuclear Corporation and potentially other investors. In particular, EDF announced on 21 October 2013 that it expects NNBG's equity to be composed as follows: EDF: 45 to 50 per cent; Areva: 10 per cent; China General Nuclear Corporation and China National Nuclear Corporation: 30 to 40 per cent; other investors: up to 15 per cent. (39) NNBG is structured to have sole responsibility for licensed and permitted activities relating to the control of design, construction, commissioning, operation and eventual decommissioning of NNBG nuclear power plants. (40) In addition to the HPC nuclear power plant, the UK government indicated that NNBG plans to build and operate a further EPR plant in the UK, in particular in Somerset. NNBG is also carrying out preliminary work to consider the development of further twin units at Sizewell, in Suffolk. (41) In November 2012 the Office for Nuclear Regulation granted NNBG the Nuclear Site Licence needed to operate the HPC plant, and the Office together with the Environment Agency issued final design acceptances for the EDF/Areva EPR reactor on 13 December 2012. The Secretary of State granted planning permission for the HPC plant on 19 March 2013. (42) It is intended that the UK fleet of EPRs will use the same technology as the rest of the EDF Group international EPR fleet. The nuclear plants under construction in Flamanville, France and Taishan, China will be used as the base design. The EPR plants in Taishan are being built by a joint venture between the EDF Group and China General Nuclear Corporation. 3. DESCRIPTION OF THE MEASURE 3.1. Investment Contract and ancillary agreements (43) The notified measure consists of an Investment Contract, defined as an early form of CfD, as well as ancillary agreements. (44) The Investment Contract is a private law agreement between the Secretary of State, hence the UK government, and a private investor in nuclear energy. The investor in nuclear energy is an entity called NNBG in the notified case. (45) Under the Investment Contract, NNBG will receive a fixed amount of revenues for the output it produces, for which it will receive a fixed price level, the 'Strike Price.' The Commission understands that NNBG will be obliged to maintain a level of performance which can be considered standard for this type of plant and is not committed to produce a pre-determined output level. NNBG will receive difference payments based on its metered output, up to a maximum level of output (‘cap’), which will be set in the Investment Contract. 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. (46) When the reference price at which the electricity is sold is lower than the Strike Price, the Secretary of State will pay the difference between the Strike Price and the reference price, ensuring that NNBG will ultimately receive a fixed level of revenues based on the Strike Price and its level of output. Conversely, when the reference price is higher than the Strike Price, NNBG will be obliged to pay the difference to the Secretary of State. Also in this case, therefore, NNBG will receive a fixed level of revenues, based on the Strike Price and its level of output. (47) The Investment Contract will be accompanied by a Secretary of State Agreement which will include provisions to deal with the eventuality that the nuclear power plant is shut down as a result of a political decision and not related to health, safety, security, environmental, transport or safeguards concerns, or other specified circumstances. In such circumstances, the counterparties will have options: the Secretary of State will have a ‘call’ option requiring the shares in NNBG (which now owns the HPC site) to be transferred to it (or its nominee); and Holdco, i.e. the holding company which owns NNBG, will have a ‘put’ option requiring the shares in NNBG to be transferred to the Secretary of State (or its nominee). (48) Under those circumstances, NNBG's owners will be entitled to a level of compensation […] (13). The level and the exact scope of circumstances of compensation for such a shutdown are currently being negotiated and are not yet fully known. (49) The Investment Contract will be accompanied by lender direct agreements. These are agreements between the counterparty (the Secretary of State in the first instance) and lenders to NNBG. These agreements will provide that, in the event NNBG defaults on its obligations under the Investment Contract, the counterparty will not terminate the Investment Contract without first observing a period in which the lenders have an opportunity to cure the default. Such agreements are a standard feature of financing arrangements for infrastructure projects. 3.2. Credit guarantee (50) The HPC project, and NNBG, will not only benefit from an Investment Contract, but also from the provision of a guarantee by the UK Treasury under the UK Guarantees scheme. (51) Details of the guarantee have not yet been set. It however seems that the guarantee would be linked to the level of credit actually obtained by NNBG. However NNBG has not yet structured its financing needs and the UK government indicated that it would expect it to do so in the period immediately after the agreement with the UK government and before taking a final investment decision. The final investment decision is expected to be taken by […] at the latest. (52) The UK government refers to discussion with EDF Energy which would point to the possibility that NNBG's equity will be shared between EDF Energy, Areva, China General Nuclear Corporation and China National Nuclear Corporation (see paragraph 2.6 above). However, both the equity structure and the potential recourse to debt in addition to equity have not been decided upon yet. 3.3. Overall functioning of the CfD mechanism (53) While in the notified measure the counterparty to the Investment Contract is the Secretary of State, the current intention of the UK government is for all CfDs, including the CfD for nuclear, to develop into a contract between two counterparties, of which one is the investor in nuclear energy, and the other is an entity which would be funded through a statutory obligation on all of the licensed suppliers collectively. (54) Under this framework, the UK government would envisage licensed suppliers to be liable collectively for any obligations arising from the contract, and the counterparty to the contract to be 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. Some form of mutualisation of potential losses, due for example to non-payment by suppliers, is also being considered. Further regulations are expected to clarify more in detail how the mechanism would work, for example in the event of a shortfall in payments from licensed suppliers. (55) Therefore the UK government mentions that it intends to transfer the contract with NNBG to a counterparty to be designated as soon as CfD regulations and supplier obligations have been established. (56) The counterparty in the future CfD framework will be a UK government-owned private company. The role of the counterparty will be to enter into contracts with low-carbon generation operators (including NNBG) and administer the payment scheme. (57) 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 as the Settlement Agent. (58) Elexon (14) is currently the settlement agent for the GB electricity system, i.e. the administrator of the balancing and settlement code, which is a fully owned subsidiary of UK's Transmission System Operator ('TSO') National Grid. National Grid also fully owns the electricity System Operator, National Grid Electricity Transmission, which under the Electricity Act 1989 is entrusted with the obligation to develop and maintain an efficient, coordinated and economical system of electricity transmission, balancing supply and demand and ensuring that supply meets demand at all times. National Grid Electricity Transmission is regulated by Ofgem, the UK National Regulatory Authority for electricity, in particular through a five-year price control which limits its maximum revenues and provides the cost methodology to set the price of access to, and use of, the electricity transmission and distribution systems. (59) The UK government intends to entrust National Grid with the administration of all CfD schemes, including for example also those supporting renewable energy. The UK authorities believe that National Grid is best placed to fulfil this role, based on its current remit as TSO, which includes estimating and assessing overall capacity levels and running balancing services for short-term needs through competitive tenders. (60) 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. (61) The Energy Bill will set the framework for the designation of the counterparty. The detailed arrangements for the supplier obligation are expected to be set in secondary legislation. The counterparty's constitutional documents will include Articles of Association, and the body will be subject to UK company law. The company's articles would not be amended without the Secretary of State's consent. The UK government intends to appoint the minority of the counterparty's Board (the Chair and Senior Independent Director) and set out the process for appointing the remainder of the board. (62) 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. 3.4. Bilateral negotiations (63) The UK government published an Expression of Interest to select an undertaking to enter into an Investment Contract (in particular, to enable the final investment decision by the undertaking) in March 2012, after several months of informal contacts. Following NNBG's submission, the UK Government has been in discussions with NNBG on an Investment Contract for the HPC project. Formal negotiations on the terms of the Investment Contract commenced in February 2013. (64) Both the selection of the undertaking and the definition of the terms to be used in the Investment Contract have been based on bilateral negotiations between the UK government and NNBG. The negotiation focused in particular on the terms of the agreement which would have been acceptable to the parties, including, and especially, the level of the Strike Price and the duration of the contract. (65) The UK government claims that the negotiating process allows it to maintain a competitive tension in setting the terms of the agreement, by making use of various benchmarks and comparisons which enables it to identify acceptable values for the key terms of the agreement. The UK authorities have consistently claimed that they were not prepared to offer an Investment Contract at any price. (66) During the negotiations, the UK government made use of expert external technical and financial advisers to provide reports on the detailed costs of the project and the likely returns to NNBG, as well as in-house expertise. The purpose of the advisory work was, the UK government claims, to provide a final recommendation on whether it would be reasonable for the Secretary of State to conclude that NNBG's return on its investment in the HPC project is reasonable from a financial point of view. Evidence of such work undertaken by KPMG and Lazard has been provided to the Commission. (67) The UK government and EDF announced on 22 October 2013 that they had reached an agreement on the key commercial terms of the Investment Contract, including the Strike Price, the rate of return and the duration of the contract. The UK authorities notified the measure object of this decision on the same day. (68) The agreement, as well as the notification, relate to the key parameters of the Investment Contract (a Head of Terms agreement), as opposed to a final Investment Contract. The Investment Contract itself, as well as the detailed and final structure of the measure, including the financing structure of NNBG, are to be finalised in the course of 2014. The agreement reached is not legally binding. 3.5. Terms of the agreement 3.5.1. Strike Price and net present value (69) The purpose of the Investment Contract is to provide a high degree of certainty over the level of revenues that the HPC plant will achieve over the duration of the contract, subject to the plant achieving its forecast level of output. A summary of the terms of the agreement can be found in Annex 1. (70) The Strike Price is set at GBP 92.50 per MWh (as an average of the 2012 price), which would become GBP 89.50 per MWh if EDF undertakes to build a second nuclear power plant at Sizewell C using the same design. The Strike Price will be fully indexed to the Consumer Price Index from the date of signature of the contract. Based on current assumptions, this would translate into a nominal Strike Price of GBP 279 per MWh in 2058, the last year of application of the CfD scheme. (71) The Strike Price has been derived by using a financial model, where the Strike Price is the main output of the model subject to a number of other project parameters being set and assumptions being made, including assumptions on the macroeconomic context. The Strike Price is the result of the negotiation between the UK government and EDF. Several of the assumptions being made, and in particular a large part of the construction and operation cost base, is based on information provided by EDF. The Strike Price of GBP 92.50 per MWh corresponds to a (post-tax and nominal) rate of return of [9.75 to 10.25] per cent for the HPC project as a whole, i.e. taking into account the lifetime of the installation. (72) The net present value ('NPV') of total revenues is GBP […]bn, while the NPV of the difference payments, i.e. the difference between the Strike Price and the reference price, is calculated to vary between GBP 3.5bn and GBP 9.0bn, depending on whether the carbon price in the UK is higher (lower NPV of the differences) or lower (higher NPV of the differences). 3.5.2. Rate of return (73) The UK claims that the rate of return implied by the measure is consistent with a range of analyses carried out to inform the government's decision. In particular, the assessments described in Table 1 were carried out. The resulting rate of return, as specified above, is [9.75 to 10.25] per cent in post-tax and nominal terms. Table 1 Assessments of rate of return of the HPC project […] Source: UK authorities (74) The UK authorities claim that in the absence of an Investment Contract, the rate of return required by the investor would be substantially higher, and potentially well above 10 per cent, based on work undertaken by consultancy KPMG and commissioned by DECC. Such a high rate of return would however not be realistic and the project would not go ahead. An Investment Contract would allow the HPC project to meet returns which are more comparable to those of a regulated utility in the UK government's view. 3.5.3. Costs (75) The project costs are based on a review undertaken with the support of two external advisers commissioned by the UK government: KPMG and LeighFisher. The consultants were asked to provide technical advice (on assessing construction, operation and decommissioning information), and financial and economic knowledge. (76) The UK authorities submitted to the Commission a financial model of the HPC project, which is the result of discussions with NNBG and takes account of an agreed cost base. While the notified measure is based on the cost base underpinned by the financial model, which the UK government considers reasonable, it also states that the full costs of the projects will be subject to revision at the time of the signature of the final Investment Contract. (77) The construction costs will total about GBP […]bn, with yearly operating costs of about GBP […]. (15) This assumes a 91 per cent capacity availability rate after […] years of operations. Under the agreement, NNBG has […] years to complete construction starting from the commissioning date, and a further period of […] years before the counterparty, i.e. the UK government during an initial period, has the right, but not the obligation, to terminate the contract. This implies an […]-year window for NNBG to complete the construction, after which it will expose itself to the risk of termination of the contract. 3.5.4. Duration (78) The duration of the contract is 35 years for each of the two reactors of the HPC plant. The UK government considers this duration reasonable to ensure that the project can find adequate financing funds, given the uncertainties surrounding future electricity prices. It states that their own estimates show a great deal of uncertainty over the long-term trends of wholesale electricity prices, which at least in part depend also on uncertainties on the price of carbon, either under the ETS or under the UK carbon price floor. (79) The UK government also believes that any duration shorter than 60 years, which is the operational lifetime of the plant, exposes NNBG to market risks. For this reason, NNBG is reported as having a preference for a […]-year contract. In particular, the UK government argues that NNBG would not be able to achieve adequate revenues to cover the cost of servicing the debt and maintain an A rating with less than 30 years of stable revenues. (16) (80) NNBG is expected to seek a substantial level of debt-financing from the market, subject to the UK credit guarantee, although the UK government could not yet specify the definitive financing structure. EDF is reported as seeking to raise as much as […] per cent of financing needs through debt, with the remaining […] per cent being equity, possibly to be shared with EDF's partners as specified in paragraph (38). (81) According to the UK authorities, this level of debt would require an Investment Contract duration of at least […] years for the debt to maintain A rating to ensure a more favourable level of interest repayments. The required duration becomes longer if a ‘tail’, or a safety buffer period, is required by funds providers. Advisors to the UK government indicated that a 30- to 35-year Investment Contract providing certain and stable revenues would be needed to secure a leverage ratio, i.e. the ratio of equity to debt, of between 50 and 65 per cent, assuming a 5-year tail is also required. (82) The UK also highlights that there is a trade-off between the level of the Strike Price and the duration of the contract, as NNBG would require a higher Strike Price if the Investment Contract had a shorter duration, in order to achieve similar financial results. (83) The UK government compares the duration of the Investment Contract with NNBG to similar contracts, in particular CfDs, which are considered for wind farms. Such contracts are being considered for a duration of 15 years, to be compared with an operational lifetime of between 20 and 25 years. The UK mentions that payments in support of renewable energy sources are allowed by the Environmental Aid Guidelines (17) (‘EAG’) until the plant has been fully depreciated according to normal accounting rules, which for the HPC project would take 60 years. (84) The UK government also believes that the obligation on NNBG to set aside funds for decommissioning the plant to comply with the Funded Decommissioning Programme (18) would require stable revenues for 35 years. (85) In particular, the UK Energy Act 2008 (19) obliges operators of new nuclear power stations to have secured financing arrangements in place to meet the full costs of decommissioning and their full share of waste management and disposal costs. The Funded Decommissioning Programme must be approved by the Secretary of State before construction of a new nuclear power station begins. NNBG has submitted a draft Funded Decommissioning Programme in March 2012. The definitive Programme has not been approved yet by the UK government. 3.5.5. Other items (86) The […]-year commissioning window will start on the target commissioning date, which is proposed by NNBG and will be agreed with the UK government in the Investment Contract. As mentioned above, the UK government will have the right to terminate the contract without penalties or obligations after a further […]-year period, starting on the last day of the commissioning window. However NNBG will be entitled to difference payments under the CfD regime only within the commissioning window. A 2-year delay after the end of the commissioning window will therefore shorten the duration of the contract by 2 years. (87) The UK government is discussing with NNBG the possibility to include cost re-opener provisions and gain-shares in the final agreement. The cost re-openers would make it possible to adjust some of the costs to better reflect their levels at specific points in time, in particular in relation to operating costs. (88) The Investment Contract is also expected to include a ‘gain share’ mechanism, whereby in case the construction costs were lower than the amount agreed, the implicit gains from it would be shared between NNBG and the UK government […]. Other ‘gain share’ mechanisms might be put in place, in particular in relation to financing and operational costs. (89) However, cost re-openers and gain-share mechanisms have not been finalised at the time of writing and are not part of the notified measure. 4. UK POSITION ON THE STATE AID ASSESSMENT OF THE NOTIFIED MEASURE (90) The UK claims that the notified measure does not constitute aid according to Art 107(1) TFEU, in particular since the intervention would not confer an advantage to an undertaking based on the 'Altmark' criteria. (91) Alternatively, the UK claims that the aid fulfils the conditions of the SGEI Framework. (92) At the very least, the UK claims that the aid is compatible with Article 107(3)(c) TFEU. 5. ASSESSMENT OF THE MEASURE: GENERAL CONSIDERATIONS (93) The Commission will consider in turn each of the legal bases to which the UK government refers in each of the sections below. 6. EXISTENCE OF AID WITHIN THE MEANING OF ART 107(1) TFEU (94) Article 107(1) TFEU provides that “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, shall, in so far as it affects trade between Member States, be incompatible with the common market.” The cumulative conditions set out therein are examined below. 6.1. The Investment Contract: Existence of an advantage (95) The UK claims that the notified measure does not constitute aid according to Art 107(1) TFEU, in particular since the intervention would not confer an advantage to an undertaking based on the 'Altmark' criteria. (96) The 'Altmark' criteria have been set out by the Court of Justice to clarify under what circumstances a compensation provided by a public authority for the performance of a Service of General Economic Interest ('SGEI') qualifies as State aid under Art 107(1) TFEU. (20) (97) In particular, the Court stated that four criteria must all be met for compensation provided for a SGEI not to constitute State aid. Those conditions are cumulative, and in particular they are the following ones. (i) The recipient undertaking must actually have public service obligations to discharge and the obligations must be clearly defined; (ii) The parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner, to avoid it conferring an economic advantage which may favour the recipient undertaking over competing undertakings; (iii) The compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations; and (iv) Where the undertaking which is to discharge public service obligations, in a specific case, is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable of providing those services at the least cost to the community, the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with the necessary means, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations. (98) The Commission has further clarified the conditions under which public service compensation is to be regarded as State aid in its Communication on the European Union framework for State aid in the form of public service compensation (‘the SGEI Compensation Communication’). (21) 6.2. Existence of a SGEI (99) The UK believes that the first criterion is met, in particular since the service to be provided by NNBG would be clearly defined and would not be provided by the market. (100) The Service to be provided would be the construction of Hinkley Point C, within a specified time schedule, and operating Hinkley Point C within the framework of the Investment Contract. The UK submits that this service is required to achieve the combined general economic interest objectives of i) security of supply, ii) diversity of generation, iii) decarbonisation and iv) electricity price stability/affordability. (101) In this regard, the UK notes that public service obligations ('PSOs') in the general economic interest are often used in the electricity sector and are explicitly allowed for security of supply reasons under Art 3(2) of Directive 2009/72/EC ('the Electricity Directive'). (22) (102) The Commission does not question the possibility of Member States to entrust SGEIs in the electricity sector: It has accepted such entrustment at different times in the past, however in very specific circumstances. (23) Nor does it intend to question the legitimate interests of a Member State to implement measure to pursue security of its electricity supply, which as the UK recalls is a duty under the Electricity Directive. (103) However, the Commission considers that specific undertakings can be seen as being entrusted with the operation of a SGEI if they are entrusted with "a particular task", i.e. the supply of services which, if they were considering their own commercial interest, undertakings would not assume or would not assume to the same extent or under the same conditions. The Commission thus considers that it would not be appropriate to attach specific public service obligations to an activity which is already provided or can be provided satisfactorily and under conditions, such as price, objective quality characteristics, continuity and access to the service, consistent with the public interest, as defined by the State, by undertakings operating under normal market conditions. (104) It is true that in its decision on case N 475/2003, (24) the Commission has accepted a measure which involved the provision of contracts to generators for the purpose of providing a certain level of reserve capacity to be used to meet peaks in demand in a situation where capacity was forecast to be scarce and during the first stages of liberalisation, hence for a security of supply objective. However in that case the service was precisely defined not as the provision of electricity but as the provision of reserve capacity. Reserve capacity is a well-defined type of electricity supply which can only be used under particular demand and supply conditions, and which would not necessarily be provided by the market. (105) The case being assessed in this decision seems to be very different. NNBG will produce and deliver baseload electricity, that is, electricity which is provided continuously and without interruption – also based on the fact that nuclear power plants cannot be easily switched on and off. The electricity provided by NNBG cannot, and will not, be used as reserve capacity or to cover peaks in demand levels. (106) In particular, also based on the terms of the contract, NNBG will participate in the market and sell electricity through the standard exchange arrangements used to allow buyers and sellers to conclude spot contracts. (107) The Commission notes, in this respect, that not only electricity generation is normally considered a commercial activity and a market in which competition takes place, but also and in particular nuclear technology has and can generally be considered a viable commercial activity. This appears to be confirmed by the fact NNBG will compete also against nuclear plants which are operated commercially, seven of which are owned by EDF itself. It is therefore at the very last unclear why the market would not invest in the HPC plant, even if it uses a different technology than existing nuclear plants, under normal market dynamics. This is all the more so since, according to the UK's own assessment, the opposite seems to be true, as private investors are forecast by both Redpoint and by DECC to invest in nuclear energy by 2027 and by 2030 respectively in the absence of CfDs or Investment Contracts. (25) In addition, life extensions of existing plants might take place on a commercial basis. (108) It would therefore appear that the UK's main argument to claim the existence of a SGEI is that the Investment Contract will provide incentives for NNBG to build the nuclear plant under a specified timeline. (109) In particular, it appears difficult to argue that the measure can help the UK achieve security of supply, given that the plant will not be operational before 2023 (assuming the Investment Contract is concluded in 2013 and no delay occurs in the construction,) and that capacity levels are forecast by Ofgem to be relatively low before 2020. (26) On this point, see also Section 8.1.1.2. (110) The measure is argued to contribute to the objective of decarbonisation, but it would merely do so on a different time scale compared to the one which would be provided by the market according to DECC’s own forecasts – which are based, among other things, on a government-set price of carbon, which could therefore, and in principle, be an equally effective, and more market-oriented, instrument to achieve the same result, as discussed further in Section 8.1. (111) The measure, moreover, could hardly be argued to contribute to affordability – at least at current prices, when it will instead and most likely contribute to an increase in retail prices, as discussed in Section 8.1. The notified measure would seem to be able to contribute to affordable prices only under very specific conditions which can only materialise far away in the future. The contribution to higher prices, however, would be very much in the short and medium term. 6.3. Entrustment act (112) The first Altmark criterion requires that the undertaking has a public service obligation to discharge. Accordingly, in order to comply with the Altmark case-law, a public service assignment is necessary that defines the obligations of the undertakings in question and of the authority. (113) The public service task must be assigned by way of an act that, depending on the legislation in Member States, may take the form of a legislative or regulatory instrument or a contract. It may also be laid down in several acts. Based on the approach taken by the Commission in such cases, the act or series of acts must at least specify: (i) The content and duration of the public service obligations; (ii) The undertaking and, where applicable, the territory concerned; (iii) The nature of any exclusive or special rights assigned to the undertaking by the authority in question; (iv) The parameters for calculating, controlling and reviewing the compensation; and (v) The arrangements for avoiding and recovering any overcompensation. (114) The Commission doubts that in this case NNBG has been entrusted with specific public service obligations to discharge. (115) The UK submits that NNBG would have been entrusted with discharging the following obligations: (i) If certain milestones in the construction of the plant are not met by certain dates, NNBG risks losing the CfD, and if the project is delayed by more than […] years, the payment period will be reduced accordingly. (ii) In particular, NNBG is required to achieve the ‘Start Date’ for each Reactor by meeting the Conditions Precedent within the ‘Target Commissioning Window’ for that Reactor in order to receive the full benefit of the CfD. If the ‘Start Date’ is achieved after the ‘Target Commissioning Window’ closes, then the payment period for that reactor decreases by an amount which is equal to the length of time between the ‘Target Commissioning Window’ and the ‘Start Date.’ If the ‘Start Date’ is not achieved by the ‘Long Stop Date,’ the UK government can terminate the contract. (iii) NNBG can benefit from the differences payments only to the extent that it generates and delivers to the GB transmission system low-carbon, baseload electricity from nuclear generation. (iv) The Investment Contract would oblige NNBG to pay the difference between the Strike Price and the reference price to a counterparty in case the reference price is above the Strike Price. (v) For the duration of the investment contract, all electricity generated by Hinkley Point C, up to the contracted capacity, will be subject to the difference payment mechanism (including the obligation to make payments back to the counterparty where the reference price is above the Strike Price). NNBG will not be able to sell that electricity outside of the terms of the Investment Contract. (116) The UK authorities add that, without the Investment Contract, NNBG would be free to sell electricity into the market and retain any profits in case electricity prices are above the Strike Price. In other words, the service would not be provided in the same manner by the market, and "[w]ithout the Investment Contract NNBG would be free to sell electricity into the market and retain any profits in case electricity prices are above the Strike Price (27)." However no demonstration is provided to the effect that these results would not otherwise be provided by the market. (117) The Commission doubts, however, that these conditions can be viewed as public service obligations or as demonstrating that NNBG would be entrusted with a SGEI. (118) First, the UK explained that the nuclear plant would be constructed under market conditions at a later stage, while the UK wishes to incentivise its construction at an earlier stage. It would appear to be only sensible, if this is the logic behind of the UK measure, to shorten the period of payments. Indeed, the closer the date of effective construction of the nuclear plant to the date when it would have been constructed anyway, the more limited the incentive effect and the necessity of the aid. (119) Moreover, making the realisation of the project subject to a certain end date is rather typical for the granting of investment aid or structural funds. (120) Second, the aid will be disbursed only insofar as NNBG supplies electricity. This again shows that while the CfD aims at incentivising the deployment of nuclear within a certain time frame, payments under the CfD are not conceived as a form of compensation for the timely construction of the nuclear plant. The timely construction is a necessary but not sufficient condition for the granting of aid. (121) Third, requiring NNBG to pay back the difference between the Strike Price and the reference price is the system devised by the UK to ensure that the aid is limited to a certain amount. It does not amount to an SGEI obligation. The same can be said of the limit to a maximum contracted capacity. Again, this condition ensures that the amount of the aid is limited. It does not prevent NNBG from selling electricity on the market at market price. (122) Finally, the Commission notes that NNBG is not obliged to enter into the Investment Contract and can actually withdraw from it without particular penalties. NNBG is actually not obliged to build the nuclear plant, nor is it obliged to build it by a certain date. The UK authorities cannot enforce any obligation in this respect, they can only terminate the contract. (123) The UK authorities have referred in this respect to case T-17/02 of 2005 (28) (Fred Olsen), submitting that it is not required that the act assigning the tasks be a law or regulation, the only determining factor being the desire of the UK authorities to entrust a task to NNBG. (124) However, while in that case the SGEI might have been entrusted upon Fred Olsen at his instigation, this does not alter the fact that the company had certain service obligations to discharge. Those obligations were enforceable and the State might have enforced them. In this case, to the contrary and as explained above, NNBG does not have any such obligation. (125) On the basis of the information provided, the Commission considers at this stage that the Investment Contract does not represent a sufficiently specified entrustment act, given that many of the most important terms have not yet been agreed between NNBG and the UK government – including on timing and on the obligations to which NNBG commits. 6.4. Assessment of the second 'Altmark' criterion: Parameters used to set the compensation level (126) The UK believes that the second criterion is met, since the parameters based on which the compensation for the SGEI provision is paid are established in advance and in an objective and transparent manner. (127) The Commission notes that some of the terms being offered to NNBG are still unclear and the parameters have not all been set. This is in particular true about the nature of the CfD mechanism, and especially the terms based on which the difference will be calculated, notably a reference for the market price. (128) The UK claims that a 'reference price' will be used to calculate differences. At this juncture it is still unclear what the reference price will be, with the UK authorities pointing out that "[t]he manner in which the Reference Price against which difference payments are to be calculated is to be determined remains to be agreed according to the principles outlined in the Heads of Terms". Also, potential adjustments to the Strike Price, which are still being negotiated, have not yet been finalised. (129) Provided that these parameters are ultimately established in the final Investment Contract and before such contract enters into force, the condition that those parameters are set in advance could be fulfilled. However, as those elements have not been established yet and will be subject to further negotiation, the Commission is not yet in a position to verify that the negotiated parameters will be established in an objective and transparent manner so as to avoid conferring an economic advantage which may favour the recipient undertaking over competing undertakings. (130) The UK authorities have also indicated that the Strike Price will determine a reasonable profit. It is not known, however, whether the Entrustment Act will establish the criteria for calculating that profit. In particular, as will be argued more extensively in Section 8, the profitability of the project is subject to uncertainty. 6.5. Assessment of the third 'Altmark' criterion: No overcompensation (131) The compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations. (132) The UK states that the CfD mechanism does not allow for overcompensation, since NNBG will receive no more and no less than the Strike Price, and the Strike Price is set at a level which ensures only the recovery of costs plus a reasonable profit. (133) As indicated above, it is doubtful that NNBG has been entrusted with any particular PSO. Even if there were any PSO involved, the specific obligation would have to be the obligation to construct the nuclear plant at HPC by a certain date, i.e. in advance of what the market would deliver. (134) In order to prevent that compensation exceeds what is necessary to cover all or part of the costs incurred in the discharge of PSOs, it should be limited to the costs resulting from building and operating the HPC plant, or from supplying a set amount of electricity. (135) However, the UK authorities have not indicated what the costs resulting from the alleged PSO would be. Nor have the UK authorities demonstrated that the total compensation resulting from the differences between Strike Price and reference prices over the period of the Investment Contract would not go beyond these costs. (136) In addition, as to the reasonable level of profit that the UK authorities took into account, the Commission notes that the level of profit was negotiated with NNBG and it doubts that the profit was established by reference to the rate of return on capital that would be required by a typical undertaking considering whether or not to provide the alleged SGEI. (137) In addition, nothing in the Investment Contract seems to ensure that the compensation would be limited to that level of profit over the lifetime of the project. Depending on the evolution of wholesale electricity prices in the post-CfD period, NNBG’s profits might be substantially higher than those resulting from the negotiated rate of return. (138) The Commission notes in this respect that while the Investment Contract will last for 35 years and should in principle cap NNBG’s revenues to a certain level, this leaves 25 years of operational life where NNBG will be receiving revenues corresponding to the price which it is able to earn from the market, without any correction. It is impossible to forecast what levels of revenues, and hence of profits, NNBG will be able to make based on the HPC project as a whole, including the CfD and post-CfD period. As a result, the CfD, should it be considered as a SGEI compensation mechanism, does not ensure that the compensation will not exceed a reasonable rate of return. (139) The CfD scheme allows NNBG to finance and build a nuclear plant, since most of the costs which can be quantified and are relevant for the initial part of the operating life of the plant will be covered. Also, potential creditors are likely to look essentially at the first period of the life of the plant when deciding whether to provide funds or not, thereby allowing NNBG to overcome the large initial difficulties of constructing the plant and commence operations using a technology, nuclear energy, which is characterised by very high fixed and upfront costs. (140) However NNBG will also then be able to reap any benefits from the continuous operation of the plant in the post-CfD period. Such benefits might be very large, or indeed might not exist at all, depending on the market conditions in the post-CfD period. Precisely because of this uncertainty, it would appear to be impossible to determine at this stage whether NNBG will be overcompensated or not. The terms of the Investment Contract communicated to the Commission do not contain a correction mechanism that would take account of the effect of developments after the end of the CfD in order to ensure that no overcompensation has taken place overall. (141) While the Commission acknowledges that the assessment of overcompensation needs to be carried out in particular taking into account the duration of the scheme, (29) it also must note that, due to the technological characteristics of nuclear energy generation and of the costs involved, in this case limiting the assessment to the duration of the CfD would seem inappropriate. In fact, if it were accepted that NNBG has been entrusted with a SGEI task consisting of constructing a nuclear plant at HPC in advance of market delivery, it must then be considered that the entrustment ends with the timely construction of the nuclear plant but the payment of the compensation is made in instalments over a 35-year period. (142) The Investment Contract allows the plant to be built, however the profitability of the project is based on the entire operational life of the plant. Given the low level of the variable costs, the possibility exists that once the plant has been built and is operational, NNBG might be allowed to realise a super-normal rate of return when considering the entire life of the project – something which would be allowed through State aid. (143) The second uncertainty is related to the discounting of fixed costs. The nature of nuclear production, which requires very high levels of capital for the investment in the construction and hence before revenues can be generated, while also being characterised by a relatively low level of operating costs once the plant has been built, has few, if any, equivalents in commercial activities. As will be discussed in Section 8.1.2 below, this feature of nuclear technology might in itself represent a form of market failure. (144) However this also means that any assessment of the costs and revenues, and hence of the profitability, of the project crucially depends on the view that it is taken on the discount rate used to put a value to future cash flows. (145) The UK claims that the discount rate used in NNBG's Financial Model, of [9.75 to 10.25] per cent in post-tax and nominal terms, which is their estimate of the weighted average cost of capital ('WACC') of the plant, is a reasonable value to assess the project. For the reasons set out in Section 8.1.6 below, the Commission doubts whether such a value can be deemed to be the most appropriate one. While a range of values are likely to be deemed to be reasonable when assessing a project such as HPC, the Commission notes that even a small variation in the rate used bring about very large changes in the project results. As the Investment Contract does not contain any correction mechanism, it does not account for that uncertainty and does not ensure that the even for the duration of the Investment Contract, the project will not yield more than a reasonable rate of return on capital. (146) Finally, the Commission notes that NNBG will also obtain a State credit guarantee. Such guarantee is bound to lower the costs of financing the plant, hence the discount rate, which links back to the uncertainty highlighted above. It is however unclear, at this juncture, what the impact of the guarantee will be, since the financing structure of NNBG is not complete and the amount of debt, the amount of the guarantee and the rate paid are not yet known. (147) The UK claims that NNBG will pay a commercial rate for the guarantee, however this cannot be verified at the moment, because no data are available on the guarantee, and because it is not clear that a definite benchmark exists for the type of financing needs which the plant will need. 6.6. Assessment of the fourth 'Altmark' criterion (148) Where the undertaking which is to discharge PSOs, in a specific case, is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable of providing those services at the least cost to the community, the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with the necessary means, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations. (149) The UK authorities do not contest that NNBG was not chosen pursuant to a public procurement procedure. They consider, however, that the level of compensation was determined on the basis of an analysis of the costs which a typical undertaking, according to the Altmark criterion, would have incurred. In particular, the UK claims that NNBG is well-run and that the rate of return used in the Investment Contract is reasonable. Also, they stress that the Strike Price was calculated on the basis of NNBG's costs of construction and operation, including a reasonable profit and that all costs were substantiated and verified. (150) Where a generally accepted market remuneration exists for a given service, it provides the best benchmark for the compensation in the absence of a tender. The Strike Price, however, will – according to projections – in general be higher than the estimated average market price, i.e. the reference price. (151) The reference price however, will, according to the UK authorities, be too low, at least in the coming years and would not have attracted the investment within the timeline targeted by the UK. (152) It could therefore be appropriate to determine the amount of compensation by reference to an analysis of the costs that a typical undertaking would have incurred in discharging those obligations. (153) The reference to the costs of a ‘typical’ undertaking in the sector under consideration implies that there are a sufficient number of undertakings whose costs may be taken into account. Those undertakings may be located in the same Member State or in other Member States – for example, in the present case the Flamanville an Olikiluoto plants might be used as references. (30) However, the Commission takes the view that reference cannot be made to the costs of an undertaking that enjoys a monopoly position or receives public service compensation granted on conditions that do not comply with Union law, as in both cases the cost level may be higher than normal. The costs to be taken into consideration are all the costs relating to the SGEI, that is to say, the direct costs necessary to discharge the SGEI and an appropriate contribution to the indirect costs common to both the SGEI and other activities. (154) If the Member State can show that the cost structure of the undertaking entrusted with the operation of the SGEI corresponds to the average cost structure of efficient and comparable undertakings in the sector under consideration, the amount of compensation that will allow the undertaking to cover its costs, including a reasonable profit, is deemed to comply with the fourth ‘Altmark’ criterion. (155) The Commission notes that in this case, the Strike Price has been determined so as to enable NNBG to recover the project investment costs and deliver NNBG's target rate of return for the HPC project. (156) The UK authorities have commissioned experts to verify NNBG's cost estimates for the construction, operation and decommissioning of the HPC plant. (157) While the studies reveal that NNBG's cost estimates might be reasonable and within the range of benchmark data and while the benchmark data seems to have taken into account costs from other nuclear plants of EDF and others, the study also concludes that NNBG's development cost estimates are towards the upper end of the cost range. (31) As to the operating costs, it is only concluded that they are broadly consistent with those of equivalent benchmark plants and thus reasonable. (158) It thus appears that while the verification undertaken by the UK authorities might ensure that NNBG cost estimates are reasonable, they do not ensure that the Strike Price does not exceed the average cost structure of efficient and comparable undertakings in the sector under consideration and do not ensure that the service is provided at the least cost for the community. (159) In the study on reasonableness of cost estimates, it is observed that NNBG costs are towards the upper end of the benchmark cost range because the HPC plant is the first project of a kind in the UK. Indeed, NNBG has chosen a technology for HPC that is not yet operational anywhere in the world. However, as it does not appear that this technology was chosen at the request of the UK authorities to discharge the alleged SGEI, it is questionable whether the higher costs linked to that technology can be taken into account to justify – under the Fourth Altmark criteria – a compensation that is higher than what would be necessary. (160) Finally, as already indicated above, the Commission doubts that the level of profit used to set the Strike Price corresponds to the rate of return of a typical company considering whether or not to provide the SGEI for the whole duration of the period of entrustment, taking into account the level of risk. (161) On the basis of those elements, the Commission concludes that the information provided by the UK authorities is not sufficient to demonstrate that the fourth Altmark criteria is complied with. 6.7. Conclusion of the assessment under Art 107(1) TFEU based on the 'Altmark' criteria (162) On the basis of the arguments set out in Sections 6.2, 6.3, 6.4, 6.5 and 6.6above, and of the information provided to the Commission, the ‘Altmark’ criteria do not seem to be fulfilled for the notified measure. Therefore the Commission cannot exclude that the Investment Contract will provide NNBG with a selective advantage. 6.8. Investment Contract, State resources and imputability to the State (163) As the whole Investment Contract and the establishment of the Strike Price is due to the State, the advantage under the Investment Contract is imputable to the State. In addition, the Investment Contract will initially be entered into by the Secretary of State. (164) For advantages to be capable of being categorised as aid within the meaning of Article 107 TFEU, they must be granted directly or indirectly through State resources. This means that both advantages which are granted directly by the State and those granted by a public or private body designated or established by the State are included in the concept of State resources within the meaning of Article 107(1) TFEU. (32) In this sense, Article 107(1) TFEU covers all the financial means by which the public authorities may actually support undertakings, irrespective of whether or not those means are permanent assets of the public sector. (33) (165) The UK authorities do not contest that the Investment Contract is financed from resources under the control of the State. (166) The Commission considers, based on the elements explained below, that the advantage granted under the Investment Contract will be financed directly by the State during an initial period and then by a public or private body designated by the State. (167) Indeed, the Investment Contract will initially be entered into between the Secretary of State and NNBG. The Secretary of State will make the payments under the Investment Contract. It will be funded through a levy on suppliers and /or through normal UK Government funding mechanisms. Under such circumstances it must be concluded that any advantages paid under the Investment Contract are imputable to the State and are also financed from State resources. (168) Also after the transfer of the Investment Contract, the Commission considers that the advantage under the Investment Contract will be financed from resources under the control of the State for the following reasons. (169) First, the Strike price and the levy will be established by the State. (170) Second, the counterparty will in principle be a government-owned private company and will in any event be designated by the State. The counterparty’s articles cannot be amended without the Secretary of State’s consent. (171) Third, the counterparty designated by the State will administer the payment scheme, which includes the collection of the levy from suppliers and the collection of payments from generators when the market price is higher than the Strike price. It will also include payments to generators and payments to suppliers in certain cases. Part of the counterparty's tasks will probably be delegated to a subsidiary of Elexon (i.e. collecting the supplier obligation and making and receiving CfD payments from generators on behalf of the counterparty). (172) Fourth, the counterparty will be provided with revenue-raising power in the Energy Bill to enable it to collect from suppliers the funds required to make payments to CfD generators and a certain number of mechanisms will be put in place by the State to ensure certainty of payments to CfD generators in the event of a supplier not paying. These mechanisms will include the obligation for suppliers to provide collaterals, an insolvency reserve fund and the designation of a Supplier of Last Resort. The insolvency reserve fund would provide the counterparty with funding to cover a defaulting supplier’s levy payments for the period from its collateral being exhausted until a replacement supplier is appointed under the Supplier of Last Resort mechanism governed by Ofgem. (173) Fifth, the Counterparty will report to the State on the implementation. In this connection, it is intended that the counterparty will be governed by a framework document, setting out amongst other things the relationship between the counterparty and the State, the operating principles of the counterparty, matters reserved for the shareholder, the counterparty’s roles and responsibilities, management and financial responsibilities, and reporting and monitoring requirements. It will also set out the parameters within which the counterparty is to fulfil its functions in relation to CfDs. (174) Finally, in the unlikely event that the counterparty does not exist at the time payments are required to be made to NNBG (or suppliers), the Secretary of State has powers to either set up an Investment Contract counterparty to administer and make payments under the contract, collect payments from suppliers in order to pay generators under the Investment Contract or to pay generators directly. (175) Also, while normally the financial means to cover payments under the Investment Contracts will in principle be raise through the supplier obligation, it will remain possible that the UK Government make direct payments to the Counterparty. (176) On the basis of those elements, it can be concluded that after the transfer of the Investment Contract, the advantage provided under the Investment Contract will be financed through contributions imposed by the State and managed and apportioned in accordance with the provisions of the legislation by an entity designated by the State and controlled by the State. (177) It is to be noted that Elexon and the Counterparty will also obtain payments to cover the costs resulting from their tasks of collecting the supplier obligation and paying the generators. Also, Ofgem will be compensated for its tasks under the ERM. (178) In this respect, the UK claims that these entities will not be offering goods or services on the market in performing their duties under the Investment Contract and CfDs and accordingly their ability to recover their costs in respect of those functions (or indeed to be paid by the UK government for those functions) does not confer an advantage in favour of any undertaking and therefore falls outside Article 107. The Commission agrees with this analysis. 6.9. The credit guarantee: Existence of an advantage funded through State resources and imputable to the State (179) The UK claims that the credit guarantee which the UK government agreed to provide to NNBG does not constitute State aid. (34) In particular, the UK authorities claim that the credit guarantee will be provided on commercial terms. The UK authorities also state that the guarantee will comply with the Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees ('Guarantee Notice'), (35) in particular in relation to its pricing terms. (180) The Commission notes, however, that the guarantee will be provided by the UK government, and State resources can be involved to the extent that the State foregoes part of the remuneration to which it would be entitled if the guarantee price were not based on market premiums. The question of whether the State indeed foregoes revenues can only be ascertained at the moment when the guarantee is given. (181) The guarantee has not yet been granted and there are at this juncture very little details on the structure, the level and the price of such guarantee. Hence the Commission is not in a position to exclude that State resources are involved. (36) (182) In addition, while the UK has indicated that it intends to provide the guarantee on commercial terms, the Commission is not convinced that the methodology proposed to determine the price of the guarantee ensures that such price would be consistent with the price which a market investor would offer. (183) Without taking a final view on whether the formula proposed by the UK authorities to price the guarantee fee appropriately reflects the approach which a market investor would be expected to take in a similar situation, the Commission notes that market investors are not likely to derive optimal pricing levels from first order equivalences, as the UK is proposing to do. A market operator providing credit guarantees would be likely to be able to use standard benchmarks to set the price of the guarantee. Indeed, what the UK approach seems to indicate is that it would be unlikely that a market operator could be in a position to adequately price the guarantee, given the uniqueness of the investment and the lack of appropriate benchmarks. (184) In particular, the approach taken by the UK authorities is an 'expected loss approach,' i.e. an approach which attempts to set the price of the guarantee by taking into account the probability of a loss occurring. Given the high uncertainty around expected loss and the potential for relatively high unexpected losses, it seems that the approach should at least provide some discussion about the causes and nature of unexpected losses and the potential of these occurring as well as the impact on debt guarantee fees. In this respect, the current approach seems lenient and incomplete. (185) Also, the approach proposes that an 'appropriate' return on equity for the credit guarantor would be given by multiplying a 4 per cent risk premium with an 8 per cent notional reserve. However this proposal lacks justification, or indeed evidence that a market operator would behave in a similar way. (186) Moreover, the debt guarantee referred to in the Notification seems to differ from ordinary debt guarantees in that it would be drawn before equity, apart from equity already spent, (37) and except when the plant completes outside the 'long-stop date' and in case of cost overruns. (38) However market-provided guarantees are usually drawn only after equity has been wiped out in all scenarios. It would therefore appear that the credit guarantee provided by the UK might diminish the risks borne by equity holders, except in the circumstances specified above. (187) For the reasons set out above, the Commission cannot at this stage rule out that the provision of a credit guarantee by the UK on NNBG's debt involves State aid. 6.10. Distortion of competition and effect on trade (188) Both the Investment Contract and the credit guarantee have the potential to distort competition and affect trade between Member States. The Commission notes in this respect that the generation and supply of electrical power is liberalised. As in this case the notified measures will enable the development of a large level of capacity which might otherwise have been the object of private investment by other market operators using alternative technologies, from either the UK or from other Member States, the notified measures can affect trade between Member States and distort competition. 6.11. Investment Contract and Credit Guarantee: General conclusion on the existence of aid (189) The Commission therefore concludes, at this stage, that the Investment Contract and the credit guarantee involve State aid within the meaning of Art 107(1) TFEU. 6.12. Existence of aid within the meaning of Article 107(1) of the TFEU: Compensation in case of political shutdown (Secretary of State agreement) (190) The UK intends to grant compensation to NNBG in case the HPC plant were to be shut down for reasons not directly imputable to its operations, and in particular due to changes in government policy. (191) The UK does not seem to consider this indemnification as aid. (192) According to the jurisprudence of the European Court of Justice damages paid by national authorities to compensate for a damage caused public authorities to individuals do not constitute State aid within the meaning of Article107 (1) TFEU (39). (193) This principle is also set out in the decision making practice of the Commission. In the decision1999/268/EG on the acquisition of land under the German Indemnification and Compensation Act, the Commission stated that compensation in kind or monetary compensation to the operator who had suffered losses as a result of expropriation or the like did not constitute an advantage in the meaning of Article 107(1) TFEU as the compensation merely reflected the legal principles common to all Member States regarding the protection of property rights. (40) (194) Equally the Commission has in the Akzo Nobel Decision provided that compensation for the withdrawal of the approval to produce chlorine and monochloroacetic acid does not constitute aid: "Indemnifications normally do not entail a selective advantage to the company in so far as they merely compensated for damage resulting from an official act, where the indemnification is the direct result of this official act on the basis of a general system for indemnifications that derives directly from constitutional rights of property as recognised by the judicial system. (41)" (195) In the light of this case law and case practice, the compensation in case of early shut down could possibly not qualify as State aid. However, before a conclusion can be reached, it is necessary that the UK authorities provide more information on whether this compensation results from a general principle and would also be available to other market operators placed in a similar situation. 6.13. Legality of the aid (196) The UK authorities confirmed to the Commission that the granting of the aid is subject to the approval by the European Commission. By notifying the measure before its implementation, the UK authorities have fulfilled their obligation according to Article 108(3) TFEU. 7. ASSESSMENT OF THE MEASURE AID UNDER ARTICLE 106(2) TFEU (197) The Commission notes that the notified measure cannot be assessed under Commission decision 2012/21/EU, (42) given that it does not fall under any of the categories included in Art 2 of that decision. (198) The Commission has explained how it would interpret Art 106(2) TFEU, when assessing a notified measure which involves State aid and the provision of a SGEI, in its Communication on the European Union framework for State aid in the form of public service compensation (‘the SGEI Framework’). (43) (199) In particular, the SGEI Framework points out that the following conditions need to be taken into account in order for a measure involving the provision of State and being assessed under Art 106(2) to be deemed, on balance, not to unduly affect competition and trade: (i) The measure should entail the provision of a genuine SGEI; (ii) There should be an entrustment act setting out PSOs and compensation levels; (iii) The duration should be justified; (iv) The measure should be compliant with Directive 2006/111/EC (44) on the transparency of financial relations; (v) The measure should be compliant with Union public procurement rules; (vi) The measure should not discriminate; (vii) Compensation should cover costs and a reasonable profit; and (viii) The measure should not affect trade between Member States. 7.1. The measure should entail the provision of a genuine SGEI (200) The UK claims that the notified measure is a genuine SGEI for the same reasons as those put forward in their claim that the measure is not aid based on the application of the first ‘Altmark’ criterion. However, and for the arguments set out in Section 6.2 above, it is unclear whether the measure can indeed be qualified as a genuine SGEI. (201) In particular, the SGEI Framework specifies that “Member States cannot attach specific public service obligations to services that are already provided or can be provided satisfactorily and under conditions, such as price, objective quality characteristics, continuity and access to the service, consistent with the public interest, as defined by the State, by undertakings operating under normal market conditions (45).” (202) It is unclear that the market would not provide the service asked of NNBG under the potential SGEI – and in fact exactly the same product, i.e. baseload electricity at technical standards consistent with the TSO specifications, is normally provided by the market. If the SGEI encompasses both the product and the terms of the Investment Contract, the Commission would note that the market is expected to provide nuclear energy without Investment Contracts, as argued above, and that the link between the public objectives specified by the UK, i.e. security of supply, decarbonisation, diversification and affordability, would be better achieved under the terms of the notified measure than otherwise. Indeed, it would appear that the proposed SGEI would contribute to higher prices, as noted above. (203) For the reasons set out above, the Commission doubts whether the notified measure qualifies as a genuine SGEI. 7.2. There should be an entrustment act setting out PSOs and compensation levels (204) The UK claims that the entrustment act complies with condition 2.3 under the SGEI Framework for the same reasons as those put forward in their claim that the measure is not aid based on the application of the first ‘Altmark’ criterion. (205) While not necessarily disputing the UK’s claim on the characteristics of the alleged entrustment act, the Commission must however reiterate that several of the key features of such act are not yet final. It is therefore difficult to conclude that condition 2.3 of the SGEI Framework is met, for the reasons set out in Section 6.3 above. (206) The Commission also notes that it is unlikely that the notified measure can be deemed to include any arrangement to avoid overcompensation, as specified in point 16(e) of the SGEI Framework. In particular, the measure not only appears to be structured in a way which excludes the possibility of overcompensation, as argued in Section 6.5 above, but also does not include any mechanism which might ensure that, if overcompensation does materialise, it can be recovered in future periods. (207) For the reasons set out above, the Commission doubts whether the notified measure satisfies condition 2.3 of the SGEI Framework, in particular since a mechanism to prevent or avoid overcompensation is not included. 7.3. The duration should be justified (208) The UK claims that the duration of the Investment Contract is justified because it ensures that investment is secured while minimising the cost to consumers, thereby complying with condition 2.4 of the SGEI Framework. The UK government argues in particular that the chosen duration is less than the depreciation period, which is claimed to be 60 years, and reconciles the need to secure the investment, by providing a 'package' of Strike Price, duration and rate of return which is acceptable to NNBG, with the objective of leaving some degree of market risk, in particular in the post-CfD period. (209) As results from Section 6.3 above, the Commission doubts that the 35-year period can be considered as an entrustment period at all given that NNBG does not seem to have been entrusted with any obligation. The 35-year period simply seems to correspond to the period during which the aid will be paid out. (210) In addition, even if an entrustment existed and the 35-year period were considered as the entrustment period, the Commission notes that this period does not seem to have been determined on the basis of objective criteria as required by condition 2.4 of the SGEI Framework. Based on the UK’s own statements, the duration has been negotiated and is based on a range of considerations and ultimately on the contract counterparties to conclude an agreement. (46) (211) For the reasons set out above, the Commission concludes at this stage that the notified measure does not seem to comply with condition 2.4 of the SGEI Framework. 7.4. The measure should be compliant with Directive 2006/111/EC on the transparency of financial relations (212) The Commission has at this stage no reason to believe that condition 2.5 of the SGEI Framework might not be met. 7.5. The measure should be compliant with Union public procurement rules (213) The UK government claims that Union public procurement rules, in particular those enshrined under Directives 2004/17/EC (47) and 2004/18/EC, (48) do not apply to the notified measure, as such measure does not involve the procurement of supply, works or services for its benefit. (214) On the basis of the available information, the Commission preliminarily believes that it is not possible to conclude that the Investment Contract concerns the acquisition of any works, services or supplies and thus qualify as public contracts or concessions. (215) First, it is not clear whether the Investment Contract establishes any specific requirements on the supply, to the contracting authority or to third parties, of any type of services, goods or works. Those contracts seem to involve only a general commitment, by the nuclear power companies, to invest and operate new plants. (216) Secondly, the contracts do not seem to cater for mutually binding obligations which could be enforceable before a Court. To the contrary, the contracts appear to contain just certain conditions such as several ‘hold points’ relating to the construction/commissioning phase of the nuclear reactors at each of which the contractor runs the risk of seeing the contract terminated if certain requirements are not met. (217) Thirdly, there is no selectivity on the number of possible economic operators that can enter into an Investment Contract other than those resulting from the limited number of sites available for the construction of nuclear power stations. As UK authorities have highlighted, the system remains open to all potential interested parties. (218) The Commission therefore considers that indeed, Directives 2004/17/EC and 2004/18/EC, and in fact public procurement rules do not apply. Those rules apply only when the State is proposing to enter into a public contract. A contract will constitute a public contract within the meaning of procurement rules, when the States is purchasing works or services under a mutually enforceable contract before a court. (219) However NNBG is not under the obligation to contract the nuclear plant or provide a specific service in the sense that the State cannot enforce any obligation to construct the nuclear plant or provide a certain service in Court. For that reason, the Commission has preliminarily concluded above that NNBG has not been entrusted with any tasks and obligation of general economic interest. For the same reason, it seems appropriate to conclude that public procurement rules do not apply. (220) By contrast, if it were to be concluded that NNBG is entrusted with the realisation of works or a service the realisation/supply of which would be enforceable before a court, public procurement rules would be applicable and should have been complied with by the UK, which on the basis of the information available at this juncture does not seem to be the case. The UK government admits that no public tender has been used to select the beneficiary. In addition, the terms of the agreement with the beneficiary have been reached through private negotiation. (221) For the reasons set out above, if NNBG were to be considered as entrusted with SGEI obligations, the Commission would have strong doubts that the notified measure satisfies condition 2.6 of the SGEI Framework. 7.6. The measure should not discriminate (222) The UK seems to imply that other operators could be entrusted with SGEIs under CfDs. As the Commission could so far not identify any clearly defined SGEI, it is also not possible at this stage to determine whether or not the alleged SGEI is discriminatory. However, the Commission notes that the Investment Contract seems to be tailor made for NNBG. The UK has acknowledged that it will contain specificities that other CFDs will not necessarily contain. Also, the terms of the Investment Contract are being negotiated with NNBG. On this basis, if NNBG were to be considered as entrusted with SGEI obligations, the Commission is at this juncture not convinced that the SGEI would not be discriminatory. 7.7. Compensation should cover costs and a reasonable profit (223) The UK claims that the measure does not result in a level of compensation which exceeds what is necessary, taking into account the costs, revenues and a reasonable profit. (224) The SGEI Framework states that the calculation of compensation levels should, where possible, be calculated by taking account of the ‘net avoided cost methodology.’ According to such methodology, the “net cost necessary, or expected to be necessary, to discharge the public service obligations is calculated as the difference between the net cost for the provider of operating with the public service obligation and the net cost or profit for the same provider of operating without that obligation (49).” (225) The Commission believes that it is difficult to ascertain whether this methodology, which in principle would be applicable in this case, is indeed used for the notified measure. In particular, the measure does not appear to be aimed at compensating a provider for the obligation to incur higher costs than it would otherwise incur. To the contrary, the measure appears to be aimed at providing incentives for the provider to invest in the project and, ultimately, offer the product, i.e. electricity, on the market. (226) It would therefore seem that the condition cannot be fulfilled by the notified measure. Moreover, as argued in Section 6.5 above, the level of compensation cannot be defined clearly, given the long duration of the measure, the costs involved in the project, and the uncertainties over electricity prices, based on which the differences will be calculated. Consequently, it cannot be determined whether overcompensation might take place, and whether the rate of return can be deemed to be reasonable. (227) In particular, since the Commission believes that overcompensation constitutes incompatible State aid, (50) and that the notifi