EDF’s U.K. Nuclear Deal Faces State Aid Probe by EU

Electricite de France SA’s deal with the U.K. to build the nation’s first new nuclear plant in two decades faces an in-depth investigation by the European Union, which must approve large state subsidies.

The European Commission “has doubts that the project suffers from a genuine market failure,” the regulator said in an e-mailed statement today. It “will assess whether the construction of a nuclear power station could not be achieved by market forces alone, without state intervention.”

EDF, with Areva SA and two Chinese nuclear companies, agreed in October to construct the plant at Hinkley Point in southwest England after the U.K. government offered to buy electricity at a price that’s almost double today’s market rate under a 35-year contract. The project will cost about 16 billion pounds ($26.2 billion) and take 10 years to build.

A setback in the plans by the EU may derail U.K. Prime Minister David Cameron’s efforts to lure 110 billion pounds of investment into Britain’s aging electricity infrastructure by the end of the decade. The investigation could delay the venture, since EDF may hold investments until it’s certain the contract doesn’t fall foul of EU rules on state aid, according to Totis Kotsonis, a London-based competition lawyer at Norton Rose Fulbright LLP.

“They’re relying on, over a period of 35 years, to know that if the reference price goes below the strike price, then the government will step in and subsidize,” Kotsonis said by phone. “If they’re not going to have that insured, would EDF be willing to start investing? I think not.”

Large Investments

The government agreed the Paris-based utility will earn 92.50 pounds a megawatt-hour for power from Hinkley Point, irrespective of the market or reference price. The contract garnered criticism from environmental groups such as Greenpeace which said it locks consumers into higher energy bills, at a time when tariffs are rising.

The EU probe is standard for large investment projects and was always part of the process for developing Hinkley, Energy Secretary Ed Davey said today in a statement.

“We will use this period to demonstrate how the project meets state aid rules and provides good value for consumers while cutting carbon in the energy sector,” Davey said.

Potential hurdles to EU approval include the duration of the contract that the commission would need to agree is a “legitimate time frame,” Norton Rose Fulbright’s Kotsonis said. The investigation may take as much as 18 months, he said.

`Far-Reaching Reform'

The EU inquiry is proceeding as expected and in time for a project investment decision due in Summer, EDF said today in an e-mailed statement.

“As part of a far-reaching reform of the U.K. energy market, it is right that the European Commission should examine the contract and highlight potential challenges,” it said.

The market reforms, including so-called contracts for difference guaranteeing a price for power, are part of an energy bill that today became law.

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