EU aid rules do not allow counterparty to n-contracts, says UK minister
LONDON - With EU State Aid rules not allowing the UK government from direct involvement in new nuclear contracts, energy minister Charles Hendry Tuesday informed the House of Commons Energy and Climate Change Committee that various other options are being looked at.
The EU State Aid rules do not allow the UK government from acting as counterparty to new nuclear Contracts for Difference (CfD), Hendry said.
The hearing comes as the government contemplates setting up new nuclear power plants and also the sale of the Horizon Nuclear Power.
It also coincides with the UK government preparing for energy market reforms, some key aspects of which are still being formulated.
The minister conceded that "we need clarity on the counterparty for CfDs, but the proposal has to be within EU state aid rules."
The CfD would establish 'strike prices' for electricity from new nuclear, offshore wind etc.
If the wholesale electricity market price dips below this strike price over the period of the contract, investors would be compensated via a levy on consumer bills. If the wholesale price exceeds the strike price, the investor reimburses consumers.
The government's original plan had been to sign the CfD contracts with generators, thereby lending its sovereign 'AAA' credit rating to the arrangement and boosting its ability to help investors raise finance.
However, with the government's direct involvement not acceptable under the European Commission's state aid rules, Hendry said the National Grid company is to be the signatory, by splitting its operations.
One part will continue as the grid operator; the other will administer the 'settlement process' and determine the 'strike price' for the CfD.
Money paid out or collected from utilities will be handled by National Grid and factored into the billing process.
This move away from government-backed CfDs is less attractive to investors said Volker Beckers of RWE, one of the joint venture partners along with E.On
Beckers stated, "We are not in the position of counting on a AAA contract and any deterioration from that point inevitably has an impact [on the cost of finance]."
Tony Cocker of Eon said it was important to "ensure that [CfD is] as immune as possible from future political and regulatory interference."
Hendry told the MPs that government would be legally liable for lost CfD payments, not National Grid, if any future government decides to change the CfD.
The minister said the government is still formulating the package of legislation it will present next week. This will have to be fully compliant with EC requirements.
Horizon's proposal was to build up to 3600 MWe of new nuclear capacity at Wylfa in north Wales at a cost of around 10-12 billion pounds ($16-19 billion), said Beckers. It would have taken 8-10 years to complete.
Nevertheless, all three men giving evidence on Tuesday agreed that the opportunity to set up the plant at Wylfa represents one of the best in the nuclear market as the UK has one of the best regulatory and legislative frameworks.
Hendry said there was "a window of a few months" for "serious interest" to be shown in Horizon by international buyers, and some "significant interest" had already been seen.
No firms were named, but Hendry pointed out that some potential buyers may have recent proven experience in building nuclear plants and this means the Wylfa project "could happen on the same timescale or faster" than originally planned.
All Horizon's potential buyers are from outside the UK but Hendry was unperturbed by MPs' questioning on this, which they noted is a major issue of interest to the public.
The energy minister pointed out that no UK companies want to take the lead in nuclear projects which is why potential investors are being sought.
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