The European Commission today gave the go-ahead for the UK government to subsidise the building of two new nuclear reactors. The decision is something of a U-turn for the commission, which outlined a range of objections to the deal late last year.

The UK government last October signed a deal with energy company EDF to build the first new nuclear power plant in the UK for 20 years, worth between £16 billion and £24.5 billion. The government agreed to pay a guaranteed price for the plant’s electricity and underwrite the loans needed to get construction started.

The European Commission was called in to check the deal didn’t contravene EU laws designed to avoid governments giving unfair support to particular industries. Last December, the commission published a long list of objections to the deal. But today it has decided the deal can go ahead after all.

So why the change of heart?

Clawing back profits

It’s hard to know exactly what went on behind the scenes over the last 10 months, but the commission claims two changes to the Hinkley deal were enough to get it to change its mind.

The commission originally said the UK government hadn’t forced EDF to agree to pay enough money back if the Hinkley plant was more profitable than expected. The government agreed to tweak the agreement earlier this month, and seems to have won the commission round.

The commission was unhappy with how the government and EDF initially agreed to split the profits from the plant once it was up and running, called a ‘gain share mechanism’.

The deal originally mean EDF would keep all the profits until it started to make a 15 per cent return on its investment. At that point, it would evenly split the extra profits with the government for 35 years. But the commission said the UK government had struck a bad deal.

Under the revised terms, the government will get 30 per cent of the profits once EDF starts making an 11.4 per cent return on its investment, over the project’s total 60 year lifetime. A second threshold was also introduced, where the government will get 60 per cent of the profits once EDF starts making a 13.5 per cent return on its investment.

EDF will pay the government back by agreeing to the guaranteed price of electricity, known as the strike price, being lowered once its profits hit that threshold. The government has agreed to initially pay £92.50 for each megawatt hour of electricity Hinkley C produces, almost double the current market price.

The commission also forced the UK government to raise the fee it will charge EDF in return for guaranteeing the loans the company needs to take out to build the plant. This should cut the subsidy by around £1 billion and cut EDF’s profits by 0.3 per cent, the commission says.

The government originally wanted to charge between £225 million and £250 million to underwrite up to £10 billion worth of project finance.

Future challenges

The UK government will be relieved to see one of its flagship energy projects finally approved. But not everyone is happy.

Greenpeace Europe said the commission’s decision was “a world record sell-out to the nuclear industry at the expense of taxpayers and the environment”. The Austrian government has promised to challenge the decision in the courts. It is expected to argue that nuclear shouldn’t qualify for government subsidies as it is a mature technology. A line of argument similar to one of the commission’s original concerns.

So while today’s decision means the government and EDF have cleared a significant hurdle, it’s certainly not the final one. Among others, EDF now faces the not-inconsiderable challenge of actually getting the plant built.

EDF currently has an agreement only “in principle” from Areva, and a number of Chinese firms. EDF has previously said it couldn’t make a final investment decision until the commission made its state aid announcement and outside investment was confirmed.

Bringing the project in on time and budget will also be a challenge. Many new nuclear plants across Europe have taken longer and cost more to build than was originally anticipated. The European Commission today said it thought Hinkley could cost as much as £24 billion to construct, once financing costs and inflation were included. That’s a considerable hike from the UK government’s original £16 billion estimate.

So there are still some significant  stumbling blocks before a the UK’s new nuclear era can be said to have begun in earnest.