UPDATE 2-EU to rule on controversial British nuclear deal this year

Fri Feb 7, 2014 1:07pm EST

* EU's Almunia wants final decision by year-end

* EU letter to UK says proposed deal involves state aid

* Lawyers see little chance of deal as is

By Huw Jones and Geert De Clercq

LONDON/PARIS, Feb 7 (Reuters) - European Union antitrust chief Joaquin Almunia said on Friday Britain must clarify why state aid is needed to build a 19 billion euro ($26 billion) nuclear plant with French state-controlled utility EDF.

"We need the UK authorities' cooperation. My intention is to be able to adopt a final decision on this before the end of the year," he told reporters in London.

The European Commission has challenged the British government's assertion that power price guarantees and state-backed loans for the Hinkley Point project are legitimate aid.

In a 68-page letter to the British government dated Dec. 18 and released last week it said the Hinkley Point contract between EDF and the government has the "potential to distort competition and affect trade between Member States".

Specifically, it said a proposed "Contract for Difference" guaranteeing prices for power the plant produces "effectively insulates" EDF and its investment partners from the market.

The government proposes guaranteeing a power price of 92.50 pounds ($150) per megawatt-hour for 35 years, which is more than twice the current market rate.

The Commission asked Britain to reply and submit any additional information within a month.

"From a market investor's point of view, it would be safer to give up hope that the UK government can convince the European Commission and to opt for a realistic assumption that the deal is off," said Doerte Fouquet, a Brussels-based lawyer at Becker Buettner Held who specialises in EU energy policy.

PUBLIC SERVICE

The legal discussion partly hinges on whether the two planned reactors can be considered to provide a "service of general economic interest". The Commission said it would not be appropriate to attach public service obligations to an activity already provided by operators under normal market conditions.

It points to British nuclear plants which operate commercially without state support, as well as to two Areva-designed EPR reactors - similar to the ones being planned for Hinkley Point - being built in Olkiluoto, Finland and Flamanville, France, without state support.

The Commission also questioned the nuclear project's decarbonisation claims.

While certain generation technologies emit less carbon emissions, their impact on the environment might nonetheless be considered substantial, it said, citing storage of radioactive waste and the potential for accidents.

For Britain, the Hinkley Point C project is important as it looks to replace 20 percent of its ageing coal and nuclear power plants over the coming decade. For France, the project offers an important export contract for the country's nuclear sector.

A compromise is likely, according to specialists who expect the European Commission and the UK government to engage in negotiations. Yet the question is to whether the contract, after possible changes, would remain economically realistic for EDF.

If the EU wants to decarbonise electricity production, it must help low-carbon technologies, said IEA analyst Manuel Baritaud. "Governments will have to find ways to boost the net present value of low-carbon investments and mitigate the market risks for investors," he said.

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