The Rt Hon Philip HAMMOND Secretary of State for Foreign and Commonwealth Affairs King Charles Street London SW1A 2AH UNITED KINGDOM Commission européenne, B-1049 Bruxelles – Belgique Europese Commissie, B-1049 Brussel – België Telephone: 00-32 (0) 2 299 11.11.

EUROPEAN COMMISSION

Brussels, 09.10.2015 C(2015) 6827 final

PUBLIC VERSION

This document is made available for information purposes only.

Subject: State Aid SA.34962 (2015/N) – United Kingdom

Waste Transfer Contract for New Nuclear Power Plants

Sir,

The Commission wishes to inform you that the aid measure aimed at providing Waste Transfer Contracts to provide waste disposal services for spent fuel and intermediate level waste (‘ILW’) for nuclear plants to be built in the UK in the future (new nuclear power plants), against payment of a Waste Transfer Price and Risk Fee, is compatible with the common market in accordance with Article 107(3)(c) of the Treaty for the Functioning of the European Union (hereinafter "TFEU") and has therefore decided not to raise objections to the notified measure.

1. PROCEDURE

(1) Following pre-notification contacts, the UK notified for legal certainty its proposed measure on 10 July 2015 by electronic notification, registered by the Commission on the same day. Additional information was provided on 10 and 14 September 2015. The proposed scheme relates to waste transfer contracts between the UK Government and operators of new nuclear power stations. Under those contracts, operators would be offered disposal services for spent fuel and intermediate level waste against payment of a price which is capped.

2. DETAILED DESCRIPTION OF THE MEASURE

2.1. Background and objective

(2) The UK has started an ambitious reform of its energy sector: the Electricity Market Reform (‘EMR’). It aims at: (i) decarbonising the electricity sector by

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2050; (ii) safeguarding security of supply; and (iii) ensuring diversity and affordability of electricity supply.

(3) Together with renewables and fossil fuels with carbon capture and storage, nuclear power is one of the three complementary key elements of the UK's strategy for moving towards a decarbonised, diverse electricity sector by 2050.

(4) Like many other Member States, the UK is going through a challenging transition from a carbon-intensive to a low-carbon economy which it is addressing, among other things, by adopting policies in support of renewable energy sources. The complex consequences of this transition are compounded by the volatility of energy fuel prices, and have led over time to a lack of investments in electricity generation other than (the supported) renewable electricity. Private investors are currently not deploying enough generation installations, including nuclear generation, to cope with predicted demand in a situation where old, carbon-intensive power stations are due to be phased out.

(5) The UK considers that nuclear energy can improve security of supply while also contributing to the reduction of carbon emissions, given that nuclear power plants are characterised by very low carbon emissions1. Currently the UK has a fleet of 9 nuclear plants that are scheduled to shut mostly during the 2020s. Overall, nuclear energy accounts today for about 20 per cent of overall electricity generation in the UK.

(6) The UK Government has observed that a number of market failures and other barriers were hampering investments in new nuclear power generation. The UK therefore plans to facilitate investment in nuclear energy by remedying those market failures and removing barriers so as to allow for the construction of new nuclear power plants that could replace the current fleet of 9 nuclear plants.

(7) As market failures and barriers to investments, the UK had first identified the absence of market-based risk hedging financial instruments with time-horizon longer than 15 years and a risk of political "hold-up". The Commission examined those market failures and barriers to investments in its decision of 8 October 2014 relating to aid provided to a new nuclear power plant, Hinkley Point C ('HPC' and 'HPC decision') and confirmed their existence2. To tackle those market failures and barriers, the UK is going to provide State aid for a new nuclear power plant through Contracts for Difference ('CfD'), i.e. a premium on top of the wholesale price of electricity which will be paid by a government-owned body to the operator, up to a fixed support price (the Strike Price)3. The CfD is actually not specific to electricity generation from nuclear energy but will also be used to

1 See Nuclear Energy Agency, The Role of Nuclear Energy in a Low-carbon Energy Future, OECD,

2012. According to figures presented in this report, the entire nuclear energy cycle would produce a level of greenhouse gas emissions which is among the lowest of existing fuels sources, together with hydroelectric and wind power generation. The report is available at the following address:

http://www.oecd-nea.org/nsd/reports/2012/nea6887-role-nuclear-low-carbon.pdf 2 Commission Decision (EU) 2015/658 of 8 October 2014 on the aid measure SA.34947 (2013/C) (ex

2013/N) which the United Kingdom is planning to implement for support to the Hinkley Point C nuclear power station (OJ L 109, 28.4. 2015, section IX.3).

3 CfDs will be used for both new nuclear plants and for renewable energy sources.

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support other low carbon generation plants, in particular renewables4. In its HPC decision the Commission found that the CfD for HPC, as well as other State aid measures, i.e. the credit guarantee and the Secretary of State Agreement5, were compatible aid.

(8) In addition, the UK has identified a further market failure – high level of uncertainty of spent fuel and radioactive waste disposal costs, which the UK proposes to address through a regime for the final disposal of spent fuel and intermediate level waste (ILW) which is the object of this decision. The regime aims at providing a certain degree of certainty to investors in new nuclear generation over their cost exposure regarding final disposal of spent fuel and ILW. Potential new nuclear operators are under the obligation to make prudent financial provisions for their future radioactive waste management liabilities, including for the final disposal of the waste. However, costs linked to the final disposal of spent fuel and ILW are not known. This uncertainty hampers investment decisions and also prevents access to finance. The UK is intending to tackle this market failure by means of the scheme under assessment in this Decision. In particular, operators will know from the outset their maximum cost exposure that will be determined by a Cap on the Waste Transfer Price6.

2.2. Spent fuel and radioactive waste management

(9) The generation of power from a nuclear reactor generates radioactive waste at different stages of the fuel cycle, as well as spent fuel. The level of hazard of all radioactive waste due to the radioactive decay diminishes with time. Depending on the radioactivity of the waste, a distinction is generally made between high-level waste (HLW), intermediate level waste (ILW) and low level waste (LLW). Also, depending on the time needed to decay, distinction is made between short-lived and long-lived waste.

(10) The most significant HLW (if spent fuel is declared as waste) from a nuclear reactor is the spent nuclear fuel left for cooling for several years in the reactor. If not declared as radioactive waste7, spent fuel can be reprocessed for further fuel use. During reprocessing, the spent fuel is dissolved and uranium and plutonium are separated and can be reprocessed as Mixed Oxide Fuel (MOX). The reprocessing generates reprocessing waste, a part of which also constitutes HLW.

4 The Commission approved the aid scheme providing CfDs for renewables in its State aid decision of

23 July 2014, SA.36196 (2014/N) – United Kingdom – Electricity Market reform – Contract for Difference for Renewables (OJ C 393 07.11.2015) .

5 The HPC project will benefit from a State Credit Guarantee on the debt it issues. The Credit Guarantee guarantees the timely payment of principal and interest of qualifying debt. The Credit Guarantee allows the investor to raise debt, while the CfD allows the investor to commit equity to the project. The Secretary of State agreement provides for certain compensation in case of a political shutdown of the HPC project.

6 See Section 2.6.2 of this Decision. 7 Radioactive waste is radioactive material for which no further use is foreseen or considered by the

Member State or by a legal or natural person whose decision is accepted by the Member State, and which is regulated as radioactive waste by a competent regulatory authority under the legislative and regulatory framework of the Member State (Article 3(7) of the Council Directive 2011/70/Euratom of 19 July 2011 establishing a Community framework for the responsible and safe management of spent fuel and radioactive waste, OJ L 199/48, 2.8.2011).

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(11) ILW is waste that, because of its content, particularly of long lived radionuclides, requires a greater degree of containment and isolation than that provided by near surface disposal. It might include used filters, steel components from within the reactor and some effluents from reprocessing spent fuel but also contaminated materials from reactor decommissioning.

(12) LLW is waste that is above clearance levels, but with limited amounts of long lived radionuclides. It could contain lightly-contaminated items like tools and work clothing from power plant operation. The notified scheme does not relate to the management of LLW.

(13) HLW is waste with levels of activity concentration high enough to generate significant quantities of heat by the radioactive decay process or waste with large amounts of long lived radionuclides that need to be considered in the design of a disposal facility for such waste. Handling and storing it safely can be done as long as it is cooled and plant workers are shielded from the radiation it produces by a dense material like concrete or steel, or by a few metres of water. Water can provide both cooling and shielding for spent fuel storage, so a typical reactor will have its fuel removed underwater and transferred for storage (wet or dry). After about five years it can be transferred into dry ventilated concrete containers, but it can also be kept in the pool for several decades (interim storage).

(14) After that period of interim storage, the HLW can be disposed of. Currently, disposal in deep underground engineered facilities - geological disposal - is considered as the safest and most sustainable option for the long-term management of HLW that is available or likely to be available in the foreseeable future8. While storage facilities for LLW and ILW exist in several Member States there exists today no such geological disposal site. Progress in development of deep geological disposal has been made in Finland9, France10 and Sweden11, the most advanced being Finland where the site has been selected and the construction licence was provided in February 2015. It is foreseen to be operational around 2020-2025.

2.3. The UK Energy Act 2008

(15) The UK Energy Act was introduced in 2008 and entered into force on 26 November 200812.

8 https://www.iaea.org/OurWork/SS/storage.html; see also Recital 23 of Council Directive

2011/70/Euratom of 19 July 2011 establishing a Community framework for the responsible and safe management of spent fuel and radioactive waste.

9 2013 EU Decommissioning Funding Data, Section 2.9.3. 10 http://www.inventaire.andra.fr/sites/default/files/documents/pdf/fr/dossier_1_-

_les_solutions_existantes.pdf. 11 2013 EU Decommissioning Funding Data, Section 2.4.4. 12 Available at the following address:

http://www.legislation.gov.uk/ukpga/2008/32/pdfs/ukpga_20080032_en.pdf.

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(16) It requires prospective operators of new nuclear power stations in the UK to have a Funded Decommissioning Programme (FDP) approved by the Secretary of State for Energy and Climate Change before construction can begin. After approval the FDP is regularly reviewed. A FDP must set out the operator's cost plans for decommissioning the power station and managing and disposing of the spent fuel and radioactive waste it will produce as well as make prudent financial provision for those costs. Hence an approvable FDP will require the operator to have a credible plan for the long term management of their spent fuel and radioactive waste, in particular for their spent fuel and ILW.

(17) The UK intends to build a permanent geological disposal facility (the "Geological Disposal Facility", GDF) for the final disposal of radioactive waste from already shut down and still operational nuclear power plants (the waste of those plants is considered as "legacy waste"). Indeed, the UK considers that the technical, financial and political challenges surrounding the construction and management of a GDF are such that only the government is capable of delivering it.

(18) The UK will also offer disposal services in this GDF to any new nuclear operator in the UK. Section 66 of the Energy Act makes provision for the UK Government to enter into Waste Transfer Contracts with new nuclear power stations within England, Wales and Northern Ireland. The Waste Transfer Contract scheme does not apply to Scotland but no sites have been identified in Scotland as being suitable for the construction of new nuclear power stations. New nuclear power stations are defined by reference to the date on which a person has applied for a nuclear site licence. Sites in respect of which an application for a nuclear site licence is introduced on or after the day on which Section 45 of the Energy Act comes into force (26 November 2008) qualify as new nuclear power sites.

(19) Under the Waste Transfer Contract, the UK Government will charge a price ("Waste Transfer Price") for the provision of ILW and spent fuel disposal services.

(20) Operators will not be formally required to make use of the GDF. In principle they could enter into a waste disposal contract with any provider of that service. However, as the publicly-built GDF will be for the foreseeable future the only credible option available to new nuclear operators, the UK expects that each of them will enter into a Waste Transfer Contract with the UK authorities before construction begins in order to obtain approval of their FDP. As a result, to obtain approval of their FDP, operators will in practice have to conclude Waste Transfer Contracts and will have to estimate their liabilities based on the Expected Price13 and Waste Transfer Price. Operators must then provide for these liabilities on a prudent basis in their FDP. Generally this provision will be in the form of a segregated fund, which builds up over time through a combination of payments by the operator and investment growth. If the fund is below target, the operator will have to make additional payments into the fund.

(21) The Secretary of State for Energy and Climate Change is the party that will enter any Waste Transfer Contract. The Nuclear Decommissioning Authority (NDA) has been given the responsibility for planning and implementing geological disposal. It is envisaged that NDA’s Radioactive Waste Management Directorate

13 On the Expected Price, see recital (27).

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(RWMD) will evolve under NDA into the ‘NDA’s delivery organisation’ for the GDF.

2.4. Waste Transfer Price and Expected Price

(22) The UK authorities have published a document setting out the pricing methodology on 8 December 2010, following previous public consultations. An updated methodology, which takes account of the responses to the public consultation, was published in December 201114 (hereinafter referred to as the “Methodology”).

(23) The exact actual costs of the service will not be known until actual disposal takes place. As mentioned above, no permanent GDFs exist at the moment anywhere in the world and the building of a permanent GDF is a complex project that spans over an extremely long time. The UK expects that the planned permanent GDF would not be operational before 2040. The project thus is surrounded by many uncertainties that translate into uncertainties on costs, in particular given that the site for the GDF is not yet known.

(24) The GDF is expected to commence operations around 2040 while new nuclear power stations are forecast to begin operations around 2020 and to be operational for around 60 years with decommissioning of the first new nuclear power station around 2100. Disposal of spent fuel from new nuclear power plants waste could commence only around 2075 and span until 2140. The reason for this is to allow the spent fuel to thermally decay in interim storage to the point that it can be safely disposed. ILW could be disposed of at an earlier time, potentially in parallel to the emplacement of legacy waste, depending on the storage space already available at the time the ILW from new build nuclear could be transferred.

(25) The Energy Act 2008 requires operators to make prudent provisions for their waste and decommissioning liabilities in their FDP. The UK Government considers that in order for an operator to be able to make such prudent provisions, they need some degree of certainty over their waste disposal liabilities during the operational life of their power station, as it is during this period that they will be able to set aside sufficient funds from operating revenues. Therefore, the UK Government does not think it advisable for the Waste Transfer Price to remain uncertain until the point of the disposal and intends to establish the Waste Transfer Price in advance of the expected date of disposal, at a time that the power plant is operational and able to raise funds for decommissioning, and spent fuel and radioactive waste management. Leaving the Waste Transfer Price uncertain until the point of disposal induces the risk that, at that point in time, the operator cannot raise the required revenues to meet nuclear liabilities as he would have ceased income generating activities. Indeed, waste disposal is not expected to take place until decommissioning is complete. There is therefore a considerable lag between the provision of the waste management services and the lifetime of the revenue-generating operations of the nuclear power plant.

14 Available at the following address: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/42629/3798-waste-

transfer-pricing-methodology.pdf

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(26) Under the Methodology it is proposed to defer setting the Waste Transfer Price until uncertainty over costs can be significantly reduced (essentially until the GDF is expected to be operational). The UK currently considers that the Deferral Period should be of 30 years after the start of electricity generation in any new nuclear power plant. By that time, the GDF is expected to be operational. Also, by that time, the operator will still have around 30 years of operation to rectify provisions for its long-term waste management. The Methodology notes that a modest degree of flexibility in the application of the 30 year Deferral Period is likely to be necessary to take account of specificities of each operator. For instance, the UK Government has found that such flexibility is necessary to align the timing of the setting of the Waste Transfer Price with opex reopener under the CfD for the Hinkley Point C power plant15; as a result, the Deferral Period for the Hinkley Point C Waste Transfer Contracts would be 25 years.

(27) For the duration of the Deferral Period, operators will be expected to make prudent provision for their estimated spent fuel and ILW disposal liability. To enable operators to do this, the Government will provide operators with an Expected Price. The Expected Price corresponds to the Government's projection of what they expect the future level of the Waste Transfer Price would be. The Expected Price will be reviewed at 5-year intervals during the Deferral Period.

(28) It is possible to estimate the GDF costs (and thus the Expected Price) based on a series of assumptions. The UK claims in this respect that its expertise and skills at developing a GDF are progressing, among other things based on the interaction of the NDA, the body responsible for implementing the GDF, with the European Commission and its counterparts in other Member States.

(29) However, the UK also states that the activity is in itself characterised by a large margin of uncertainty and that there are sizeable uncertainties around cost estimates that will decrease progressively with each phase of the GDF project. The NDA has identified 5 phases in its work program for the implementation of an operating GDF: 1) preparatory studies (which is the current phase of the project), 2) surface based investigations, 3) construction and underground based investigations (this phase will start once the Government has decided on a preferred site for a GDF), 4) operation (this phase will begin when the GDF operator has obtained all relevant permissions to receive waste at the GDF; by that time, estimated to be around 2040, the upfront construction costs will be known and actual data on waste emplacement will start to become available), 5) closure of the GDF.

(30) The choice of the site for the GDF (phase 2) will have a significant impact on cost estimates. The choice of the site will allow for site-specific cost estimates, thereby reducing also significantly uncertainties. Even at that point there will still be some uncertainty associated with implementing the GDF project. This uncertainty should steadily decrease over time as various intermediate milestones are reached, for example, when the underground environment where the waste will be emplaced is reached. Therefore, price projections could still vary in particular during the three first phases of the GDF program.

15 See Recital (91) of this Decision.

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(31) The UK Government has devised different methodologies to determine the Waste Transfer Price and to estimate it through the Expected Price during the Deferral Period:

(a) The Expected Price is determined by two methodologies: one before the site is selected and uncertainty is at its highest, and one after the GDF site is selected which will reduce the degree of uncertainty as significant parameters of costs will then be known. The Expected Price will be set in order to provide the operator with the best estimate of future costs for appropriate provisions to be made to cover the spent fuel and ILW management costs after the operational life of the nuclear power plant.

(b) The Waste Transfer Price itself will be set at a point when the GDF site is expected to be operational, in principle around 30 years after the start of the new nuclear power plant's operation (25 years in the case of Hinkley Point C). In case the GDF site has not yet been selected by then, there is a further methodology called "Default Pricing Mechanism".

(32) These methodologies will be detailed below in Section 2.6.

2.5. The Cap on the Waste Transfer Price

(33) While the Expected Price will help operators to make prudent provisions, it does not guarantee them that the Waste Transfer Price will remain in the same range. As long as the GDF is not operational, the projections of the Waste Transfer Price could still evolve significantly, in particular as long as the site has not been selected.

(34) In addition, as the publicly built GDF is likely to remain a monopoly service for a relatively long period, new nuclear operators will have little ability to influence waste disposal costs and prospective operators would under the Waste Transfer Contracts – at least during the Deferral Period – bear unlimited exposure to risks relating to the costs of disposing of their spent fuel and ILW in a GDF.

(35) The UK reported that in the framework of the public consultation relating to the Methodology for the Waste Transfer Price, energy companies and providers of finance explained that new nuclear power stations would not be financeable unless the scale of the cost risk represented by reliance on the UK Government for the provision of waste disposal services could be quantified16. In other words investment decisions into new nuclear power plants cannot be made as long as complete uncertainty about the spent fuel and ILW disposal costs that the operator would have to incur remains.

(36) In order to reconcile the need to ensure that nuclear power plant operators set aside funds for the management and disposal of spent fuel and ILW according to

16 See Waste Transfer Pricing Methodology, section 3, paragraph 3.4, page 94: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/42629/3798-waste-

transfer-pricing-methodology.pdf; and “White Paper on Nuclear Power” paragraph 3.72 http://webarchive.nationalarchives.gov.uk/20100512172052/http:/www.decc.gov.uk/en/content/cms/w

hat_we_do/uk_supply/energy_mix/nuclear/white_paper_08/white_paper_08.aspx.

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the 'polluter pays' principle, with the need of providing potential investors in new nuclear power stations certainty over the maximum amount they will be expected to pay for disposal, the UK will set out at the outset a maximum Waste Transfer Price within the Waste Transfer Contract (the "Cap"). The UK authorities consider that the Cap provides insurance for the operator in the event that the actual costs of building the facility were to be significantly larger than the estimated costs at the time of planning the construction of the GDF. The Cap will apply to both the Waste Transfer Price and the Expected Price and will be indexed for inflation.

(37) The Cap will be set at a level where the Government has a very high level of confidence that actual costs will not exceed the Cap. However, in setting the Cap, the residual risk that actual costs might exceed the Cap is being borne by the UK. Therefore the Government will charge an appropriate Risk Fee for this risk transfer.

(38) The Waste Transfer Price will be paid by operators at the moment the spent fuel or ILW is transferred to the GDF. Until that date, the Waste Transfer Price and the Expected Price will be used by operators to calculate provisions for their waste liabilities.

(39) The Risk Fee will be charged as an upfront cost to the operator, payable as a lump sum at the start of operation.

2.6. Pricing methodology

(40) The purpose of the Methodology is to set out how the Waste Transfer Price and the Expected Price will be determined. The Expected Price will be reviewed every five years during the Deferral Period.

(41) The price that operators will be asked to pay, the Waste Transfer Price, as well as the Expected Price will be set at a level such that operators of new nuclear power stations meet additional costs of disposing new build spent fuel and ILW in the GDF (GDF variable costs) but will also include a contribution to the construction costs of the GDF (GDF fixed costs). This contribution to GDF fixed costs will reduce the costs for the UK of building the GDF to dispose of legacy radioactive waste.

(42) The pricing methodology distinguishes between five scenarios in which the pricing methodology framework can be applied:

(a) Setting the Expected Price prior to GDF site selection;

(b) Setting the Expected Price after GDF site selection;

(c) Setting the Waste Transfer Price at the end of the Deferral Period (as long as GDF site selection has taken place);

(d) Setting the Cap and Risk Fee at the outset;

(e) Setting the Waste Transfer Price at the end of the Deferral Period through the Default Pricing Mechanism if GDF site selection has not yet taken place.

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2.6.1. Expected Price and Waste Transfer Price

(43) The Expected Price prior to GDF site selection is calculated by taking into account the best available estimates for fixed and variable costs incurred in the construction of the GDF (NDA base estimate), a so-called Optimism bias uplift to compensate for the systematic tendency of project appraisers to be overly optimistic and a Projected Risk Premium.

(44) The Expected Price prior to site selection is defined as follows:

Expected Price =NDA base estimate + Optimism Bias uplift +

Projected Risk Premium

(45) Since site-specific cost estimates will only be available around 2025, when the UK will have decided on the location of the GDF, the best fixed and variable cost estimates used in the calculation are based on a reference design, including preparatory activities, R&D, site investigation, and construction and operation of the site both above and below ground. The reference scenario corresponds to a GDF built in higher strength rock with low complexity and a depth of 650m.

(46) The fixed costs include site selection and construction of surface facilities and access shafts. The variable costs include the construction of the underground tunnels for spent fuel and underground disposal vaults for ILW, which vary with the volume of waste to be stored.

(47) The NDA base estimate is based on the "cost brochure", which is a very detailed exercise aimed at estimating costs based on quotes from September 2008. A large number of inputs were required for the estimation, ranging from the method of construction, the operational manpower, plan requirements, associated consumables, equipment purchase, etc. All these elements were detailed in technical sheets describing the costs for each phase of the project. Data from actual tenders, quotes from suppliers, public information, and actual data from existing costs (e.g. office based staff) etc., were used.

(48) Each nuclear operator will be asked to pay for the variable costs it will cause, based on its disposal needs, and for a portion of fixed costs, which are proportional to the use of the GDF capacity. The cost estimates will be expressed in terms of units of new nuclear power plant ILW (GBP/m³) or spent fuel (in the latter case the unit cost estimates are expressed in GBP per tons of uranium, GBP/tU).

(49) The Optimism Bias uplift takes into account the expected systematic tendency for project appraisers to be overly optimistic. At time of notification, the optimism bias uplift for the Expected Price is set at 62.93% in line with the uplift presented in the Green Book Guidance of Mott MacDonald (2002) for non-standard civil engineering projects (it corresponds to the optimism bias upper bound (66%) x (1 – weighted mitigation factor of 4.65%).

(50) The Projected Risk Premium represents a level of contingency over and above the best fixed and variable cost estimate to compensate for taking on the risk of subsequent cost escalation. Before GDF site selection, given that no meaningful cost distribution can be produced, the projected Risk Premium is expected to take the form of a percentage uplift on estimated cost. The approach that will be used

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to derive the base cost estimate, the optimism bias uplift and project Risk Premium before site selection is called Interim Approach. As the process of selecting a site for a GDF proceeds and more detailed information becomes available the Interim Approach will be refined and updated at each Quinquennial review.

(51) Once the site for the GDF has been selected site specific cost estimate will be available. After site selection it will thus be possible to produce a meaningful cost distribution. It will serve as a basis to establish the Expected Price after site selection and then ultimately the Waste Transfer Price. The cost distribution will be adjusted in line with good industry practice for the risk and cost uncertainties that still remain after site selection. The Expected Price after site selection and the Waste Transfer price will be set at 95% of the Risk Adjusted Cost Distribution (P95), i.e. at the level at which there is only a small risk that costs would be higher (5%).

(52) After GDF site selection, the Risk Premium is defined as the difference between Pricing Cost Estimate (i.e. P95 of the Risk Adjusted Cost Distribution) and the best cost estimate at the time the cost distribution is derived.

(53) If, however, at the end of the Deferral Period the site has not yet been selected (which the UK Government considers as highly unlikely) the Methodology provides for a Default Pricing Mechanism.

(54) In this respect the Methodology provides that the Secretary of State would set the Cap having regard to such cost modelling as would be available at the time.

(55) In the absence of a Site Specific Cost Estimate, the UK considers it likely that the cost modelling exercise at the time would be broadly similar to that undertaken to derive the value of the Cap but is still to be determined. If the Waste Transfer Price in those circumstances is not fixed at the Cap, the UK has indicated that it will notify the price to the Commission. The Default pricing Methodology is not part of the scope of this Decision.

2.6.2. Setting of Cap

(56) The Cap applying to the Expected Price and the Waste Transfer Price will be set at the outset and will limit the maximum exposure of nuclear operators to the future disposal costs. The Cap is being calculated as the sum of three components:

Cap = Output of parametric cost model + Optimism Bias +Contingency Allowance

• Parametric cost model considers the probability and cost impact of 39 scenarios for the GDF;

• Optimism bias adjustment adjusts for underestimation of costs; and

• Contingency allowance adjusts for specific additional risks based on probability distributions.

These three components are combined in the Waste Transfer Pricing Model, which is an Excel based model developed by KPMG in 2013. As also outlined in the Leigh fisher validation report (2015) the Cap is set as follows:

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(57) For the purposes of the setting a Cap (and Risk Fee) at the outset, the UK considers a range of 39 possible scenarios for the implementation of geological disposal. Given that the GDF site has not yet been identified, there are a set of uncertainties, also called risk factors, which could significantly impact the cost distribution. The parametric cost model reflect these uncertainties by considering the impact of three risk factors: geological environment (higher strength rock, lower strength rock and evaporates), depths (ranging from 200 to 1000 meter) and site complexities (low, moderate and high). The combination of 3 rock types, 5 depths and 3 complexities results in 45 scenarios, from which 39 are deemed relevant. For each of the scenarios, relative probabilities and cost estimates have been derived from a Parametric Cost Model. The model has a bottom-up logic which starts from the NDA's best estimates of the cost of building a GDF, which themselves are based on all available tender information, quotations and industry data.

(58) The parametric cost model divides 10,000 iterations between 39 cost scenarios based on the probability of each scenario occurring. While the parametric cost model only considers the cost impact of geological risk factors, the optimism bias and contingency allowance add additional costs based on “in-model risks” and “out-of-model risks”, respectively. For each iteration the cost is adjusted upwards with an optimism bias uplift of 66%17 to compensate for underestimation of costs. In addition, for each iteration and each of the “out-of-model risks” outlined below, a randomly selected cost from a probability distribution is being added through Monte Carlo method:

(a) The GDF uses a different disposal concept to the planned method;

(b) Need to develop two separate GDFs for spent fuel and ILW;

(c) The GDF does not close immediately after last emplacement of ILW and of spent fuel;

(d) Complications arise from storing waste and spent fuel from new build plants and legacy power stations in the same GDF;

(e) New build waste and spent fuel emplacement begins later than planned;

(f) Emplacement rate is faster or slower than expected.

(59) The UK authorities have indicated that currently Cap is assumed to be set at the 99th percentile of the 10,000 iterations (P99). Assuming that the final cost distribution is a good representation of the actual costs, the P99 value could also be defined as the level where the probability of costs exceeding the Cap is less than 1 per cent.

17 The optimism bias uplift for the cap is set at 66% while it is set at 62.93% for the Expected Price

because for the purpose of setting the Expected Price, mitigating factors were taken into account while for setting the cap no mitigating factors were taken into account.

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2.6.3. The waste inventory

(60) The Waste Transfer Price and the Cap also include a share of GDF fixed costs. The cost estimate used to derive the Waste Transfer Price and Cap per unit is the share of one unit in total project cost, including fixed costs. The cost estimate per unit is therefore also dependent on the final total inventory of spent fuel and ILW (legacy and new build) disposed of in the GDF. Indeed, the inventory assumption is used to derive the share of GDF Fixed Costs borne by a unit of waste.

(61) The assumed inventory, including HPC's share of the total assumed inventory, is set out in Table 1 below.

Table 1 – Radioactive waste inventory assumptions in the Cap calculation

Waste type Spent fuel (canisters) ILW (m3)

Legacy inventory 5,625 503,746

HPC inventory 1,837 11,524

Total inventory 7,462 515,270

HPC as % of total 24.6% 2.2%

Source: UK authorities

(62) When determining the Cap, the UK Government established the waste inventory based on the assumption that HPC is the only new nuclear power station. In addition, significant quantities of legacy materials that might ultimately require disposal in the GDF are excluded from the inventory (this concerns Plutonium, highly enriched Uranium and depleted uranium that for the moment are not considered waste).

2.6.4. Risk Fee Methodology

(63) The UK will obtain a Risk Fee to compensate for the benefit of the Cap. This remuneration will be proportional to the size of the risk borne by the UK authorities, and will be calculated by multiplying the probability of the cost exceeding the 99th cost percentile with the cost consequence, and adding a mark-up. The Risk Fee is comparable to an insurance premium, which will be paid as a lump sum at the start date of the first reactor.

(64) The Risk Fee is calculated as follows:

Risk Fee = % − + mark-up

(65) The calculation of (1% x cost consequence) provides the expected loss arising from the cap, which in effect is the cost of providing this service. The UK government believes that this approach is similar to what a commercial provider would do, i.e. setting the Risk Fee at a level over and above expected cost in order to provide compensation to the service provider for undertaking the transaction.

(66) The UK maintains that while the charging of the Risk Fee is not directly analogous with an insurance premium, this approach can be compared with the insurance sector, where the calculation of an expected loss forms the basis for the calculation of insurance premiums.

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(67) The small size of the Risk Fee and the very small population of entities paying a Risk Fee convinced the UK that it would not be feasible for them to obtain commercial compensation for the service provided. Hence the UK uses a simple mark-up approach to determine the Risk Fee, whereby they apply a 50 per cent mark-up on the probable cost consequence.

(68) Generally, there is an inverse relationship between the cap and the Risk Fee. Setting the cap at a higher level of the probability distribution means that the Risk Fee to be paid by the nuclear operator to the UK government will be lower, reflecting a lower probability of the actual costs exceeding the estimates, hence a lower risk for the UK government to be exposed to cost consequences.

2.6.5. Current Cost, Expected Price and Cap Estimated by UK

(69) The UK authorities provide an example of calculation of the Expected Price. Table 2 below shows the relative size of each component of the Expected Price and the effect of the adjustments made in each step, assuming the Cap is set at the 99th percentile of the cost distribution (P99), i.e. at a level where the probability of the cost being higher is 1 per cent.

Table 2 – Variable and Total Cost, Expected Price and cap estimated by the UK using the parametric cost model

Variable cost estimate

Total cost estimate Expected Price Cap

Spent fuel (k£/tU) 204.8 306.0 585.5 1,159

ILW (k£/m3) 8.8 13.1 23.0 65.9

Source: UK authorities

(70) In Table 2 above the variable cost of disposing of a tonne of uranium is equal to GBP 204,800, and the variable cost of disposing of one square metre of ILW is equal to GBP 8,800. The fixed costs are based on the total (i.e. legacy plus new build) inventories of radioactive waste which are expected to be stored in the GDF, which are equal to 7,462 canisters of spent fuels and 515,270 m3 of ILW. A single operator will be asked to pay for a portion of these costs, in particular a share equivalent to the proportion between the variable costs of the operator and the total variable costs of the GDF.

(71) Based on these figures, the UK authorities adjust for risk (i.e. optimism bias, in-model uncertainties and out-of-model uncertainties) to calculate a Risk Premium and derive an Expected Price of GBP 585,500 per tonne of uranium and GBP 23,000 per square metre of ILW. Using the same parametric cost model techniques, the UK authorities estimate that the cap should be set, assuming the same figures as above, at GBP 1,159,000 and GBP 65,900 respectively for a tonne of spent fuel and a square metre of ILW.

(72) Based on the parametric cost model, different levels of the Cap and the Risk Fee can be computed corresponding to different levels of probability of the expected costs being higher than the 99th percentile, based on the cost input used for the model. Table 2 and Table 3 provide the levels of the Cap, the cost consequence, and the Risk Fee corresponding to probability levels of 90 per cent, 95 per cent and 99 per cent respectively.

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Table 3 – Cap/Risk Fee values for spent fuel

Percentile Cap Max Cost consequence (max – Cap)

Probability (based on percentile)

Mark-up Risk Fee

P90 879.80 1,360.76 480.96 10% 50% 72.1

P95 1,036.13 1,360.76 324.63 5% 50% 24.35

P99 1,159.25 1,360.76 201.52 1% 50% 3.02

Source: UK authorities

Table 4 – Cap/Risk Fee values for ILW

Percentile Cap Max Cost consequence (max – Cap)

Probability (based on percentile)

Mark-up Risk Fee

P90 54.41 77.13 22.72 10% 50% 3.41

P95 58.69 77.13 18.43 5% 50% 1.38

P99 65.85 77.13 11.28 1% 50% 0.17

Source: UK authorities

2.7. Early Transfer

(73) The Waste Transfer Contract provides that title to and liability for the waste from a new nuclear power station will transfer to the UK government on a specified Transfer Date, which for spent fuel will generally be after the power station has been decommissioned and after the spent fuel has thermally decayed to a point that allows for safe disposal. The Transfer Date of ILW could be different from the Transfer Date of the spent fuel and could also occur at an earlier point in time. The transfer of title to and liability for the spent fuel and ILW includes the transfer of any liability arising from potential accidents linked to the management and disposal of the spent fuel and ILW after the Transfer Date. Prior the Transfer Date that liability sits with the operator, including for any costs arising as a result of environmental pollution or accidents linked to the management of radioactive waste.

(74) The UK has indicated that during the public consultation process safety concerns were raised around the scenario in which there might be an extended period when the operator is required to maintain the spent fuel in interim storage after the site has otherwise been decommissioned. Therefore, the UK Government has provided for the possibility that title to and liability for spent fuel can be transferred from the operator to the UK Government at the end of station decommissioning, even if the spent fuel can be disposed of only later ("Early Transfer").

(75) Under such an Early Transfer arrangement, the UK will bear additional costs relating to the management of the spent fuel pending disposal. Under the current assumptions, which are that the spent fuel will be held in on-site interim storage pending disposal and will not be packaged for disposal until immediately prior to disposal, these costs are the operation and decommissioning of the interim store,

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the packaging of the fuel for disposal, the transport of the packaged spent fuel from the power station site to the GDF and insurance.

(76) The UK therefore will charge a Lump Sum Payment to account for these additional waste management costs in the event of an Early Transfer, whereby on the Transfer Date two payments would be made by the operator:

(a) The Waste Transfer Payment, covering disposal costs and calculated using the Waste Transfer Price; and

(b) The Lump Sum Payment, covering waste management costs between the Early Transfer Date and the Assumed Disposal Date.

(77) The Lump Sum Payment is a full and final payment by the operator covering additional waste management costs and will include a commensurate risk premium to provide compensation to the UK for taking on the risk of subsequent cost escalation after Early Transfer. Unlike the Waste Transfer Price, the Lump Sum Payment is not capped at the outset, nor is it fixed during the operational period but shortly prior to the Transfer Date. Indeed, the operator has substantial scope to manage risks around waste management costs up until the final disposal. The operator is required to regularly review and update its plans for interim storage and associated costs. Those plans and costs are under his direct control and there is already long experience and practice with interim storage costs, so that those costs can also be estimated at the moment the business plan is made.

2.8. EU legislative framework applicable to spent fuel and radioactive waste management

(78) The legislative framework applicable to radioactive waste in the EU is grounded on two fundamental principles: First, MSs have ultimate responsibility for the safe management (including disposal) of spent fuel and radioactive waste; and Second, operators of nuclear installations have the prime responsibility for the safety of spent fuel and radioactive waste management and must bear the costs from generation to disposal of all by-products of their processing/reprocessing process, including secondary radioactive waste (i.e. the 'polluter pays principle').

(79) The need to ensure the safe management (including disposal) of spent fuel and radioactive waste stems directly from Art 2(b) of the Euratom Treaty18. It has then found a more detailed implementation in Commission Recommendation 2006/851/Euratom19 on the management of financial resources for the decommissioning of nuclear installations, spent fuel and radioactive waste ("2006/851 Euratom Recommendation"), which suggests that all nuclear installations set aside adequate financial resources to ensure safe decommissioning, including for the management of waste. This Recommendation

18 In addition to Art 2, Art 30 Euratom provides for the establishment of basic standards for the

protection of the general public against radio-active material; Art 33 Euratom expressly requires MSs to lay down provisions to ensure that basic standards of safety are met; and Art 37 further requires MSs to notify the Commission in relation to plans to dispose of radioactive waste.

19 Commission Recommendation 2006/851/Euratom of 24 October 2006 on the management of the financial resources for the decommissioning of nuclear installations, spent fuel and radioactive waste (OJ L 330, 28.11.2006, p. 31).

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clearly reflects the commitment of the EU policy to link the "polluter pays principle" with decommissioning in general, and radioactive waste in particular and recommends in Section 3(3) that: "The polluter pays principle should be fully applied throughout the decommissioning [including the management of waste] of nuclear installations. In this regard, the primary concern of nuclear operators should be to ensure the availability of adequate financial resources for safe decommissioning by the time the respective nuclear installation is permanently shut down".

(80) Finally, Council Directive 2011/70/Euratom of 19 July 2011 establishing a Community framework for the responsible and safe management of spent fuel and radioactive waste20 (the “Directive 2011/70/Euratom”) requires MSs to develop, maintain and implement national programmes to ensure the safe disposal of spent fuel and radioactive waste, and requires operators to bear the costs of management of spent fuel and radioactive waste. In particular, concerning the obligation of operators, the Directive establishes, that “the costs for the management of spent fuel and radioactive waste shall be borne by those who generated those materials" (Art 4(3)(e)) and that "Member States shall ensure that the national framework requires that adequate financial resources be available when needed for the implementation of national programmes […], especially for the management of spent fuel and radioactive waste, taking due account of the responsibility of spent fuel and radioactive waste generators" (Art 9).

2.9. New build and legacy radioactive waste

(81) The GDF will be used for disposal of both legacy spent fuel and ILW and spent fuel and ILW from new nuclear plants, with the vast majority of the spent fuel and ILW estimated to come from legacy nuclear installations. The cost of managing and disposing of legacy spent fuel and ILW in the GDF will be covered in line with the NDA State aid decision21 and the British Energy State aid decision22 through the funds set aside by the UK to that purpose, or by the operators, as set out below.

(82) Legacy spent fuel and radioactive waste come from the nuclear reactors shut down and currently operating in the UK. There are three different reactor types currently existing in the UK: Magnox, advanced gas-cooled reactor (AGR) and pressurised water reactor (PWR).

(83) The Magnox power stations are owned by NDA. Their sites are all closed apart from one (Wylfa), which is due to close in 2015. All waste from these sites is the responsibility of the UK government. The liability for the disposal of these wastes is accounted for on the basis of a best cost estimate within the NDA accounts. The UK bears the full risk arising from any increases in the costs of managing and disposing of these wastes.

20 OJ L 199, 2.8.2011, p. 48–56. 21 Commission decision of 4 April 2006 on the State aid which the United Kingdom is planning to

implement for the establishment of the Nuclear Decommissioning Authority (OJ L 268/37, 27.9.2006). 22 Commission decision of 22 September 2004 on the State aid which the United Kingdom is planning to

implement for British Energy plc (OJ L 142, 6.6.2005).

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(84) The AGR power stations and the PWR station at Sizewell are sites formerly owned by British Energy (BE) and are now owned by EDF Energy, which is also the promoter of the HPC new nuclear plant. Spent fuel from AGR power stations is dispatched to Sellafield, where it is either reprocessed or held in long term interim storage. Spent fuel from Sizewell B is held in interim storage onsite.

(85) Under the terms of BE restructuring, the costs of the long-term management and disposal of ILW are met by the Nuclear Liabilities Fund (NLF). The NLF will meet its liabilities through a combination of growth in existing assets and fixed payments by EDF Energy. In the event that the NLF’s assets are insufficient to meet its liabilities, the UK Government has guaranteed it will meet any shortfall.

(86) PWR spent fuel liabilities are fully covered by the NLF under the terms of the Nuclear Liabilities Funding Agreement (NLFA). AGR spent fuel liabilities, in respect of fuel loaded into reactors prior to the restructuring of BE, are owned by EDF Energy (following the acquisition of BE by EDF in 2009). Their management is covered by contracts between BE and the then BNFL (now NDA) and funded by the UK government in accordance with the terms of the Historic Liabilities Funding Agreement (HLFA). This arrangement will apply to ILW until 2038 at which point NLF will fund storage and disposal.

(87) For HLW, plutonium and reprocessed uranium in storage, and un-reprocessed AGR spent fuel, responsibility for funding will transfer to the NLF in 2086. The arrangements for NLF-funded liabilities are provided for under the NLFA. Although funding is the responsibility of third parties, ownership of the liability remains with EDF Energy. AGR spent fuel loaded after the restructuring of BE becomes an NDA liability although it is funded by EDF Energy.

(88) The Commission examined the above mentioned funding modalities and contracts as part of the NDA State aid decision and the BE State aid decision. The State aid involved in the management of legacy spent fuel and ILW in conjunction with BE installations was found to be compatible with the internal market under those decisions23.

(89) Legacy spent fuel and ILW will be disposed of first in the GDF, a process which is expected to last for several decades. The indicative timing for the disposal of spent fuel from new nuclear power station shows a potentially extended gap between the end of the decommissioning of the power station (forecast to be around 2100 for the first new nuclear power station) and the point at which the spent fuel from that power station will be disposed of in the GDF (currently expected to be around 2140). The reason for this is to allow the spent fuel to thermally decay to the point that it can be safely disposed of.

2.10. Radioactive waste and State aid to HPC

(90) The HPC operator will have to enter into two Waste Transfer Contracts, one each for ILW and spent fuel, with the UK government as part of their FDP approval process. While those agreements have not yet been concluded, key terms have been drafted and Expected Price, Cap and Risk Fee have been calculated for HPC on the basis of the proposed Methodology. The contributions that the operator

23 Reference mentioned in Fn 25 and 26.

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will be required to make under its proposed FDP to cover the costs of waste and decommissioning, including spent fuel and ILW disposal costs, have been incorporated into the overall assessment of project economics for HPC and are reflected in the financial model and the Strike Price.

(91) The CfD in support of HPC includes 'opex reopeners,' i.e. a mechanism which allows for adjustment in the Strike Price in case some operating costs end up being different than the estimates used to calculate the initial Strike Price. The mechanics of the two-way (i.e. allowing for adjustments for both increases and decreases of actual operating costs compared to their estimates) opex reopeners are summarised in paragraphs 31 to 33 of the HPC decision.

(92) The first reopener would occur 15 years after commercial operation date ('COD') for the first reactor and the second reopener would occur 25 years after the COD for the first reactor.

(93) Under the proposed FDP for HPC, changes in the estimated waste disposal liabilities under the Waste Transfer Contracts would be reviewed at the time of the two opex reopeners. Any changes to the contributions that the HPC operator will be required to make to its FDP to fund this future liability will be revised accordingly at the same time. Indeed if the waste disposal liabilities under the Waste Transfer Contracts are lower than expected, this will require a reduction of the Strike Price; if it is higher, it would lead to an increase of the Strike Price to continue to ensure that the aid under the CfD still covers investment costs and a reasonable return.

3. ASSESSMENT OF THE MEASURE

3.1. State aid within the meaning of Article 107(1) TFEU

(94) Under Article 107(1) TFEU aid is defined as aid granted i) by a Member State or through State resources in any form whatsoever ii) which distorts or threatens to distort competition by iii) favouring certain undertakings or the production of certain goods, in so far as iv) it affects trade between Member States. Whether an economic advantage will be provided through the Waste Transfer Contracts will depend on whether the price offered in the Waste Transfer Contracts were to be lower than the price which would be asked by a private operator offering the same service on the market.

(95) The UK has argued that the Waste Transfer Price and the Cap do not provide any advantage to the operators given that the service is priced in a way which, in the absence of a market in higher activity radioactive waste disposal, provides a proxy commercial service and given that the operators pay a risk fee for the Cap that is equivalent to an insurance premium.

(96) The Commission notes that under the Waste Transfer Contracts, the State is in effect offering different services:

(a) The disposal service as such: the Waste Transfer Price is the price that will be paid by nuclear operators for the disposal of their ILW and their spent fuel. This price is to be established 25-30 years after the new power plant starts operation. This point in time could be before the GDF is operational. Hence, at the time the Waste Transfer

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Price is determined the exact costs of the disposal services could still be unknown to a certain extent. That uncertainty is being compensated by a Risk Premium included in the Waste Transfer Price.

(b) The Cap on the Waste Transfer Price: In order to provide operators with some visibility and certainty over their future costs, the Waste Transfer Price (as well as the Expected Price) will be capped at the outset. This risk hedging service offered under the Waste Transfer Contract is being remunerated by a Risk Fee.

(c) Early Transfer of waste: In principle, the waste is to be transferred under the contracts when it is suitable for safe disposal. However, the Waste Transfer Contracts also provide for the possibility of Early Transfer. This means that liability for the waste is transferred at a point in time when the radioactive waste, in particular spent fuel still needs to be kept in interim storage. In such case, however, the operator must pay a price for that service. This price is not capped as interim storage costs are costs that are under the control of the operators and are well known to them.

(97) The Commission has examined whether the price or the pricing methodology for the services listed under a, b and c above constituted an advantage for the operators of new build nuclear power plants.

3.1.1. Waste Transfer Price

(98) There are currently no final disposal services offered on the market for ILW or spent fuel, nor is it possible for nuclear operators who would decide to invest into new build nuclear power stations in the UK to conclude Waste Transfer Contracts with any other entity than the UK Government as this type of contract is not yet offered on the market.

(99) While nothing prevents the market from offering those services it is expected that the UK Government will remain the sole provider of those services at least in the medium-term and probably also in the long term. Therefore, in accordance with established case law24, in the absence of any possibility of comparing the situation of the GDF to be operated by the State with that of another operator, the situation must be assessed by reference to the objective and verifiable elements which are available, i.e. in this case the projected costs25.

(100) The Waste Transfer Price will be paid by operators in line with Article 4(3) of Directive 2011/70/Euratom.

24 See Joined Cases C-83/01 P, C-93/01 P and C-94/01 P Chronopost SA, La Poste and French Republic

v Union française de l’express (Chronopost) [2003] ECR I-6993, para 38; Case C-124/10 P Commission v EDF, EU:C:2012:318, paras 101 and 102; Joined Cases C-533/12 P and C-536/12 P SNCM v Corsica Ferries France, EU:C:2014:2142, para. 34.

25 See Joined Cases C-83/01 P, C-93/01 P and C-94/01 P Chronopost SA, La Poste and French Republic v Union française de l’express (Chronopost) [2003] ECR I-6993, para. 39.

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(101) The price that operators will be asked to pay, the Waste Transfer Price, will be set at a level such that operators of new nuclear power stations meet additional costs of disposing new build wastes in the GDF (all GDF variable costs linked to the disposal of their waste and which vary with the volume of waste to be stored) but will also include a contribution to the GDF fixed costs. The contribution to fixed costs will be proportionate to the use of the GDF capacity. This contribution to GDF fixed costs will reduce the costs for the UK of building the GDF to store legacy spent fuel and ILW.

(102) The Waste Transfer Price will preliminarily be set as an estimate based on current cost forecasts (i.e. the Expected Price), which will then be reviewed and set definitively once costs become more certain.

(103) The fixed costs are all GDF costs incurred from until First Waste Emplacement and all costs incurred after Last Waste Emplacement. They include for example preparatory studies, site selection, construction of surface facilities and access shafts, closure of the GDF after all waste has been emplaced and related financing costs. The fixed costs also include a charge to address the issue of the payment of the contribution to the fixed costs long after the fixed costs have been incurred (the "financial charge"). It corresponds to an uplift factor and is equivalent of the cumulative interest rate applicable in the period between the year of the cost realisation and the first (projected) waste emplacement.

(104) The variable costs include the construction of the underground tunnels for spent fuel and underground disposal vaults for ILW, which vary with the volume of waste to be disposed of.

(105) It is expected that the Waste Transfer price will be determined at a point in time where site selection has already taken place, i.e. at a time where rock type, site complexity and depth of the GDF will be known.

(106) Site selection is the most decisive element in the determination of the costs. Once the site is selected, many uncertainties regarding the costs will be eliminated. However, even after site selection, there will remain a risk that certain cost elements could be higher than expected when the Transfer Price was established. The UK, however, is remunerated for that risk through the inclusion in the Waste Transfer Price of the Risk Premium.

(107) The Commission observes that the Methodology takes a probabilistic approach to the determination of the Waste Transfer Price: the UK will derive a cost distribution on the basis of site specific cost data. The cost distribution will be adjusted to incorporate identified risks covering their financial impact and their assessed probability (Risk Adjusted Cost Distribution). The Price will not be set at the level corresponding to the best cost estimate at the time of defining the Waste Transfer Data but it will be set at a higher level, namely the 95th percentile (P95) from the risk adjusted cost distribution. This is a level where the risk for the UK is small (5%) that the costs are ultimately higher than projected. The difference between P95 and the best cost estimate at the time of setting the Waste Transfer Price corresponds to the Risk Premium.

(108) According to the UK calculations (based on Worked Example 1 of the Methodology on spent fuel), the Waste Transfer Price could yield a return of 13%

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if the UK Government is able to control costs such that actual costs are no greater than the estimate of costs at the point the Waste Transfer Price is fixed.

(109) The Commission notes further that the Methodology prescribes a conservative approach to the determination of the inventory. For instance, the UK has indicated that for HPC, if at the time the Waste Transfer Price has to be determined no new power station other than HPC has become operational, the new build fleet for the calculation would be only HPC. This increases the share of the fixed costs to be borne by HPC and hence also the Waste Transfer Price.

(110) The Commission concludes that the Waste Transfer Price does not confer any advantage to operators of new nuclear power plants as it will cover all variable costs and a portion of fixed costs that is proportionate to the use of the GDF capacity, it will be set at a higher level than the estimated costs26, namely at P95 of a risk adjusted cost distribution, the cost distribution will be robust as it will be derived after site selection, the Waste Transfer Price will include adequate remuneration of the UK for taking on the risk of costs being higher than expected and the UK has a conservative approach in determining costs and inventory.

(111) As the Waste Transfer Price to be determined on the basis of the proposed Methodology will not provide operators with an advantage, the Waste Transfer Price does not involve State aid.

3.1.2. Early Transfer and Payment

(112) The UK will provide for the possibility that title to and liability for spent fuel can be transferred from the operator to the UK Government at the end of station decommissioning, even if the spent fuel can be disposed of only later ("Early Transfer").

(113) Under such an Early Transfer arrangement, the UK will bear additional costs relating to the management of the spent fuel pending disposal (see recital (75)) and will charge a Lump Sum Payment to account for these additional waste management costs in the event of an Early Transfer.

(114) The Commission notes that the Lump Sum Payment is a full payment by the operator covering additional waste management costs. It will also include a commensurate risk premium to provide compensation to the UK for taking on the risk of subsequent cost escalation. In addition, unlike the Waste Transfer Price, the Lump Sum Payment is not capped at the outset, nor is it fixed during the operational period but shortly prior to the Transfer Date so that the lump sum payment can be established on the basis of actual costs. The Commission therefore concludes that the Methodology for setting the Early Transfer Payment will ensure that the Early Transfer does not involve State aid as the Payment will cover all costs linked to the Early Transfer, including a Risk Premium for taking on the risk of subsequent cost escalations.

(115) The Commission concludes that the Early Transfer Payment does not include any advantage to operators of new nuclear power plants, given that the operator will

26 See joined Cases C-83/01 P, C-93/01 P and C-94/01 P Chronopost SA, La Poste and French Republic

v Union française de l’express (Chronopost) [2003] ECR I-6993, para. 40.

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have to make a payment that must entirely cover the liabilities concerned27. In particular the payment will cover all costs linked to operating and decommissioning the interim storage facility and the packaging of the waste for disposal. This payment will not be capped. In addition, a risk premium will have to be paid to fully compensate for any risk of cost escalation of the interim storage.

(116) As proposed Methodology for the determination of the Early Transfer Payment does not include any advantage to operators of new nuclear power plants, the Early Transfer Payment does not involve State aid.

3.1.3. The Cap and the Risk Fee

(117) The Waste Transfer Price will be subject to a price cap which is meant to provide certainty to investors about the maximum level of costs they will have to incur.

(118) This decision is based on a Methodology setting the Cap at the 99th percentile of the estimated cost distribution, which means that the projected costs have a probability of 1% at most to exceed the Cap. The model also estimates a maximum cost level above which cost realizations are assumed to have a zero probability.

(119) The Commission considers that the proposed Methodology will confer an advantage to its beneficiaries given that in effect, the UK government will offer an insurance against all cost realizations exceeding the cap (and the maximum cost) whereas the insurance fee covers only cost realizations between the cap and the maximum cost realization. As explained below, it can, however, not at this stage be excluded that cost realizations exceed the maximum cost calculated under the model.

(120) Indeed, in reality, the maximum cost could be exceeded because the Methodology constructs an estimate of the real cost distribution which is at present unknown. The estimated cost distribution was developed on the basis of a number of assumptions and simulations which provide by construction a built-in boundary to the cost, even though there might be cost realizations above the modelled maximum with a non-zero probability. Given that the UK government is not charging a fee for cost realizations above the modelled maximum, State aid comes in the form of a free insurance for such cost realizations. Figure 1 below illustrates the methodology.

27 On the transfer of nuclear liabilities, see also recital 150 of the NDA State aid decision where the

Commission concluded that the transfer of BNFL’s liabilities to the NDA did not involve State aid.

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Figure 1: The principle of the cap, maximum cost and the risk fee

(121) The Commission therefore concludes that the Cap combined with the Risk Fee (see the development under 3.3.1.5) provides operators with an advantage in the sense that the Risk Fee does not include a part for cost realisations above the modelled maximum.

(122) The Cap is selective as it will be offered only to operators of new build nuclear power stations for the disposal of their spent fuel and ILW. Similar provisions to a capped waste transfer price for disposal services will not be proposed to other producers of electricity, including to other producers of low carbon electricity.

(123) The Cap is offered in Waste Transfer Contracts to be concluded by the Secretary of State and is thus imputable to the State. The aid element in the Cap is financed from State resources as the State is renouncing to factor the risk that costs might be higher than the modelled maximum in the Risk Fee and is thus renouncing resources.

(124) As there is trade in electricity between the UK and other MS and as the electricity market has been liberalised, the benefit enjoyed by new nuclear operators under the Cap and the Risk Fee is likely to distort competition in a number of electricity markets (in particular generation of electricity) and.to affect trade between Member States.

3.2. Lawfulness of the aid

(125) The UK has notified the aid measure on 10 July 2015 before putting it into force. It has thus complied with its obligations under Article 108 TFEU.

3.3. Compatibility of the aid

3.3.1. Compatibility of aid with Article 107(3)(c) TFEU

(126) Article 107(1) of the TFEU provides for the general principle of prohibition of State aid within the Union. Article 107(2) and 107(3) of the TFEU provide for exemptions to the general incompatibility set out in Article 107(1).

(127) Article 107(3)(c) provides for the authorisation of State aid granted to promote the development of certain economic sectors, where such aid does not adversely affect trading conditions to an extent contrary to the common interest. According to the case-law, the Commission may declare State aid compatible with the internal market if the aid contributes to the attainment of an objective of common

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interest28, is necessary for the attainment of this objective29, and does not adversely affect trading conditions to an extent contrary to the common interest.

(128) The aid measure under assessment does not fall within the scope of the EEAG 2014-2020 since the later do not cover the measures in the field of nuclear energy and radioactive waste. Nor any other Guidelines are applicable for the notified measure. However the Commission may declare an aid measure compatible directly under Article 107(3)(c) TFEU if it is necessary and proportionate and if the positive effects for the common objective outweigh the negative effects on competition and trade. The Commission considers that the conditions for compatibility with the Internal Market under Art 107(3)(c) TFEU are met if the measure satisfies the following conditions: (i) It aims at an objective of common interest in accordance with Article 107(3) TFEU; (ii) it is targeted towards a situation where aid can bring about a material improvement that the market alone cannot deliver (addresses a market failure); (iii) the proposed aid measure is an appropriate policy instrument to address the objective of common interest; (iv) it has an incentive effect; (v) it is proportional to the needs based on which it is deployed; and (vi) it does not unduly distort competition and trade between Member States.

3.3.1.1. Objective of common interest

(129) The UK submits that the measure aims at ensuring the safe disposal of ILW and spent fuel from new nuclear. It also aims at facilitating investment in nuclear energy through the establishment of predictable financing provisions for disposal of ILW and spent fuel. The UK adds that nuclear energy will help the UK to improve its security and diversity of energy supply and will also make an important contribution to the UK's decarbonisation objective.

(130) The UK is the Contracting Party of the Euratom Treaty. This Treaty has established a European Atomic Energy Community that pursues both the objective of promoting the development of the nuclear industry that on its turn is expected to provide extensive energy resources30 and the objective of developing a safe nuclear industry in order to protect public health. Indeed Article 2(c) of the Euratom Treaty provides that the Community shall "facilitate investment and ensure, particularly by encouraging ventures on the part of undertakings, the establishment of the basic installations necessary for the development of nuclear energy in the Community". And at the same time it shall "establish uniform safety standards to protect the health of workers and of the general public and ensure that they are applied" (Article 2(b) of the Euratom Treaty).

(131) The objective of nuclear safety, including safe spent fuel and radioactive waste

28 Case T-162/06 Kronoply v Commission [2009] ECR II-1, especially paragraphs 65, 66, 74 and 75. 29 Case T-187/99 Agrana Zucker und Stärke v Commission [2001] ECR II-1587, paragraph 74; Case T-

126/99 Graphischer Maschinenbau v Commission [2002] ECR II-2427, paragraphs 41-43; Case C-390/06 Nuova Agricast [2008] ECR I-2577, paragraphs 68-69.

30 See Euratom Treaty, Article 1 and Preamble.

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management, has become increasingly important over time and is one of the priorities of the EU Energy Strategy31. Ensuring adequate funding for the management of spent fuel and radioactive waste is one of the key elements of safe radioactive waste management given that in particular the management of spent fuel can span over very long periods and requires waste handling still decades after the power plant has stopped operating. In addition, the EU acknowledges that electricity produced from nuclear power plants constitutes a reliable base-load electricity supply of emission free supply32 and that for Member States choosing this option, nuclear energy plays an important role in energy security as increasing the use of nuclear energy increases energy production in the EU and thus reduces dependency from external energy suppliers33.

(132) The Commission has already confirmed that both objectives of nuclear safety and the development of the nuclear energy under the Euratom Treaty constitute objectives of common interest within the meaning of Article 107(3)(c) TFEU34.

(133) The Commission notes that in general the Waste Transfer Contracts aim at ensuring the safe management of spent fuel and ILW. They will be part of the funded decommissioning programme of nuclear operators. Waste Transfer Contracts will determine how the nuclear plant operators will comply with their obligations to provide for the safe and final disposal of ILW and spent fuel. The Cap and the Risk Fee are part of the Waste Transfer Contracts. They will be set at the outset in the Waste Transfer Contracts and will provide prospective new nuclear operators with their maximum cost exposure in respect of a service

31 Communication from the Commission to the European Parliament, the Council, the European

Economic and Social Committee and the Committee of the Regions on Energy 2020 – A strategy for competitive, sustainable and secure energy, COM(2010) 639 final; see Priority 3, Action 2: Continuous Improvement in safety and security.

32 Communication from the Commission to the European Parliament and the Council on a European Energy Security Strategy, COM(2014) 330 final, section 7.2.

33 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on A policy framework for climate and energy in the period from 2020 to 2030, COM(2014) 15 final, section 2.7; Communication from the Commission to the European Parliament and the Council on a European Energy Security Strategy, COM(2014) 330 final, section 5.1.

34 On the promotion of nuclear safety as objective of common interest, see Commission Decision on the State Aid which the United Kingdom is planning to implement for the establishment of the Nuclear Decommissioning Authority, 2006/643/EC of 4 April 2006, OJ L 268/37 of 27 September 2006, recitals 161-162; Commission Decision of 20 February 2013 on State aid SA.31860 (N 506/2010) – Slovakia - Partial financing of decommissioning of two already shut down nuclear plants (A1 and V1), OJ C 162 of 7 June 2013, recitals 95-96. On the objective of facilitating the development of the nuclear energy as an objective of common interest, see Commission Decision (EU) 2015/658 of 8 October 2014 on the aid measure SA.34947 (2013/C) (ex 2013/N) which the United Kingdom is planning to implement for support to the Hinkley Point C nuclear power station (notified under document C(2014) 7142), OJ L 109 of 28 April 2015, recital 374. See also Commission decision of 22 September 2004 on the State aid which the United Kingdom is planning to implement for British Energy plc, OJ L 142 of 666 June 2005. This case concerned a restructuring aid and was assessed under the Restructuring Guidelines; However, the Commission took into account in its decision the fact that the measures contributed to preserve the safety of nuclear power stations, to ensure the safe management of nuclear liabilities and to enhance security of supply by maintaining diversity of fuel sources in Great Britain as well as to avoid carbon dioxide emissions and was thus appropriate to address the combination of objectives pursued and endorsed fully under the Euratom Treaty, see Section VI(I) of the decision and recital 326.

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provider for which they have no alternative. Hence, Waste Transfer Contracts will enable prospective operators to make investment decisions and raise financial means to build new nuclear power plants. In that sense the Waste Transfer Contracts also contribute to the objective of facilitating investments in the nuclear energy.

(134) Finally, the UK Government has pointed out that through the way the Waste Transfer Price (and the Cap and Risk Fee) is calculated, new operators will be contributing to the financing of the costs of disposing legacy waste in the GDF. As new build spent fuel and ILW would also bear a share of the fixed costs of the GDF that is anyway needed to store the legacy spent fuel and ILW, the Waste Transfer Contracts can indeed be considered as increasing the funding of the costs of the GDF. In that sense the Cap and the Risk Fee together with the Waste Transfer Contracts also contribute to the objective of safe management of legacy spent fuel and ILW.

3.3.1.2. Need for State intervention and market failure

(135) The Commission has verified whether there is a need for State intervention to achieve the objectives mentioned above. The Commission considers that there is a need for State intervention when the State aid measure is targeted towards a situation where aid can bring about a material improvement that the market alone cannot deliver, for example by remedying a well-defined market failure.

(136) The Commission notes that in general there is a tension between the need to ensure safe disposal of radioactive waste and a private operator's decision to invest in nuclear energy. This tension stems from the long timelines needed to deal with the disposal of spent fuel and radioactive waste: while the operator is asked to set aside funds during each year of the lifetime of the installation, the actual disposal takes place at a much later period, when actual costs may turn out to be different than estimated.

(137) The UK has proposed to solve this tension first by establishing the Waste Transfer Price 25 years after starting of operation and by providing in the meantime the operator with an Expected Price to enable him to make adequate provisions and by including in the Waste Transfer Price a Risk Premium to compensate the UK Government for the risk of cost increases after setting the Waste Transfer Price. However, while the Expected Price will indicate to operators what needs to be set aside to meet their nuclear liabilities linked to spent fuel and ILW already during operation of the plant, it is however in the case of the UK insufficient to solve the tension in its entirety. Indeed the Expected Price does not give them - at the point in time when they need to make the investment decision and find the funding – any certainty on what their maximum cost exposure will be in relationship with the disposal of their spent fuel and ILW. This will be known to them only 25 years after starting of operation. The uncertainty is in the present case particularly large because the GDF has not yet been built and the site for the GDF has not yet even been selected. As a result, it is not possible to draw a stable cost distribution. This uncertainty has two consequences: first, it hinders an investment decision as such and second it prevents access to funding on financial markets given that – as confirmed by the public consultation – financial institutions cannot provide loans for projects with undefined cost exposure. Also the market does not provide hedging services for this specific risk. The UK has thus proposed to Cap the Waste Transfer Price

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against payment of a Risk Fee. In other terms, the UK Government will provide itself the hedging service.

(138) The operators will, in practice, likely not have any other alternative than to conclude a Waste Transfer Contract with the UK Government if they wish to operate a new power plant (see recital (20)). These Waste Transfer Contracts will thus relate to a GDF that has not yet been built, for which the site has not yet been selected and that will have to be entered into with a service provider who is in a monopoly situation. The latter increases the uncertainties surrounding the price.

(139) In the absence of a price cap investors in nuclear energy would be exposed to the risk of indefinite costs for a service which they are obliged to obtain in order to operate. They have no control over those costs (contrary to the costs linked to interim storage for instance that they manage themselves), for which there is yet no benchmark and that they cannot mitigate as the market is not providing hedging services for that risk. Without the Cap, no new investments in nuclear energy installations could actually come forward.

(140) The Commission agrees that the Cap is a State intervention needed to enable investments in generation of nuclear energy in the present UK context and taking into account operators' obligations under the Euratom Treaty. Indeed it is not conceivable that an investor would carry out an investment of financial size and time dimension such as the construction of a nuclear power plant while incurring an unlimited risk of disposal costs largely outside his control.

(141) The Commission therefore concludes that the Cap and the Risk Fee correspond to a State intervention that is needed to achieve the objective of facilitating investments in the nuclear energy.

3.3.1.3. Appropriate instrument

(142) Given the inherently uncertain nature of the costs surrounding the activity, the Cap combined with the Risk Fee under the Waste Transfer Contracts also constitute an appropriate instrument to address the objectives described above. Indeed, the Waste Transfer Contracts provide an upper limit to the operator's exposure to very uncertain waste cost liabilities which are beyond their control. While the Cap is established at a level where the UK Government has a very high level of confidence that the Waste Transfer Price will cover all costs, it nevertheless provides the operator with visibility over its maximum cost exposure and facilitates investment decisions. It is that visibility that is crucial to investors. In exchange for the capped liabilities, operators are expected to remunerate the UK government with a Risk Fee calculated at the start of the contract for taking on the risk that costs exceed the cap.

(143) There does not seem to be other policy instruments available in this case. As mentioned, no insurance provider is offering hedging services for this risk; establishing the cap at a later stage when costs are better known leaves the potential investor with the uncertainty about his maximum costs exposure.

(144) The UK had also considered whether voluntary mechanisms would produce the right outcome in the policy area concerned. Based on past experience it concluded that they would not guarantee taxpayer protection and the observation of the “polluter pays” principle. This led the Government to devise the FDP

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requirements, without which the operator cannot use the site, and which require prudent provision for decommissioning and waste management costs to be made from the beginning of the life of the power station but then entails the cost exposure uncertainties that the Cap aims at removing. The Risk Fee provides remuneration for that hedging service.

(145) The Commission therefore concludes that the Cap and the Risk Fee constitute an appropriate instrument to address the objectives pursued by the UK.

3.3.1.4. Incentive effect

(146) A further question is whether the measure has an incentive effect. A measure has an incentive effect when it changes the behaviour of the undertaking concerned in such a way that it engages in additional activity which it would not carry out without the aid or which it would carry out in a restricted or different manner.

(147) The incentive effect is ensured by setting a price and a cap, which the UK authorities believe would give reasonable assurance to investors interested to build new nuclear power stations in respect of their disposal liabilities. This on its turn is a condition necessary to make the investment decision possible.

(148) As explained above (recital (139)), the high levels of uncertainty relating to the future waste disposal costs deters investments in new nuclear installations. A cap on the waste transfer price reduces the level of uncertainty attached to future costs as it eliminates the risk of costs being higher than the set cap. It further ensures nuclear operators that the UK Government being most likely the only provider of HLW and ILW disposal services (at least in the short to medium term) will conduct the construction of the GDF in a diligent way and will not misuse its position to set prices at a level that is excessively profiteering.

(149) By providing visibility over the maximum cost exposure of the operators the Cap removes an uncertainty that otherwise would hinder both the investment decision and the funding of the investment. This has been confirmed by the public consultation where respondents insisted that clarity on maximum cost was necessary to seek financing35.

(150) The Commission further notes that the Cap and the Risk Fee also have an incentive effect for HPC. The HPC project has been developed based on the assumption that the Waste Transfer Contract would contain a Cap (and a Risk Fee) determined on the basis of the draft Methodology. The final investment decision has not yet been made and is depending on the Commission approving the draft Methodology for determining the Waste Transfer Price, the Cap and Risk Fee. The Commission therefore concludes that the Cap and the Risk Fee have an incentive effect.

35 Methodology Section 3, recital 3.4.

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3.3.1.5. Proportionality (necessity) of the aid amount (Cap and Risk Fee)

(151) In order to determine whether the aid does not go beyond what is necessary to achieve the common objective the Commission has examined the approach to pricing enshrined in the cost modelling used by the UK to establish the Cap for the future HPC Waste Transfer Contracts. Following aspects of the Methodology are relevant for the assessment of proportionality: the level at which the Cap was set and the method for calculating the risk fee which assumes a maximum cost above which costs realizations are assigned a zero probability of occurring.

(152) The uncertainty associated with future GDF cost levels means that the amount of state aid will remain unknown until the GDF is built and operated and will depend on whether the actual costs exceed the Cap or not. This uncertainty is inherent to the market failure the potential aid is aiming to solve. The main question is therefore whether the methodology for calculating the Cap and the Risk Fee can be considered proportionate. This is the case given that the cost distribution on which the Cap is based and the assumptions underlying the calculation of the Risk Fee level are reasonable, plausible and generally conservative.

(153) The UK has commissioned two independent consultants – Leigh Fisher and KPMG - to evaluate the consistency and the degree of conservativeness of the modelling approaches used for the calculation of the Cap and the applicable Risk Fee.

The Cap

(154) As explained in Section 2.6.2 above the Cap is a result of the sum of three components – the output of the parametric cost model, the optimism bias and the contingency allowance.

(155) To assess the plausibility of the output of the parametric cost model Leigh Fisher analysed the adequacy of:

• the main risks, influencing the level of costs, used as input parameters for the model;

• the respective probabilities of occurrence attached to each risk.

(156) The Leigh Fisher’s report confirms36 that the main risk factors (and their variations) used in the parametric model - geological environment or rock type, depth and site complexity – are adequate as these reflect the number of geological uncertainties that could have an impact on the cost of the GDF. In terms of the probability of occurrence the report concludes that the probability of risk factors (and their variations) which imply a higher level of costs is overestimated. In particular, Leigh Fisher observes that the UK allocated probabilities to site properties of rock based on land areas without taking into account that certain rock types would be preferred over others (high strength rock and evaporates are

36 The conclusions of Leigh Fisher on the adequacy of the calculation methodology applied in the

calculation of the waste transfer price cap are laid down in the Validation Report on UK Nuclear Decommissioning, Waste Transfer Pricing, 14 April 2015.

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considered to be better suited for a GDF). As a result the UK has probably overstated the probability that the GDF will be located in low strength rock, which is also the most costly solution. This points to the conservative nature of the approached used in the building of the parametric cost model.

(157) The second component of the Cap – the optimism bias addresses the optimistic underestimation of costs and is based on guidance37 provided by HM Treasury’s Green book. The guidance proposes an optimism bias adjustment for capital costs in the range of 6% to 66%. The upper end of this range is appropriate for non-standard engineering projects that involve construction of facilities requiring special design considerations much like those of the GDF. For the purposes of the calculation of the cap the maximum upper bound of 66% has been applied, allowing for no risk mitigation. This makes the calculation of the optimism bias a conservative one.

(158) The last component of the cap calculation – the contingency allowance adjusts for specific additional risks as explained in recital (58) above. These are risks associated with the probabilities that a number of assumptions about the technical design and performance of the GDF may not materialise in reality. Leigh Fisher concludes that the significant additional cost increases stemming from these extra risks and the corresponding probabilities of their occurrence have been overstated in the original calculations, which reinforces the conservative nature of the parametric cost model.

(159) In addition to analysing each separate component of the model Leigh Fisher developed a separate risk model using the assumptions underlying the parametric cost model. The P50 to P99 and the maximum values calculated by the Leigh Fisher model are all between 10% and 16% lower than those in the parametric cost model. It follows that the P99 value derived from the parametric cost model and used to set the cap appears to be calculated conservatively.

Table 5: Risk model comparisons

Source: Leigh Fisher

(160) In light of the above it can be concluded that the parametric cost model is of a realistic, plausible and conservative nature.

37 The guidance provided by HM Treasury’s Green Book is based on the results of a study by Mott

MacDonald into the size and causes of costs and time overruns in past projects and is based on empirical evidence.

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The inventory

(161) As the Waste Transfer Price includes an element relating to the fixed costs of the inventory, the price and the Cap are sensitive to assumptions around the size of the inventory. The smaller the inventory, the higher the share of fixed costs that will be borne by new operators.

(162) The Commission notes that the approach used to define the inventory for the purposes of setting the Cap of the future Waste Transfer Contract for HPC is very conservative as it:

• Assumes that HPC will be the only new build while the UK expects other operators to come forward.

• Assumes that part of the legacy (spent) fuel is not waste as it could in theory be recycled. However, not all of it can and/or will be recycled, which also implies that the inventory is very conservative and that it has increased the level of the Cap.

The Risk Fee

(163) The Risk Fee is calculated as the possible cost burden on the UK Government in case the Cap is exceeded (i.e. this is the difference between the maximum cost estimated in the model and the Cap). This expected cost burden is multiplied by the probability of the cap being exceeded (which is 1%). The UK Government will also add a mark-up to the expected cost burden (50%).

(164) It should be noted that the parametric model assumes that the Cap could only be exceed in 1% of the cases as it is set at the 99 percentile (P99) of the cost distribution.

(165) The appropriateness of the risk fee has been assessed by KPMG, who for the purposes of the analysis evaluated the feasibility of the two key components, used for the calculation of the Risk Fee:

• the basic cost

• the mark-up

Basic cost

(166) KPMG outlines three possible tail distributions from P99 to P100 that could be used for the calculation of the basic cost, which is a product of a probability and a cost consequence as explained in section 2.6.3. above:

• A flat tail – in this case if the cost exceed the Cap, the former goes straight to the estimated maximum – GBP 1,360.76;

• A linear tail – in this case if the cost exceed the Cap, the former will be 50% of the estimated maximum;

• A quadratic tail – in this case if the cost exceed the Cap, the former will be 33% of the estimated maximum;

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(167) The most conservative approach of the three is the flat tail approach, which is used by the UK to calculate the level of the cost consequence and consequently the level of the basic cost.

The Mark-up

(168) The mark-up is similar to an insurance loss ratio, which is the result of the expected costs divided by the risk fee. The issue of whether the mark-up is appropriate and reasonable is equivalent to whether the loss ratio is reasonable given the cover offered.

(169) KPMG compared the risk fees of loss ratios of insurance companies insuring against risks comparable to those of the GDF project, involving low frequency high severity characteristics and using linear and quadratic tail cost distributions. The resulting figures are in the range of GBP 2,240 to GBP 3,360. The Risk Fee of GBP 3,020 proposed by the UK is within the upper end of that range. It shows that the mark up is indeed similar to insurance loss ratios used by insurances to cover risks with low frequency but high severity characteristics.

(170) On the basis of all the elements conclusions set out above the Commission concludes that the methodology for the establishment of the cap and the relevant Risk Fee ensures that possible State aid amount involved in the Cap and the Risk Fee are proportionate.

3.3.1.6. Potential distortions of competition and trade

(171) The negative effects on competition and trade between Member States resulting from the Cap and the Risk Fee are limited.

(172) In this context, the Commission notes first that the aid element is limited. New nuclear operators will have to bear the costs of spent fuel and ILW management in line with the polluter pays principle. The scheme does not relieve them from those costs. As mentioned, the aid element is limited to a free insurance in respect of costs being higher than the modelled maximum. The Cap is set at a very high level (P99), i.e. at a level where there is only 1% of chance that the costs become higher and in addition, a Risk Fee must be paid in exchange of the Cap. Also, the model on the basis of which the Cap and Risk Fee will be determined is very conservative. Ultimately, what the aid scheme does is to protect nuclear operators against inefficient handling by the State of the GDF project. Indeed the Cap incentives the State to safely and efficiently carry forward the GDF project so as to keep costs below the Cap and in any event below the Cap + the Risk Fee. As already mentioned.

(173) Second, the Commission notes that the Cap will be proposed to any new operators and the draft Methodology will apply to all of them. Concerning the possible distortion of competition on the energy market, the Commission notes that the driver for the Cap and the Risk Fee are the cost uncertainties resulting from the fact that the GDF has not been constructed, the site for it has not yet been selected and the fact that the UK Government is currently the only plausible provider of this type of service. These uncertainties do not exist on other waste management markets to which operators of other types of power generating plants have access. As a result the distortion of competition on the electricity market will remain very limited. It should be noted that in addition to ILW and spent fuel new nuclear

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power stations will also produce conventional wastes together with LLW and these wastes will require disposal. However established disposal routes are available for these waste streams and hence these do not fall within the scope of the Waste Transfer Contract.

(174) Furthermore, in terms of radioactive waste disposal services, distortions of competition are very limited as well. The likelihood that other operators might decide to offer disposal services is very low, and there is currently no EU market for such services of the same kind (i.e. permanent disposal). In addition, given the nature of the waste its transportation over long distances is not recommended and local disposal is generally considered to be the best available solution. It is also legally the solution that should be first considered. Article 4.4 of the Directive 2011/70/Euratom provides in this respect that radioactive waste must be disposed of in the Member State in which it was generated, unless at the time of shipment an agreement, taking into account the criteria established by the Commission in accordance with Article 16(2) of the Directive 2011/70/Euratom, has entered into force between the Member State concerned and another Member State or a third country to use a disposal facility in one of them.

(175) Finally, the Commission also notes that the money and assets that will be put aside to meet liabilities under the Waste Transfer Contracts will be protected so that operators cannot use them for other purposes. Indeed, under the FDP, arrangements in terms of structure of the fund and governance must be made to ensure that fund assets cannot be disbursed for any purpose other than the discharge of the operators' decommissioning, waste management and waste disposal liabilities to which the FDP relates, as and when those liabilities fall due, and irrespective of any reorganisation of the group or parent to which the operators belong38.

3.3.1.7. Conclusion and balancing test

(176) The Commission concludes that the positive effects of the Cap and the Risk Fee contained in the WTCs offset its negative effects, and that the potential distortions caused by the measure do not alter market conditions to an extent contrary to the common interest.

3.3.2. Compliance with Article 4(3)(e) of the Directive 2011/70/Euratom

(177) Article 4(3)(e) of the Directive 2011/70/Euratom provides that the costs for the management of spent fuel and radioactive waste must be borne by those who generated those materials. This is further confirmed in Article 9 of the Directive 2011/70/Euratom requiring that MS take due account of the responsibility of spent fuel and radioactive waste generators when they set up programmes ensuring that adequate resources will be available when needed for the

38 See Guidance to the Funded Decommissioning Programme, Paragraph 1.25, available under

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/70214/guidance-funded-decommissioning-programme-consult.pdf.

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management of spent fuel and radioactive waste. The Commission has examined whether the Cap and the Risk Fee39 comply with these Articles.

(178) The Cap determines a maximum level for the Waste Transfer Price and the Expected Price, which the costs will probably never reach. The Cap has been established in order to provide investors with information over their cost exposure. The Cap hedges prospective investors against the risk of the UK Government establishing the Waste Transfer Price at a level that is higher than most conservative estimates. Knowing their maximum cost exposure, prospective investors can make investment decisions and seek financing from financial institutions. The Cap, however, does not relieve them from their obligation to bear the costs of disposal of their spent fuel and ILW.

(179) First operators will have to pay the Waste Transfer Price for each spent fuel and ILW canister that will be transferred to the GDF and operators will have to set aside the funds necessary to meet their liabilities based on the (capped) Expected price and (capped) Waste Transfer Price.

(180) Second, operators need to pay a Risk Fee covering the area between the Cap and maximum costs. This Risk Fee constitutes the remuneration for the hedging service provided by the UK Government through the Cap.

(181) Third, both the Cap and the Risk Fee are based on probabilistic models that the Commission has reviewed. As was explained more in detail in Section 3.3.1.5., the Commission has been reassured that the model has taken into account the risk factors likely to have an impact on the costs. In addition, the model is based on conservative assumptions and approaches, for instance on the inventory (see recital (162)), also it includes a 66% uplift for optimism bias to take account of the fact that there is a general tendency of underestimating costs.

(182) Fourth, the Cap will be set at P99 of the risk adjusted cost distribution, i.e. at a level where there is a very high confidence (99%) that the cost will not be higher than the Cap. In other terms there is a 99% probability that costs will be lower than the Cap. As an order of magnitude, the current simulations show that the Cap is more than 3 times higher than the best estimates of total spent fuel and ILW disposal (see Table 2 above).

(183) Fifth, the Risk Fee itself is 1% of the difference between P99 and the maximum cost calculated under the cost distribution, which implies that beyond P99 all costs would necessarily be equivalent to the maximum (flat tail), which however would normally not be the case and hence increases the level of the Risk Fee. This is in itself a very conservative approach to the Risk Fee. The Risk Fee also includes a Mark Up of 50% in accordance with insurance practices for calculating insurance fees linked to risk having a very low occurrence but high costs (see also recital (169)).

39 The Decision is limited to the assessment of the Cap and Risk Fee. It does not prejudge the

Commission assessment of UK’s compliance with its other obligation under the Radioactive Waste Directive and the Commission reserves its right to provide comments on the national programme and its compliance with the Radioactive Waste Directive.

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(184) For all these reasons, the Commission concludes that the Cap and the Risk Fee comply with Article 4(3)(e) and Article 9 of the Directive 2011/70/Euratom.

(185) Furthermore, the Commission notes that the Waste Transfer Price will be paid by operators in line with Article 4(3) of Directive 2011/70/Euratom. The Commission has stressed in its 2006/851 Euratom Recommendation the importance of applying the polluter pays principle throughout the decommissioning, including spent fuel and radioactive waste management, of nuclear installations. As indicated in Recital 14 and Section 3(3) of that Recommendation, this implies that operators should set aside adequate financial resources for the future decommissioning costs (including spent fuel and radioactive waste management costs) during the productive life of those installations. The Waste Transfer Contract follow this recommendation given that under the Waste Transfer Contracts they are obliged to pay the Waste Transfer Price and are obliged under the FDP to set aside all necessary funds to meet their liabilities under the Waste Transfer Contracts. Finally, as explained above in recitals (177) - (184) the Cap on the Waste Transfer price does not relieve operators from this obligation.

4. CONCLUSION

The Commission has accordingly concluded that the pricing methodology for the Waste Transfer Price (after site selection) and the Early Transfer Payment does not involve State aid.

The Commission has accordingly decided not to raise objections to the State aid resulting from the Cap and Risk Fee on the grounds that it is compatible with the internal market pursuant to Article 107(3)(c) of the Treaty on the Functioning of the European Union.

The Commission reminds the UK authorities that, in accordance with Article 108(3) TFEU, plans to refinance, alter or change this scheme have to be notified to the Commission pursuant to provisions of Commission Regulation (EC) No 794/2004 implementing Council Regulation (EC) No 659/1999 laying down detailed rules for the application of now 108 of the TFEU.40

If this letter contains confidential information which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: http://ec.europa.eu/competition/elojade/isef/index.cfm.

40 OJ L 140, 30.4. 2004, p.1.

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Your request should be sent electronically to the following address:

European Commission, Directorate-General Competition State Aid Greffe B-1049 Brussels Stateaidgreffe@ec.europa.eu

Yours faithfully For the Commission

Margrethe VESTAGER Member of the Commission