Developing a New Nuclear Project in Europe

Developing a New Nuclear Project in Europe

September 10, 2015

By Li Zhang

There are 131 nuclear power reactors with a combined capacity of around 122,000 megawatts currently operating in 14 European Union member states and managed by 18 utilities. They account for 27% of the electricity generated across all of the 28 EU member states. Despite the fact that nuclear is a proven source of low-carbon, secure and reliable electricity, the sector faces a struggle to survive within the EU, where some countries, such as Austria, Germany and Belgium, are pursuing policies that are strongly anti-nuclear. EU nuclear generating capacity is expected to decline over the period through 2030 due to the closure of a number of reactors.

Today, new construction is underway in only three EU member states: Finland, France and Slovakia. These construction projects have all experienced cost overruns and delays. Additional new projects are planned or under consideration in Finland, Hungary, Lithuania, the United Kingdom, Bulgaria, Czech Republic, The Netherlands, Poland, Romania, Slovakia, Slovenia and Sweden. The long-term future of nuclear power in the EU will depend on whether these planned projects are successfully built.

This article discusses the legal issues and challenges that developers of nuclear power projects are facing in the European Union.

Euratom Treaty

All EU member states are parties to a 1957 Euratom treaty that established the European Atomic Energy Community, now known as Euratom, to coordinate research programs in the member states for the peaceful use of nuclear energy. The Euratom treaty is a separate treaty from the main EU treaty that governs operation of the European Union. It has two major implications for nuclear new-build projects in Europe.

First, developers of new nuclear projects are required to notify the European Commission of their investment projects under articles 41 through 44 of the Euratom treaty.

This notification must be done three months before the first contracts are concluded with suppliers or, if the work is to be carried out by the developers with their own resources, three months before the work begins. In practice, a meeting would be held with the Commission to talk about the timetable and information required to be provided before any filing.

After the filing, the Commission does an assessment of the proposed project and communicates an opinion to the government of the affected country about whether the project fulfils the objectives of the Euratom treaty.

There is no time limit for the Commission to act. It can take the Commission as long as a couple years to form an opinion. The opinion has no legally binding effect. However, a project without a favorable opinion from the Commission will not be eligible for loans from Euratom or the European Investment Bank to help build the project. The Commission’s favorable assessment under the Euratom treaty does not guarantee favorable assessments on environmental or competition aspects under the EU Treaty, including state aid as discussed below.

Second, article 37 of the Euratom treaty obligates EU member states to keep the Commission informed about how they plan to dispose of radioactive waste. The Commission then has six months to determine whether the proposed plan would lead to significant contamination of the territory of another member state after consulting scientific experts from the member states.

In some member states, a favorable opinion from the Commission on the article 37 notification is a prerequisite for the relevant environmental authorities to issue environmental permits for new nuclear projects. For instance, in the UK, the Environmental Agent will not issue a radioactive substance regulation permit without a favorable opinion first from the Commission on the article 37 notification. In the UK, submission of general data on radioactive waste disposal is usually made by the government, although the ultimate responsibility to provide such data resides with the project developer.

Energy Policy

Within the EU, energy policy is largely decided at the EU level, but the actual energy mix within each member state is determined at the national level.

An EU climate and energy package enacted in 2009 sets a so-called 20-20-20 target for 2020, meaning the EU is aiming by 2020 for a 20% reduction in greenhouse gas emissions from 1999 levels, a 20% share of EU energy consumption produced from renewable energy, and a 20% improvement in energy efficiency.

The EU leaders also agreed to a greenhouse gas reduction target of at least 40% compared to 1990 levels by 2030 and a new target of at least 27% for renewable energy and energy savings by 2030.

A roadmap developed by the Commission suggested further that the EU should cut its emissions to 80% below 1990 levels by 2050.

The role of nuclear energy in achieving these targets is left to each member state to decide. However, national nuclear programs are nevertheless significantly affected by EU legislation. EU regulatory barriers have the potential to cause significant delay or cancellation of new projects.

Nuclear Safety

There has been a struggle between national and European institutions for control over nuclear safety. The Commission tried to enforce European-level measures on nuclear safety and waste, but the member states with nuclear programmes have refused to cede power to the Commission due to the anti-nuclear policies pursued by several EU member states.

The battle over the sovereignty of nuclear safety was settled with the adoption of the 2009 nuclear safety directive. Responsibility for nuclear safety lies with national authorities, and the directive requires them to adopt their own national nuclear safety requirements. An amendment to the nuclear safety directive, adopted in 2014, subjects national nuclear safety regulators to a peer review system. Thus, developers of new projects apply to the national authority in the project country for nuclear safety permits and licenses covering such activities such as siting, construction or operation of nuclear power plants.

Nevertheless, two European-level associations of nuclear regulators – WENRA and ENSREG – have become important, especially after the Fukushima accident.

WENRA – the Western European Nuclear Regulators’ Association – is a network of regulators with membership in 17 countries, including the EU member states with nuclear power plants and Switzerland. It was formed in 1999 and has played a major role in coordinating nuclear safety standards across Europe.

ENSREG – the European Nuclear Safety Regulators Group – is an independent expert body created in 2007 by the Commission. It comprises senior officials from the national nuclear safety, radioactive waste safety and radiation protection regulatory authorities from all EU member states and representatives of the Commission. Its role is to help establish conditions for continuous improvement and to reach a common understanding in the areas of nuclear safety and radioactive waste management. It makes recommendations to the Commission.

Public Procurement

Procurement of new nuclear projects is sometimes subject to EU procurement rules, especially where the procuring entity for the nuclear power is directly or indirectly controlled by the state. The EU 2004 utilities directive has a set of procurement procedures that entities operating in the water, energy, transport and postal service sectors must follow. These rules also apply to the nuclear energy sector with certain exceptions.

There are three categories of contracts that fall within the scope of the utilities directive: works contracts, supply contracts and service contracts, but only to the extent that the relevant contract value exceeds a threshold. When awarding any such contracts for a nuclear project, the procuring entity, if it is a publicly-owned utility, would be required to issue a public tender and follow procedures and award criteria found in the utilities directive. Failure to follow these procedures could cause the contract awarded to be declared void.

There are a number of exemptions in the utilities directive, either excluding certain contracts from the directive or allowing the procuring entity to award the contracts without putting the project out for bid. For instance, the directive does not apply to the contracts awarded for purposes of resale or lease of assets to third parties, or to contracts awarded pursuant to international rules or to contracts in the fields of defense and security. In practice, we have seen some member states rely on these exemptions to award contracts directly to a particular contractor without going through a tender process. Hungary, for example, awarded the contract for construction of the Paks II nuclear project directly to Rosatom via an intergovernmental arrangement with Russia. This strategy has also been pursued by some nuclear developers when seeking to secure nuclear contracts outside the EU.

Thus, before entering into negotiations with a member state, developers should determine whether the procuring entity is able to conduct the procurement without launching a public tender.

State Aid

Challenging market conditions have led governments throughout the world to consider various support mechanisms to help finance nuclear power plants. In the EU, developers must carefully review and negotiate any proposed financing plan involving state aid and engage in discussions with the Commission as early as possible to ensure that any aid measures are compatible with the EU state aid rules.

The EU member states are prohibited in principle by the EU treaty from granting state aid that distorts competition and trade.

However, despite this general prohibition, the EU treaty allows state aid in cases where state aid may be considered to be compatible with the internal market.

The Commission has the exclusive competence to determine the compatibility of state aid under the EU treaty. As far as the nuclear sector is concerned, the current framework requires EU member states wishing to subsidize nuclear energy generation to notify the Commission of any aid measure to be granted. The Commission then decides whether to allow the aid.

The most significant state aid case to date concerning the nuclear sector involves the Hinkley Point C nuclear power project, where the Commission approved the UK government’s proposed aid to support the financing of the project. There are three arrangements that were reviewed by the Commission: a contract for differences arrangement ensuring that the operator of the plant receives a stable revenue for a period of 35 years, a state guarantee of construction debt for the project of up to £17 billion, and an arrangement on compensation by the state in the event that the plant must be shut down prematurely on political grounds. Following a lengthy investigation and after the UK government agreed significantly to modify the terms that were originally notified to the Commission (including raising the guarantee fee and sharing project gains with UK consumers), the Commission eventually approved the UK aid measures and found them to be in line with EU state aid rules.

The Commission’s decision on Hinkley Point C sets a precedent for future nuclear projects in the EU. However, the decision is currently facing two legal challenges at the EU Court of Justice: one was initiated by the Austrian government and the other by Greenpeace and nine utilities in Germany and Austria that have renewable energy in their portfolios. The challenge adds to the uncertainty surrounding the future of nuclear energy in the EU.

Source of Finance

There are two EU sources available for financing commercial nuclear power projects: Euratom loans and EIB loans.

Euratom loans are administered by the Commission. Euratom loans were initially restricted to nuclear fuel cycle facilities with an initial credit ceiling of €500 million. The ceiling was then increased to €4 billion and the funds were extended to certain eastern European countries for safety upgrades of nuclear power plants in those countries. In principle, Euratom loans could contribute to the financing of nuclear new-build projects. However, Euratom loans cannot be used as the sole source of finance for any projects and can only fund a maximum of 50% of the total costs of the projects.

The criteria for project eligibility were only that a project receives a favorable opinion from the Commission in technical and economic terms. The Commission makes the final decision. There is no formal involvement of either member states or the European Parliament in the decision. The Commission has been considering a further increase in the loan ceiling since 2004, but no decision has been made.

A Euratom loan could be complemented by a loan from the EIB. The EIB financed numerous nuclear power generation and nuclear fuel cycle projects for about two decades up to the mid-1980s. In 2007, the EIB resumed lending to the nuclear sector and has since provided about €1 billion to three uranium enrichment facilities. In principle, the EIB lending policy adopts a technology-neutral approach toward nuclear energy, meaning all nuclear energy projects are eligible for EIB financing, provided that they are technically, environmentally, financially and economically justified, taking into account the lifetime costs of the projects, and have received a positive opinion from the Commission under articles 41 through 44 of the Euratom treaty.  Eligible projects include power generation, full fuel cycle, waste management, safety upgrade, lifetime extension, decommissioning and R&D.

In terms of screening and assessment criteria, the normal EIB criteria for large thermal power plants are also used for nuclear, together with additional nuclear appraisal guidelines to address specific issues related to nuclear projects, such as safety regulations, radioactive waste management, plant decommissioning, technology aspects and promoter capacities.

The Commission and the EIB recently launched a European Fund for Strategic Investments (EFSI) to support investment in strategic sectors such as transport, energy and digital infrastructure. The EFSI will support projects that typically have a higher risk profile than projects normally supported by the EIB. The United Kingdom and Poland are currently seeking funds from the EFSI to support their new nuclear projects.

In addition, the European Bank for Reconstruction and Development administers three funds for nuclear safety on behalf of the G24 countries and the EU: the Nuclear Safety Account, the International Decommissioning Support Funds for Bulgaria, Lithuania and the Slovak Republic, and the Chernobyl Shelter Fund. However, the funds are only available for nuclear safety purposes. They are not available for new nuclear projects.

Environmental Impact Assessment

Nuclear power projects are subject to an environmental impact assessment under the 2011 EIA directive, which has been transposed into the domestic EIA regimes of the EU member states.

Under the directive, the environmental impact assessment procedure can be summarized as follows. Developers of nuclear power projects must provide information on the environmental impact to the competent environmental authority. The environmental authority and the public must be informed and consulted. The competent authority then makes a decision, and the public is informed of the decision afterwards and can challenge the decision before the courts. Where a project is likely to have a significant effect on the environment in another member state, the other affected member state must be consulted. The responsibilities for the EIA lie solely with the EU member states. The Commission does not participate in such deliberations.

Transboundary impacts have recently been under judicial review in the English courts, where the National Trust of Ireland challenged the legality of the UK government granting a development consent to the Hinkley Point C nuclear power project, which is 150 miles from the Irish coast. The Irish National Trust said the UK government failed to undertake a “transboundary consultation” with the Irish people about the environmental risks as required by the EIA directive before granting the development consent. The UK government argued that such a consultation was not necessary because nuclear accidents were unlikely due to the robustness of the UK regulatory regime. The English high court ruled against the Irish National Trust. The Trust appealed, but the English court of appeal rejected the appeal on the merits and also rejected the Trust’s request for referral to the EU Court of Justice.

In addition to the EIA directive, developers must also consider the potential impact of other EU environmental-related legislation concerning habitats and the water framework on their projects.

Nuclear Fuel Supply

The EU imports 95% of natural uranium and about 40% of nuclear fuel and enrichment services from outside the EU.

Deliveries to EU utilities are generally well diversified across the whole nuclear fuel cycle, except in four countries: Bulgaria, Czech Republic, Hungary and Slovakia. These countries operate exclusively VVER reactors – a Russian version of the pressurized water reactor – and are dependent on deliveries of fuel assemblies from a single Russian supplier.

Within the EU, a common nuclear fuel market is maintained by the Euratom Supply Agency or ESA, an agency established by the Euratom treaty to ensure a regular and equitable supply of ores and nuclear fuels to all EU users. ESA implements a common supply policy. The ESA relies on four tools to implement its supply policy.

First, ESA has an exclusive right to conclude contracts relating to supply of ores, source materials and special fissile materials coming from inside or outside the EU. In practice, this means all such supply contracts in whatever form (sale, purchase, loan or exchange) are required to be co-signed by the ESA in order to be valid.

Second, ESA must be notified of transfer, import or export contracts for small quantities of ores, source materials and special fissile materials, as well as all transformation contracts for processing, conversion, shaping, enrichment, storage of ores, source materials and special fissile materials.

Third, ESA has the right to request the Commission to authorize export of material produced in the EU and supply contracts with durations exceeding 10 years. This procedure has to be initiated by ESA and the Commission’s authorization does not substitute for separate approval by ESA. ESA recently exercised this right to intervene in a nuclear fuel deal between Hungary and Russia and requested the term of the fuel supply contract between the two countries be reduced from 20 to 10 years.

Finally, ESA has an option on all ores, source materials and special fissile materials produced in the EU. This right is normally waived by having ESA sign the supply contract involving such materials. ESA must be a party to all such supply contracts.

by Li Zhang, in London