Commission opens in-depth investigation over Belgian State aid package to support nuclear energy production

The European Commission (the “EC”) recently opened an in-depth investigation into a Belgian State aid for the lifetime extension of two nuclear reactors.[1] 

While considering the aid in principle justified, the Commission expresses doubts as to its compatibility with EU State aid rules as well as sectoral regulation on electricity market design.

Background

The two reactors involved by the aid, Doel 4 and Tihange 3, originally needed to be phased-out, respectively, in July and September 2025 according to the “Nuclear Phase-Out Law”.[2] However, in 2022 the Belgian government decided to amend its energy policy and extend the operation of the reactors for 10 more years through the so-called “Long-Term Operation” project, “LTO”.  The objective of the extension was to allow Belgium to answer to resource adequacy concerns, reduce its dependency on imported fossil fuels and supply baseload capacity in view of increased electrification needs in the near future.  In December 2023, an Implementation Agreement (“IA”) was concluded between Engie (whose fully owned subsidiary Electrabel, the former incumbent of the Belgian electricity market, owns the reactors together with Luminus), and the Belgian government for the implementation of the LTO.[3]

The Agreement for Risk sharing and Financial protection

As the lifetime extension of the nuclear reactors entails significant investments and risks, the IA provides for mechanisms to finance the LTO Project as well as to ensure costs and risk-sharing between the Belgian State and Engie for energy production, nuclear waste management, nuclear safety and legislative changes that may negatively impact nuclear operations.  The IA includes three components:

• Component 1, entailing structural and financial arrangements allowing stable revenues for the two nuclear reactors;
• Component 2, providing for the transfer of liabilities for the storage and final disposal of nuclear waste and spent fuel from Engie to the Belgian State.  It establishes that Engie will pay a € 15 billion lump sum to definitively settle its obligations, while the remaining risks related to nuclear waste will be borne by the Belgian State;
• Component 3, establishing risk-sharing mechanisms and legal protection in the event of future legislative changes.

In more details, Component 1 includes a set of interrelated measures, including:

• Joint Development Agreement. Setting the stage for the overall project execution, this agreement provides that the Belgian State pre-funds Engie’s development costs, including expenses for necessary studies and preparatory activities to ensure the timely extension of the reactors.  This reduces the upfront financial burden on Engie and aims at accelerating preparation for the LTO until the legislative conditions are met;
• Two-way contract-for-difference (“CfD”).  The CfD guarantees stable revenues to Electrabel for the operation of the reactors.  According to this agreement, the Belgian State will benefit from any positive margin between the day-ahead spot price (“reference price”) and the strike price.  This ensures that Engie does not gain windfall profits from excessively high market prices while at the same time taking advantage of increased revenue certainty;
• Joint Venture (“JV”) (BE-NUC) and Shareholder Financing. The Belgian State and Electrabel will establish a 50/50 Joint Venture, named BE-NUC, which will own the LTO Units. This JV framework enables shared financial responsibilities and investments in the reactors, fostering collaboration between Electrabel and the Belgian State in the operational management of the units.  To support the capital expenditures necessary for the lifetime extension, both parties will issue shareholder loans and inject equity totaling approximately €2 billion.
• Working Capacity Facility (“WCF”).  The Belgian State will guarantee stable cashflows for the operation and the maintenance of the reactors, thereby reducingthe risks associated tounpredictable market conditions and potential cashflow shortfalls.
• Shutdown and Development Costs (“SDC”) Loans.  The Belgian government will grant to both BE-NUC and Luminus loans amounting approximately to €580 million to cover expenditures required for the LTO project.   SDC loans will cover both the shutdown costs and operating costs until 2028.  Unless electricity generation is insufficient, SDC loans will be repaid after 2028, or once a specific amount has been repaid to shareholders.
• Minimum OPEX and capital payment (“MOCP”). After the SDC Loans expire, the Belgian State will provide coverage for minimum operational expenses and capital expenditures for the LTO Units during their extended run-phase, starting after 2028. The MOCP mitigates risks by stepping in to cover revenue shortfalls that cannot be addressed through BE-NUC’s regular operations.

Commission concerns and grounds for starting an in-depth investigation

The Commission considers the three components of the notified measure, analyzed as a single intervention,[4] as constituting a State aid within the meaning of Article 107(1) TFEU.[5]  The Commission indeed finds that, through the IA, the Belgian State attributes the main beneficiaries, Electrabel and Luminus, an economic advantage which is not available to other energy operators in similar legal and factual situations, particularly through the CfD,[6] thereby altering competitive dynamics in the internal market.

The measure is in principle deemed to be justified pursuant to Article 107(3)(c) TFEU, particularly as the energy market is characterized by significant market failures and that timely State intervention may be necessary to increase energy production and decrease the overall carbon-intensity of the energy mix.  Further, the Commission finds that the measure satisfies the “incentive effect” requirement,[7] interpreted in light of the CEEAG[8] as entailing that the beneficiary of the aid has not started implementing the project on its own.  However, the Commission questions the compatibility of the measure with EU State Aid rules, particularly in terms of necessity, appropriateness and proportionality, as well as with the new electricity market design rules.[9]

Necessity of the Component 1. The Commission doubts the necessity of further financial support on top of the two-way CfD, particularly in relation to the creation of the JV and its financing, the minimum OPEX and capital payment and the €580 million loan.[10]  The Commission finds that no conclusive argument on the need for the creation of a BE-NUC is set forth by Belgium.[11]  It also considers that the low likeliness of the event based on which Belgium justifies the additional measures – i.e. an unexpected 12-month unavailability event in 2029 affecting both LTO Units – renders the need for such measures questionable.[12]   

Appropriateness of the remuneration package. The Commission finds that the CfD as designed in the IA eliminates important market risks that would otherwise be borne by Engie and incentivizes the company to maximize energy production regardless of market signals.  This  may infringe the appropriateness requirement as well as  the design criteria set out in Article 19d(2), points (a) and (b) of Regulation (EU) 2024/1747, which require, respectively, that CfDs: (a) preserve incentives for power-generating facilities to react to market circumstances; and (b) avoid distortions in the operation, dispatch, and maintenance decisions of power-generating facilities.[13]  The risks borne by the operator are further reduced by the minimum OPEX and capital payment, covered by the SDC Loans, to an extent that the Commission deems to require further assessment.  Also considering that, in the past, the lifetime extension of other nuclear reactors took place without such an extensive participation by the State, the Commission concludes that the measure requires a more extensive analysis.

Proportionality of Component 1 and 2. The Commission discusses the proportionality of the combination of financial and structural arrangements in Component 1,[14] and particularly of the CfD’s design.  It concludes that, due to the numerous interconnections between the sub-measures, compliance with the principle of proportionality also depends on the positive assessment of the appropriateness of the measures.  Further, the Commission assesses the proportionality of the €15 billion lumpsum under Component 2,[15] and affirms that further analysis is necessary to evaluate the methodologies used to quantify it.

In line with the general principle of protecting legitimate expectations, the Commission decides not to raise concerns regarding Component 3, mainly the compensation clauses for Engie’s direct losses in case of premature reactors’ shutdown.[16] Following its Hinkley Point C decision,[17] the Commission acknowledges that nuclear operators are particularly exposed to political “hold-up” due to the controversial nature of nuclear energy in the public opinion. It thus concludes that legal protections are necessary and appropriate to address risks of political and regulatory shifts in nuclear policy.[18]

Next steps

Article 107(3)(c) TFEU establishes that State aid measures may be deemed compatible with EU law provided that they contribute to the development of an economic activity and do not unduly affect trading conditions to an extent contrary to the common interest.  As clarified by the Court of Justice,[19] State support for nuclear power generation may fall within the scope of this provision.

In other proceedings, the Commission has accepted that remuneration mechanisms, including CfDs, could be justified under Article 107(3)(c) TFEU.[20]  Indeed, two-way CfDs have been widely used in the EU to foster the development of renewable energy.[21]  

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[1]                 Commission’s Decision of July 22, 2024, SA.106107 (2024/N) – Belgium –  Lifetime extension of two nuclear reactors (Doel 4 and Tihange 3), (”Decision”).

[2]                 Loi n. 2003-11096 of 31 January 2003, sur la sortie progressive de l’énergie nucléaire à des fins de production industrielle d’électricité. 

[3]                 Cleary ERC, “The Belgian State and Engie Reach an Agreement for the Prolongation of Two Nuclear Plants”, 11 July 2023, available at https://www.clearygottlieb.com/news-and-insights/publication-listing/the-belgian-state-and-engie-reach-an-agreement-for-the-prolongation-of-two-nuclear-plants#_ftn1.

[4]                 Decision, §209.

[5]                 Decision, §223.

[6]                 Decision, §217-219.

[7]                 Decision, §230.

[8]                 Communication from the Commission – Guidelines on State aid for climate, environmental protection and energy 2022 (OJ C 80, 18.2.2022, p.1), Point 29.

[9]                 In particular regarding the CfD design principles established in Regulation 2024/1747 and the principles for direct award of (potential) construction works established in Directive 2014/25/E.

[10]                Decision, §273.

[11]                Decision, §272.

[12]                Decision, §271.

[13]                Decision, §289-299.

[14]                Decision, §331.

[15]                Decision, §345.

[16]           Decision, §346.

[17]           Commission Decision of October 8, 2014, S.A. 34947 (2013/C) – UK – Support to the Hinkley Point C Nuclear Power Station, §384-385.

[18]                Decision, §278 and §306.

[19]                Austria v Commission (Case C-594/18 P) EU:C:2020:742.

[20]                Commission Decision C (2024) 3825 of June 04, 2024.

[21]               European Commission, « Q&A Eu’s internal electricity market design revision », March 14 2023, available here https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_1593.