Commission approves State aid to support construction of nuclear power plant in Czechia

The European Commission has approved, under EU State aid rules, a Czech support measure for the construction and operation of a new nuclear power plant in Dukovany in Czechia.

The Czech measure

In March 2022, Czechia notified the Commission of its plan to support the construction and operation of a new nuclear power plant in Dukovany, with an electricity generation capacity of up to 1200 MW. The nuclear power plant is expected to be commissioned in 2036 for trial operations, while commercial operations are planned to commence in 2038. The plant will have an operating lifetime of 60 years and is planned to be decommissioned in 2096. Dukovany is already the site of an existing nuclear power plant.

The beneficiary of the measure is Elektrárna Dukovany II (‘EDU II’), a fully owned subsidiary of the ČEZ Group, the only nuclear power plant operator in Czechia. Czechia plans to grant direct price support in the form of a power purchasing contract with a State-owned Special Purpose Vehicle (‘SPV’). The contract will ensure stable revenues for the nuclear power plant for a period of 40 years. The beneficiary will also benefit of a subsidised State loan to cover a majority of the construction costs and a protection mechanism against unforeseen events or policy changes that may make the realisation of the project impossible.

The Commission’s investigation

On 30 June 2022, the Commission opened an in-depth investigation to assess the appropriateness and proportionality of the measure.

During the in-depth investigation, Czechia modified the terms of the project’s public support package to address the Commission’s concerns.

To ensure that the aid is proportionate and does not unduly distort the functioning of the electricity market, Czechia:

• introduced a remuneration formula akin to a two-way contract-for-difference, which provides revenue stability and limits excess remuneration through a yearly ex-post settlement. In principle, when average electricity prices are low, the plant receives a top-up equal to the difference between the strike price and the reference price (an ex-post yearly average of hourly market prices) for a given reference quantity. When average electricity prices are high, the plant pays back the difference between reference price and strike price. In addition, for every megawatt-hour of electricity produced, the plant receives the actual market price, thus exposing the plant to market signals for efficient and flexible operation. In particular, market prices provide incentives to reduce production and plan maintenance and refuelling when market prices are low and to increase production when market prices are high. Such exposure to market signals limits market distortions and prevents the displacement of renewables, to the benefits of the electricity system and facilitating its decarbonisation;
• reduced the duration of the direct price support from 60 to 40 years;
• set the strike price on the basis of a discounted cash flow model ensuring that the total aid amount, taking into account the subsidised loan, is limited to the funding gap of the project. The financial model notably ensures that EDU II’s shareholders will get a rate of return equal to the market return that investors would require on a similar investment. In other words, Czechia will ensure State aid proportionality through the calibration of the strike price, given the subsidised cost of debt and a proportionate cost of equity.

To address the risk of overcompensation, Czechia will implement a claw-back mechanism. It will ensure that any additional gains generated by the project will be shared with the Czech State. This mechanism will be in place over the entire operational lifetime of the plant.

To avoid market concentration and remove the risk that the measure provides an advantage to certain electricity consumers, Czechia has committed to ensure that at least 70% of the power output will be sold on the open power exchange – namely, day-ahead, intraday and futures markets – over the entire lifetime of the power plant. The rest of output can be sold on objective, transparent and non-discriminatory terms by way of auctions.

Following those changes, the Commission concluded that the aid is appropriate to achieve the objectives pursued, as well as proportionate as it is limited to the minimum necessary, while the competition distortions caused by the measure are minimised. On this basis, the Commission approved the Czech measure under EU State aid rules.