Subsidies for UK nuclear plant could reach £17bn and 'may be unnecessary'

British consumers could pay £17bn in potentially unnecessary subsidies to fund construction of the country's first new nuclear plant in a generation, the European Commission has said.

The EC said it was assessing whether the planned subsidies for Hinkley Point in Somerset - which could exceed the £16bn cost of the plant itself - were needed at all, or whether energy companies would build the plant anyway without a penny of public support.

Ministers in October signed a landmark deal with energy giant EDF to fund the construction of the plant, which would see consumers pay billions of pounds in subsidies to the French company for decades to come.

On Wednesday the Commission opened a formal investigation into "whether the construction of a nuclear power station could not be achieved by market forces alone, without state intervention".

The Commission said its investigation, which threatens to delay or derail the plant altogether, will assess whether UK plans "to subsidise the construction and operation" of the plant are in line with EU state aid rules.

"In particular, the Commission has doubts that the project suffers from a genuine market failure," the EC said.

It said that total "public support" for the project could reach £17bn - equating to several hundred pounds for every UK household - compared with EDF's construction cost estimate of £16bn.

Commission Vice-President Joaquín Almunia, in charge of competition policy, described the proposed subsidies as "a complex measure of an unprecedented nature and scale".

In a statement, EDF insisted that without the subsidy deal with government "the investment will not take place".

Ministers have repeatedly denied that they are offering the nuclear plant a subsidy, though it is widely regarded as one, and insist their plans are consistent with state aid rules.

Ed Davey, the energy secretary, insisted the investigation was routine and that "the project meets state aid rules and provides good value for consumers while cutting carbon in the energy sector".

The main planned subsidy scheme for Hinkley Point involves guaranteeing the operator, French energy giant EDF, a price for the power the plant will generate for 35 years.

That price, which is twice the current market price of power, will be subsidised through billions of pounds of "top-up" payments, funded by levies on all UK energy bill-payers when the market price is lower than the guaranteed level.

EDF and its partners will foot the estimated £16bn cost of construction in return for the guarantee, which is designed to ensure they will get a return on their investment.

But critics have long questioned the funding model, arguing it could be more cost-effective for the government to fund the initial construction itself.

The investigation will also examine £10bn loan guarantees from the Treasury, which will underwrite the debt EDF takes out to fund the project.

The investigation could take until summer 2015, derailing EDF’s plans to take a final investment decision on building the plant in July 2014 - although Whitehall officials are hopeful that the case is being treated as high priority and will be concluded in time.

A spokesman for EDF said: "This announcement shows that the inquiry is proceeding as expected and in time for a decision in the summer of 2014.

"This investigation gives the Government and others the opportunity to show that Electricity Market Reform in the UK is essential to deliver the investment needed for the country’s low carbon energy future at a price that is fair for customers.

" Without this reform, the investment will not take place. The Hinkley Point C agreement is proof that this reform works to attract the investment needed to secure Britain’s future electricity supply."