TESTO DELLA LETTERA

The Commission wishes to inform Poland that, having examined the information supplied by your authorities on the measure referred to above, it has decided to initiate the procedure laid down in Article 108(2) of the Treaty on the Functioning of the European Union (‘TFEU’).

1.   THE PROCEDURE

(1)

Following pre-notification contacts, pursuant to Article 108(3) TFEU, the Polish authorities notified to the Commission on 18 September 2024 their intention to provide support to the construction and operation of the first nuclear power plant (‘NPP’) in Poland, situated in Lubiatowo-Kopalino (the ‘Project’).

(2)

The Commission sent further questions on 16 October, 12 November, and 29 November 2024 to which Poland replied on 24 October, 17 November, and 2 December 2024.

(3)

By letter dated 17 September 2024, the Polish authorities exceptionally agreed to waive their rights deriving from Article 342 TFEU, in conjunction with Article 3 of Regulation 1/1958 (1) and to have this decision adopted and notified in English.

2.   DESCRIPTION OF THE CONTEXT

2.1.   Electricity generation in Poland

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The Polish electricity market is dominated by coal-fired generation, as shown in Figure 1 below. Coal-powered dispatchable capacities are currently the backbone of Poland’s electricity system, ensuring security of supply to consumers. The Polish authorities highlight that coal-fired power plants account for a significant share of the electricity produced, which far exceeds their share of the installed generation capacity in the Polish electricity system.

Figure 1:

Structure of the installed capacity and electricity generation

Source:

TSO data provided by the Polish authorities

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According to data published by the Polish transmission system operator (‘TSO’) Polskie Sieci Elektroenergetyczne S.A. (‘PSE’), the installed capacity of generating units in Poland in 2023 was 67.8 Gigawatt (‘GW’) of which almost half (33.4 GW or 49% of the total capacity) is provided by conventional thermal power plants fired by hard coal and lignite. (2)

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Renewable energy sources (‘RES’) also have a significant share in the installed capacity, accounting for about 40% of that capacity (approximately 27.2 GW). The total generation capacity in the Polish electricity system has steadily increased over the past years (3), driven primarily by the growth of RES, which amounted to nearly 20 GW in the years 2019-2023.

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Most of Poland’s electricity supply comes from conventional units fired by hard coal, lignite and natural gas, accounting for about 124.8 Terawatt hours (‘TWh’) or 76.3% the total production. Renewable sources accounted for about 21.5% of the electricity generated (about 35.2 TWh) (4). The remaining 2.2% of the generation is covered by commercial hydroelectric power plants (about 3.6 TWh). (5)

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The Polish authorities stress that the ratio of installed dispatchable capacity to the overall installed capacity has declined steadily in Poland in recent years. Notably, from 2014 to 2023 this ratio decreased by 20 percentage points from around 70% to 50%. In the view of the Polish authorities, this development creates systemic risks over the mid- and long-term due to a lower capability of always meeting demand and thus to ensure adequate energy security parameters.

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Electricity consumption in Poland in the years 2019-2023 varied between approximately 165 and 175 TWh, with the lowest value recorded for the year 2020 and a slight downward trajectory starting from the highest value in 2021. (6)

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Poland has traditionally been a net exporter of electricity but that changed in 2014 when it became a net importer (7). Its import-export balance has been growing dynamically since then and, in 2020, the total volume of electricity imported reached a historic high of 13.22 TWh covering about 8% of the total demand in Poland (see Figure 2). This trend is reinforced by the increasing costs of coal and the price of allowances under the EU emission trading system (‘EU ETS’) (8), which make electricity generation in coal-fired power plants more expensive compared to imported electricity from neighbouring countries with less emission-intensive generation, except in periods with low generation of electricity by RES throughout the EU.

Figure 2:

Import-export balance values for Poland 1991-2023 based on PSE data

Source:

Polish authorities

(11)

According to the forecasts included in the most recent draft version of the Polish national energy and climate plan (‘NECP’) (9), an increase in demand for electricity, driven by the electrification of various industries including the transport and heating sectors, will occur in the period 2023-2045. The projected electricity demand in 2040 will be 261 TWh in the baseline scenario, representing an increase of about 55% compared to current demand (see Figure 3).

Figure 3:

Historical demand of electricity in the Polish electricity system (dark blue) and demand increase forecasts (light blue)

Source:

Polish authorities

2.2.   Expected capacity gap

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The Polish transmission system operator (‘TSO’) Polskie Sieci Elektroenergetyczne S.A. (‘PSE’) has conducted analyses of the need to ensure power adequacy and security of supply which justify the integration of the Project in the Polish electricity system.

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The Development Plan for meeting the current and future electricity demand for 2023-2032 (‘Development Plan’) (10), stresses the need to ensure access to dispatchable power to maintain the operational security of the electricity system. The TSO emphasises that the rate of increase in new capacity may not be sufficient to cover the increase in power demand and replace planned-to-be-retired capacity (11).

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The Development Plan explains that, taking into account the current stage of development of technology, it is not possible to ensure capacity needs solely based on RES, which are dependent on weather conditions. Therefore, in order to ensure that supply meets existing and growing demand – especially in the situations of extreme weather conditions or limited availability of electricity that can be imported or increased unavailability of conventional generation sources – it is necessary to have additional resources that will ensure stable operation of the Polish electricity system and guarantee reliable supplies of electricity to end consumers.

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Projections show that electricity generation from dispatchable hard coal and lignite-fired generating units will gradually decline. This is confirmed in all energy-related strategic policy documents of Poland. In the ‘pessimistic scenario’ (12) of PSE, about 11 GW of coal-fired units will be shut down by 2030, and by 2040 the figure will reach more than 19 GW (13). In the near term, therefore, a significant portion of controllable generating units that currently provide security of supply to end users is expected to be shut down.

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Taking into account the available information on the connections of new renewable sources and assuming the deployment of new planned conventional generating units in accordance with the schedules (14), the TSO's projected loss of load expectation (‘LOLE’) indicator, which describes the number of hours per year when there will be a power shortfall in the grid, stands at 1 040 hours in 2030, 2 744 hours in 2033 and 6 441 hours in 2040 (15). This means that for about 75% of the time in 2040, the Polish system will be short on generation capacity.

Figure 4

Additional dispatchable capacity required and LOLE indicator in 2023-2040

Source:

Polish authorities based on TSO data

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The Development Plan indicates that, in the coming years, to achieve the required level of security of energy supply, dispatchable capacity should maintain the security criteria for the operation of the power grid (16). This necessity also stems from the TSO's analysis of the adequacy of generation resources in the Polish electricity system in 2023-2040 included in the Development Plan which shows a substantial need for additional dispatchable capacity up to 10 GW in 2033 and 17.5 GW in 2040.

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Hence, according to forecasts, in the coming years there will be a situation in which the demand for power in the Polish electricity system will increase, while at the same time large, dispatchable generating units will be shut down. Such a situation leads to a power adequacy gap and poses a threat to the continuity of supply, according to the Polish authorities.

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The 2023 edition of the European Resource Adequacy Assessment (‘ERAA’) also indicates some adequacy risks for Poland in the medium term, with LOLE values of 2.5 hours/year in 2030 and 8.5 hours/year in 2033 for the central reference scenario. In a sensitivity scenario, LOLE value estimations for Poland reach 4.4 hours/year in 2030 and 12.3 hours/year in 2033.

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In the view of the Polish authorities, the expected capacity gap underscores the urgent need for additional dispatchable capacity to ensure the safe operation of the Polish electricity system. Such a need was expressed in the Development Plan, in which the TSO explicitly indicated the need to build new, controllable generation sources (17).

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In 2017, Poland introduced a capacity mechanism, approved by the Commission in 2018 (18) for ten delivery years starting with 2021. In the years 2018-2024, 8 main auctions (19), as well as 20 additional auctions (20), were conducted in Poland. The last main auction is planned in 2025 (for delivery year 2030), followed by additional auctions. The Polish authorities submit that therefore there are no measures in place that would support construction of new dispatchable capacities after 2030. In their view, this lack of incentives for investments in dispatchable power is reflected in a significant increase of adequacy risk, expected in the 2030s and 2040s. The Polish authorities currently consider it uncertain whether the capacity market will be prolonged and, if so, under what conditions or modifications. Due to this uncertainty, the capacity market, as it was accepted in 2018, in their view cannot be currently considered as sufficient to address resource adequacy in the long term, especially after 2030, when a significant need for additional dispatchable capacity is still recognised.

Figure 5

Total volume of capacity obligation by year divided into auctions, where obligation has been concluded

Source:

Polish authorities based on TSO data

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The implementation of the Project and further envisaged NPPs in line with the schedule determined in the Polish Nuclear Power Programme (‘PNPP’) is, according to the TSO, one of the measures to keep dispatchable capacity. Completion of the 3.75 GW Project, as planned in the PNPP, will reduce the projected capacity and electricity shortfalls in Poland.

2.3.   Objectives and background

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The Polish authorities submit that the Project will contribute to the achievement of the following objectives, considered to be in line with the fundamental aims of the Energy Union (21): (a) Energy security; (b) Sustainability (decarbonising the economy); and (c) Competitiveness (price stability and affordability).

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Overall, they consider the Project to be part of the long-term energy policies of Poland and submit that the Project is of strategic importance for ensuring Poland’s energy security in the coming decades, while contributing to the EU’s energy policy objectives expressed in Article 194 of the TFEU. Namely, the Polish authorities explain that the Project is a fundamental element to decarbonise the energy system while ensuring continuity of energy supply at a competitive and affordable cost to end-users, considering the requirements of safety, and technical standards and environmental sustainability.

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The Polish authorities submit that the large share of coal-fired power generation in Poland's energy mix translates into the power sector's high carbon intensity of about 662 kilogramme CO2/MWh, which is the highest value across all Member States. At the same time, the rising prices of CO2 emission allowances in recent years, coupled with the tightness in the commodity markets, led to increased electricity prices in Poland. They consider that the aging generation assets should be replaced with units that will significantly reduce CO2 emissions without significantly increasing electricity costs to households and the economy thereby implementing the Polish climate policies aimed at reducing greenhouse gas emissions. In the view of the Polish authorities, NPPs are one of the few sources that provide a stable supply of electricity, without greenhouse gas emissions, at a moderate system-wide cost.

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The Polish authorities explain that the above objectives are consistently reflected across all energy-related government programmes and strategies adopted to date, which notably include: (a) the PNPP, initially adopted on 28 January 2014 by the Polish government (22) and updated in 2020 (23); (b) the energy policy of Poland until 2040 (‘PEP2040’) (24); and (c) the NECP, covering the years 2021-2030.

(27)

The PNPP aims to enhance energy security by diversifying the fuel base in the electricity sector and the geographical origin of primary energy carriers, to replace high-emission baseload generation assets, and to contribute towards mitigating climate change, while providing electricity at competitive and affordable price for end-users. Moreover, the PNPP recognises that investments in nuclear power projects are highly capital intensive, have long lead times, with exceptionally extensive preparatory time before actual investment, and require a uniquely complex and comprehensive risk management strategy. Therefore, the Polish authorities submit that they require State involvement in view of the predominant impact the investment and financing costs have on the final cost of energy produced. Furthermore, the uncertainty of developments on the electricity market in the long term also hampers the realisation of such projects without any State involvement. The PNPP defines actions required to achieve the aims set, such as developing a skilled workforce for the construction and operation of NPPs and energy infrastructure, as well as strengthening nuclear regulatory control. It also outlines the steps for the commissioning of NPPs with a total installed nuclear power capacity of 6 to approximately 9 GWe based on proven, large-scale, Generation III (+) pressurised water reactors.

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The PEP2040 is anchored in the Polish Energy Law (25), which provides the legal basis for adoption of general energy policy. The document sets the framework for the energy transition in Poland and includes in-depth assessments of the current situation in the electricity sector, strategic State-level priorities as well as modelling and forecasts of energy supply and demand. The PEP2040 includes eight strategic objectives covering the entire energy supply chain, from obtaining raw materials, through energy production and supply, to the method of its use and sale. PEP2040’s fifth strategic objective provides for ‘implementation of nuclear power’ through the commissioning of a first nuclear unit by 2033 with a capacity of 1-1.6 GW, followed by subsequent units every 2-3 years. The document refers to, among other things, the Project’s site and delivery dates in correlation with the need to replace existing (mainly coal-fired) dispatchable generating units, as well as to reduce national emissions of greenhouse gases and air pollutants.

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The NECP emphasises an urgent need to implement nuclear power, including the Project, to ensure a sustained energy security. Furthermore, it states that the implementation of the Project will be one of the primary measures aimed at the decarbonisation of the electricity sector. The importance of the timely deployment of NPPs is also emphasised in the draft updated NECP that is being finalised. Nuclear power, and specifically the NPP, are expected to play a crucial role in ensuring power generation, as well as enabling the decarbonisation of the electricity sector in Poland.

2.4.   Alternative options for securing a low carbon energy mix

2.4.1.   Impact of the Project on the reduction of system-wide costs

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The Polish authorities submit that the TSO’s actions are technology-neutral and its role is to ensure an adequate level of security of electricity supply, regardless of the technology that will provide such a level. At the same time, from the perspective of the State, it is reasonable that the security of supply is ensured in a cost-optimum way for citizens, as well as for the economy. Poland therefore stressed that, when making investment decisions related to ensuring a reliable supply of electricity, the socio-economic calculations should duly be considered taking into account all costs generated, including system-wide costs (26) and environmental costs. In their view, system-wide costs increase with the growing share of weather-dependent sources in electricity generation, significantly increasing the total cost of electricity (27).

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Such costs were included in an analysis of alternative scenarios for ensuring continuity of electricity supply while minimizing greenhouse gas emissions, prepared by the National Center for Energy Analysis (‘NCAE Analysis’) (28). The Polish authorities submit that the NCAE Analysis has clearly shown that under all scenarios the use of nuclear power is the least costly way to provide the Polish electricity system with 6 GW of continuously available dispatchable capacity throughout a 30-year period, also in the variant assuming net-zero CO2 emissions.

Figure 6

Comparative analysis of the costs of ensuring stable and reliable electricity supply by nuclear technologies and RES sources

Source:

Polish authorities based on NCAE Analysis

2.4.2.   Alternative options: gas power plants

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The Polish authorities submit that natural gas will play an important role in Poland’s energy mix as a transition fuel. According to the Development Plan, the installed capacity of gas-fired power plants (existing and new natural gas-fired power plants possibly with hydrogen co-firing or adapted to combust hydrogen) in 2032 will be nearly 9 GW (compared to around 3.3 GW at the end of 2022). However, taking into account the experience of the recent energy crisis that Europe faced as a result of the aggression of the Russian Federation against Ukraine, Poland’s energy strategy, including with regard to energy security, reflects the need to effectively avoid systemic overdependence on imports of natural gas and the overdependence of the country’s energy mix on natural gas. Moreover, the costs of generating electricity in this type of units have in the recent past been prone to volatility. On top of that, gas power plants are not CO2 emission free and thus their marginal cost also depends on the cost of EU allowances. Therefore, the Polish authorities consider that taking these features into account, gas units will play a supplementary role but are not a viable sustainable alternative to nuclear energy.

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In addition, Poland explains that, bearing in mind that gas supplies to Poland mostly rely on secure international deliveries and geopolitical stability, NPPs provide added value in terms of national and regional energy security through the ability to accumulate on-site fuel supplies sufficient for several years of plant operation.

2.4.3.   Alternative option: electricity storage technology

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The use of energy storage is one of the scenarios taken into account in the planned energy mix of Poland (29). However, due to the current state of development of large-scale storage technologies and very high costs associated with investments in this type of infrastructure, their future role is seen by the Polish authorities as auxiliary in balancing the system by the TSO. Poland submits that currently it is uncertain whether this technology will be able to ensure energy security on the necessary scale and over the needed periods that will be required to meet electricity demand at all times.

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At the same time, given the scale of Poland's energy transition challenges, the development of energy storage facilities, once economically and technologically viable, could proceed in parallel with the nuclear program and the development of renewable energy sources.

2.4.4.   Alternative option: cross-border electricity flows

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Poland is part of the Continental Europe Synchronous Area (‘CESA’) and is connected with six neighbouring countries, namely Germany, Czechia, Slovakia, Ukraine, Lithuania and Sweden with interconnectors enabling electricity import/export depending on the current situation on local markets or system needs.

Figure 7

Projected cross-border transmission capacities with Germany, Czechia and Slovakia

Source:

Polish authorities based on data from ENTSO-E

Figure 8

Projected capacity with Lithuania and Sweden

Source:

Polish authorities based on data from TSO). * TBD means that capacity will be determined after synchronisation using interconnection LitPol Link and will depend on the future capabilities and conditions of the Baltic States’ power system:

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Poland plans to reach the interconnection targets in accordance with the Polish implementation plan (30) based on the EU market rules. As explained in recital (10), it is envisaged that Poland will be an electricity importer in the coming decades. Pursuant to the Ten-Year Network Development Plan 2022 scenario report prepared by the European network of electricity TSOs (‘ENTSO-E’), in 2030 Poland will import around 40 TWh, while in 2040 net import will amount to around 25 TWh.

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However, the Polish authorities submit that, given Poland's expected role as a net importer of energy in the long term, there is a risk to the country's energy security related to the lack of predictability of electricity imports, especially from Member States that strategically base their energy mix on intermittent sources. In particular, the results of the European resource adequacy assessment (‘ERAA’) (31) point towards a tendency of growing inadequacy – not only in Poland, but also in most neighbouring countries – in the forecasts up to 2033. Hence, according to the Polish authorities, developing a stable, dispatchable source of power such as nuclear power will strengthen Polish energy security.

2.4.5.   Comparative scenarios to reduce CO2 emissions

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The Polish authorities provided an assessment illustrating the potential impact of the Project on reducing CO2 emissions in the Polish electricity system and lowering the cost of purchasing CO2 emission allowances for the Polish economy, based on three alternative scenarios that also represent comparable dispatchable capacity: (a) High-carbon scenario – assuming 50% of the electricity is generated from existing coal-fired capacity (hard coal) and 50% from new gas-fired capacity. (b) Natural gas scenario – assuming 100% of the electricity generated comes from new natural gas-fired capacity. (c) RES scenario – assuming 50% of the electricity generated comes from new natural gas-fired capacity and 50% from new renewable energy capacity combined with electricity storage.

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The Polish authorities submit that the alternative scenarios are comparable in terms of ensuring security of energy supply, i.e. they all ensure an adequate supply of dispatchable capacity in the power grid. For that reason, the Polish authorities explain that the scenario where the alternative to production from NPPs is based on 100% RES was not analysed, given lack of commercially available, system-scale energy storage technologies (both short-term and seasonal).

(41)

The Polish authorities submit that the Project will be beneficial from the perspective of reducing CO2 emissions and accordingly lowering the cost of purchasing emission allowances for the Polish economy. Specifically, the lower CO2 emissions are estimated to be between 27.4 million tonnes and 112.9 million tonnes, while the lower costs for purchasing emission allowances are between PLN 8.7 billion and PLN 35.7 billion.

2.5.   Alternative options on financing mechanisms for nuclear energy

(42)

Poland submits that when designing the Project, many factors were taken into account, including (i) the financial feasibility of the investment, (ii) specific risks related to the investment in the nuclear projects, and (iii) relevant legal requirements (especially State aid rules and sectoral regulation). Based on an analysis by the National Center for Energy Analysis, Poland considered that a direct price support scheme is needed to provide the long-term revenue certainty needed to incentivise nuclear newbuild.

(43)

Poland highlights that the design of a direct price support for the Project coincided with the work on the reform of the electricity market design, which requires that direct price support for investment in new power-generating facilities of electricity from certain sources takes the form of two-way contracts for difference or equivalent schemes with the same effects (32). Poland further refers to the similar objectives pursued by the reform and the Project, namely aiming to ensure the interests of consumers by limiting excessive prices.

(44)

Poland submits that it investigated the regulated asset base model (“RAB model”) as well, in which the amount of the aid would take into account the investments made throughout the life-cycle of the NPP, from construction to decommissioning, where the investor’s allowed revenue would be determined at regular intervals by an independent regulator and based on efficient investments and other legitimate costs, including a reasonable profit level. Poland explains that the RAB model is currently proposed for the Sizewell C investment in the United Kingdom and aims to attract to a greater extent private financing, notably equity. Poland however recalls that the RAB model as such has not been successfully implemented for new NPPs in the EU so far.

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Poland explains that it nevertheless assessed the advantages and disadvantages of a RAB model and further considers that the direct price support scheme proposed for the Project accommodates a number of elements of the RAB model, most notably as regards the supervision of the national regulatory authority (‘NRA’) in determining the strike price that reflects justified costs. These costs will be verified by the NRA, which will set the initial strike price in an administrative decision. A review of changes in eligible costs will also be carried out by the NRA. These measures introduce an important incentive for the beneficiary of the aid to keep within initial investment cost estimates throughout the construction of the NPP, as it will bear the risks associated with the failure to obtain eligibility approval by the NRA of the costs incurred and the related determination and adjustments of the strike price.

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Referring to the option of relying on a capacity mechanism, Poland considers such an approach as not appropriate and insufficient to support a uniquely cost-intensive investment in the NPP with uniquely long investment recovery time-horizon, due to the fact that capacity mechanisms are market-wide measures that aim at compensating the readiness of plants to supply electricity in pre-defined periods rather than providing a supply of electricity by dispatchable source such as for the Project. As per Poland, the participation by the NPP in the capacity mechanism auctions would not address the specific needs to support the NPP, taking into account the limited timeframe of a capacity mechanism which cannot reach the 60 years timeframe envisaged in the financial model for the Project. Moreover, a capacity mechanism alone would not ensure the benefits sought by the Polish authorities of the NPP in the Polish electricity system, including stabilising electricity prices over the long-term (i.e. longer than the time horizon of the accepted capacity mechanism) for end consumers and contributing to the competitiveness of the economy. Taking those considerations into account, Poland came to the conclusion that the investment in the NPP requires a dedicated support scheme outside of the capacity mechanism.

3.   DESCRIPTION OF THE PROJECT

3.1.   General description of the Project

(47)

The notified measures cover the construction and operation of a new NPP in northern Poland, in the commune of Choczewo on the Lubiatowo-Kopalino site, with a capacity of up to 3 750 MW.

(48)

The State support package comprises the following measures (together the ‘measures’): (a) an equity injection of representing around 30% of the estimated costs of the Project into Polskie Elektrownie Jądrowe sp. z o.o (‘PEJ’), the undertaking tasked with implementing the Project and which will own the NPP (‘measure 1’, see section 5.1); (b) 100% State guarantees for the debt taken to finance the Project (‘measure 2’, see section 5.2); (c) a two-way contract for difference (‘CfD’) with a duration of 60 years and including an ex-post settlement mechanism (‘measure 3’); the CfD settlement will cover the exchange rate risk for costs incurred in EUR and USD (‘measure 3’, see section 5.3).

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The beneficiary of the project (see also section 4) will be PEJ, a project company 100% State-owned. PEJ, or a subsidiary of it, will also act as operator of the NPP and will be responsible of the sale of the electricity (see Figure 9 below).

Figure 9

Project structure

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The new-built NPP is expected to be commissioned as from 2037 and have a lifetime of 60 years.

3.2.   History of the project, technical characteristics, and procurement process

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Poland’s plan to diversify energy sources and reduce carbon emissions in the electricity sector by investing in nuclear energy dates back to at least 2009 (33). To deliver on the Government’s objectives, in 2010, Poland’s largest energy group, the publicly traded PGE Polska Grupa Energetyczna S.A. (‘PGE’) in which the State was a majority shareholder, established an investment vehicle PGE EJ1 sp. z o.o. (hereinafter ‘PGE EJ1’) for the purpose of the nuclear energy deployment in Poland.

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In 2021, the State Treasury bought 100% of shares in PGE EJ 1 which was renamed Polskie Elektrownie Jądrowe sp. z o.o (‘PEJ’).

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On 2 November 2022, the Council of Ministers adopted a Resolution (34) on the construction of large-scale nuclear power plants in the Republic of Poland, whereby the Council of Ministers indicated the key elements of the Project, including (i) reactor technology, (ii) maximum capacity, and (iii) two possible location sites. In the Resolution, the Council of Ministers found it necessary to build a nuclear power plant with a capacity of up to 3750 MWe in the area of the communes of Choczewo or Gniewino and Krokowa, based on U.S. AP1000 reactor technology.

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The Project thus concerns the construction of three III+ generation pressurised water reactors (‘PWR’), using the AP1000 reactor technology design of Westinghouse Electric Company LLC (‘Westinghouse’) and its consortium partner Bechtel Nuclear Power Company Limited (‘Bechtel’), with a gross capacity of 1 250 MW per reactor.

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Poland explained that, following a prior dialogue with the relevant services of the Commission, it is conducting the procurement procedure for all strategic contracts (35) relating to the PNPP implementation without direct application of the national regulations transposing Directive 2014/25/EU (36) (i.e. the Polish Procurement Law of 11 September 2019). To all other, non-strategic PNPP-related procurements, standard national regulations should apply. In Poland’s view, this approach is justified on the basis of Article 24 of Directive 2014/25/EU which allows derogations to the extent that the protection of the essential security interests of a Member State cannot be guaranteed by less intrusive measures. Poland submits that it is facing fundamental challenges regarding its core security and that Russia’s resurgent aggressiveness has been evident and felt long before the 2022 invasion of Ukraine, not only in the military realm but also in its weaponization of energy as a widely used tool of political and economic coercion.

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Poland submits that, after a thorough assessment of the various nuclear reactor technologies available on the market for the purpose of the construction of the NPP under the PNPP, it has reached the conclusion that the technology offered by Westinghouse (i.e., AP 1000) was the only one capable of meeting the essential requirements for establishing the nuclear power sector in Poland and pre-existing (mainly site-related) conditions for the NPP. Therefore, the Polish authorities have chosen Westinghouse as technology provider in accordance with §5 of the Internal Regulations (37) (based on Article 50 (c) of Directive 2014/25/EU). Given that Westinghouse acts as technology provider and does not have construction capabilities, it has chosen Bechtel as consortium partner, with whom it jointly implemented the recent nuclear project in Vogtle, Georgia, USA. Therefore, Westinghouse and Bechtel, as the engineering, procurement and construction (‘EPC’) supplier will be responsible for the engineering, construction and commissioning of the Project.

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The Polish authorities submit that procurements which are not directly linked to reactor technology, but still require higher than usual degree of protection for the sake of national interest (e.g. tenders for consulting services) will be conducted via competitive procedure in accordance with the Internal Regulation. All other non-strategic procurements (such as the construction of buildings outside of the NPP site, preliminary works on the NPP site, monitoring facilities, utility connections to the construction site, etc.) will comply with the standard procedure under the Polish Procurement Law.

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The Polish authorities also explained that, to the extent practically, commercially, and legally feasible, PEJ intends to carry out the Project in accordance with the technical screening criteria for nuclear energy generation activities set out in section 4.27 of the delegated act (38) adopted pursuant to Regulation (EU) 2020/852 (‘Taxonomy Regulation’) (39), which can be considered as a source of benchmark for sustainable investments. The Polish authorities note that the Taxonomy Regulation creates a broad set of requirements not only for the investor and investment, but also for the regulatory environment or policy planning process. The Polish authorities submit that they are committed to creating an adequate basis for the fulfilment of those requirements for investments in the construction and operation of new nuclear power plants.

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For example, the Polish authorities explain that they intend to ensure that there will be resources available at the end of the estimated useful life of the NPP corresponding to the estimated cost of radioactive waste management and decommissioning. A relevant obligation on the entity with the license to operate the NPP to this effect (i.e. to create a decommissioning fund) is already foreseen in the Polish Atomic Law (40). Furthermore, the Polish authorities take account of section 4.27 as regards the regulation of the final disposal facilities for the radioactive waste. As regards two criteria set out in the delegated act (namely, having a documented plan with detailed steps to have in operation, by 2050, a disposal facility for high-level radioactive waste, and use of accident-tolerant fuel from 2025), the Polish authorities explain that to the extent practically, commercially, and legally feasible they aim to realise the Project in line with those criteria.

3.3.   Current state of development and planning of the Project

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The Polish authorities explained that the construction of a nuclear power plant is a long-term process which can be divided into five successive phases as outlined in Figure 10 below:

Figure 10

The main phases of the project

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As part of the first (‘Concept and preparation’) phase of the Project, PEJ has been working to obtain the necessary permits and to develop the engineering/conceptual design of the NPP together with the EPC contractors. PEJ has obtained the following administrative decisions/permits: (a) On 12 July 2023, the Minister of Climate and Environment issued the decision in principle for the NPP which represents the State's acceptance of a specific investor's intention to build, in a designated location, a nuclear power facility of predetermined parameters. (b) On 19 September 2023, the General Director for Environmental Protection issued a Decision on the environmental conditions for the construction of the NPP, at the Lubiatowo-Kopalino site in the Choczewo commune. The Polish authorities explain that this Decision represents a key milestone permit in the investment process and subsequent administrative approvals, including the location decision and the construction license and permit, must be consistent with its terms and conditions. Poland stresses that the Project is the only nuclear power investment in Poland that reached this milestone and explain that the Decision was preceded by numerous environmental and site evaluation surveys, the environmental impact report, as well as extensive and transboundary consultations. (c) On 26 October 2023, the head of the Pomorskie Voivodeship issued a location decision for the NPP to be established in the Choczewo commune. The location decision constitutes critical spatial planning tool for the investment, setting technical and environmental conditions, determining the exact location of the NPP and setting the basis for PEJ to acquire proprietary rights to the real estate properties needed for the construction of the NPP. The Project is the only nuclear power investment in Poland that obtained a location decision at the time of drafting.

(62)

The Polish authorities explained that PEJ has entered the following contractual commitments with its EPC suppliers, as part of the conceptual and preparatory phase: (a) In December 2022, it signed a Cooperation Agreement with Westinghouse which provides a set of overarching principles defining the future cooperation between the parties by describing the key aspects of works to be performed prior to the EPC Contract, the overall role of Westinghouse in the Project and main principles in the area of intellectual property right and their disclosure. (b) In February 2023, it signed a Bridge Contract with Westinghouse which set the terms for carrying out early pre-engineering design work. (c) In May 2023, it signed with Westinghouse and Bechtel a Trilateral Agreement on Project Consortium and Engineering Services Contract Heads of Terms, which defines the basic principles of cooperation and the NPP’s execution. (d) In September 2023, it signed with its EPC suppliers an Engineering Services Contract which should be finalized in 2025. Under this contract, the conceptual design of the NPP will be prepared and adapted to the requirements of the location site and of the EU and Polish technical and regulatory frameworks. One of the underpinning objectives of the Engineering Services Contract is to progress the plant design (engineering) to the point of regulatory approvals for early works and long-lead procurement.

(63)

Poland explained that the final investment decision is expected in 2028. The Project will move into a construction phase after the final investment decision.

3.4.   Financial structure

(64)

Poland explained that the envisaged financing structure of the NPP in the scenario that is used as a base case (‘base case scenario’) is as follows: (a) The State Treasury will supply 30% of total investment costs in equity through capital injections; (b) The Export–Import Bank of the United States (‘EXIM’) will provide up to a total of ca. 40% of investment costs through direct debt financing; (c) Other export credit agencies (‘ECAs’) will provide up to ca. 10% of investment costs through debt financing; (d) Financial market: both Polish and foreign investors are expected to provide the remaining ca. 20% of investment costs in the form of debt financing.

(65)

Poland stresses that the final financial structure of the Project will depend on the liquidity of the financial market as well as on cost effectiveness and foresees the possibility of any potential shortfalls being offset by additional equity provided by the State Treasury.

(66)

Poland explained that in case of any cost overruns that are likely in large infrastructure projects such as the Project, which will generate need for additional funding, PEJ would first attempt to obtain additional financing from export credit agencies, which will also be 100% guaranteed by the State, with no guarantee fee. If external financing is not available on acceptable terms, PEJ would rely on additional equity contributions from the Polish State.

3.5.   Revenues and costs of the Project and expected rate of return

3.5.1.   Revenues and costs of the project

(67)

Poland submitted a financial model based on a discounted cash-flow analysis which forecasts future streams of cash flows, including the revenues and costs of the investment, and discounts them to determine the net present value (‘NPV’) of the Project. The financial model also determines the Strike price of the two-way CfD, at a level where the NPV of the project is zero.

(68)

During the operating period, PEJ will be the beneficiary of a two-way CfD (see section 5.3 for more details) with a duration of 60 years, which corresponds to the expected lifetime of the asset. PEJ will be selling the produced electricity either via PPA auctions or through organised markets (see section 5.3.7) and will receive an amount of revenues determined by the sum of its market revenues and the difference (settlement) payments under the CfD.

(69)

The technical input assumptions used in the financial model have been provided by the EPC supplier while operational inputs and assumptions were provided by technical advisors such as Jacobs Clean Energy and Southern Nuclear. Poland explains that these inputs represent the best current expectations regarding the costs and operational characteristics of the NPP.

(70)

The financial model assumes a 14-years construction phase and a 62-years operational phase. Each reactor unit is expected to be operated for 60 years, but their operational phases will start during three consecutive years.

(71)

Poland explains that for the base case scenario, CAPEX estimates have been derived on the basis of the Front-End Engineering Design Study, adjusted by a 10% capex contingency. On this basis, the total capital expenditure for the Projects have been estimated at PLN 192 billion in nominal terms (41).

(72)

For the cost estimates, the memo supplementing the financial model notes that the project is the first of its kind in Poland and still at an early stage. Therefore, high ranges of sensitivity are being considered. For example, CAPEX is considered being of class risk 3-5, meaning that CAPEX can increase by 40% or decrease by 30%.

(73)

The sensitivity analyses in the financial model show how the strike price of the two-way CfD varies to changes of various parameters. In the base scenario (which includes a 10% contingency on the investment costs), the strike price after State aid is estimated at [470-550] PLN/MWh (42). Various other scenarios are presented: (a) A 30% reduction in the capital expenditure compared to the base scenario would reduce the strike price to [400-480] PLN/MWh while an increase of 40% of the costs would bring the strike price to [600-680] PLN/MWh. (b) Postponing the start of operation would also negatively impact the strike price and a delay of 1-year and 3-years would respectively increase the strike price to [500-580] PLN/MWh and [550-630] PLN/MWh, respectively. (c) A variation in the exchange rate would also affect the cost of the project. For example, a 20% PLN depreciation by 2040 would bring the strike price up to [550-630] PLN/MWh while a 20% PLN appreciation by 2040 would reduce the strike price to [450-530] PLN/MWh

(74)

The financial model assumes a load factor of 92.7% (43) based on the reference plant of AP1000 as provided by Westinghouse, which is the underlying technology that Poland will adopt for the NPP. Using a load factor of 92.7% assumes the NPP would dispatch electricity at full capacity when possible, and therefore represents the likely maximum load factor.

(75)

The long-term electricity price development is of importance as it affects the CfD payments. Poland uses two sources of information to forecast electricity prices: (a) For the years until 2035, it uses the forecast performed by Refinitiv, a global data provider, based on its independent assessment of power generation and demand in Poland; (b) For the years between 2035 and 2060, it uses a long-run price forecast for the European Union prepared by Energy Brainpool, an independent energy think-thank; (c) For the years after 2060, it assumes prices will remain flat in real terms.

Figure 11

Electricity price forecast

Source:

Polish authorities

(76)

The Polish authorities explain that the Project will incur costs in three currencies: PLN, USD, and EUR. For each of them a different inflation profile is assumed in the financial model. Inflation is forecasted for each currency using the World Economic Outlook (‘WEO’) published by the IMF. The IMF’s forecasts extend to 2029, where the IMF assumes a return to the inflation target levels for each currency; thereafter the model assumes inflation remains constant at the 2029 level. The figure below illustrates the inflation rate inputs, used respectively for PLN, EUR, and USD.

Figure 12

Inflation forecast

Source:

Polish authorities

(77)

While its revenues will be in PLN, the Project will have a significant proportion of capital and operating expenses, as well as financing, in USD and EUR. Thus, the evolution of exchange rates between these currencies over the relevant period, 2024 to 2096, will affect the Project’s economics. The financial model forecasts exchange rates in two steps. Until 2029 the PLN/USD and PLN/EUR exchange rates are based on forward traded exchange rate swaps. For 2030 and onwards the purchasing power parity framework is used. It assumes that over the long-term, the expected change in the exchange rate should be equal to the expected difference in inflation rates in Poland and the United States or the Eurozone.

(78)

The financial model includes two sources of debt financing: lending from banks and ECAs. The interest charged by the banks is calculated as a spread over WIBOR, which is forecasted based on long-term forward rates from Bloomberg. The interest rate charged by ECAs is based on the commercial interest reference rate (‘CIRR’). For USD-denominated loans, the CIRR is set at a 1 percentage point premium to US government debt, fixed as of the agreement date. PEJ expects to finalise the lending agreement between 2025 and 2028. The expected CIRR is forecasted in two steps: a first forecast consists in the expected yield on 7-year US government bonds in this period using Bloomberg, which results in an average rate of 4.3%; secondly a 1 percentage point premium is added and the resulting rate is fixed during the term of the senior loans.

(79)

The Polish authorities explain that the financial model also takes into account the future cost for decommissioning and nuclear waste management which are estimated at 17.16 PLN/MWh (44).

3.5.2.   Expected rate of return

(80)

The financial model, discussed in recital (67), aims at estimating the Strike Price necessary to close the funding gap of the project (45), given a defined set of projected costs and a discount rate (46). The discount rate is, thus, one of the central elements of the analysis and the model is such that it sets the rate of return of the Project equal to its discount rate, or cost of capital. This implies that the model is calibrated so that the Project earns its cost of capital, or so that the NPV of the Project is nil.

(81)

To estimate the discount rate, the Polish authorities use the weighted average cost of capital (‘WACC’) approach. The standard WACC formula is the following: Where: (a) CoE is the Cost of Equity (see section 3.5.2.1); (b) CoD is the Cost of Debt (see section 3.5.2.2); and (c) D/(D+E) is the leverage ratio of the project (see section 3.5.2.1).

(82)

The Polish authorities calculate, first, the WACC without State aid and then, the WACC with State aid (i.e. the WACC when all the aid measures are included). The Polish authorities explain that the WACC with State aid is lower than the WACC without State aid. This is because the proposed aid measures reduce the risk of the project.

3.5.2.1.   Cost of equity

(83)

The Polish authorities explain that to calculate PEJ’s CoE, both with and without State aid, they have relied on the standard capital asset pricing model (‘CAPM’). The standard CAPM formula is the following: Where: (a) RfR is the risk-free rate, i.e., the return expected from investing in riskless assets; (b) MRP is the market risk premium; and (c) Beta (or levered beta) is a measure of the idiosyncratic, non-diversifiable risk of the project.

(84)

Poland estimates that the levered CoE without State Aid is equal to [12-14]%, whilst the unlevered CoE is equal to [9.5-11.5]% (47). These results are based on contemporaneous 30-year Polish sovereign bonds yields of 6.12%, a market risk premium (MRP) of [4-6]% (48), an unlevered beta of [0.39-0.47] (49), a leverage ratio of [50-60]% (50), and a so-called project specific risk premium (‘PSRP’) of [2-4]% (levered) or [1.8-3]% (unlevered).

(85)

Poland explains that they introduce a PSRP within their CoE because the NPP is not an operational project and faces risks during construction and development. To determine the PSRP, Poland applies a technique that accounts for project development risk by treating capital commitments as a debt-like instrument. To do so, Poland splits the project’s cash flows in capital investment cash flows and operation cash flows and discounts each category at a different rate. For operation cash flows, Poland applies the unlevered CoE of [6.5-8.5]% (excluding the PSRP), whilst for capital investments, they use a debt-like interest rate of [4-6]% (51). In this way, Poland obtains two NPVs, one for the capital investment phase and one for the operation phase. Poland then discounts the combined sum of the operating cash flows and capital expenditure at the rate that leads to the same NPV for the Project as the sum of the two NPVs calculated above (one for the capital investment phase and one for the operation phase). The resulting discount rate is [180-300] basis points higher than the unlevered ‘operational’ CoE of [6-5-8.5]%. According to Poland, this is the PSRP of the unlevered project. Once the project is levered (i.e., the [50-60]% leverage ratio is accounted for), then this PSRP becomes [2-4]% (PSRP (equity)) (52).

(86)

Poland estimates that the levered CoE with State aid is equal to [10-12] %, as opposed to the [12-14]% without State aid (53). This CoE is obtained by revising the assumptions for the risk-free rate, unlevered beta and PSRP. These assumptions are described below. All other CoE parameters remain the same as in the CoE without State aid. (a) First, Poland adopts a risk-free rate of 5.43%, as opposed to 6.12%, relying on interbank swap rates. They do so for two reasons, first because Poland will provide the project equity and to the extent that Poland introduces any measures such as windfall taxes, those measures would affect profits that already go to the Polish State. Second, because a State fund backed by consumer payments will fund the CfD payments. According to Poland, this means that the NPP’s revenues with a CfD may be more secure than a Polish bond as consumer payments act as additional insurance even if Poland defaults on other obligations. (b) Second, Poland adopts an unlevered beta of [0.3-0.4] as opposed to [0.39-0.47]. This is because Poland considers that the CfD can reduce the exposure of the Project to market movements, reducing the systematic risk captured in the beta component of the CAPM. Poland states that this reduction is supported by published research, suggesting that a CfD can reduce the asset betas of renewable power plant by 0.1 to 0.3 (54). (c) Third, Poland adopts a PSRP of [1-2]%, as opposed to [2-4]%. To estimate the PSRP with State aid, Poland follows, in general, the same methodology as in the estimation of the PSRP without State Aid, as explained in recital (85) above (55).

3.5.2.2.   Cost of debt

(87)

To estimate the post-tax (56) cost of debt (‘CoD’), the Polish authorities use the risk-free rate plus a premium for credit risk.

(88)

For the CoD without State aid, Poland sets the risk-free rate using the Polish interbank swaps with a term of 15-years to match the midpoint of NPP’s debt repayments. For the credit risk premium, Poland assumes that the project would receive a credit rating of B based on the expected interest coverage ratio. The resulting CoD is [6-7.5]%.

(89)

For the CoD with State aid, the Polish authorities leave the risk-free rate unchanged, whilst they update the credit risk premium. They assume that the combination of the CfD and state guarantee would improve the Project’s rating from B to A- and reduce the credit margin in the cost of debt. The revised credit risk premium reduces the cost of debt from [6-7.5]% to [4.5-6]%.

3.5.2.3.   WACC

(90)

Poland calculates the WACC without and with State Aid by using the CoE, CoD and leverage ratios described above for the scenarios without and with State Aid. The table below shows Poland’s WACC without and with State aid (57). Table 1 WACC without and with State aid, Poland   State aid   Without With Leverage [50-60]% [50-60]% CoE levered [12-14]% [10-12]% CoD post-tax [6-7.5]% [4.5-6]% WACC [8.5-10.5]% [6-8]% Source: Financial Model for Polish Nuclear Plant – Summary

3.6.   The national legal basis, transparency, and cumulation

(91)

In the framework as referred to in recital (26), the measures for the Project (see section 5 for a detailed description of the measures) will be put in place based on two legal acts, both of which will subject the measures to a stand-still obligation: (a) an act of law setting a legal framework for the CfD and the State Treasury guarantees (‘NPP Act’). The NPP Act will apply only to the Project (58); (b) the amendment of the Act of 29 June 2011 on the preparation and carrying out of investments in nuclear facilities and associated investments for the equity injection.

(92)

The Polish authorities intend to draft and adopt the NPP Act once all relevant elements of the measures comprising the support mechanism for the Project are agreed with the Commission.

(93)

Further, the Polish government adopted on 30 May 2023 a resolution on providing financing for the construction of a nuclear power plant with a capacity of up to 3750 MWe in the communes of Choczewo or Gniewino and Krokowa (‘Resolution on Financing’), which already sets out the key measures of an equity injection into PEJ and the need for providing guarantees to enable the debt financing of the Project. It further requests an analysis whether a support mechanism is needed and if so, that such a support mechanism should be developed.

(94)

Poland explained that information on the measures will be published on the website of the competition authority: https://sudop.uokik.gov.pl/home.

(95)

Poland further submits that the measures cannot be cumulated with any other aid for the same eligible costs.

3.7.   Administration of the measures

(96)

The Polish State Treasury is responsible for implementing the measures by way of being the entity providing the equity injection and the State guarantees, which are described in more detail below in sections 5.1 and 5.2.

(97)

The two-way CfD will be administered by a dedicated body, described in more detail in section 5.3.6.

(98)

In addition, the Project is steered by the Government Plenipotentiary for Strategic Energy Infrastructure, which exercises the rights from the shares in PEJ.

4.   THE BENEFICIARY

(99)

The direct beneficiary of the measures is PEJ, a fully State-owned undertaking, which will implement the Project and own the NPP. PEJ (or a subsidiary of it) will further act as operator of the NPP and will be responsible of the sale of the electricity.

(100)

To ensure the highest quality standards, PEJ collaborates with a consortium of experienced NPP operators, namely the Finnish undertakings Fortum Power and Heat Oy and TVO Nuclear Services Oy, to get support in the development of operation and maintenance processes for the first NPP in Poland. As per the Polish authorities, this will also develop PEJ’s internal capabilities to operate the NPP.

(101)

The Polish authorities further submitted that there are no plans to consolidate PEJ with other State-owned companies active on the electricity market and that therefore PEJ will be legally and functionally independent from any other major operator in the Polish electricity market.

(102)

The Polish authorities envisage that PEJ will have in its portfolio only the electricity produced in its NPP(s) and will trade these electricity volumes in order to maximise its profits. (59) However, Poland does not exclude that in the future PEJ will operate also other nuclear power plants, as set out in the PNPP.

(103)

The Polish authorities explained that PEJ was selected as beneficiary because the Project is by far the most advanced NPP project in Poland. Specifically, as per the Polish authorities this progress includes years-long site surveys, procedural advancements and permitting, project and engineering development as well as contracting. Poland submits that the Project is and will remain, at least in mid-term, the only project in Poland with sufficient maturity to advance to the basic and detailed design phase. Any other entity seeking to build a NPP in Poland will need to undertake several years of preparatory work (incl. obtaining some long duration permits such as the decision on the environmental conditions where the process – from the preparation of the scoping report to the environmental impact assessment submission – took more than 7 years) to reach the stage where PEJ’s NPP project currently is. Only once this preparatory work is successfully concluded can any project be effectively assessed in terms of its contribution to the energy security of the country and its energy transition. Hence, the Polish authorities explain that, due to the lack of comparable competitors, they did not envisage a tender selection process for the company developing the Project.

(104)

The Polish authorities further explained that starting in 2009, there were political plans to introduce NPPs into the Polish electricity system (see section 3.2). At the time, an investment vehicle, which later became PEJ, which was set up by PGE was the only such project while no other company was planning to build an NPP in Poland or made any such information available to the Polish authorities, which led to the progress described in recital (103). Currently, only one other nuclear project in Poland, OSGE’s BWRX-300 project (which however concerns a small modular reactor compared to the Project’s large-scale NPP), has obtained a scoping decision (i.e. a decision specifying the scope of the environmental report required for the decision on the environmental decision to be granted) which occurred in 2024 (60). Given that a decision on the environmental conditions is required to obtain a location decision, it should be noted that the latter has not been issued for any other project.

(105)

The Polish authorities emphasise that selecting another company as beneficiary of the aid measures described in section 5 was and is not feasible because: (a) PEJ possesses unique know-how developed in the last several years, contractual relations, property rights as well as administrative decisions which are related to the Project; (b) the involvement of the State Treasury in the NPP is necessary. Any change of the company developing the Project will undermine the lessons learned from previous ownership of PEJ by PGE which, in the view of the Polish authorities, clearly demonstrated the risks of developing a NPP by publicly listed investors in terms of ensuring the originally envisaged timeline; (c) to their best current knowledge, there is no other company interested in the Project. Poland submits that an attempt to seek an alternative company risks significantly delaying the Project (considering the necessary steps in the development phase, as explained in recital (103)) as well as may jeopardise the development of the nuclear power program in Poland and ultimately the Polish energy security.

(106)

In light of these reasons, the Polish authorities highlight that (i) any change of beneficiary at this stage of the Project will result in devastating consequences for the timing of the NPP, leading to years of delay or even abandonment of the Project (as the process of selecting a new company might not be successful) as well as putting in jeopardy the energy transformation benefits of the NPP; and (ii) consequently, based on the know-how of PEJ and its administrative and contractual advancements, PEJ is currently the only choice to develop the Project.

5.   DESCRIPTION OF THE MEASURES

5.1.   Measure 1: Equity injection

(107)

The Polish authorities explain that between 2025 and 2030 the State Treasury will provide equity in multiple tranches to PEJ, which in turn will issue common shares. The equity injections may take the form of cash and non-cash contributions, including government bonds. The currently estimated amount of the necessary equity injections is PLN 60.2 billion (approximately EUR 14.1 billion) (61), representing around 30% of the estimated total investment costs of the Project.

(108)

According to the Polish authorities, an equity buffer is a requirement set by the lenders to provide debt financing for the construction of the NPP. They submit that shareholder equity is treated as a risk mitigation factor, showing how much risk in each investment the sponsor is considering taking on itself. Projects characterised by greater risk tend to have greater participation of equity in total financing. Even though the State guarantee is one of the most valuable securities, it is not treated by financial institutions equally to equity.

(109)

The Polish authorities further explain the current assumption on the capital structure is indicative and will highly depend on the availability of external debt. Given the current early design stage of the Project and the changing market dynamics, at this stage, the Polish authorities consider it impossible to assess with sufficient degree of confidence either the debt contribution from ECAs or available commercial debt financing, with its sensitivity to global macro trends.

(110)

As explained in recital (107), the Polish authorities currently envisage that 30% of the Project’s costs will be financed by equity provided by the State Treasury. Nevertheless, Poland submits that the capital structure may change over the course of the development of the Project, potentially increasing the State’s equity stake in PEJ if the intended share of 70% of investment costs cannot be financed with debt.

(111)

The Polish authorities further submit that the estimated 30% equity ratio results from their analysis of other relevant project finance transactions in the infrastructure and energy sector (including nuclear projects), where a similar gearing ratio was applied (62). When structuring the financing for the Project an initial gearing ratio of 30% was deemed most appropriate by the Polish authorities in terms of debt coverage (the ability to service debt and maintain bank ratios), but also taking into account the current and future national budget constraints, which was reflected in the justification linked to the Resolution on Financing.

5.2.   Measure 2: State guarantees for debt financing

(112)

According to the Polish authorities, the majority of the costs will be financed with debt provided by a number of different financial institutions. The currently estimated amount of State-guaranteed debt financing is PLN [130-150] billion (approximately EUR [31-35] billion), representing around 70% of the estimated total investment costs of the Project. Additionally, State guarantees will also cover accrued interest and fees on debt drawn during the construction period in the amount of PLN [25-34] billion as well as treasury limits of PLN [9-12.5] billion necessary to manage the foreign exchange risk and interest rate during the construction period on loan agreements concluded in foreign currency and based on floating interest rates.

(113)

The Polish authorities expect that more than 70% of the total debt financing will be provided by export credit agencies (‘ECAs’), such as the U.S. EXIM Bank. The ECAs will comply with the rules set out in the OECD Arrangement on Officially Supported Export Credits (the ‘Arrangement’) (63), in particular its Annex II covering the sector understanding on export credits for NPPs. For large transactions, such as those entailed by the Project, the pricing under the Arrangement is based on the officially quoted commercial interest reference rates set at an equal level for projects and borrowers of similar characteristics, e.g. currency, tenor, type.

(114)

In addition, the Polish authorities explain that it is currently envisaged that commercial banks and other multilateral financial institutions will together cover a share of around 30% of the total debt financing. The Polish authorities submit that to secure full cost-effectiveness as well as arm’s length conditions for the transaction, and thereby ensure that no financial institution will obtain any undue advantage, PEJ will seek in the book building process to engage as many institutions as possible for a volume necessarily (significantly) exceeding the amount required to finance the existing portion of the Project to be able to pick the tickets starting with the ones representing the best terms (taking pricing into account). Based on this, the Polish authorities submit that competition amongst financial institutions will ensure that the interest rate is on market terms.

(115)

The Polish authorities submit that based on current market sounding and taking into account that 70% of total investment costs will be financed by third-party institutions, the debt financing will require cover in the form of 100% State guarantees. Notably, an official letter issued by U.S. EXIM Bank declares that 100% State guarantees are required in order to cover risk and allow U.S. EXIM Bank to enter into the transaction and provide debt. Additionally, ECAs conduct such business pursuant to the Arrangement, which clearly indicates that better terms and conditions are applied for the sovereign risk buyers and a sovereign guarantee is required to use sovereign credit rating in relation to weak credit quality buyers.

(116)

The Polish authorities emphasise that one of the fundamental requirements when entering into credit agreements (with respect to a non-subordinated tranche) is the pari passu principle which means that no lending institution can be in a privileged position relative to the others. The Polish authorities and PEJ submit that the debt financing for the Project is envisaged to comply with this principle. Thus, the 100% State guarantees will be required also by other financial institutions.

(117)

In the view of the Polish authorities, State guarantees are also crucial since PEJ, as a stand-alone special purpose vehicle, is a high-risk borrower (with no credit rating and limited possibilities to obtain one) and ECAs, as well as commercial banks, will only finance such entities based on the sovereign risk, what is particularly important with regards to nuclear sector.

(118)

State guarantees are explicitly foreseen in the Resolution on Financing and the State guarantees will be granted directly under the NPP Act. In terms of concrete implementation, the Minister responsible for public finance shall issue written confirmation that (i) the State guarantee covers the performance of obligations arising from contracted debt financing, and (ii) the State Treasury shall, in case of a default, at the request of the guarantee holder, unconditionally and irrevocably perform the payment obligations covered by the guarantee. State guarantees will be issued for a determined period corresponding to the duration of the loan or credit agreement - estimated at 22 years - and up to a predetermined amount. The maximum total amount of the State guarantees will be specified directly in the NPP Act and accordingly they will be granted exclusively to PEJ (64).

(119)

The Polish authorities further refer to Commission decisions approving significant infrastructure projects in the energy sector, which were similarly characterised by a capital-intensive investment and the need for 100% State guarantees, which in the view of the Polish authorities demonstrate that the Commission accepted a 100% State guarantee for capital intensive projects in the energy sector, when such guarantees were required by institutions financing the project (65). The Polish authorities consider that the Project equally fulfils these conditions, since it is a capital-intensive project, as all large-scale NPP investments, and of vital importance for energy security of Poland. Moreover, the Polish authorities highlight additional specific risks unique to the nuclear sector, like the initial duration of the construction period and significant financial impact of any potential incidents such as overruns and delays.

(120)

On that basis, the Polish authorities decided to provide the 100% State-guarantees for the debt financing (including interest) without charging any guarantee premium. The Polish authorities further argue that since the value of the Project once it is operational remains constant when comparing scenarios with different guarantee premium level, the value obtainable for the Polish State (acting both as equity investor and guarantor) is not affected by the level of the guarantee premium.

5.3.   Measure 3: Two-way CfD

5.3.1.   Rationale for the two-way CfD

(121)

The Polish authorities submit that granting support in the form of a two-way CfD is essential for enabling the final investment decision. The CfD allows to reduce the risks associated with the uncertainty on the development of the electricity market, including price fluctuations, ensures the revenues necessary to obtain and repay debt financing, and provides investors with sufficient security of a reasonable return, which should enable the massive upfront capital investment to be made.

(122)

Poland explains that investments in new nuclear power plants are characterized by a long operational life-cycle, where income is earned over the long term (60 years for large-scale nuclear power plants), as opposed to the short to medium term for investments in other energy sources (66). The income depends, in principle, on the uncertain development of wholesale prices, which results in the lack of adequate economic predictability of revenues (67). The Polish authorities submit that there exists a well-recognized overall market risk associated with guaranteeing adequate income (68) for such plants, which needs to be addressed in a direct price support scheme.

(123)

Poland further explains that the Regulation 2024/1747 (69) (‘the Electricity Market Design Regulation’) determines the permissible form of direct price support – a CfD or equivalent schemes with the same effects – leaving some discretion on the detailed elements of a CfD which depend on the objectives to be served. In the case of the NPP, the Polish authorities’ main objectives of the CfD are to provide stable revenue to cover financial obligations and operating expenses, minimise the risks of costs recovery by the NPP and allow end-users to benefit from the operation of NPP at times of high electricity prices. At the same time, in Poland’s view, the CfD should preserve the NPP’s incentives to operate and participate efficiently on the market, in particular to react to market signals, including in periods of very low or negative prices, in line with the requirements of the Electricity Market Design Regulation. Poland submits further that the two-way load factor strike price (‘LFPS’) adjustment mechanism (see section 5.3.8.3 for more details) as part of the two-way CfD’s design provides a non-production-based element. Based on this, Poland considers that the NPP will not have an incentive to maximise production irrespective of prevailing market circumstances while Poland also considers that not including remuneration under the LFSP adjustment mechanism for periods where the market prices are higher than the variable costs provide an incentive to the NPP to sell electricity during these periods.

(124)

The yearly remuneration of the NPP will be the sum of the market revenues obtained by the NPP, the monthly settlements with the CfD counterparty and a retrospective yearly settlement in the form of a two-way load factor strike price adjustment mechanism (described in detail in section 5.3.8.3 below).

(125)

Poland submits that three important elements will affect the monthly CfD settlement with the CfD counterpart: (a) the CfD Volume; (b) the Reference Price of the CfD; (c) the Strike Price of the CfD (including the foreign currency settlement mechanism).

(126)

Such settlements can be presented in the form of the mathematical formula below: where i represents every day in a given month m

(127)

If the CfD settlement is positive, the CfD counterpart will transfer the amount of the CfD settlement to PEJ and, if it is negative, PEJ will transfer the amount of the CfD settlement to the CfD counterpart. The sections below present in detail all key elements affecting the monthly CfD settlement.

5.3.2.   Volume of the CfD

(128)

In principle, the two-way CfD is designed to reflect the volume of electricity sold on the market via all sales channels and thus to be the sum of: (i) electricity generated and fed into the grid, (ii) the volume curtailed by the TSO (i.e. volume of electricity generation and feed-in that was planned based on the market but which was reduced through the balancing market or other TSO operations), and (iii) the volume of electricity sold previously through long-term or mid-term contracts but not produced as a result of a spot price arbitrage mechanism (70).

(129)

Therefore, the volume of CfD would be calculated as the volume of electricity output measured at the connection point between the NPP and the transmission system increased by the volume reduced through the balancing market, redispatching, or other TSO operations and increased by the volume not produced because of a spot price arbitrage mechanism.

(130)

The formula to calculate the CfD volume therefore is: where: Vr = volume measured at the connection point between the NPP and the transmission system; VTSO = volume reduced as a result of the outcome of the balancing market, redispatching and other TSO operation; VMI = volume not produced, however previously sold through long-term or mid-term contracts, as a result of the spot market arbitrage mechanism.

5.3.3.   Reference price

(131)

The Polish authorities explain that it will be necessary to establish a reference price, which will be compared to the strike price, to settle with the CfD counterparty. Depending on the difference between the reference price and the strike price, either a refund would be made to PEJ or PEJ would transfer the favourable difference to the CfD counterparty.

(132)

The objective of the Polish authorities is for the reference price to represent the market price of given products traded on all markets where the NPP sells its electricity. Therefore, the Polish authorities propose that the reference price of the CfD would be set as a volume-weighted average price of electricity on the markets and of products corresponding to the NPP’s sales of its electricity.

(133)

Poland submits that, since the reference price depends on the commercial behaviour of the broader market, rather than only of the NPP, such a mechanism constitutes an additional incentive for efficient bidding behaviour. This is because in situations when the prices achieved by the NPP deviate significantly from those on the market, the NPP would be at risk of lower settlements with the CfD counterparty leading to lower-than-expected remuneration.

(134)

PEJ would monitor the liquidity of such products and adjust its sales strategy in response to demand. The reference price would be calculated on the basis of data available on Polish power exchange. Overall, the Polish authorities envisage four main elements to allow for an efficient determination of the reference price of the CfD: (a) the reference price of the CfD will be determined on a daily basis i.e., there will be one reference price for every single day that the NPP supplies electricity to the market or generates electricity and feeds it into the grid. For forward contracts, the daily reference price for settlement is directly linked to the objective market indices which are reported daily; for spot market daily settlement encourages efficient market behaviour of the NPP as all hourly prices from a given day (even from the hours when the NPP does not sell electricity on the spot market) would affect the reference price, thus incentivising proper reaction to hourly price changes (i.e., for the NPP to generate more during times with higher prices); (b) the reference price of the CfD will be based on the market indices from the Polish Power Exchange (71) (e.g., for forward market – daily settlement price of each product); (c) the market indices used to calculate the reference price of the CfD will be weighted by the volume of all transactions of a given product on the market in a pre-defined fixed period of time, which will result in having an average blended price for each product sold by the NPP; (d) the reference price for the NPP for a given day will be an average blended price for each product weighted by the share of volume of electricity sold (open interest volume) in these products by the NPP for delivery in a given day (market indices blended price).

(135)

These elements are represented in a formula for the reference price for a given settlement day as follows: where: a,b,c,d,e,f = the respective share of each type of products sold by the NPP in a given delivery day (open interest, in %); PPPA = volume-weighted price of all PPA contracts concluded by the NPP for a given delivery day (in PLN/MWh); PY = volume-weighted average price of all yearly contracts for a given year concluded on the market in the last few (72) years preceding delivery day (expressed as the volume weighted average of all daily settlement prices ‘DSP’, in PLN/MWh); PQ = volume-weighted average price of all quarterly contracts for a given quarter concluded on the market in the last few quarters preceding delivery day (expressed as the volume weighted average of all DSP, in PLN/MWh); PM = volume-weighted average price of all monthly contracts for a given month concluded on the market in the last few months preceding delivery day (expressed as the volume weighted average of all DSP, in PLN/MWh); PW = volume-weighted average price of all weekly contracts for a given week concluded on the market in the last few weeks preceding delivery day (expressed as the volume weighted average of all DSP, in PLN/MWh); Pspot = single day-ahead average spot price (currently expressed as TGeBase index (73), in PLN/MWh).

(136)

The Polish authorities note that the Reference Price for the NPP will be calculated ex post. Hence, there will be a considerable level of uncertainty in respect to the reference price which will decrease along with the length of the trading period in each relevant product. Depending on the market and product development, market indices blended prices for other products with other duration might also be taken into account in the calculation of the reference price, according to the Polish authorities.

5.3.4.   Settlement cycle of the CfD

(137)

Taking into account the need to secure PEJ's liquidity, a monthly settlement period will be established, within which payments will be made for the difference between the reference price and the strike price (for the volume of the CfD, calculated as explained in section 5.3.2 above) to PEJ or the CfD counterparty. Such a solution will provide an adequate revenue stream to cover PEJ’s liabilities and ensure the ability to regularly repay credit facilities and interest, as well as cover the NPP’s operating expenses. Poland explained that the monthly settlement cycle is modelled on an analogous solution that is provided for offshore wind farms (74).

(138)

In addition, a settlement mechanism would be triggered annually under the two-way load factor strike price adjustment mechanism described in section 5.3.8.3. As part of the annual review, the level of revenues achieved would also be verified. If PEJ achieves revenues higher than planned, which could result e.g. from higher contracting than originally assumed, the difference would be transferred to the CfD fund in the annual settlement cycle.

5.3.5.   Duration of the CfD

(139)

The Polish authorities consider that the CfD should remain in force for the NPP’s whole operational life cycle, i.e. 60 years, allowing for the full control of compensation levels under the Project. In addition, they consider that this approach would: (a) ensure a cost-reflective strike price that is needed to finance the NPP, thus contributing to affordability which is in line with EU energy policy pillars (security, affordability, sustainability); and (b) fulfil the objective of recourse to CfDs for the support of such investment projects pursuant to the EMD reform, to not only grant a minimum remuneration for the NPP, but also aiming at protecting end consumers from the sudden increase of market prices as experienced in 2022. A 60-year CfD would therefore properly protect end consumers from the volatility of prices on the energy market.

5.3.6.   CfD counterparty and CfD fund

(140)

The two-way CfD will be established by a legislative act, in the form of an administrative contract, and will be funded through a dedicated fund (the ‘CfD fund’), which will be managed by Zarządca Rozliczeń S.A. (the ‘CfD counterparty’).

(141)

The CfD counterparty is a fully State-owned undertaking, which already performs a similar role within the framework of several operating aid schemes in the energy sector in Poland (e.g. for RES, combined heat and power and offshore wind schemes).

(142)

The CfD fund would be established for settlements made as part of the CfD for the NPP. In a situation when the reference price is lower than the strike price, the fund will pay the difference to PEJ, ensuring a constant revenue at the level predicted earlier. On the other hand, if the reference price is higher than the strike price, PEJ will be obliged to transfer the difference to the fund’s account.

(143)

The Polish authorities explained that any surplus accumulated within the CfD fund will first be used to finance the support mechanism, i.e. paying PEJ, in the future, the difference between the reference price and the strike price when the former is lower, which would be a form of self-financing of the CfD. Second, the statutory solutions will provide for the possibility of using the funds accumulated within the CfD fund to support electricity consumers. Poland explains that the distribution of revenues to final consumers will be designed to maintain incentives to reduce their consumption or shift it to periods when electricity prices are low and not to undermine competition between electricity suppliers. Poland intends to distribute excess revenues to consumers in a non-discriminatory manner, while it will seek flexibility to target vulnerable customers and customers affected by energy poverty, subject to the approval by the NRA. However, no further details on this possible measure, e.g. eligibility of consumers, modalities of implementation, etc. are available at this stage. Poland commits that it will inform the Commission upfront in case CfD proceeds would be distributed to consumers and, if need be, notify such a measure.

(144)

In addition to the excess revenue over the established strike price, which would be transferred by PEJ into the CfD fund, the CfD fund will also be financed via a special levy added to the bills of electricity consumers, which would be set annually by the NRA. According to the Polish authorities, the NPP Act will provide for flexibility in this regard, and the amount of the fee will depend on market conditions – including the possibility of waiving it, for example, if the anticipated reference price is higher than the strike price.

(145)

Finally, in order to guarantee adequate funds, the NPP Act will include the possibility of additional replenishment of the fund from the State budget in order to secure the funding of any shortfalls.

5.3.7.   Electricity sales on the market and bidding rules

(146)

The Polish authorities submit that the NPP would operate on the market in accordance with the rules set forth in the NPP Act. The Polish authorities identified certain bidding behaviours that may lead to distortions in the price formation based on marginal pricing: (i) withholding capacity; (ii) bidding below variable costs; (iii) misaligned incentives, e.g. caused by directly linking revenues with electricity generated (also referred to as ‘produce-and-forget’), which is likely to eliminate incentives for power plants to increase output at time of high prices and reduce output at times of lower or even negative prices; and (iv) inefficient maintenance schedules.

(147)

The Polish authorities submit that they plan to implement an approach based on both tailor-made rules as well as market and financial incentives (e.g. incorporated in the two-way CfD formula) to ensure that the NPP responds correctly to market signals and the behaviours identified in recital (146) are mitigated. They submit that these rules imposed on the NPP together with the economic incentives would ensure that it operates and participates efficiently in the electricity markets, in particular to reflect market circumstances by: (a) obliging the NPP to offer electricity on the market; (b) prohibiting NPP to bid below its marginal costs; (c) establishing an adequate reference price for the two-way CfD. In addition, the Polish authorities highlight the two-way LFSP adjustment mechanism, the spot market arbitrage mechanism and the design of the reference price as elements to preserve incentives to operate efficiently in the electricity markets. Moreover, they submit that maintenance schedules have to be agreed on with the TSO and comply with the technical and nuclear safety requirements overseen by the nuclear regulatory authority. The Polish authorities further refer to the applicable rules concerning the ancillary and balancing services, which are established by the TSO, and they submit that there is no deviation from these rules in the elements of the price support scheme for the NPP.

(148)

Through the obligation to offer electricity on the market, on a transparent and non-discriminatory basis, the NPP would be obliged to offer the entire volume of electricity technically possible to be produced. Poland explains that this obligation prohibits the NPP to withhold capacity thus alleviating potential distortions which is particularly consequential in times of high electricity prices. At these times the NPP would offer all available electricity (75). According to the Polish authorities, this obligation would ensure that the NPP reacts to high market prices and may this help lowering persisting market prices due to low variable costs of the NPP. In addition, the Polish authorities refer to an element included in the calculation of the volume under the LFSP adjustment mechanism referring to electricity not generated despite technical availability in periods where spot prices where above variable costs.

(149)

Conversely, at times of low prices, support schemes may provide misaligned incentives (e.g. in the case of remuneration for generated electricity) leading to power plants bidding below their variable costs. It would be prohibited for the NPP to offer electricity below its marginal costs. The Polish authorities consider that this would ensure that it reacts properly to market signals at times of lower prices, without artificially lowering its bid in order to sell electricity. Taking into consideration the load factor price adjustment mechanism (see section 5.3.8.3 for a detailed description), the two-way CfD would ensure the NPP can rely on stable revenues, even if, due to market volatility, prices are lower than the NPP’s variable costs. Further, the Polish authorities also refer to the spot market incentive mechanism (as explained in footnote 70).

(150)

The Polish authorities submit that PEJ will be eligible to sell electricity only via organised markets (76) but will have the flexibility to determine its sales strategy in compliance with market principles. Primarily, the electricity output of the NPP will be sold by means of auctions in the form of long-term contract (‘PPAs’). The volume of electricity that is not sold in PPA auctions will be offered on the Polish power exchange. At the same time, the NPP Act would provide flexibility in how electricity is offered on the power exchange. PEJ would be able to offer electricity on both the forward/futures market and the spot markets. If a given volume of electricity is not sold on the forward/futures market, it would have to be offered on the day-ahead market and the intraday market.

(151)

Poland explains that the obligation to offer available electricity and prohibition to bid below marginal costs provide basic prescriptive rules, which are complemented by economic incentives. It further considers that an additional incentive for the NPP’s efficient bidding would be provided by the reference price of the CfD which should faithfully match the market price of the relevant products sold by PEJ, as it would be calculated as the volume-weighted average price of electricity on the markets and products representing NPP’s sales of electricity (see section 5.3.3). Should the prices achieved by PEJ deviate significantly from the market, PEJ would be at risk of insufficient settlements with the CfD counterparty leading to lower-than-expected revenues.

(152)

The Polish authorities note further that in addition to the above rules for offering electricity, the NPP would be obliged, like any other market participant, to comply with the requirements resulting from REMIT (77). Those provisions are intended to prevent situations in which prices would be set at artificial levels that are not justified by market forces of supply and demand, including the actual availability of production capacity.

(153)

These principles will be applicable accordingly to each sales channel. The whole volume of energy sold via PPAs and the power exchange will be covered by the CfD. The basic bidding rules, as envisaged by the Polish authorities, for each market will be as follows: (a) Non-discriminatory, objective and transparent long-term contract (‘PPAs’) auctions (78): They will be supervised by the NRA and open to any undertaking based in the EU, in particular energy trading companies and industrial consumers, subject to a certification process by the NRA to ensure to minimise the risks of distorting the process or outcome of the PPA auctions (79), and the NPP would be a price-taker not a price-maker. It is currently envisaged that the PPA auctions would include products covering 5, 10, and 15 years. The prices for PPA contracts would be established in a competitive, purely market driven process based on offers submitted by market participants. The Polish authorities explain that this process would include demand identification, setting a minimum price and supervision over the auctions to achieve the objective that PPAs are concluded at market price. The first auction is planned to be held before the commissioning of the first NPP reactor. Subsequent auctions would be held regularly addressing market demand. (b) Forward products on the power exchange (80). The NPP would offer electricity not sold via PPAs in different products available on the power exchange, on a transparent and non-discriminatory basis, according to market principles and REMIT rules. As the forward contracts are traded on continuous basis, the rules for the reference price would provide incentives for efficient market behaviour. At the same time the prohibition to sell below variable costs would apply, preventing any potential bidding distortions. (c) Products for the day-ahead market on the power exchange: Their price is established based on the merit order rule. The obligation to offer electricity (not sold via PPA and forward market) on the spot market would prevent the NPP from withholding capacity and ensure it reacts at times of high prices. At the same time, the prohibition to offer electricity below variable costs would prevent the NPP from getting ‘artificially’ into the merit order. In this regard, the NPP would automatically respond at the times of low prices and under the imposed bidding rules would not distort market functioning. In other words, in the view of the Polish authorities, the design of the support scheme for the NPP obliges it to react to market signals and does not allow the NPP to fully or partially enter into the merit order at times of very low or even negative prices on day-ahead market, while ensuring it offers electricity in times of high electricity prices. (d) Sales via the intraday market on the power exchange: The obligation to offer all remaining electricity would also apply on this market, therefore eliminating any potential capacity withholding (leading potentially to higher prices on this market). At times of low prices on intraday market, there might be misaligned incentives stemming from support schemes to offer electricity below variable costs. This in principle would be prohibited for the NPP, alleviating potential risks.

(154)

The Polish authorities highlight that the NPP has certain technical characteristics, including technical possibilities to adjust production volumes. Therefore, it cannot be ruled out that in order for the NPP to remain within its technical characteristics and limitations and to avoid any potential nuclear safety related threats, adjustments of its output to the hourly deviations in volumes sold on the market would not be possible. In order to ensure operational security of the NPP, on the day-ahead, intraday and balancing markets, bidding rules cannot prevail over technical limitations; therefore, the Polish authorities consider that a possibility for justified deviations from strict bidding rules would need to be introduced, but only for that purpose.

(155)

The first auction is planned to be held before the commissioning of the first NPP reactor. Subsequent auctions would be held regularly addressing market demand. The reference price (needed for settlement calculation under the CfD) for electricity sold through PPA will be equal to contract PPA price.

(156)

The volume of electricity that is not sold in the PPA auctions will be offered on the Polish power exchange. At the same time, the NPP Act would provide flexibility in how electricity is offered on the power exchange. PEJ would be able to offer electricity on both the forward/futures market and the spot markets. If a given volume of electricity is not sold on the forward/futures market, it would have to be offered on the day-ahead market and the intraday market.

5.3.8.   Determination of the strike price

5.3.8.1.   Setting of the strike price

(157)

The Polish authorities submit that the strike price will be set, using the financial model, at a level at which the net present value (‘NPV’) of the project over its lifetime is equal to zero and allows the investor to earn a target return on capital.

(158)

The NPP Act, which would transpose the measure into the Polish legal system, would not explicitly indicate the strike price. Instead, it would provide a mechanism for setting and changing the strike price.

(159)

The strike price would be first determined, on the basis of the financial model notified to the Commission, at the earliest when CAPEX-Class-2 estimates are available (with accuracy in the range of +15% to -10%) and the construction permit for the NPP is obtained. The cost categories included in the model and used to set the initial strike price would be listed explicitly in the NPP Act and will include: (a) operating costs (e.g. fuel and personnel costs, decommissioning fund fees, costs related to maintenance and management of assets); (b) capital expenditures (e.g. capital costs for contract performance, own costs, modernization expenses); (c) financing costs; (d) taxes and fees; (e) assumed rate of return on the investment equal to the weighted average cost of capital (‘WACC’).

(160)

The costs would be verified by the NRA, who would set the initial strike price by administrative decision.

(161)

The initial strike price would be calculated based on the assumed load factor which depends on the NPP’s operation on the electricity market. The maximum load factor, understood as the technical capacity to produce electricity as determined by the EPC supplier, is 92.7% (81). This accounts for potential downtime, including downtime for repairs and refuelling. However, Poland explains that the technical generation capability leaves aside the market situation and the actual sale of electricity from the NPP. Since the strike price is to apply to the actual volume of the CfD (see section 5.3.2), it needs to take into account not only the maximum technical capacity of the NPP but also relevant market data, including market prices and Poland’s projected energy mix, which will determine how much the NPP should run. Therefore, the Polish authorities submit that the load factor used for setting the initial strike price may be set at a level that is several percentage points lower than the maximum technical capacity of the plant, as it should take into account projection of the NPP’s operation on the market.

(162)

Poland explains that setting the initial strike price before construction works start should incentivise PEJ to optimise investment costs.

5.3.8.2.   Adjustment of the strike price

(163)

The strike price would be adjusted prior to the start of operations, which will coincide with the date of obtaining the operating license.

(164)

The strike price could only be adjusted based on changes in strictly defined eligible costs and variables which are outside PEJ’s control such as unpredictable changes of inflation that could result in increasing prices, interest rates, construction/raw materials, labour costs, costs due to unplanned regulatory changes (e.g. additional safety analysis required after Fukushima accident affecting Flamanvile-3 project).

(165)

Verification of changes in eligible costs would be made by the NRA. Poland submits that this solution ensures adequate incentives for PEJ to not exceed previously assumed investment costs during the construction of the NPP as it will bear the risks deriving from the failure to obtain NRA approval for the costs incurred, which would negatively affect the assumed rate of return on investment.

(166)

At the same time, the assumed load factor of the NPP would also be verified at this stage, according to the more accurate and up-to-date market data.

(167)

The Polish authorities explain that a number of possibilities for adjusting the strike price would be provided for also during the operational life cycle as follows: (a) Annual indexation to inflation: The strike price would be indexed annually to the annual level of inflation in the price of consumer goods and services as reported by Statistics Poland (GUS). Indexation would be made by 31 January of a given year, taking into account the level of inflation in the previous year. (b) OPEX cost adjustment: The level of the strike price depends on projections, including the assumed values of expenditures and operating costs over a 60-year operational life cycle of the NPP. Given the operational life cycle of the NPP, there is a high risk of uncertainty due to changes in macroeconomic factors. In view of this uncertainty, Poland proposes to introduce the possibility of changing the strike price during the operation of the NPP.

(168)

The possibility to change the strike price would be limited to strictly defined occurrences listed in the NPP Act, including primarily a change in OPEX costs. Verification would be conducted by the NRA. The change would be made as part of an administrative procedure.

(169)

The frequency of changes to the strike price would be strictly defined in the NPP Act. A change would be possible: (a) 5 years after the last NPP reactor has been put into operation; (b) 15 years after the last NPP reactor has been put into operation; (c) 25 years after the last NPP reactor has been put into operation; (d) 35 years after the last NPP reactor has been put into operation; (e) 45 years after the last NPP reactor has been put into operation;

(170)

The Polish authorities note that a similar solution was adopted as part of the support mechanism for Hinkley Point C (82), which was upheld by the Court of Justice in its judgment in case C-594/18 P - Austria v Commission (83).

Figure 13:

Illustrative timeline with deadlines for determining and revising the strike price

Source:

Polish authorities

5.3.8.3.   Two-way load factor strike price adjustment mechanism

(171)

The Polish authorities consider that due to the development of the EU's electricity market, investors in NPPs are currently in a different situation than a few or several years ago. At the time of making the investment decision to build Hinkley Point C, for example, it was possible to assume, with a high degree of probability, that the NPP would always operate in the baseload at the maximum or close to maximum technical capacity available. Low operational costs guaranteed that the nuclear power plant was able to always enter into the merit order on the short-term market.

(172)

However, given the development of other sources of electricity generation (notably RES) and existing market rules, the Polish authorities consider that new NPPs now face additional risk than previously addressed in the price support schemes. As identified by the European Commission in the Dukovany case (84), “a future generation mix marked by higher shares of RES with typically very low marginal cost could, depending also on other developments such as storage or hydrogen production, result in higher volatility including periods of low or even negative prices. In such situations, reductions in output also of nuclear generation could be an efficient reaction to market signals”. Thus, in the periods of very low or even negative prices, the electricity offered by the NPP can either not enter into the merit order or the NPP could reduce its output in order to react efficiently to such market signal. Specifically, Poland clarifies that the NPP would decide whether to seek spot market price arbitrage opportunities, taking into account the technical characteristics of the NPP’s operation, nuclear safety and regulatory requirements as well as potential costs of hourly changes in the production (e.g. related to ramping-down and/or ramping-up).

(173)

At the same time, the Polish authorities consider that RES, due to their dependence on weather conditions, will not, as a rule, be able to meet the full demand for electricity over extended periods (including throughout the day). Thus, their increased participation in the grid, leading to price volatility, will not fully ensure security of electricity supply. This situation will have a potential impact, depending on commercial agreements and market transactions, on lowering the NPP output at given hours during the day. Such a situation may result in a reduction of the initially assumed energy output by the NPP expressed as load factor, because the NPP will not be able to be dispatched during increased periods of very low, zero, or negative prices driven by high RES production.

(174)

According to the Polish authorities, at the same time, the lack of certainty about both the pace of RES development, demand for electricity, as well as the rules for offering electricity on the market and the possibility of the sudden development of other low-carbon technologies, introduces significant uncertainty about the NPP output levels that will be achieved in real terms over the next decades.

(175)

Therefore, currently NPPs face not only a well-recognized risk of long-term market price fluctuations, but also a risk of higher market volatility leading potentially to lower volume of electricity sold, hence achieving lower load factors. Poland submits that simply having a CfD mechanism, without some mechanism to take into account an unpredictable level of output, will not provide the level of security necessary to make the huge capital investment. In order to address both price and volume risks, the CfD should therefore be designed with the inclusion of a tailor-made solutions providing income stability in volatile market conditions.

(176)

The Polish authorities, based on their reasoning summarised above, propose for the envisaged CfD to include a load factor strike price adjustment mechanism (the ‘LFSP adjustment mechanism’). This mechanism is the proposed response by the Polish authorities to the identified risks which, at the same time, in their view, is in compliance with EU law, including the EMD Reform, and also in line with the assessment of potential market distortions caused by NPPs (85). The purpose of the mechanism is to provide a steady revenue for the NPP to cover financial obligations and operating expenses in a view of unforeseeable lower load factor risk. The load factor strike price adjustment mechanism would also allow the NPP to fully react to market signals in the view of the Polish authorities.

Figure 14

Illustration of strike prices and load factors

Source:

Polish authorities

(177)

The two-way LFSP adjustment mechanism would only be used in the event of a change in the actual load factor (its increase or decrease) achieved at the end of a given period Figure 14 compared to the assumed load factor envisaged for the same period (marked as B in Figure 14) taking into account expected market developments (which result in lower value than maximum technically possible load factor – marked as A in Figure 14).

(178)

The two-way LFSP adjustment mechanism would apply only to changes in the load factor (volume of electricity sales) caused by an unforeseen increase or decrease (different than expected) in electricity sales from the NPP related to participation in the market of RES or other emerging technologies (market volatility risk) - highlighted in green in Figure 15 below (86). Such a solution will ensure that the operation of NPP, while contributing to energy security, will not adversely affect the development and operation of other low-carbon sources of electricity.

Figure 15:

Illustration of eligible effects

Source:

Polish authorities

(179)

The use of the two-way LFSP adjustment mechanism would be strictly limited to the market volatility risk described above. It would not refer to other cases affecting the load factor, such as unplanned outages, breakdowns and repairs (highlighted in dark grey on the exhibit above) (87). The mechanism would be applied automatically, based on predetermined parameters, and would serve the purpose of appropriate settlement with the other party to the CfD.

(180)

The LFSP adjustment mechanism would be applied every year. After the end of the calendar year, the load factor actually achieved will be verified according to the table/formula previously established by the NRA President.

(181)

In case of a deviation of the actually achieved load factor from the baseline load factor caused by additional (higher or lower than expected) impact of market volatility (as highlighted in green in Figure 15), there would be: (a) Retroactive settlement for the past year: The difference between the achieved revenue and the planned revenue resulting from the change in the achieved load factor compared to the baseline load factor caused by the market volatility. If the achieved load factor was higher than assumed, the NPP would return the excess revenue to the counterpart to the CfD. If, on the other hand, the achieved load factor was lower than assumed (and the difference would be caused only by unexpected market volatility as explained above), the NPP would receive a refund of the difference for the past year. (b) Adjustment of the strike price for the future: Based on the load factor actually achieved in the previous year by the NPP and other factors (e.g. envisaged developments in the Polish electricity system, scheduled maintenance), the load factor and the strike price for the following year would be established. Any adjustment would be made in accordance with the table/formula approved by the NRA President.

(182)

The Polish authorities submitted an example how the LFSP adjustment mechanism could work:

Figure 16

Example calculation

Source:

Polish authorities

5.3.9.   Coverage of exchange rate risk as part of CfD settlement

(183)

As part of the two-way CfD, the possibility to settle the CfD in other currencies would be introduced to mitigate foreign exchange risk. Such risk is an inseparable element of the envisaged CfD given the fact that – after the commissioning of the NPP – PEJ will have a short foreign exchange position due to its repayment of debt obligations and part of its operating expenses (mainly in USD but also in EUR).

(184)

The purpose of the currency hedge incorporated within the CfD is to minimise the risk of cash flow fluctuations during the operational phase of the Project and to maintain a stable level of costs and expenses. The risk arising from a significant value of liabilities with a long repayment period, settled in foreign currencies, will be accordingly mitigated, as it will allow PEJ to hedge its short foreign exchange position, allowing for a stable and foreseeable rate of return based on the investment costs and appropriate CfD strike price, as assumed in the WACC.

(185)

According to the Polish authorities, this risk cannot be properly addressed by PEJ due to the magnitude of expenses in foreign currency as well as the lack of available measures to hedge the exchange rate. Long-term hedges against such a large currency exposure are not offered on the market. As an example, the Polish authorities explain that PEJ would have to purchase over a year’s worth of liquidity on the entire USD/PLN market which would be not only ineffective but also impossible.

(186)

As per the Polish authorities, in the process of defining the initial principles for its hedging strategy PEJ reached out to several banks on the Polish market to discuss the possibilities of mitigating such foreign currency risk during the operational phase. PEJ explains that the response by these banks was unanimous stating that such a volume will a) be impossible to hedge on the financial market during such tenor and b) even if it was possible the pricing would be unreasonably high.

(187)

The envisaged currency mechanism will determine what part of the CfD would be settled in PLN and what part in foreign currencies. The Polish authorities explain that the exchange rate adopted for the purpose of conversion from PLN into the foreign currency should be determined no later than at the start of commercial operations by the NPP and be in effect from at least the date on which the debt repayment begins. The exchange rate of PLN into a foreign currency will be the same as the rate adopted in the final financial model, based on which the appropriate level of internal rate of return was estimated at the corresponding strike price.

(188)

The share of each foreign currency in the settlement will be determined by PEJ annually and then communicated no later than on 31 December of the year preceding the year for which the settlement is to be made. Since the strike price (expressed both in PLN and foreign currency), as per current plans, will be indexed annually by the level of the PLN consumer price index (‘CPI’) and that the vast majority of expenses denominated in a foreign currency during the operational life cycle of the NPP will be fixed (i.e. not based on the CPI, like repayments of instalments of loans and credit facilities), Poland argues that a mechanism allowing the changing the shares of the foreign currency part is necessary to avoid over/under compensating PEJ, since this way PEJ will not benefit from a PLN appraisal and will not account for a loss in the contrary situation.

(189)

According to the Polish authorities, taking into account financial market liquidity as well as debt pricing, they currently estimate that approximately 70% of total debt will be financed in a currency other than PLN (most likely USD and EUR). Over the course of debt repayment, (that is 22 years after the date of commissioning), PEJ will have to manage a debt repayment liability of approximately USD [1.2-2] billion year-on-year. In addition to this, the Polish authorities also expect that a significant amount of operating expenditure encountered during the operational phase (88) will be denominated in a foreign currency and are expected to be approximately USD [0.4-0.6] billion year-on-year.

(190)

PEJ therefore currently estimates a total volume of foreign currency-denominated liabilities in the range of USD [1.6-2.6] billion year-on-year throughout the course of 22 years at least. Foreign currency forward instruments are offered with an effective rate up to around 3 years whereas for foreign currency swap instruments up to 10 years are offered at the most.

6.   MARKET STRUCTURE AND IMPACT OF THE PROJECT

(191)

As regards the main sales channels in the Polish electricity market, the Polish authorities submit that the largest amount of electricity is sold on organised markets (between 54% and 70% in the years 2019-2023), followed by sales directly to the trading companies (between 20% and 36% in the same period). Together, both account for around 90% of the overall sales.

(192)

As to organised markets, the majority of the wholesale electricity is traded through the forward market (e.g. in 2022: 84 TWh out of 147.46 TWh traded on the Polish Power Exchange).

(193)

As of the end of 2023, there were 1058 companies on the Polish market with a licence to generate electricity and 423 companies with a licence to trade electricity. In 2023, almost 27% of total electricity produced was generated by companies with a market share of less than 1%. However, there are eight capital groups that retain significant shares of electricity sales volumes on the Polish energy market, namely PGE, ENEA S.A., Orlen S.A., Tauron Polska Energia S.A., PAK S.A., CEZ, Veolia and Polenergia S.A (see Figure 17).

(194)

In terms of the shareholding structure, the State Treasury holds significant stakes in four of those companies, namely PGE (60,9%), Tauron Polska Energia S.A. (30%), ENEA S.A. (52,2%), and Orlen S.A. (49,9%). However, the Polish authorities note that the total share of the State-controlled companies in electricity sales has steadily decreased in the last years, primarily due to deployment of new RES capacities, and the growing share of private companies investing in RES development as compared to conventional electricity generation and they expect that this trend is going to undergo further dynamic shifts over the next decade due to an expected fundamental transformation of the Polish energy mix.

Figure 17:

Utilities share in the total electricity volume sold in the years 2019-2023

*	Total volume of all companies merged with Orlen S.A. in years 2019-2023, e.g., PGNiG S.A. and ENERGA S.A. Source: Polish authorities

(195)

The Polish authorities estimate that the share of the Project, compared to the gross electricity production for the baseline scenario (with existing measures) of the NECP, will be 6.2% in 2035 and 10.1% in 2040 (89). The overall share of nuclear power, including all declared investment projects irrespective of their progress, in total electricity production, based on the same projections, is estimated to be 11.9% in 2035 and 23.4% in 2040 (90).

7.   ASSESSMENT OF THE MEASURES

7.1.   Scope of the decision

(196)

The scope of the decision covers the measures described in sections 5.1 to 5.3. It does not cover any possible future measures to distribute funds accumulated within the CfD fund from the surplus transferred by PEJ to the CfD counterparty to support electricity consumers.

(197)

Furthermore, the measures ensure that a new NPP will be able to generate electricity and sell it on the market. The effects of these measures should therefore be assessed with respect to the potential distortions of the electricity markets. The construction works are not covered by the measures, and the EPC suppliers (or any other suppliers) will not be the beneficiaries of the notified aid, but PEJ will be the sole direct beneficiary.

7.2.   Existence of aid

(198)

Under Article 107(1) TFEU, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, in so far as it affects trade between Member States, is incompatible with the internal market.

(199)

A measure constitutes State aid within the meaning of Article 107(1) TFEU, if it fulfils four cumulative conditions. First, the measure must be imputable to the State and funded through State resources. Second, the measure must confer an advantage to a beneficiary. Third, the measure must favour certain undertakings or economic activities (i.e. there must be a degree of selectivity). Fourth, the measure must have the potential to affect trade between Member States and to distort competition in the internal market.

7.2.1.   A single intervention comprising several measures

(200)

Under point 81 of the Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union (91), different measures could be considered as a ‘single intervention’. This could be the case, in particular, where consecutive interventions are so closely linked to each other, especially having regard to their chronology, their purpose and the circumstances of the undertaking at the time of those interventions, that they are inseparable (92). For instance, a series of State interventions which take place in relation to the same undertaking in a relatively short period of time, are linked to each other, or were all planned or foreseeable at the time of the first intervention, may be assessed as one intervention.

(201)

First, the Commission considers that the measures concern the same subject matter and objective, they namely enable a new NPP situated in Lubiatowo-Kopalino to produce electricity. Further, the measures coincide chronologically as they were planned together (and were thus foreseeable when negotiated) (93). While the equity injection, has a separate contractual basis (see recital (91)(b)) the legal framework for the State guarantee and the CfD will be established based on the same legislative act, the NPP Act (see recital (91)(a)), and the grantor of the measures is the Polish State.

(202)

Second, the measures are designed in a way that each measure has a direct impact on the others, and that the measures jointly create the financial preconditions to enable the execution of the Project. In fact, despite their separate legal bases, measure 1 is entirely linked to measures 2 and 3 and none of them would exist in the absence of the other measures. Notably, the equity injection, according to the Polish authorities, is a precondition to enable the debt financing benefitting from the State guarantee (recital (108)). Furthermore, both measure 1 and 2 affect the determination of the strike price under measure 3 (see recital (159)(c)) as lowering the operational risks through the foreign exchange risk coverage and lowering the debt financing costs (or even enabling such financing at all) through the State guarantees and equity injection impact the amount of aid needed for the two-way CfD. Similarly, any additional equity reduces the required State guarantees on debt financing and vice versa. Accordingly, the three measures at issue are closely linked and they are inseparable from each other.

(203)

The Commission considers therefore that the measures should be examined together as a single intervention, as they are interdependent and have mutually enhancing effects for the performance of the Project.

(204)

The Polish authorities do not dispute the conclusion that the measures are inseparable and constitute a single intervention.

7.2.2.   Imputability to the State and financing through State resources

(205)

For measures to be capable of being categorised as aid within the meaning of Article 107 TFEU, they must be granted directly or indirectly through State resources. It is established case-law (94) that measures financed through compulsory charges imposed by the legislation of the Member State, managed and apportioned in accordance with the provisions of that legislation, may be regarded as State resources within the meaning of Article 107(1) TFEU even if they are managed by private or public entities separate from the public authorities. This means that both advantages which are granted directly by the State and those granted by a public or private body designated or established by the State are included in the concept of State resources within the meaning of Article 107(1) TFEU.

(206)

Furthermore, it is not necessary to establish, in all cases, that there has been a transfer of State resources in order to assess the measure as State aid within the meaning of Article 107(1) TFEU (95).

(207)

The combination of measures for the Project has been decided by the State with the adoption of the Resolution on Financing (see recital (93). The granting authority for measures 1 and 2 is the Polish State acting through the Treasury. The equity injection will be set out via an amendment to the Act of 29 June 2011 on the preparation and carrying out of investments in nuclear facilities and associated investments and the State guarantee on debt financing will be set out in the NPP Act (see recital (91)). The two-way CfD will be established in the NPP Act, in the form of an administrative contract contracted with the CfD counterparty, a fully State-owned entity (see recital (141)).

(208)

The Project will benefit of three measures constituting a single intervention and involving a transfer of State resources to the benefit of PEJ. As mentioned in recitals (143) to (145), the CfD will be financed through one or a combination of: (i) the revenues from CfD settlements with PEJ, (ii) a special levy added to the bills of electricity consumers set annually by the NRA, and (iii) contributions from the State budget. The choice of the actual revenue stream for financing the different measures depends on the choice of the Polish State. Furthermore, both the equity injection under measure 1 and the State guarantee on debt financing at no fee under measure 2 are provided by the Treasury and financed directly through the State budget. The equity injection entails a direct transfer of funds, and the guarantee entails a concrete risk for the State budget to be burdened in case the guarantee is triggered. As all three measures are interdependent and constitute a single intervention, it is without bearing on the existence of State resources whether the levy would, if it were to finance the two-way CfD under measure 3 by itself, result in the provision of State resources. The provision of the equity injection from the State budget and the granting of a State guarantee for 100% of the debt raised for the Project without the charging of any fee are already sufficient to establish that the overall intervention relies on the granting of State resources.

(209)

In the light of the above, the Commission considers that the measure is granted through State resources and is imputable to the State within the meaning of Article 107(1) TFEU. The Polish authorities do not contest that the measures will be financed from resources under the control of the State.

7.2.3.   Selective economic advantage

(210)

A measure is deemed selective if it favours only certain undertakings or the production of certain goods. An advantage, within the meaning of Article 107(1) TFEU, is any economic benefit, which an undertaking would not have obtained under normal market conditions, i.e., in the absence of State intervention (96).

(211)

The specific measures described in sections 5.1 to 5.3 target selectively the Project, ultimately enabling production of electricity generated by a new NPP at the Lubiatowo-Kopalino site. The measures, taken as a whole, allow the Project to be realised and provide for a certain target return on investment (see recital (90)). Further, the measures are provided to PEJ as the sole beneficiary, thereby favouring it compared to other undertakings in the energy sector.

(212)

As argued by the Polish authorities, the measures ultimately aim to enable investment into a new NPP to produce electricity, which, due to the specific risks and the long project duration, would not have been undertaken by a private investor under normal market conditions, that is to say in the absence of State intervention.

(213)

Measure 1 provides equity to PEJ in an amount of approximately 30% of the investment costs, with an expected return which the Polish authorities consider to be in line with the rates market investors would expect for similar projects. The provision of equity provides an advantage to PEJ as it helps to raise debt financing from lenders, which would not be possible in the absence of the equity buffer (see recital (108)).

(214)

Measure 2 provides guarantees with no premium for all the debt raised to finance the Project while reducing the Project’s risk and transferring it to the State, thereby conferring an economic benefit that could not have been obtained under normal market conditions, since a guarantee without fee would not have been provided by a market operator.

(215)

Measure 3 provides a stable long-term remuneration for electricity produced by the NPP that would not, at least not for such a duration, be available on the market, ensuring a steady flow of revenues for PEJ for the duration of the two-way CfD that other operators not benefitting from a similar support measure do not receive.

(216)

Therefore, the Commission concludes that all three measures under discussion confer a selective advantage to PEJ.

7.2.4.   Threat of distortion of competition and effect on trade

(217)

The electricity market has been liberalised and electricity producers are engaged in trade between Member States so that an advantage granted to the producers of nuclear electricity is likely to distort competition and affect trade between Member States. Electricity from nuclear sources is generally sold on the internal market for electricity where it enters in competition with all sources of electricity, including those in other Member States.

(218)

Therefore, the advantage granted to the beneficiary of the measures is likely to distort competition and affect trade between Member States. As all measures grant advantages to electricity generation as a competitive activity, that conclusion would, again, be the same if the measures were looked at individually.

7.2.5.   Conclusion on the existence of State aid

(219)

The Commission therefore considers that the equity injection, the State guarantee with no fee and the two-way CfD as different measures pertaining to a single State intervention involve State aid within the meaning of Article 107(1) TFEU.

7.3.   Legality of the aid

(220)

The measures were notified to the Commission on 18 September 2024 and have not been implemented to date. The implementation is furthermore made conditional upon the Commission approval of the measures (see recital (91)). Therefore, the Polish authorities have fulfilled the notification and standstill obligations under Article 108(3) TFEU.

7.4.   Compatibility of the measures with Article 107(3)(c) TFEU

(221)

Article 107(3)(c) TFEU provides that the Commission may declare compatible ‘aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest’. Therefore, compatible aid under that provision of the Treaty must contribute to the development of certain economic activity. Furthermore, the aid should not distort competition in a way contrary to the common interest. The Commission must thus verify: (a) Whether the aid measure facilitates the development of an economic activity by: — identifying the economic activity supported by the aid; and — showing that the aid effectively facilitates the development of the economic activity, — without that activity breaching any relevant Union rules. (b) Whether the aid measure does not unduly affect trading conditions to an extent contrary to the common interest by: — identifying the market(s) affected by the aid; — identifying the positive effects of the aid measure on the internal market; — assessing how the aid measure minimises the distortions on competition and trade by evaluating the necessity of the aid, its appropriateness and its proportionality; — identifying the outstanding distortions of trading conditions that cannot be avoided (despite the aid being necessary, appropriate, proportionate); and (c) weighing up the positive effects of the aid with the negative effects on competition and trade in the internal market.

7.4.1.   Positive condition: development of an economic activity

(222)

Under Article 107(3)(c) TFEU, the measure must contribute to the development of certain economic activity (97).

7.4.1.1.   Contribution to the development of an economic activity

(223)

As mentioned in section 3.1, the objective of the measures subject to this decision is to ultimately enable investment in new nuclear power generation and ensure its operation for a prolonged period, thereby contributing to the decarbonisation of the electricity system in Poland and to the security of electricity supply.

(224)

The Court of Justice has recognised the development of new nuclear capacity as an economic activity in the sense of Article 107(3)(c) TFEU (98) and has established that Article 107 TFEU may be applied to investments in nuclear power stations (99).

(225)

The Commission therefore considers that the Project facilitates the development of certain economic activities, namely generation of nuclear-based energy, as required by Article 107(3)(c) TFEU.

7.4.1.2.   Incentive effect

(226)

State aid can only be considered to facilitate an economic activity if it has an incentive effect. An incentive effect occurs when the aid induces the beneficiary to change its behaviour towards the development of the economic activity pursued by the aid, and if this change in behaviour would not otherwise occur without the aid.

(227)

According to the Polish authorities (see recital (27)), in the absence of aid the investor would not have the incentives or capacity to invest in the development of new nuclear electricity generation. Poland submits that the PNPP already recognized that, by their nature, investments in nuclear power projects are highly capital intensive, have long lead times, with exceptionally extensive preparatory time before actual investment, and require a uniquely complex and comprehensive risk management strategy. High input costs of investment represent a barrier to entry into the industry and investments in nuclear energy without State support are unlikely to materialise due to the uncertainty of developments on the electricity market.

(228)

The Commission considers it plausible that the Project would not be implemented in the absence of State support in view of its negative funding gap (see recital (80)), the limited capacity of the beneficiary to raise market financing and considering the uncertain market conditions and existing market failures associated with nuclear power development.

(229)

The Commission therefore considers preliminarily that aid for the Project has an incentive effect as it induces the beneficiary to engage in economic activity it would not carry out without the aid.

7.4.1.3.   Compliance with the relevant provisions of EU Law

(230)

In its ruling in the Hinkley Point C case (100), the Court of Justice clarified that ‘State aid which contravenes provisions or general principles of EU law cannot be declared compatible with the internal market’. For nuclear energy specifically, the Court of Justice clarified that for the sector ‘covered by the Euratom Treaty, State aid for an economic activity falling within that sector that is shown upon examination to contravene rules of EU law on the environment cannot be declared compatible with the internal market pursuant to that provision’.

(231)

The Court of Justice also clarified that the provisions of the TFEU as well as EU environmental law, including the principle of protection of the environment, the precautionary principle, the ‘polluter pays’ principle and the principle of sustainability cannot be regarded as precluding, in all circumstances, the grant of State aid for the construction or operation of a nuclear power plant (101). That reasoning is fully applicable to the Project and the measures at stake, since Poland has opted for nuclear energy to address future resource adequacy issues and security of supply concerns as well as to decarbonise its energy sector.

(232)

Moreover, the Court of Justice highlighted in its ruling that secondary legislation, such as Directive 2011/92/EU of the European Parliament and of the Council of 13 December 2011 on the assessment of the effects of certain public and private projects on the environment (102), under which certain projects are subject to an environmental impact assessment, applies to nuclear power stations and other nuclear reactors (103).

(233)

The Commission has no indications that the Project may violate provisions of EU environmental law. The Polish authorities specified that the Project development was preceded by an extensive and open environmental impact assessment process conducted in compliance with EU secondary legislation requirements (see recital (61)(b)).

(234)

The Polish authorities committed to notify the Project to the Commission pursuant to Article 41 of the Euratom Treaty (104).

(235)

The Commission has also examined whether the State aid measures in question are indissolubly linked or not with the application of public procurement rules.

(236)

According to the case-law, "when the Commission applies the State aid procedure, it is required, in accordance with the general scheme of the Treaty, to ensure that provisions governing State aid are applied consistently with specific provisions other than those relating to State aid and, therefore, to assess the compatibility of the aid in question with those specific provisions. However, such an obligation is imposed on the Commission only where the aspects of aid are so inextricably linked to the object of the aid that it is impossible to evaluate them separately. […] By contrast, if the aspect at issue can be separated from the object of the aid, the Commission is not required to assess its compatibility with provisions other than those relating to State aid in the context of the procedure provided for in Article 108 TFEU" . (105)

(237)

In the present case, the Commission considers that there is no indissoluble link between the State aid and public procurement aspects, because it is possible to evaluate them separately. The State aid measures support the activity (establishment and operation of a nuclear power plant) independently of how the EPC contractor is chosen. The implementation of the aid measures also does not depend on the exact application of public procurement rules. A potential inobservance of public procurement rules might only lead to distortive effects on the market of nuclear construction works and not on the market for electricity. The operation of the power plant and the conditions for marketing the electricity are therefore separable from the public procurement aspects regarding the construction of the power plant. It is therefore possible for the Commission to assess the measure without evaluating the public procurement aspects of the EPC contract and such aspects are not inextricably linked to either the economic activity promoted by the aid or its modalities.

(238)

In any event, Poland considers that Directive 2014/25/EU on procurement by entities operating in the water, energy, transport and postal services sectors (106) is not applicable in the present case based on derogations possible under the Directives for essential security interest (see recital (55)).

(239)

In the field of energy, any levy that has the aim of financing a State aid measure and forms an integral part of that measure needs to comply in particular with Articles 30 and 110 TFEU (107).

(240)

According to settled case law, for a levy to be regarded as forming an integral part of an aid measure, it must be hypothecated to the aid under the relevant national rules, in the sense that the revenue from the charge is necessarily allocated for the financing of the aid and has a direct impact on the amount of the aid, and, consequently, on the assessment of the compatibility of that aid with the common market (108). In particular, the concerned charge must be levied specifically and solely for the purpose of financing the aid at issue (109).

(241)

Furthermore, it is also apparent from the case law that there may be no such hypothecation when the amount of aid is determined solely on the basis of objective criteria, not related to the allocated revenue, and subject to an absolute statutory ceiling (110). In particular, the Court has held that there is no hypothecation when the national legislation establishes the aid amount between a minimum and maximum value regardless of the revenue from the tax (111). Moreover, the Court has recently held that there was no hypothecation between the tax and the aid granted in a case where the amount of the aid was determined according to criteria unrelated to the allocated tax revenue and where national legislation provided that any surplus in relation to this aid had to be reallocated, as appropriate, to a reserve fund or the treasury, that revenue also being the subject of an absolute ceiling with the result that any surplus is also reallocated to the State’s general budget (112). To exclude the existence of a hypothecation link, the Court also took into account the fact that, where the revenues from the levy are insufficient to cover the total aid amount, the relevant Member State is required to cover the shortfall by means of contributions from its general budget.

(242)

In the present case, the financing of two-way CfD will be ensured from a dedicated CfD fund managed by the CfD counterparty and financed by: (i) any difference payments by PEJ (see recital (142)); (ii) a levy paid by electricity consumers (see recital (144)) and (iii) contributions from the State budget (see recital (145)). As explained in section 5.3.6, in case the strike price of the two-way CfD is above the market prices of electricity, the State will need to finance the price difference through State resources, namely through the State budget and through consumption levies.

(243)

Poland further confirmed that while a levy may contribute to the financing of the measures, the financing would not depend on such a levy and the State budget would cover costs where required. Specifically, any deficits of the levy, will be ultimately covered by the general State budget.

(244)

It follows that the possible introduction of a levy in the Project in connection with the financing of the CfD does not have a direct impact on the amount of the aid and, therefore, does not form an integral part of the measure as it is not hypothecated to the aid under the relevant national rules. As a result, the compliance of the levy with Articles 30 and 110 TFEU is not assessed in the present decision.

(245)

As regards the design of the two-way CfD, the Commission considers that the principles set out in Article 19d(2) of the Electricity Market Design Regulation apply to all new two-way CfDs, as of the entry into force of the Regulation. This includes instances where a Member State, without having the obligation to do so under the Regulation (113), decides to introduce a two-way CfD in relation to investments aiming to incentivise nuclear newbuild, as in the present case. The Commission considers that the Polish authorities have not demonstrated compliance with the design principles in Article 19d(2) of the Electricity Market Design Regulation, as explained in more details in section 7.4.2.6.1.

(246)

Poland submits that any proceeds from the CfD will flow to the dedicated CfD fund and will be primarily used to finance the payments by the CfD counterparty to PEJ, when the strike price is above the reference price (see recital (142)). Poland explains that surpluses from the CfD fund may also be used to support electricity consumers in accordance with Article 19d(2), point (d) and (e) of the Electricity Market Design Regulation. Poland will inform the Commission upfront in case CfD proceeds would be distributed to undertakings and, if need be, notify such a measure (see recital (143)). Through this commitment, the Commission considers that the Polish authorities provided further assurances regarding compliance with the principles set out in Article 19d(2), point (d) and (e) of the Electricity Market Design Regulation.

(247)

As explained in recital (245), the Commission cannot confirm, at this stage, that the design of two-way CfD, as proposed by the Polish authorities, fully complies with the design principles set out in Article 19d(2) of the Electricity Market Design Regulation. Therefore, the Commission has doubts that the proposed measures do not infringe relevant provisions of EU law.

7.4.1.4.   Conclusion

(248)

For the reasons explained in section 7.4.1.3, the Commission cannot conclude, at this stage, that the Project fulfils the first (positive) condition of the compatibility assessment i.e. that the aid facilitates the development of an economic activity without breaching relevant Union rules.

7.4.2.   Negative condition: the aid cannot unduly affect trading conditions to an extent contrary to the common interest

7.4.2.1.   Identification of the market(s) affected by the aid

(249)

The measures were designed based on considerations concerning the decarbonisation of the electricity system while also taking into account security of supply concerns covering the Polish market as described in section 2.2. At the same time, it has been established that the Polish market is well interconnected to neighbouring countries in the CESA and beyond (see section 2.4.4). The Commission notes that this holds true in particular for the interconnections to Czechia, Germany and Slovakia, which, like Poland, are part of the Core region (114).

(250)

For this reason, the relevant markets for the assessment of the measures at stake are the electricity market in Poland and the neighbouring countries, in particular those in the Core region.

7.4.2.2.   Identification of the positive effects of the aid measure on the internal market

(251)

The transition towards climate neutrality involves the progressive phase out of fossil fuels starting from the most polluting ones. Most Member States have already announced their plans for phasing out coal over the coming years (115). Similarly, the progressive phase out of coal in Poland to the largest extent is announced in the draft NECP by 2049, at the latest. These developments are expected to lead, according to the Development Plan and the ERAA (see recitals (16) and (19)), to adequacy issues in the mid-long term. This trend is expected to be observed in other Member States phasing out coal.

(252)

The installation of new nuclear generation capacities allows to maintain the necessary generation at the supply side while contributing to the decarbonisation of the energy system. This is all the more important in view of the expected rise in demand in Poland (see recital (11)). The measure therefore has positive effects on the market as it will increase security of supply. Since Poland is well-connected to neighbouring countries in the CESA, in particular those in the Core region, these positive effects would likely benefit the neighbouring countries when importing electricity from Poland. By ensuring secure supplies when phasing out the most polluting fuels, nuclear generation also contributes, jointly with the development of renewable energies, to achieving Union and Polish decarbonisation objectives.

7.4.2.3.   Necessity for State intervention

(253)

Following consideration of the different options to achieve its policy objectives set out in section 2.3 and using its right to choose between different energy sources under Article 194 TFEU, Poland has concluded that new nuclear capacity is a necessary component to facilitate the development of the economic activity detailed in section 3.1 and under recitals (223) and (227) and that its promotion itself achieves the multitude of common objectives identified in section 2.

(254)

The Polish authorities explain that investments in new NPPs are unique in nature when compared to other investments in the energy sector, in particular when it comes to the very long development and construction periods, long operational life cycles, and risks associated with construction costs overruns, delays, and completion. They maintain that the construction of NPPs is unlikely to take place absent State aid support as proven by the financial model of the Project which demonstrates the existence of a funding gap.

(255)

Indeed, the Commission considers it unlikely that market forces alone would be capable of ensuring the timely delivery of the nuclear capacity necessary to facilitate the development of electricity generation from nuclear energy sources in Poland.

(256)

According to the case law, Article 107(3)(c) TFEU does not make Member States’ intervention through State Aid conditional upon the existence of a market failure, but it may be a relevant factor for declaring State aid compatible with the internal market (116).

(257)

Therefore, the Commission has identified certain market failures that require State intervention regarding nuclear power development (117). For new nuclear energy investments, the market failure arises principally due to three aspects: (i) scale of the capital requirement, (ii) longevity of exposure to market pricing signals, which are themselves distorted by interventions, and (iii) longevity of exposure to political decisions. The Commission considers also that the combination of those parameters is unique to nuclear technology (118).

(258)

First, the scale of capital requirements for nuclear investments is particularly high, creating issues in raising financing. While the levelized cost of energy for nuclear generation is not necessarily higher than for other technologies, (119) the long lifetime and large production capacity of nuclear power plants could only be compared to the largest of hydropower projects. These capital needs, reaching tens of billion of Euros, are further exacerbated by frequent and significant investment cost increases for new-built nuclear generation facilities. Indeed, particularly the first wave of Generation III investments in OECD countries have been affected by construction delays and cost increases (120). These can be explained, in part, because new projects were initiated after a long hiatus for nuclear construction which significantly eroded the nuclear supply chain and the industry’s capabilities, and in part due to a lack of design maturity and execution planning at the time of the construction start, as well as an increasingly uncertain political context. A joint report by the International Energy Agency (IEA) and the Nuclear Energy Agency (NEA) (121) found that this situation has eroded stakeholder confidence in the capability of the nuclear industry to deliver new build projects and has raised the level of the perceived investment risk, intimidating investors and further reducing the chances of attracting financing for future projects.

(259)

Second, planned operation times of 60 years make it difficult to align typical durations of private investments or commercial loans with the lifetime of the Project. This is even more relevant in current electricity markets, which are significantly changed by the energy transition and the rapid deployment of renewable energies, as well as regulatory reforms accompanying this transition. In consequence, even the most experienced market participants struggle to make comfortable predictions for power prices in the far future and most electricity trades cover not more than 5 years in the future.

(260)

Finally, nuclear energy involves important safety, environmental, and financial considerations and remains subject to societal and political controversy. Thus, in order to succeed, investments in nuclear generation assets have to account for the risk of policy change and need ensure an adequate allocation of risks between parties in a transparent and responsible decision-making process.

(261)

Those market failures in relation to investment in new nuclear power generating sources can be observed in all markets and remain a concern also for the Project. As mentioned in recitals (1) and (100), the Project concerns the construction and operation of the first NPP in Poland, a country which has no previous experience with implementing such projects, which may exacerbate those market failures.

(262)

Therefore, there are clearly identified market failures with respect to investments in new nuclear energy sources in Poland. In light of the lack of sufficient electricity generation capacity in Poland, of those market failures, and of the strategic goal of Poland’s energy policy, which aims at ensuring security of supply and long-term decarbonisation of electricity generation, support for the construction of new nuclear power sources in Poland appears necessary.

(263)

Based on the above, the Commission considers, at this stage, that State intervention is necessary to ensure the development of new nuclear capacities in Poland.

7.4.2.4.   Appropriateness

(264)

Poland intends to support the investment into new nuclear energy capacity by ensuring its revenues stability via a two-way CfD providing protection against both market and currency risk, in addition to the provision of an equity injection and of a credit guarantee, as set out in sections 5.1, 5.2, and 5.3 above.

(265)

The Polish authorities explain that these measures are appropriate for tackling the market failures described in section 7.4.2.3 and address the unique characteristics of an investment in nuclear newbuild. Specifically: (a) the equity injection provides a buffer to facilitate securing debt financing covering the remainder of the investment costs of the Project; (b) the State guarantees, without premium, covering 100% of debt financing including interest, represent a pre-requisite for securing debt financing from ECAs and other financial institutions. The State guarantee is required to increase PEJ’s rating and make ECA financing possible given that PEJ is a standalone special purpose vehicle characterised by poor financial quality. Thus, the debt guarantee would make it possible to attract the necessary funding for the Project by reducing the risks debt holders would face by lending to PEJ. Poland explains that State guarantees are also required for the investor to be able to secure currency and interest rate hedging during the construction period of the NPP. (c) the longevity of the exposure to market price signals is addressed through the two-way CfD and its envisaged adjustments over time (see section 5.3) which ensures the minimum level of revenues for the Project to close its funding gap. According to the Polish authorities, the design of the two-way CfD reduces the risks associated with the uncertainty on the development of the electricity market, enables the repayment of the debt financing and provides investors with sufficient security of a reasonable return. The possibility to settle the CfD in other currencies will mitigate foreign exchange risk for the investor, protecting it against losses it may incur due to currency fluctuations. The Polish authorities claim this is necessary as long-term hedges against large currency exposures are not available on the market, or would be prohibitively expensive (see recitals (185)and (186)).

(266)

Alternative options on financing mechanisms for nuclear energy have been examined by the Polish authorities (see section 2.5). In particular, according to the Polish authorities, alternatives such as a capacity mechanism, or implementing a RAB model were considered as less appropriate for tackling the relevant market failures and the most appropriate option was the one finally selected.

(267)

The Commission notes that the measures aim at allowing the realisation of the Project – the construction of the first nuclear capacities in Poland – which should improve security of supply, diversify electricity suppliers and foster decarbonisation.

(268)

The Commission considers it plausible, at this stage, that the conditions based on which the equity is granted could not be proposed on market terms because of the long construction period (typically around 10 years) during which no dividends would be paid and the very high capital needs.

(269)

The Polish authorities claim that the combination of the measures described in sections 5.1 to 5.3 reduces several risks for the beneficiary and ensures the necessary conditions for raising funding for the Project. The Commission notes that tackling the various risks implies certain trade-offs and considers that it is, at this stage, uncertain that the proposed aid package strikes the right balance in mitigating risks while also ensuring that the investor retains the necessary incentives to behave efficiently on the market, in a way that minimises those risks. The Commission also doubts whether a higher degree of risk exposure to the beneficiary would not have been more appropriate. By taking away important market risks, certain incentives of competitive and efficient behaviour may have been hampered. For example, a two-way CfD based on a different design without a LFSP adjustment mechanism and thus without an ex-post compensation to PEJ could leave the beneficiary more exposed to demand and supply levels and to the price risk that ensues. A different CfD design could maintain better and more direct economic incentives to modulate power production in response to the market price signal, not only on average over the whole year as the design proposed by the Polish authorities does, but on a more granular basis. All measures taken together reduce the various risks to which the beneficiary is exposed considerably.

(270)

Furthermore, it is unclear to the Commission at this stage whether the combination of the two-way CfD (which removes both market and currency risks) together with the State guarantees and the equity injection constitute an appropriate instrument, especially when compared to other instruments which were deemed appropriate for past nuclear investments, which seem to have benefitted of lower protection against certain risks. For example, the exchange rate risk protections under the CfD appears to cover not only debt obligations but also operational costs denominated in foreign currency. It is therefore unclear whether the balance struck by Poland in using multiple measures is the right one, and whether alternative instruments, the consideration of only some of the proposed measures, or a different balance among the proposed measures might be able to achieve the same objectives with less aid or distortions to competition.

(271)

For those reasons, the Commission has doubts as to whether the combination of the proposed support measures and the corresponding setup of the Project is appropriate for ensuring the development of that Project. The Commission therefore invites interested parties to comment on the appropriateness of the aid instruments proposed by Poland.

7.4.2.5.   Proportionality

(272)

To assess the proportionality of a measure, the Commission must verify that the measure is limited to the minimum that enables the successful completion of the Project for the attainment of the objective pursued.

(273)

The assessment of the proportionality of the aid in the present case needs to take into account the combination of the measures proposed by the Polish authorities, namely the equity injection, the State guarantees and the two-way CfD (including the coverage of exchange rate risk).

7.4.2.5.1.   Duration of the direct price support

(274)

The Commission notes that the notified measures, including the two-way CfD, constitutes an aid measure with particularly long duration (60 years) for the energy sector. The Polish authorities explain that the duration of the support is directly linked to the operating lifetime expected for the newly built reactors. They further submit that the two-way CfD is intended to provide both long-term revenues stability for investment repayment and coverage of operating costs and a reasonable profit for the investor, as well as protection for final consumers against volatility of prices in the electricity market over the entire investment horizon.

(275)

The assumption presented by the Polish authorities, according to which the NPP would have an operational lifetime of 60 years seems to be in line with a number of studies (122) recognised by the Commission as well as with the operational lifetime expected for newly built nuclear power plants in Europe.

(276)

It is however unclear why such a long duration of the measure supporting the Project would be warranted in the present case, in particular when the major financing for the investment costs comes in the form of equity and no-fee guarantees on all debt financing raised for the project. Unless the debt financing is not refinanced earlier, a large share of the debt financing is expected to have a 22-year repayment period post commercial operation date (see recital (189)). The major investment for the Project will be financed through the debt financing and equity. Therefore, the compensation for the Project investments costs should in principle correspond to the modalities of the debt financing repayment (123) including the duration.

(277)

The Commission doubts whether supporting the operator for a period of 60 years corresponds to the minimum required to enable PEJ to carry out the Project. For example, the CfD for Hinkley Point C was concluded for 35 years. The debt financing repayment period in PAKS II case was only 21 years and the measure was not accompanied by any other form of operating aid. The offtake contract supporting the construction and operation of a new NPP at the Dukovany site was ultimately set at 40 years (124). While long-term revenue protection is a frequent requirement to enable large long-term investments in nuclear energy, such protection does not necessarily always need to cover the entire operational lifetime of a project.

(278)

Finally, while it is true that a two-way CfD provides a limit to excess remuneration in times of very high prices and volatile electricity markets, a similar limitation could be achieved through the imposition, after the expiration of the direct price support measure of the claw-back or gain-sharing mechanism, ensuring that any upside from higher-than-expected electricity market prices after the expiration of the CfD would be shared with the State, without necessarily ensuring downside protection.

7.4.2.5.2.   Support calculated at the minimum required

(279)

The State guarantees reduce the risks for the beneficiary and are supplemented with the equity injection and the two-way CfD. The lowering of the risks and financial facilitation should therefore be duly reflected in the final determination of the State aid required for the realisation of the Project and in the remuneration of the Project. The Polish authorities consider that all the measures ensure that the right balance is drawn between the risks of the Project and the benefits for the State and the beneficiary. However, the Commission notes that the balance between equity and debt financing is still subject to uncertainty and that other projects in the nuclear sector have a larger debt component and a lower equity component, which can be considered less distortive.

(280)

Moreover, the Polish authorities explain that the combination of measures was necessary to reduce the strike price from [780-860] PLN/MWh without State aid to a strike price of [470-550] PLN/MWh in the base scenario. According to the Polish authorities’ estimations, this corresponds to a reduction of the levered cost of equity from [12-14] % to [10-12] %. In a situation where the market price is higher than the strike price of the two-way CfD, this would allow additional benefits from the Project to be returned to the State. Such a return can take the form of cash flows towards the CfD Fund or, should the revenues flow into the budget used for renewable support, in the form of a reduction of the levy charged to consumers used for financing the support of electricity from RES. However, if the market prices are lower, that gap would need to be filled by the State budget and/or via another financing method such as a surcharge on energy consumption.

(281)

The Polish authorities use a financial model to estimate the strike price of the CfD, which depends on the assumed equity IRR for the beneficiary and time period of the two-way CfD as well as several assumptions and parameters, including on operating costs and capital expenditures (see section 3.5.1).

(282)

Given the uncertainty surrounding certain assumptions and parameters (see recital (73)), in particular the cost parameters, and the fact that they have an important impact on the model results, the Commission will analyse this model further and has doubts as to whether it sufficiently ensures that support is reduced to the minimum required for PEJ to carry out the Project.

(283)

To estimate the discount rate, the Polish authorities use the WACC approach (see section 3.5.2). They calculate, first, the WACC without State aid and, then, the WACC with State aid (i.e., the WACC when the three aid measures are included). The Polish authorities explain that the WACC with State aid is lower than the WACC without State aid. This is because the proposed State aid measures reduce the risk of the Project. Both WACCs include a PSRP (see recital (85)).

(284)

The Commission has doubts on the methodology used to estimate the PSRP. The methodology used by Poland is novel and, as such, it needs to be carefully assessed. Moreover, the Commission has doubts on the inclusion of a PSRP in the WACC with State aid, given the reduced risk exposure of the beneficiary due to the measures described in sections 5.1 to 5.3. Such a premium was not included in the final assessment of the WACC in comparable cases (125).

(285)

Further, the Commission has doubts on the way some of the WACC parameters (see section 3.5.2) were estimated, for example the risk-free rate and the beta that were used in the WACC with State Aid.

(286)

The Commission further notes that the WACC analysis is not supported by a benchmarking analysis against projects and investments with a risk profile similar to that of the Project. This analysis is needed to corroborate the WACC level.

(287)

Moreover, the Commission doubts whether the 100% State guarantees (measure 2) should be provided without charging a fee. While the Polish authorities submitted that the effect would be neutral for the owners, since PEJ is 100% State-owned, the Commission considers that beyond the costs stemming from interest charges, a guarantee fee may increase incentives to ensure the NPP starts as early as possible commercial operations and repays the debt.

(288)

Concerning the exchange rate risk described in section 5.3.9, the Commission acknowledges the arguments put forward by the Polish authorities that the amount of debt financing provided in foreign currency appears to be of a scale that would be difficult to hedge on the market. However, the Commission doubts whether all exchange rate risks, including that caused by operational expenses denominated in foreign currency, throughout the total length of the two-way CfD should be covered by this settlement and considers that a narrower scope linked to only the debt repayment would be less distortive and still address the risks identified by the Polish authorities.

(289)

The Commission further notes that the Polish authorities have not designed a dedicated overcompensation mechanism to ensure that PEJ does not benefit unduly from the measures throughout the operational lifetime of the NPP. As acknowledged by Poland, the NPP will have opportunities for additional potential gains from price arbitrage on the spot market for volumes sold via mid or long-term contracts (see footnote 70). Since that difference will not be settled via the CfD, it represents additional gains on top of the CfD’s strike price, which are not shared with the State and may lead to overcompensation. Also considering the concerns raised by the excessive proposed length of the CfD, the Commission therefore doubts whether this approach is appropriate and proportionate.

7.4.2.5.3.   Choice of PEJ as the project promoter

(290)

The Commission notes that the project promoter selected by the Polish authorities is the newly created special-purpose vehicle PEJ. While the Polish authorities explain the reasons behind this choice (see recital (103) and (105)), it cannot be at this stage fully excluded that having an open selection process for the project promoter might have been able to lead to a reduction of the support necessary for the realisation of the Project.

(291)

The Polish authorities consider PEJ as the only choice for developing the Project given its acquired know-how and administrative and contractual advancements. They explain that the Project is by far the most advanced large-scale nuclear investment in Poland and that selecting a new company as beneficiary would not be feasible and lead to years of delay (see recitals (103) and (105)). However, Poland also acknowledges that PEJ is a standalone special purpose vehicle characterised by poor financial quality which requires significant support in the form of State guarantees and risk protection to make it possible to attract project funding, in addition to a substantial equity injection (see recital(117)).

(292)

The Commission acknowledges that the arguments put forward by the Polish authorities do support their choice. However, it is also clear that there has been no tender or consultation allowing competitors of PEJ to express their interest for the development of the Project and there is thus no overview of all potential alternatives (see recital (106)).

(293)

Therefore, the Commission has doubts whether other potential operators could have been considered and if PEJ would be the most efficient operator. Despite the justification provided by the Polish authorities regarding the selection of PEJ as promoter of the Project and operator of the NPP once built, it is not clear that PEJ is indeed the only possible choice for developing the Project in Poland. Furthermore, it is not obvious that the potential additional costs and delays likely to be incurred by a potential new project promoter would be large enough as to offset the potential additional aid required by PEJ given its limited capacity to attract project financing from the market without significant State involvement.

(294)

For these reasons, the Commission raises doubts as regards PEJ’s selection and invites third parties to provide comments on this element.

7.4.2.5.4.   Conclusion on proportionality

(295)

For reasons outlined in the preceding sections, the Commission has doubts as to whether the combination of the proposed support measures and the corresponding aid package for the Project is proportionate for ensuring the development of that Project. The Commission therefore invites interested parties to comment on the proportionality of the aid measures proposed by Poland.

7.4.2.6.   Avoidance of undue negative effects on competition and trade and balancing test

(296)

For the aid to be compatible with the internal market, the negative effects of the aid measure in terms of distortions of competition and impact on trade between Member States must be limited and outweighed by the positive effects. In particular, it is important to avoid any potential undue negative effects on competition and trade.

(297)

Poland claims that the measures do not have any undue distortive effects on competition and trade between Member States. In particular, Poland states that the NPP will enhance the security of supply in the local market and across the region by providing additional dispatchable capacity in electricity generation and that there are currently no commercially available low-carbon alternatives to nuclear power provided stable load over long period of times. Secondly, Poland submits that a new market actor will operate in the power generation sector due to the aid, lowering the level of concentration in the market. Thirdly, Poland explains that PEJ will be obliged to sell energy on organised markets in a non-discriminatory and transparent manner under regulatory oversight. Therefore, the energy sold by PEJ will be available to all interested market participants, at prices levels that reflect market benchmarks, either through open auctions for long-term products, or via power exchanges.

(298)

The Commission acknowledges the good level of interconnection of the Polish market (recital (36)) and the security of supply concerns the Polish authorities raise with respect to the progressive phase out of coal in the following years (see section 2.2). Even though the Commission is not certain that the size of the expected capacity gap calculated by the Polish authorities is correct, and takes full account of the most recent expected developments in RES and flexibility measures, as well as the potential for imports and potential extensions of the capacity market, also taking into account the results of the 2023 ERAA (recital (19)), it is plausible that RES alone will not allow replacing the coal-fuelled capacity which is expected to leave the market and fully ensure security of supply.

(299)

However, it is clear that the Project will affect both the national and the regional electricity markets. In order to analyse the market impact of the Project, the Commission will examine the impact on competition caused by the aid measures. In particular, the Commission considers that the CfD design and corresponding provisions may have the potential to distort competition on the electricity market and affect trade between Member States.

7.4.2.6.1.   The design of the two-way CfD

(300)

As explained in section 5.3, the Polish authorities intend to provide to PEJ direct price support in the form of a two-way CfD. In their view, the CfD allows to reduce the risks associated with the uncertainty on the development of the electricity market, including price fluctuations, ensures the revenues necessary to obtain and repay debt financing, and provides investors with sufficient security of a reasonable return, which should enable the massive upfront capital investment to be made.

(301)

While the main objective of CfD is to provide revenue certainty and market risk mitigation, the Commission considers that it should be duly designed so as not to distort the efficient operation of the beneficiary, which should be guided by the market price signal and result in system-optimal choices. Specifically, the CfD should not distort the operator’s incentives to produce when the market price is above its short-term variable costs and to reduce its production when prices fall below that level. The beneficiary should also be incentivised to schedule the maintenance of the NPP during lower-price periods.

(302)

While nuclear generation assets generally aim to produce with stable profiles and high availability, a future generation mix marked by higher shares of renewable energies with very low marginal costs could, depending on other developments of various flexibility measures such as storage or demand response, result in higher volatility including periods of low or even negative prices. In such situations, reductions in output also of nuclear generation could be an efficient reaction to market signals.

(303)

In the current case, the Commission is concerned that market distortions may occur because the proposed CfD design could prevent certain market price signals from reaching the power plant operator and lead to operation that is inefficient from a system perspective and which may distort the merit order in the electricity market.

(304)

Firstly, the Commission notes that the CfD is designed so that the physical production (126) of the NPP determines its remuneration. Thus, the CfD formula essentially provides a fixed revenue per MWh produced, based on the strike price and the actual output of electricity. Under this CfD design, the generator has the incentive to maximize the output produced, regardless of market signals. Since the revenue of the NPP across all production hours equals the strike price, there is no incentive for the NPP to maximise the value added of the output rather than the volume of the output. This leads to a risk of distortion of market operations regarding intertemporal substitutability of production (e.g. the operator has no incentive to plan maintenance when the prices are the lowest) and a potential distortion of the merit order in the electricity market if the operator would continue producing when prices drop below its short-term variable cost of operating the plant. The Commission considers that the inclusion of the spot arbitrage volume (i.e. the volume sold through long and mid-term contracts but not produced following price arbitrage) into the CfD volume used for the monthly settlement might at best limit the production in periods of low prices for the volumes that have been previously sold on the forward market, but not provide for other necessary efficient operation incentives.

(305)

The Polish authorities recognised the misaligned incentives caused by directly linking revenues with output volumes under the CfD (see recital (146)) and explained they would introduce an approach on the basis of tailor-made rules as well as market and financial incentives that would force the NPP to behave efficiently on the market and reflect market circumstances. Specifically, regulatory safeguards would ensure that the NPP is (i) obliged to offer all available electricity on the market, (ii) prohibited to bid below its marginal cost. Moreover, the LFSP adjustment mechanism, in the view of the Polish authorities and the design of the reference price preserve incentives to operate efficiently in the electricity markets. However, concerning the prescriptive elements, the Commission considers that such an indirect approach, relying on a prohibition (i.e. to bid below marginal costs) rather than direct economic incentives in-built in the CfD design is insufficient by itself to ensure, at all times and circumstances, and over periods that span far into the future, that the NPP will behave efficiently in the market. Furthermore, it is not clear how that prohibition would be enforced and verified in practice, by whom, and whether it will be accompanied by an effective penalty system preventing distortive behaviour. Therefore, the Commission considers at this stage that direct economic incentives in-built into the CfD design features would be necessary to ensure that incentives to follow the market signal reliably reach the operator of the NPP, avoiding undue distortions of the operation, dispatch and maintenance planning of the NPP.

(306)

Second, the Commission notes that while the CfD ensures that electricity production of the beneficiary will be remunerated at strike price during the monthly CfD settlements, the Polish authorities also provide for an additional settlement mechanism triggered annually to ensure that the remuneration remain at an adequate level, in the form of the two-way LFSP adjustment mechanism (see section 5.3.8.3). Under this mechanism, the strike price is adjusted ex-post, to mitigate volume risk resulting from longer than expected periods in which the NPP would not run as a result of market prices lower than the NPP’s marginal costs, which would translate into a lower than forecasted load factor. However, this mechanism would not mitigate operational risk due to unplanned outages, breakdown and repairs. The Commission considers that the proposed ex-post adjustment mechanism could in principle mitigate volume risks due to low market prices but does not itself disincentivise the NPP to produce at those times. Additionally, even if the NPP were to produce the expected volume of electricity throughout the year, the incentives would be only ensured on average for the year, and not necessarily in a timely manner. Further, the design of the reference price includes also the price obtained from PPA auctions, which are assessed in more detail in recitals (313) and (314).

(307)

In light of the above considerations, at this stage, the Commission has doubts that the CfD design and the corresponding additional economic and regulatory provisions foreseen by the Polish authorities are sufficient to ensure that the market price signal always reaches the NPP operator, providing the necessary incentives to modulate production in reaction to the price signal and to plan maintenance schedule efficiently.

7.4.2.6.2.   Effects on market structure and potential spillover of aid

(308)

While PEJ as a new company would not accumulate significant market power as a result of the Project, it cannot be fully excluded that the electricity trading activity of the new NPP will be coordinated with (or even outsourced to), i.e. it will not compete with, other State-owned incumbents operating in the electricity sector, possibly consolidating their market power. The Polish authorities submit that there are currently no plans to consolidate PEJ with other State-owned companies active on the electricity market and that PEJ would be legally and functionally independent from any other major operator in the Polish electricity market.

(309)

To fully exclude such a possibility, the Commission considers, at this stage, that further safeguards and commitments would be necessary to be put in place to ensure that such separation would be maintained over the long term, removing thus any possibilities that market power of incumbents could be consolidated by the aid measure in question.

(310)

Similarly, the Commission considers that without clear provisions and conditions on the trading strategy of the NPP, a risk of aid spilling-over to final electricity consumers via bilateral contracts at below-market prices cannot be fully excluded.

(311)

As explained in section 5.3.7, PEJ will be allowed to sell electricity only via organised markets but will have the flexibility to determine its sales strategy. The Polish authorities envisage that, primarily, the electricity output of the NPP will be sold by means of auctions in the form of long-term contract (‘PPAs’). The volume of electricity that is not sold in PPA auctions will be offered on the Polish power exchange, on the forward/futures market or the spot markets. If a given volume of electricity is not sold on the forward/futures market, it would have to be offered on the day-ahead market and the intraday market.

(312)

As regards PPAs, the Polish authorities consider that the organisation of non-discriminatory, objective, and transparent auctions to award long-term contracts under the supervision of the NRA, together with the fact that the NPP will be a price taker, not a price maker, should ensure that the achieved prices of the PPA contracts would be the result of a purely market driven process and remove possibilities that aid is passed on to PPA counterparties.

(313)

At this stage, the Commission does not have sufficient information to allow it to conclude that the PPA auctions would be sufficiently open and competitive, with volumes set at levels that constitute a bidding constraint, and eligibility criteria that ensure open and non-discriminatory access to all potential bidders, so as to avoid any advantage to the beneficiaries. In addition, the Commission considers that the Polish authorities’ intention to introduce formal requirements for participants to conduct economic activity in Poland (see footnote 79) does not appear justified and could result in a restriction of cross-border trade of electricity.

(314)

Furthermore, the inclusion of the actual PPA prices realised by the NPP in the calculation of the reference price for the CfD and of the PPA volumes in the power volumes covered by the CfD may remove incentives for PEJ to seek the best price for the long-term contracts offered since PEJ would receive a CfD settlement for the difference between the strike price and the actual PPA price for all volumes sold under PPAs. PEJ is hence financially indifferent to the actual PPA price as the final remuneration obtained by PEJ on these volumes would eventually be the strike price.

(315)

The Polish authorities also submitted their intention to offer PPAs with physical delivery (see footnote 78). At this stage, the Commission is of the opinion that such provisions, unlike financial PPAs, may have the effect of reducing the liquidity in the electricity markets and therefore affect the good functioning of the markets.

(316)

For the reasons set out above, the Commission has doubts on the impact that the notified measures will have on competition and trade in the electricity markets.

8.   COMMISSION DOUBTS AND GROUNDS FOR OPENING THE FORMAL INVESTIGATION PROCEDURE

(317)

The Commission considers at this stage that the notified measures involve State aid within the meaning of Article 107(1) TFEU, which supports the development of the economic activity of nuclear electricity generation. The Commission also considers at this stage that State support for the Project is necessary and has an incentive effect.

(318)

At this stage, based on the information submitted by Poland, the Commission does not have sufficient elements to conclude whether the conditions for the compatibility of the aid with the internal market in accordance with Article 107(3)(c) TFEU are met, in particular whether the aid is appropriate and proportionate, and that undue negative effects on competition and trade are avoided. Furthermore, the Commission cannot confirm, at this stage, that the design of two-way CfD, as proposed by the Polish authorities, fully complies with the design principles set out in Article 19d(2) of the Electricity Market Design Regulation and that the proposed measures do not infringe relevant provisions of EU law.

(319)

In the light of the foregoing considerations, the Commission, acting under the procedure laid down in Article 108(2) TFEU, requests Poland to submit its comments and to provide all such information as may help to assess the aid, within one month of the date of receipt of this letter. It requests your authorities to forward a copy of this letter to the potential recipient of the aid immediately.

(320)

The Commission wishes to remind Poland that Article 108(3) of the TFEU has suspensory effect and would draw your attention to Article 16 of Council Regulation (EU) 2015/1589, which provides that all unlawful aid may be recovered from the recipient.

(321)

The Commission warns Poland that it will inform interested parties by publishing this letter and a meaningful summary of it in the Official Journal of the European Union. It will also inform interested parties in the EFTA countries which are signatories to the EEA Agreement, by publication of a notice in the EEA Supplement to the Official Journal of the European Union and will inform the EFTA Surveillance Authority by sending a copy of this letter. All such interested parties will be invited to submit their comments within one month of the date of such publication.

---

(1)  Regulation No 1 determining the languages to be used by the European Economic Community (OJ 17, 6.10.1958, p. 385).

(2)  Annual Report of PSE for 2023 (available at: https://www.pse.pl/dane-systemowe/funkcjonowanie-kse/raporty-roczne-z-funkcjonowania-kse-za-rok/raporty-za-rok-2023).

(3)  In the years 2019-2023, the compound annual growth rate (‘CAGR’) stood at 9.7% y/y. Annual Reports of PSE for 2019-2023.

(4)  Electricity generation from distributed and non-controlled RES (not including commercial hydropower plants) is growing, reaching an average annual growth rate of 24.5% in the years 2019-2022.

(5)  Annual Report of PSE for 2023.

(6)  Annual Reports of PSE for 2019-2023.

(7)  With two years (2015 and 2022) representing the exceptions from the general trend.

(8)  Established through Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC (OJ L 275, 25.10.2003, p. 32).

(9)  The Polish authorities submitted the preliminary version of the draft baseline scenario for the NECP update to the Commission in March 2024. These documents are available at: https://www.gov.pl/web/klimat/polska-przekazala-do-ke-wstepna-wersje-aktualizacji-krajowego-planu-w-dziedzinie-energii-i-klimatu-do-2030-r.. Most recently, Poland published a revised draft for consultation, available at: https://www.gov.pl/web/klimat/projekt-krajowego-planu-w-dziedzinie-energii-i-klimatu-do-2030-r--wersja-do-konsultacji-publicznych-z-102024-r.

(10)  Published by the TSO in 2022 after prior approval by the national regulatory agency (‘NRA’) and available at: https://www.pse.pl/documents/31287/ce8af969-ffc9-43bd-a6e8-668ef8ba6919?safeargs=646f776e6c6f61643d74727565.

(11)  Mostly hard coal or lignite fuelled power plants which are being successively phased-out due to the ongoing energy transformation process of the Polish energy sector.

(12)  Referring to the assumption of no profitability of coal-fired units after 1 July 2025.

(13)  Development Plan, p. 27.

(14)  Development Plan, Chapter 9, pp. 103-107.

(15)  Development Plan, p. 106.

(16)  Development Plan, p. 99.

(17)  Development Plan, p. 99.

(18)  Commission decision of 7 February 2018 in State aid case SA.46100 /2017(N) – Poland – Planned Polish capacity mechanism (OJ C 462, 21.12.2018, p. 1).

(19)  Carried out during last two months of the year n-5.

(20)  An additional set of four simultaneous auctions (one per quarter of the delivery year) carried out in the first quarter of the year n-1.

(21)  As reflected in the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank, A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy, COM/2015/080 final.

(22)  Resolution No. 15 of the Council of Ministers of 28 January 2014 on the multi-annual program under the name “Polish Nuclear Energy Program”, Official Gazette of the Government of the Republic of Poland (Monitor Polski) of 2014, item 502.

(23)  Appendix to Resolution No. 141 of the Council of Ministers of 2nd October 2020 on updating the multi-annual program under the name “Polish Nuclear Energy Program”, Official Gazette of the Government of the Republic of Poland (Monitor Polski) of 2020, item 946. It is available in English at: https://www.gov.pl/web/polski-atom/program-polskiej-energetyki-jadrowej-2020-r.

(24)  Energy Policy of Poland until 2040 adopted by way of Resolution No. 22/2021 of the Council of Ministers of 2 February 2021, published by the Announcement of the Minister of Climate and Environment of 2nd March 2021 on the energy policy of the State until 2040, Official Gazette of the Government of the Republic of Poland (Monitor Polski) of 2021, item 264.

(25)  Energy Law Act of 10 April 1997 (Consolidated text: Journal of Laws 2024, item 266), available at: https://isap.sejm.gov.pl/isap.nsf/DocDetails.xsp?id=wdu19970540348.

(26)  System-wide costs refer to costs of transmission and distribution grid development and system flexibility costs, the variability and size of which depends on the share of non-controllable RES in electricity production.

(27)  PNPP, p. 38.

(28)  Comparative analysis of the costs of ensuring stable and reliable electricity supply by nuclear technologies and RES sources, which was prepared as an update of a study prepared in 2022. The study compared the most important technological alternatives in electricity production that would provide the Polish electricity system with 6 GW of continuously available dispatchable capacity for a period of 30 years. The installed capacities are intended to guarantee energy security for end consumers and for the electricity system, by continuously meeting the demand for electricity at the lowest possible cost. 6 GW corresponds to approximately 20% of peak power demand in 2032 according to the Development Plan.

(29)  For instance, this is recognised in both the PEP2040, the most recent draft of the NECP and the development plan of the TSO.

(30)  Available at: https://www.gov.pl/web/klimat/sprawozdanie-z-realizacji-polskiego-planu-wdrazania-reform-rynku-energii-elektrycznej.

(31)  Published every year by ENTSO-E, which, among other topics, evaluates the risk of lack of adequacy in the Member States in the coming years, available at: https://www.entsoe.eu/outlooks/eraa/2023.

(32)  See Article 19d of Regulation (EU) 2019/943, as introduced by Regulation (EU) 2024/1747.

(33)  See Resolution no. 4/2009 of the Council of the Ministers of 13 January 2009 on nuclear power development activities.

(34)  Resolution no 215/2022 of the Council of Ministers of 2 November 2022 on the construction of large-scale nuclear power plants in the Republic of Poland, available at: https://monitorpolski.gov.pl/M2022000112401.pdf.

(35)  Poland explained that strategic contracts are contracts that have or could have a direct impact on the implementation of the PNPP.

(36)  Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC Text with EEA relevance, OJ L 94, 28.3.2014, p. 243–374.

(37)  Procurement rules, which were adopted by PEJ, that – to the greatest extent possible – incorporate and are aligned with the provisions of Directive 2014/25/EU, while still providing mechanisms to ensure that the Polish State’s (energy) security interests are preserved.

(38)  Commission Delegated Regulation (EU) 2022/1214 of 9 March 2022 amending Delegated Regulation (EU) 2021/2139 as regards economic activities in certain energy sectors and Delegated Regulation (EU) 2021/2178 as regards specific public disclosures for those economic activities (OJ L 188, 15.7.2022, p. 1).

(39)  Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088 (OJ L 198, 22.6.2020, p. 13).

(40)  See recital (79) as well.

(41)  This includes the total EPC cost, owners expenses, additional infrastructure and utilities. According to the Polish authorities, this equals EUR 32.43 billion based on the average PLN/EUR exchange rate used in the financial model and EUR 44.97 billion based on the current PLN/EUR exchange rate.

(42)  The strike price is calculated in real terms.

(43)  The utilization, or load factor, for a given period, is the ratio of the energy which the power reactor unit has produced over that period divided by the energy it would have produced at its reference power capacity over that period. For example, a 50% load factor indicates the plant would produce the equivalent of 4380 hours of full output per year [365 x 24 x 50%]. Thus, a plant with 1MW of capacity and a load factor of 50% should produce 4380 MWh in a year.

(44)  This cost is derived from the Council of Ministers Regulation of 10 October 2012 issued based on the Polish Atomic Law and, as per the Polish authorities, the amount specified in the regulation may be subject to future changes.

(45)  The funding gap is the difference between the Net Present Value of the factual scenario (i.e., the Project) and the Net Present Value of the counterfactual scenario (i.e., no alternative investment).

(46)  Under the assumption that in the absence of aid there would be no alternative investment (i.e., the NPV of the counterfactual scenario would be nil), the funding gap is equal to the NPV of the Project.

(47)  The unlevered CoE is that CoE estimated under the assumption of the absence of debt financing. The levered CoE, instead, accounts for the presence of debt.

(48)  Elroy Dimson, Paul Marsh, Mike Staunton, Global Investment Returns Yearbook 2024, UBS, Table 11.

(49)  This figure is based on a sample of a global sample of publicly traded power companies, see Damodaran Online: Home Page for Aswath Damodaran (nyu.edu).

(50)  The leverage is the percentage of debt in the capital structure. Poland applies assumes a target leverage of [50-60]% based on the average values observed for comparable companies.

(51)  This is calculated using the following assumptions: for the risk-free rate, Polish sovereign bonds (securities with a 10-year term as the NPP is expected to incur half of the capital investment in the next 10 years). Poland then adds a [0.7-1.8]% margin to reflect the additional macroeconomic risks that capital costs bear and adjusts the resulting cost of debt by Poland’s income tax of 19%.

(52)  

.

(53)  The unlevered CoE goes from [9.5-11.5]% in the without State aid scenario to [7-9]% in the with State aid scenario.

(54)  NERA, “Changes in Hurdle Rates for Low Carbon Generation Technologies due to the Shift from the UK Renewables Obligation to a Contracts for Difference Regime”, dated 9 December 2013. NERA updated its estimates in 2015. NERA, “Hurdle Rates update for Generation Technologies”, dated July 2015. The 2013 NERA paper indicates the CfD impact in terms of hurdle rates, while the updated 2015 paper provides the estimated beta impact. Europe Economics, “Cost of Capital Update for Electricity Generation, Storage and Demand Side Response Technologies”, dated November 2018, p. 40.

(55)  It should be noted that here (i) the operational cash flows assume the existence of a two-way CfD; (ii) the applicable discount rates for the operational cash flows and the capital expenditure incorporate the impact of the two-way CfD on the risk-free rate and the asset beta as discussed in points (a) and (b) of above.

(56)  The tax rate applied is 19%, which is the Polish corporate tax rate.

(57)  The Polish authorities note that they submitted a generic market-based WACC level, however the Polish authorities do not rule out that they would consider submitting a lower-level WACC adopted for the two-way CfD at a later stage.

(58)  Poland explained that due to the unique character of each NPP construction, including the need to individually calculate the estimated amount of State aid and demonstrate its proportionality, appropriateness, and necessity, the NPP Act will grant individual aid only to PEJ as the sole investor in the Project. Poland considers that this approach is in line with past practice on other NPP projects in the EU.

(59)  The Polish authorities clarify that the only case where PEJ will be allowed to trade electricity other than produced in its NPP is related to the market incentive mechanism where PEJ is strongly incentivised to lower the NPP production and honour its delivery obligations under previously concluded contracts with electricity purchased on the market whenever prices on the spot market are below NPP’s variable costs. However, this will be strictly limited to these specific spot market price-related circumstances and to the volumes previously sold by the NPP.

(60)  Available at: https://www.gov.pl/web/gdos/postanowienia-generalnego-dyrektora-ochrony-srodowiska-z-dnia-1-lutego-2024-r-znak-doos-wdszoo420232023aka.

(61)  Calculated with the official exchange rate of 18 September 2024: PLN/EUR 4.27 (OJ C, C/2024/5027, 19.9.2024, ELI: http://data.europa.eu/eli/C/2024/5027/oj).

(62)  This was also the case because the Polish authorities consider that there are practically no reference transactions for the construction of a NPP with a dominant senior debt share in the whole financing structure.

(63)  The Arrangement is transposed in EU law through Regulation (EU) No 1233/2011 of the European Parliament and of the Council of 16 November 2011 on the application of certain guidelines in the field of officially supported export credits and repealing Council Decisions 2001/76/EC and 2001/77/EC (OJ L 326, 8.12.2011, p. 45).

(64)  The Polish authorities further clarify that State guarantees will also be provided to PEJ in order to make currency and interest rate hedging possible during the construction period as financial institutions will require collateral for granting treasury limits. Such collateral in the form of cash can also be obtained through drawing additional debt however State guarantees are envisaged to be a much more efficient solution.

(65)  Commission Decision of 8 December 2020 in State aid case SA.55388 – Cyprus – State aid to Cyprus LNG Terminal (OJ C 25, 22.1.2021, p. 1); Commission Decision of 19 September 2019 in State aid case SA.53074 – Lithuania – Modification of investment aid approved under the Commission decision SA.36740 (2013/NN) aid to AB Klaipėdos nafta (OJ C 381, 8.11.2019, p. 1); Commission Decision of 8 November 2018 in State aid cases SA.51023 - Bulgaria and SA.52049 – Greece – State aid for the implementation of Gas Interconnector Greece-Bulgaria (OJ C 61, 15.2.2019, p. 1).

(66)  Commission Decision (EU) 2017/2112 of 6 March 2017 on the measure/aid scheme/State aid SA.38454 — 2015/C (ex 2015/N) which Hungary is planning to implement for supporting the development of two new nuclear reactors at Paks II nuclear power station (notified under document C(2017) 1486) (OJ L 317, 1.12.2017, p. 45).

(67)  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, 28.4.2015, p. 44).

(68)  Commission Decision 2017/2112, recital (313).

(69)  Regulation (EU) 2024/1747 of the European Parliament and of the Council of 13 June 2024 amending Regulations (EU) 2019/942 and (EU) 2019/943 as regards improving the Union’s electricity market design (OJ L, 2024/1747, 26.6.2024, ELI: http://data.europa.eu/eli/reg/2024/1747/oj).

(70)  The Polish authorities explain that the NPP will have an incentive to use price arbitrage in relation to already sold electricity and adjust its production to hourly price changes, like all other power plants active on the electricity market. The NPP will sell electricity in different forward contracts with determined delivery dates. The potential difference between the reference prices of these contracts and the CfD strike price would be known to the NPP. As the NPP knows its variable costs, it will be able to estimate its revenues and income. Since all of the electricity sold in forward contracts will be covered by the CfD, should prices on the spot market be lower than the NPP’s variable costs, the NPP will have an opportunity to seek additional profit from price arbitrage. Thus, the NPP could lower the production (therefore not bear variable costs) and purchase electricity on the spot market instead of producing it in order to fulfil previously concluded forward contracts. Those previously concluded forward contracts will be subject fully (i.e. for electricity directly generated by the NPP and electricity initially planned to be generated by NPP but reduced by NPP because of price arbitrage) to a CfD settlement with the CfD counterparty (based on the relevant reference price). The difference between the NPP’s variable costs for each output of electricity unit and the spot market price will not be settled with the CfD counterparty, therefore creating a potential profit for NPP. The aforementioned price arbitrage provides incentives for the NPP to react efficiently to hourly market signals, however it would not be applied automatically. The NPP would decide whether to seek spot market price arbitrage opportunities, especially taking into account the technical characteristics of the NPP’s operation, nuclear safety and regulatory requirements as well as potential costs of hourly changes in the production (e.g. related to ramping-down and/or ramping-up). Given the economic nature of these incentives, it is reasonable to assume that the NPP will seek to benefit from them in order to generate additional income.

(71)  The reference price will be calculated based on the most relevant indices in Poland when the NPP commences its operations. The NPP will not be limited in trading only on TGE. If the electricity is traded also on other platforms, relevant indices for those platforms will be incorporated in the reference price formula.

(72)  According to the Polish authorities, the exact number to be used for this term as well as the other terms referring to ‘few’, will be pre-defined and will depend on what is being traded on the power exchange and how liquid the products are (currently it is possible to buy yearly contracts up to 4 years in advance, quarterly contracts up to 6 quarters in advance, monthly contracts up to 6 months in advance, weekly contracts up to 5 weeks in advance).

(73)  Subject to change in case of significant market and power exchange reporting changes.

(74)  The Act of 17 December 2020 on the promotion of electricity generation in offshore wind farms, i.e. Journal of Laws (Dz. U.) of 2023, item 1385; Commission Decision of 20 May 2021 on State aid SA.55940 - Poland – Dedicated scheme for offshore wind installations (OJ C260, 2.7.2021, p. 3).

(75)  Except for electricity sold in advance in other products - forward products on the power exchange and PPAs with the same delivery date.

(76)  As defined in the REMIT Regulation ‘organised marketplace’ means an energy exchange, an energy broker, an energy capacity platform or any other system or facility in which multiple third-party buying or selling interests in wholesale energy products interact in a manner that may result in a transaction. Therefore, the Polish authorities consider that all of the electricity from the NPP will be sold via organised markets within the meaning of the REMIT Regulation, which excludes bilaterally negotiated agreements in over-the-counter market.

(77)  Regulation No 1227/2011 of the European Parliament and the Council of 25 October 2011 on wholesale energy market integrity and transparency (OJ L 326, 8.12.2011, p. 1).

(78)  Poland explained that its intention is that these contracts will entail physical delivery and noted that contracts with physical delivery are traded both on the forward and spot market on the Polish Power Exchange.

(79)  This will include financial and credibility safeguards, security concerns and administrative requirements. The administrative requirements would relate to licensing requirements, formal requirement to conduct economic activity in Poland in compliance with basic principles of EU law and requirements related to any criminal record of natural people in managerial capacities and owners of entities.

(80)  Towarowa Giełda Energii S.A. (‘TGE’) acting as a nominated electricity market operator in Poland, e.g. currently the Polish Power Exchange, EPEX, NordPool.

(81)  Based on the Reference plant of AP1000 as provided by Westinghouse. Actual maximum technical load factor for the specific location of the project will be calculated by the EPC supplier during the conceptual design engineering phase.

(82)  See footnote 67.

(83)  ECLI:EU:C:2020:742.

(84)  See recital (224) of the Opening decision in the Dukovany case, available here: https://ec.europa.eu/competition/state_aid/cases1/202249/SA_58207_0010CD84-0000-C7E0-A425-6311047577E0_272_1.pdf.

(85)  For example, concerns of the Commission, which were raised in the Dukovany case.

(86)  The Polish authorities explained further that this refers to the impact of periods of spot market prices lower than the NPP’s variable costs which prevent the NPP from selling any remaining electricity (not sold in long-term and mid-term contracts) resulting in lower than forecasted load factor, or the impact of higher than forecasted market demand for electricity from the NPP resulting in higher load factor than forecasted for a given year.

(87)  The Polish authorities explained further that this refers occurrences other than those defined in footnote 86 which impact the load factor achieved by NPP, including operations and maintenance, and balancing products used by TSO to ensure, in an ongoing manner, the maintenance of the electricity system frequency within a predefined stability range and compliance with the amount of reserves needed with respect to the required quality.

(88)  For example, this may concern nuclear fuel, materials, maintenance and service costs, and insurance premiums.

(89)  This estimate is based on the availability of two out of three reactor units in 2035, each with a net capacity of 1170 MW, according to the current schedule outlined in the PNPP, which is scheduled for updates in the coming months. Currently, the PNPP anticipates the commissioning of successive reactor units of the NPP1 Project in 2033, 2035, and 2037, respectively.

(90)  The Polish authorities highlight the significant uncertainty that is linked to these projections.

(91)   OJ C 262, 19.7.2016, p. 1–50.

(92)  Judgment of 19 March 2013, Bouygues and Bouygues Télécom v Commission and Others, Joined Cases C-399/10 P and C-401/10 P, EU:C:2013:175, paragraph 104; Judgment of 13 September 2010, Greece and Others v Commission, Joined Cases T-415/05, T-416/05 and T-423/05, EU:T:2010:386, paragraph 177; Judgment of 15 September 1998, BP Chemicals v Commission, T-11/95, EU:T:1998:199, paragraphs 170 and 171.

(93)  Judgement of 15 December 2021, Oltchim SA v Commission, T-565/19, paragraphs 93 to 197.

(94)  Judgments of 2 July 1974, Italy v Commission, 173/73, EU:C:1974:71, paragraph 35, and of 19 December 2013, Association Vent De Colère! and Others, C-262/12, EU:C:2013:851, paragraph 25.

(95)  Judgments of 16 May 2002, France v Commission, C-482/99, EU:C:2002:294, paragraph 36, of 30 May 2013, Doux Élevage and Coopérative agricole UKL-ARREE, C-677/11, EU:C:2013:348, paragraph 34, of 28 March 2019, Germany v Commission, C 405/16 P, EU:C:2019:268, paragraph 55, and of 20 September 2019 , FVE Holýšov I and Others v Commission, T-217/17, EU:T:2019:633, paragraph 105.

(96)  Judgment of the Court of Justice of 11 July 1996, SFEI and Others, C-39/94, EU:C:1996:285, paragraph 60; Judgment of the Court of Justice of 29 April 1999, Spain v Commission, C-342/96, EU:C:1999:210, paragraph 41.

(97)  Judgement of 22 September 2022, Austria v Commission, C-594/18 P EU:C:2020:742, paragraphs 20 and 24.

(98)  Judgement of 22 September 2022, Austria v Commission, C-594/18 P EU:C:2020:742, paragraph 63.

(99)  Judgement of 22 September 2022, Austria v Commission, C-594/18 P EU:C:2020:742, paragraph 32.

(100)  Judgement of 22 September 2022, Austria v Commission, C-594/18 P EU:C:2020:742, paragraphs 44 and 45.

(101)  Judgement of 22 September 2022, Austria v Commission, C-594/18 P EU:C:2020:742, paragraphs 48 and 49.

(102)   OJ L 26, 28.1.2012, p. 1.

(103)  Judgement of 22 September 2022, Austria v Commission, C-594/18 P EU:C:2020:742, paragraphs 43.

(104)  The notification pursuant to this provision is assessed by the Commission under the requirements of the Euratom Treaty, without prejudice to assessments to be carried out under the Treaty on the Functioning of the European Union and the obligations stemming from it and from secondary legislation. Thus, the assessment under Articles 41-43 of the Euratom Treaty is, inter alia, without prejudice to the application of the EU public procurement rules, the EU competition rules, EU environmental and international rules, and it does not amount to a clearance under the EU State aid rules.

(105)  See Judgment of 3 December 2014, Castelnou Energía, Case T 57/11, ECLI:EU:T:2014:1021, paragraphs 181-184 with further references. See also Judgement of 30 November 2022, Austria v Commission, T-101/18 EU:T:2022:728, paragraph 30 and Judgement of 31 January 2021, C-284/21 P, Commission v. Braesch e.a., EU:C:2023:58, paragraph 97.

(106)  Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC (OJ L 94, 28/03/2014, p. 243).

(107)  Judgment of 17 July 2008, Essent Netwerk Noord and Others, C-206/06, EU:C:2008:413, paragraphs 40 to 59.

(108)  Judgement of 22 December 2008, Régie Networks v Rhone Alpes Bourgogne, C-333/07, EU:C:2008:764, paragraph 99 and case law cited.

(109)  Judgement of 22 December 2008, Régie Networks v Rhone Alpes Bourgogne, C-333/07, EU:C:2008:764, paragraphs 100 and 104.

(110)  Judgment of 20 September 2018, Carrefour Hypermarchés and Others, C-510/16, EU:C:2018:751, paragraph 21.

(111)  Judgement of 27 October 2005, Distribution Casino France and Others, C 266/04 to C 270/04, C 276/04 and C 321/04 to C 325/04, EU:C:2005:657, paragraph 52.

(112)  Judgements of 20 September 2018, Carrefour Hypermarchés and Others, C-510/16, EU:C:2018:751, paragraph 22 and of 10 November 2016, DTS Distribuidora de Televisión Digital v Commission, C 449/14 P, EU:C:2016:848, paragraphs 70 to 72.

(113)  The requirement set out in Article 19d(1) to implement direct price support schemes for investment in new power-generating facilities the form of two-way contracts for difference or equivalent schemes with the same effects only applies to contracts concluded on or after 17 July 2027.

(114)  The Core region comprises 13 Member States: Austria, Belgium, Czech Republic, Croatia, France, Germany, Hungary, Luxembourg, the Netherlands, Poland, Romania, Slovakia and Slovenia.

(115)   https://energy.ec.europa.eu/topics/oil-gas-and-coal/eu-coal-regions/coal-regions-transition_en.

(116)  Judgement of 22 September 2022, Austria v Commission, C-594/18 P EU:C:2020:742, paragraphs 67.

(117)  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, p. 44), recitals 382-385.

(118)  Ibid., recital 385.

(119)  See IEA Projected Costs of Generating Electricity 2020, https://iea.blob.core.windows.net/assets/ae17da3d-e8a5-4163-a3ec-2e6fb0b5677d/Projected-Costs-of-Generating-Electricity-2020.pdf, p.46.

(120)  IEA Projected Costs of Generating Electricity 2020, p. 145.

(121)  Projected Costs of Generating Electricity – 2020 Edition, available here: https://www.oecd-nea.org/jcms/pl_51110/projected-costs-of-generating-electricity-2020-edition.

(122)  See for example the study from Asset in July 2018 on Technology pathways in decarbonisation scenarios (https://ec.europa.eu/energy/sites/ener/files/documents/2018_06_27_technology_pathways_-_finalreportmain2.pdf) and the final report from Trinomics in October 2020 on Cost of energy (LCOE), Energy costs, taxes and the impact of government interventions on investments (https://op.europa.eu/en/publication-detail/-/publication/e2783d72-1752-11eb-b57e-01aa75ed71a1/language-en).

(123)  For example, a higher interest rate would lead to higher debt service costs, which in turn would lead to a higher strike price.

(124)  Press release available here: https://ec.europa.eu/commission/presscorner/detail/en/ip_24_2366, on Commission Decision C(2024) 2858 final of 30.4.2024 on the measure State aid SA.58207 (2021/N) which Czechia is planning to implement to support the construction and operation of a new nuclear power plant at the Dukovany site (not yet published).

(125)  See footnotes 66, 67, 124.

(126)  This is to be adjusted, as explained in section 5.3.2, by the volume curtailed by the TSO and by the volume of electricity sold via long or mid-term contract but not produced as a result of spot price arbitrage.