
Article 1 
Aid to Hinkley Point C in the form of a Contract for Difference, the Secretary of State Agreement and a Credit Guarantee, as well as all related elements, which the UK is planning to implement, is compatible with the internal market within the meaning of Article 107(3)(c) of the Treaty on the Functioning of the European Union.
Implementation of the aid is accordingly authorised.
Article 2 
This Decision is addressed to the United Kingdom of Great Britain and Northern Ireland.
Done at Brussels, 8 October 2014.
For the Commission
Joaquín ALMUNIA
Vice-president
ANNEX A
Table 3 
[…]
Source: TESLA4, page 12
Figure 2

(per cent)
Approach Range of returns (project IRR; post-tax nominal) Comments
Relative risk analysis 8,5-11(project basis) Comparison of offshore wind and PPP/PFI returns during construction phase and also UK regulated utilities/nuclear operators during operations phase
Benchmarking Analysis 6-13(project basis) Comparison of UK regulated utility/PPP/IWPP/comparable nuclear projects
Project Hurdle Rate analysis 10,5-14,5 Based on EdF WACC estimates plus premium observed in academic studies from a range of corporates
Financing analysis 9-13 — construction6-9,5 — operational Analysis of potential financing structures both during construction and during operations
Assumed debt-financed structure with UK Guarantee 10,2 — Project IRR12,8 — Levered Equity IRR Analysis of the Project Return and the Levered Equity Return (for the proposed UK guaranteed debt levels) and at the negotiated SP.The 10,2 % is due to the tax shield effect on project level cash flows and indicative IUK Guarantee pricing.
Source: Notification, Table 5, based on KPMG

Table 5 
[…]

Shaded cells denote construction cost capex — target IRR scenarios yielding a lower SP than 92,50 GBP/MWh. Based on NNBG Financial Model version 9.8.

Table 6 
[…]
 (1) Includes construction gain share benefit of GBP 0,8/MWh (real 2012)
 (2) Lump sum from SZC only released post COD2 and therefore does not form part of funding requirement
 (3) Opex adjustment only applied for first 15 yrs and after CFD period due to potential opex reopener protection.
 (4) Min DSCR excluding first period
 (5) EIRR committed real approximated as EIRR committed nominal minus long term CPI assumption
 (6) Lower level of Committed equity assumed in this version of the Financial Model will mean Committed Equity IRR is optimistic v current modelled results


VERY LOW Very low likelihood of more favourable outcome than assumed
LOW Low likelihood of more favourable outcome than assumed
MODERATE Moderate likelihood of more favourable outcome than assumed
HIGH High likelihood of more favourable outcome than assumed
VERY HIGH Very high likelihood of more favourable outcome than assumed

Table 7 
[…]

Table 8 
[…]


Run Key Assumptions Capacity Market First Nuclear Deployment Grid carbon intensity 2030 Grid carbon intensity 2040 Grid carbon intensity 2049
1a BAU No 2037 232 188 96
1d BAU, High Fuel Prices No 2031 186 101 46
1e BAU, Low Fuel Prices No 2041 269 233 121
2a BAU + Nuclear CfD No 2023 158 88 37
3a Non-nuclear Low Carbon CfDs No 2037 164 135 61
3d Non-nuclear Low Carbon CfDs, High Fuel Prices No 2031 181 123 52
3e Non-nuclear Low Carbon CfDs, Low Fuel Prices No 2041 182 120 66
3h Non-nuclear Low Carbon CfDs, more interconnection No 2037 160 133 59
4a Low Carbon CfDs No 2023 100 42 25
5a BAU Yes 2037 236 194 88
5d BAU, High Fuel Prices Yes 2032 194 111 52
5e BAU, Low Fuel Prices Yes 2041 272 235 126
7a Non-nuclear Low Carbon CfDs Yes 2046 104 49 33
7d Non-nuclear Low Carbon CfDs, High Fuel Prices Yes 2038 137 65 28
7e Non-nuclear Low Carbon CfDs, Low Fuel Prices Yes Not before 2049 113 51 44
7f Non-nuclear Low Carbon CfDs, High Nuclear Costs, Low RES and CCS costs Yes 2048 97 46 35
7g (only to 2030) Non-nuclear Low Carbon CfDs, more DSR, more EDR, more Interconnection Yes Not before 2030 104 N/A N/A
7h Non-nuclear Low Carbon CfDs, more interconnection Yes 2046 101 48 32
8a Low Carbon CfDs Yes 2023 104 50 31
8d Low Carbon CfDs, High Fuel Prices Yes 2023 99 48 30
8e Low Carbon CfDs, Low Fuel Prices Yes 2023 99 38 30
8f Low Carbon CfDs, High Nuclear costs, Low RES and CCS costs Yes 2023 102 45 28
8g (only to 2030) Low Carbon CfDs, more DSR, more EDR, more Interconnection Yes 2023 98 N/A N/A
8h Low Carbon CfDs, more Interconnection Yes 2023 100 53 32


Sponsor Antin Infrastructure Partners CDP Capital Brookfield Renewable Energy Partners Borealis,First State EDIF
Fund TargetEquity IRR 15 % 16 % 9 – 12 % 9 – 15 %
Source: UK submission ‘Answers to the Commission's questions received 16 September 2014’ based on Fund websites, Preqin, Press releases. Note: Fund target IRRs shown gross of fees and expenses. Exchange rates used: GBP EUR: 1: 1,26, GBP CAD: 1: 1,81. HPC post-tax nominal equity IRR used for comparison purposes. Borealis target IRR: 9 – 12 per cent, First State EDIF target IRR: 10 – 15 per cent.


 Electricity Transmission (Ofgem) Ofwat — PR09 Ofwat — PR 14 (not finalised)
Note   
Period 2013-21 2010-15 2015-20
Real
Levered cost of equity (post-tax) 7,00 per cent 7,10 per cent 5,65 per cent
Cost of debt (pre-tax real) 2,92 per cent 3,60 per cent 2,75 per cent
Notional gearing 60,0 per cent 57,5 per cent 62,5 per cent
Vanilla WACC 4,55 per cent 5,10 per cent 3,85 per cent
   
Inflation assumption 3,50 per cent 3,50 per cent 3,50 per cent
Allowed Nominal Costs/Returns (geometric calc)
Levered cost of equity 10,7 per cent 10,8 per cent 9,3 per cent
Cost of debt (pre-tax) 6,5 per cent 7,2 per cent 6,3 per cent
Vanilla WACC* 8,2 per cent 8,8 per cent 7,5 per cent
   
Nominal (arithmetic calc)
Levered cost of equity* 10,5 per cent 10,6 per cent 9,2 per cent
Cost of debt (pre-tax)* 6,4 per cent 7,1 per cent 6,3 per cent
Vanilla WACC 8,1 per cent 8,6 per cent 7,3 per cent
   
https://www.ofgem.gov.uk/ofgem-publications/53602/4riiot1fpfinancedec12.pdf
http://www.ofwat.gov.uk/pricereview/pr14/gud_tec20140127riskreward.pdf
http://www.ofwat.gov.uk/pricereview/pr09phase3/det_pr09_finalfull.pdf



Source: Presentation of EDF Energy to Commission officials of 15 July 2014, slide ‘Comparison of HPC with UK regulated utilities’.


Project Ontario Power Authority
Technology Refurbishment of Bruce Power nuclear plant
Gearing 20-40 per cent
Real cost of debt (pre-tax) 6,20 per cent
Nominal target equity IRR (post-tax) 13,7-18 per cent (12,8-17,1 per cent adjusted for current UK interest rate)
Target project IRR 10,6-13,8 per cent (9,7-12,9 per cent adjusted for current UK interest rate)
Investment horizon (asset life) 25 years
Investment size 4bn CAD
Level of Revenue certainty Fixed price CfD for remainder of plant life (25 years)
Level of construction risk Lower — refurbishment, not new build, cost overrun sharing
Level of operating risk Lower — staff cost overrun sharing, fuel cost pass-through
Level of financing risk Lower — smaller capital project, shorter period
Contingent equity required Unknown
Source: UK submission ‘Answers to the Commission's questions received 16 September 2014’ based on publicly available documents (Bruce Power audit report — April 2007, p. 14.: Confirmed as a project rate of return in letter from CIBC World Markets Inc. to The Ministry of Energy, Ontario, 17 October 2005, http://www.rds.ontarioenergyboard.ca/webdrawer/webdrawer.dll/webdrawer/rec/67137/view/PWU_Exhibit_K11.3_fairness_opinion_bruce_20080613.pdf.PDF, Letter from CIBC World Markets Inc. to the Ministry of Energy, Ontario, 17 October 2005, http://www.rds.ontarioenergyboard.ca/webdrawer/webdrawer.dll/webdrawer/rec/67137/view/PWU_Exhibit_K11.3_fairness_opinion_bruce_20080613.pdf.PDF Bruce Power Fairness Opinion (CIBC World Markets Inc.) — October 2005, p. 5.


Technology CCGT PPA projects
Gearing < 80 per cent Unknown
Cost of debt Unknown Unknown
Nominal target return on equity (post-tax) > 13 per cent 
Nominal target project return (post-tax)  9-15 per cent
Investment horizon (asset life) 25 years Various
Investment size Various Various
Degree of revenue certainty 20 year PPA PPA
Level of construction risk compared to HPC Lower-EPC contract-based, well-known technology Unknown but likely lower
Level of operating risk compared to HPC Lower Unknown
Level of financing risk Lower shorter construction period Unknown but likely lower
Contingent equity required Unknown Unknown
References  



Source: UK submission, Table 2 — on Rate of Return, 10th September as well as (1) and (2) below.


Regulator Ofwat Ofgem CC Ofgem CC CAA ORR
Determination PR14 (not final) WPD 14 NIE 2014 Final RIIO T1 2012 (NGET) Bristol W 2010 HAL 2014 Final NR 2013
Gearing 62,50 per cent 65 per cent 45 per cent 60 per cent 60 per cent 60 per cent 62,50 per cent
Real cost of debt (pre-tax) 2,8 per cent 2,6 per cent 3,1 per cent 2,9 per cent 3,9 per cent 3,2 per cent 3,0 per cent
Real cost of equity (post-tax) 5,7 per cent 6,4 per cent 5,0 per cent 7,0 per cent 6,6 per cent 6,8 per cent 6,5 per cent
Real vanilla WACC 3,8 per cent 3,9 per cent 4,1 per cent 4,6 per cent 5,0 per cent 4,7 per cent 4,3 per cent
Inflation 3,5 per cent 3,5 per cent 3,5 per cent 3,5 per cent 3,5 per cent 3,5 per cent 3,5 per cent
Nominal cost of debt (pre-tax) 6,2 per cent 6,1 per cent 6,6 per cent 6,4 per cent 7,4 per cent 6,7 per cent 6,5 per cent
Nominal cost of equity (post- tax) 9,2 per cent 9,9 per cent 8,5 per cent 10,5 per cent 10,1 per cent 10,3 per cent 10,0 per cent
Nominal vanilla WACC 7,3 per cent 7,4 per cent 7,6 per cent 8,1 per cent 8,5 per cent 8,2 per cent 7,8 per cent
Analyst return on equity forecast (ex ante)    c 14 per cent   
Investment horizon — Price control length 5 8 3 8 5 5 5
Investment Size: Regulatory Asset Value (RAV) 70m — 11,7bn (estimated 2014 — 15) values) 5,9bn (2014) c GBP 950m (forecast across price control) 2,2bn — 14,8bn (forecast RAV range of companies over price control) 0,39bn (2013) 14,9bn 45bn (2013)
Degree of revenue protection More than HPC — see answer to question 2c — NNBG Submission on Rate of Return, 10 September
Degree of construction risk Less than HPC. See detailed discussion recitals 124 – 131 — NNBG Submission on Rate of Return, 10 September
Degree of operating risk Less than HPC. See detailed discussion recitals 132 – 135 — NNBG Submission on Rate of Return, 10 September
Degree of financing risk Less than HPC. See detailed discussion paragraphs 136 – 139 — NNBG Submission on Rate of Return, 10 September
Other risks Less than HPC. See detailed discussion on difference in fundamental business models; diversification of assets; and technology risks in recitals 113 – 122 — NNBG Submission on Rate of Return, 10 September
Contingent equity required None




















Source: based on UK submission ‘SA.34974 Hinkley Point C State aid case — Answers to the Commission's questions received 16 September 2014’.


(per cent)
Company Name Country Cost of equity in USD Pre-tax cost of debt in USD After-tax cost of debt in USD Cost of capital in USD
E.ON SE (DB:EOAN) Germany 8,25 4,04 3,19 5,78
RWE AG (DB:RWE) Germany 7,95 4,54 3,59 5,54
Centrica plc (LSE:CNA) UK 6,99 4,44 3,11 6,04
Veolia Environnement S.A. (ENXTPA:VIE) France 11,62 5,44 4,30 6,46
National Grid plc (LSE:NG.) UK 9,37 4,44 3,11 6,33
Suez Environnement Company SA (ENXTPA:SEV) France 9,97 4,94 3,90 6,38
A2A SpA. (BIT:A2A) Italy 13,72 7,44 5,88 8,68
Hera SpA. (BIT:HER) Italy 12,65 5,94 4,69 7,94
MVV Energie AG (XTRA:MVV1) Germany 8,31 4,04 3,19 5,70
ACEA SpA. (BIT:ACE) Italy 12,15 6,44 5,09 7,68
Iren SpA (BIT:IRE) Italy 13,85 7,94 6,27 8,80
Mainova AG (DB:MNV6) Germany 6,96 5,54 4,38 6,30
Gelsenwasser AG (DB:WWG) Germany 6,09 5,54 4,38 6,08
Telecom Plus plc (LSE:TEP) UK 6,45 4,94 3,46 6,44
Compagnie Parisienne de Chauffage Urbain (ENXTPA:CHAU) France 7,73 4,94 3,90 6,33
Zespól Elektrocieplowni Wroclawskich KOGENERACJA Spólka Akcyjna (WSE:KGN) Poland 7,44 5,39 4,26 6,94
Fintel Energia Group SpA (BIT:FTL) Italy 9,88 8,94 7,06 9,02
REN — Redes Energéticas Nacionais, SGPS, S.A. (ENXTLS:RENE) Portugal 19,97 7,64 6,04 10,05
GDF SUEZ S.A. (ENXTPA:GSZ) France 8,70 4,44 3,51 5,74
Burgenland Holding Aktiengesellschaft (WBAG:BHD) Austria 6,08 5,54 4,38 6,08
Source: http://www.stern.nyu.edu/~adamodar/pc/datasets/Eurocompfirm.xls (retrieved on 14 June 2014).(The presented WACCs are nominal (in USD terms, using USD risk free rate = 3,04 per cent) & post-tax. For the various definitions used by Damodaran, see: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/variable.htm).

ANNEX B

1.Recent Limited Recourse Project Finance Bank Loans (Low Carbon Energy)

This table updates the one provided in Annex A of our responses dated 5 September 2014 to show the quantum of the commercial debt tranche distinct from the total debt quantum which, for certain projects, included export credit guaranteed or multilateral debt facilities.

Project Financial Close Amount[Commercial Bank Tranche] Tenor(Years) Commercial Bank Loan Margin (6) Government Support (7)
Gemini Offshore Wind May 2014 EUR 2 000 m[EUR 850 m] 14 300 SDE renewable subsidy (per MWh) from Dutch government Separate export credit facilities provided by EKF (Denmark), Euler Hermes (Germany) and Delcredere/Ducroire from Belgium
London Array Offshore Wind Oct 2013 GBP 266 m[GBP 266 m] 13 275 Renewables Obligation subsidy (per MWh) from UK Government Separate export credit facility provided by EKF (Denmark) for initial financing
Butendiek Offshore Wind Feb 2013 EUR 950 m[EUR 230 m] 8,5 300 Feed-in Tariff subsidy (per KWh) from German government Separate export credit facility provided by EKF (Denmark)
Westermost Rough Offshore Wind Aug 2014 GBP 370 m[GBP 197 m] 15 300 Renewables Obligation subsidy (per MWh) from UK Government
[…] […] EUR 650 m[EUR 650 m] 10 175-275 Finance from commercial banks only
Derbyshire Energy from Waste PFI Aug 2014 GBP 145 m[GBP 145 m] 25 315-320 Renewables Obligation subsidy (per MWh) from UK Government Local Authority payments for waste recycling
MEDIAN    300 
SWAP SPREAD (8)    + 13 (To convert from LIBOR margin to Gilt benchmark)
ILLIQUIDITY PREMIUM    – 50 
MARKET INDICATION (9)    263 
Source: Commercial banks; InfraNews; InfraJournal
2.Corporate Debt (rated BB+) Spreads
Issuer Ticker Coupon Maturity Amount Rating Tenor(years) Current Spread (bp) Government Support
Heathrow Airport HTHROW 7,125 % 01/03/2017 GBP 325 m NR/Ba3/BB+ 3 231 Nil
Heathrow Airport HTHROW 5,375 % 01/09/2019 GBP 275 m NR/Ba3/BB+ 5 253 Nil
Anglian Water OSPRAQ 7,000 % 31/01/2018 GBP 350 m NR/Ba3/BB+ 3 290 Nil
Electricity North-West NWENET 5,875 % 21/06/2021 GBP 80 m BB+/NR/NR 7 274 Nil
Yorkshire Water KEL 5,750 % 17/02/2020 GBP 200 m BB–/NR/BB+ 5 314 Nil
Enel SpA ENELIM 7,75 % 10/09/2075 GBP 400 m BB+/Ba1/BBB– 61 373 31,2 % owned by Government Ministry
Enel SpA ENELIM 6,625 % 15/09/2076 GBP 500 m BB+/Ba1/BBB– 62 367
Telecom Italia TITIM 5,875 % 19/05/2023 GBP 400 m BB+/Ba1/BBB– 9 281 Nil
Energias de Portugal ELEPOR 8,625 % 04/01/2024 GBP 425 m BB+/Ba1/BBB– 10 256 Nil
MEAN       293 
ILLIQUIDITY PREMIUM       – 50 
MARKET INDICATION       243 
Source: Bloomberg as at 21 August 2014 using BGN Source.
3.iTraxx Europe Crossover Series 21 Constituents Rated BB+/Ba1
Company Ticker Identifier Rating Tenor (Years) CDS Flat Spread
ArcelorMittal MT NA CX375716 BB+/Ba1 10 347
EDP Energias de Portugal SA EDP PL CEPO1E10 BB+/Ba1 10 203
Finmeccanica SpA FNC IM CFME1E10 BB+/Ba1 10 285
HeidelbergCement AG HEI GY CHEI1E10 NR/Ba1 10 226
Lafarge SA LG FP CLAF1E10 BB+/Ba1 10 168
Telecom Italia SpA TIT IM CTII1E10 BB+/Ba1 10 281
Wendel SA MF FP CMWP1E10 BB+/NR 10 206
MEAN     245
Source: Markit; Bloomberg as at 21 August 2014 using CMAN Source.
Table 17 

  1992 - 2013 VAR model simulation 10 Yr (P) vs. 1992-2013 VAR model simulation
 […] […] […]   
 Spot in 10 years time VAR simulation 10 years ahead (June 2024) VAR simulation 10 years ahead (June 2024)   
Tenor 10 Yr (P) Median 95 % percentile Distance from median (ppts) Distance from 95th percentile (ppts) 10 Yr (P) + 1,5 ppt probability
1 Yr 3,47 3,80 6,20 – 0,33 – 2,72 19 %
2 Yr 3,55 4,00 6,24 – 0,45 – 2,69 21 %
3 Yr 3,62 4,16 6,24 – 0,54 – 2,61 22 %
4 Yr 3,70 4,31 6,20 – 0,61 – 2,50 21 %
5 Yr 3,78 4,44 6,17 – 0,66 – 2,39 20 %
7 Yr 3,93 4,64 6,20 – 0,71 – 2,27 19 %
9 Yr 4,09 4,76 6,19 – 0,66 – 2,10 15 %
10 Yr 4,17 4,79 6,14 – 0,62 – 1,97 13 %
12 Yr 4,11 4,88 6,15 – 0,77 – 2,03 15 %
15 Yr 4,07 4,97 6,09 – 0,89 – 2,02 17 %
20 Yr 4,07 4,99 6,12 – 0,92 – 2,05 17 %
30 Yr 3,98 4,97 6,08 – 1,00 – 2,10 20 %
50 Yr 3,91 5,01 6,04 – 1,10 – 2,13 24 %

[…]
 Graph 1 
Figure 3Note: the data is a snapshot from Bloomberg on 21 August 2014.
ANNEX C
‘EDF Group Company’ means a member of the same group of companies as EDF Energy.
 [ ].1 

((A)) record all trades undertaken to sell the HPC forecast output in a separate NNBG book;
((B)) price all trades undertaken to sell the HPC forecast output conducted with any EDF Group Company at the market price for the product concerned at the time of trading;
((C)) undertake at market price all HPC forecast output bilateral trades with any other asset portfolios owned or traded by any EDF Group Company; and
((D)) provide to NNBG (with consent for NNBG to provide the same to the CfD Counterparty, the Secretary of State and the European Commission) such information as may be reasonably required by NNBG to report to the CfD Counterparty, the Secretary of State and the European Commission on the MSA Counterparty's compliance with points (A), (B) and (C) above.
 [ ].2 NNBG shall, and EDF Energy shall procure that NNBG shall, by the [ߦ] Business Day of each calendar year provide the CfD Counterparty (with consent for the CfD Counterparty to provide the same to the Secretary of State and the European Commission) with a written report on the MSA Counterparty's compliance with points (A), (B) and (C) of Clause [ߦ].1 in the previous calendar year.
 1.  1.1. 

((A)) a mechanic to capture gains from the project above certain levels as a result of the project outperforming relative to the original base case assumptions (the ‘Project Gain Mechanic’); and
((B)) a mechanic to capture gains above certain levels arising from sales of equity from the original shareholders (the ‘Equity Sale Mechanic’).
 1.2. 
HPC IUK Model […] per ‘DECC Output’ worksheet


((A)) if the realised Equity IRR is more than the Equity IRR in the model that includes the cost of committed equity (11,4 % (nominal) as of model:
HPC IUK Model […] per ‘DECC Output’ worksheet as supplied to the Commission on 19 September 2014) but less than or equal to the threshold in (B) below, any gain above that Equity IRR threshold will be shared with the CfD Counterparty as to 30 %; and
((B)) if the realised Equity IRR is more than both (i) 13,5 % (nominal) and (ii) 11,5 % (expressed in real terms but taking into account CPI inflation), any gain above such threshold will be shared with the CfD Counterparty as to 60 %.
 1.3. There will be no double counting between the mechanisms.
 1.4. Set out below is further detail on how the mechanics of the provision will operate. In addition, there will be a covenant package in support of these obligations, which may include security.
 2.  2.1. Subsequent to the Project Gain Mechanic having been first triggered, should a further injection of equity be required in any period, the further injection of equity will be taken into account in calculating equity holders' gains.
 2.2. The Project Gain Mechanic captures the gains above the relevant threshold (as set out in point 1.2 above) as a result of the project outperforming relative to the original base case assumptions.
 2.3. To determine whether any threshold has been reached in any period, the cumulative realised to-date Equity IRR will be calculated using an updated financial model throughout the project life. The Equity Gain Share calculation will be triggered in the same period in which any threshold is reached.
 2.4. Once the Project Gain Mechanic is triggered, the CfD Counterparty will be entitled to the relevant percentage of equity holders' distributions in that period and all future periods (until the next threshold is reached in which case the relevant sharing percentage will be adjusted accordingly).
 2.5. The CfD Counterparty entitlement to equity holders' gains will be in effect over the entire life of the HPC project from the first time the Project Gain Mechanic has been triggered.
 3.  3.1. 
(A) Step 1For each investor, establish the base case equity injection and price (as extracted from the appropriate financial model).(B) Step 2Upon the occurrence of a sale/disposal of equity tranche by any investor, establish the Equity Sale IRR achieved by that investor on the particular sale/disposal of the tranche of equity.(C) Step 3The Equity Sale IRR realised by the investor selling the equity tranche is calculated taking into account the actual gross proceeds of the equity tranche sale/disposal, actual equity injections proportionate to this equity tranche sold/disposed and past dividends/shareholder loan interest and principal repayments (proportionate to this equity tranche sold/disposed) to that investor out of NNBG.(D) Step 4If the Equity Sale IRR is above any of the thresholds set out in point 1.2 above, the Equity Gain Share will be calculated as follows.(E) Step 5Calculate the theoretical amount of money that would have to have been realised by the shareholder for the same sale of equity which, if used to calculate the Equity IRR as in Step 3 above, would have resulted in the realised Equity Sale IRR being equal to the relevant threshold.(F) Step 6The positive difference (if any) between the actual sale proceeds amount used in Step 3 above and the theoretical equity sale proceeds amount calculated in Step 5 above is then the excess equity gain to be shared between NNBG shareholders and the CfD Counterparty.
 3.2. The above calculations are carried out for each sale/disposal of equity independent of any prior sale/disposals of equity irrespective of whether or not previous sales/disposals of equity resulted in a gainshare to the CfD Counterparty.
 3.3. Equity sales/disposals by secondary investors (i.e. who bought/acquired the equity on a third-party, arms-length basis from the original equity investors) will be exempt from this mechanic if such secondary investors were to subsequently sell/dispose such equity (being ‘secondary equity’).
 4.  4.1. Anti-avoidance provisions will ensure that transactions are not designed to frustrate the intent of the Project Gain Mechanics or the Equity Sale Mechanic.
 4.2. To support the Equity Gain Share mechanics, provisions will be made to ensure payments are made to the CFD Counterparty in circumstances where there is a breach of either the Project Gain Mechanic or the Equity Sale Mechanic or there is a breach of the anti-avoidance undertakings.
 5. 
Any disputes in relation to the Equity Gain Share mechanism will be resolved in accordance with a similar dispute resolution process as is set out in the HPC Contract.
 1.  1.1. The Construction Gain Share mechanism is designed to share savings, implemented through reduction of the Strike Price, where construction comes in at lower than the forecast cost in the agreed financial model for the HPC project. This mechanism will work in one direction, with no Strike Price increase if construction costs are higher than forecast.
 1.2. The initial gain share calculation will take place on the date which is the earliest of (i) the date falling 6 months after the Reactor Two Start Date; (ii) the tenth anniversary of the Reactor One Start Date; and (iii) the date (if any) after the Reactor One Start Date on which the parties agree that Reactor Two will not reach its start date. The final gain share calculation will take place on the sixth anniversary of the date of the initial gain share calculation (or earlier if all construction related claims have been settled before then).
 1.3. We have set out below further detail on how the mechanics of the provision will operate.
 2.  2.1. No earlier than a defined period before each of the Initial Reconciliation Date and the Final Reconciliation Date, NNBG will provide the CfD Counterparty with a written report.
 2.2. 

2.2.1. set out, in reasonable detail:

((a)) the aggregate amount of the Construction Costs to the date of the report, expressed in sterling;
((b)) the aggregate amount of the Construction Costs reasonably forecast to be incurred, paid or accrued by NNBG, expressed in sterling, provided that such Construction Costs shall be limited to those Construction Costs that would be reasonably and properly incurred, paid or accrued by NNBG to satisfy regulatory requirements without incurring excessive cost or expense;
((c)) NNBG's actual Construction Schedules; and
((d)) NNBG's estimated Construction Schedules for any period after the date of the relevant report;
2.2.2. set out, in reasonable detail, evidence of the steps taken to ensure that the amount of any Construction Costs forecast to be incurred, paid or accrued by NNBG following the date of the report shall be limited to those Construction Costs that would be reasonably and properly incurred, paid or accrued by NNBG to satisfy regulatory requirements without incurring excessive cost or expense;
2.2.3. if the report, or any part thereof, is prepared by or with the assistance of one or more third parties, include details of those third party(ies) and copies of any reports prepared by such third party(ies); and
2.2.4. the consequential adjustment (if any) to the Strike Price.
 2.3. The report will provide relevant supporting information and be accompanied by a Directors' Certificate certifying the information enclosed within the report.
 2.4. The CfD Counterparty may require further supporting information from NNBG within a specified period. If the CfD Counterparty makes such a request, NNBG has to provide such supporting information within a specified period from the request.
 2.5. The CfD Counterparty will notify NNBG whether or not it accepts the report provided by NNBG within a specified period. If NNBG and the CfD Counterparty are unable to reach agreement, then the matter may be referred by either party for independent resolution.
 2.6. If NNBG does not provide the CfD Counterparty with a report, the CfD Counterparty may obtain an opinion from an independent firm of cost consultants as to the Construction Costs and Construction Schedules and that opinion will be used instead.
 2.7. NNBG will give the CfD Counterparty and its professional advisers (including the cost consultants) such assistance as the CfD Counterparty may reasonably request for the purposes of reviewing the report and verifying the Construction Costs.
 2.8. The financial model will be updated with the revised Construction Costs and revised Construction Schedules, as set out in the report or as advised by the cost consultants, and rerun to determine a revised Strike Price. The difference between the Strike Prices produced by running the financial model using the forecast Construction Costs and Construction Schedules and rerunning it with the revised Construction Costs and revised Construction Schedules will determine the size of the construction gain, expressed in GBP/MWh. The CfD Counterparty will be entitled to take 50 % of the construction gain discovered by the exercise above (which percentage will increase to 75 % in respect of any construction gain in excess of GBP […] (nominal)), by reducing the then prevailing Strike Price by that amount.
 2.9. If at any time during the period between the Initial and Final Reconciliation Dates NNBG identifies any Construction Costs or Construction Schedules different from the corresponding ones used in the model update and which give rise to savings in respect of the Construction Costs, NNBG may elect to make interim payments to the CfD Counterparty in an amount equal to the whole or part of these additional Construction Costs savings.
