Introduction
The Netherlands notified an unusual measure to the Commission. The measure concerned the construction and operation of a research reactor and of an isotope processing facility in Petten in north Netherlands – the so-called PALLAS project. Although there are many nuclear reactors in Europe, very few are used for research purposes and for the production of isotopes for medical diagnostic and therapeutic purposes.
According to the Commission decision [SA.103925 and SA.103926][1], “(3) the PALLAS programme aims to guarantee the long-term security of supply of medical radioisotopes in the Netherlands, Europe and the world. To this end, the PALLAS programme comprises three initiatives: 1) the replacement of the existing High Flux Reactor [HFR] by a new reactor (the future PALLAS reactor), 2) the construction of the Nuclear Health Centre [NHC], and 3) innovation in the already existing FIELD-LAB.”
However, the decision which is reviewed here concerns only the construction of the reactor and the Nuclear Health Centre.
The HFR and the future reactor are so-called “research reactors”. They have a different purpose than reactors in nuclear power plants and they are much smaller in size and power (output). Instead of generating heat to produce electricity, they generate neutrons for various medical, industrial and research applications. However, in comparison to the HFR, the new reactor will produce more medical isotopes for diagnostic and therapeutic purposes. The NHC will be an isotope processing facility expected to start operations in 2031.
The PALLAS project also received State aid in 2013. That aid was approved by the Commission in SA.36653. As noted by the Commission “(24) in the years 2019-2024, the Dutch Authorities granted to the PALLAS Foundation further loans (in addition to the EUR 80 million loan approved by the Commission in 2013) that are not covered by the 2013 Decision and that were not notified to the Commission prior to their being granted (the “already granted loans not covered by the 2013 Decision”).” “(25) The Dutch Authorities notified both A) the already granted loans not covered by the 2013 Decision and B) the funding of NewCo.”
NewCo will be a public limited liability company, whose shares will be fully held by the Dutch authorities, and will run the reactor. NewCo will take over the management of the reactor and the NHC from the previous operator Nuclear Research Group [NRG].
“(26) According to the information submitted by the Dutch Authorities, the loans granted by the Dutch Government to the PALLAS Foundation in the period 2019-2024 amount to a total of EUR 425.7 million, as follows: 40 million in 2019, 46 million in 2020, 30 million in 2021, 60 million in 2022, 148.7 million in 2023, 59 million in March 2024 and 42 million in June 2024.”
“(27) In addition, it is expected that, in the remainder of 2024 and until the incorporation of NewCo, the Dutch Government could grant to the PALLAS Foundation a further financing of EUR 44 million, which would result in the total amount of the loans granted to the PALLAS Foundation equalling EUR 469.7 million.”
“(28) All these loans, like the loans approved by the 2013 Decision, bear a 1.5% interest rate and should be reimbursed by 31 December 2025. As explained by the Dutch Authorities, this rate was set at 1.5% based on the government lending rate of 1.02% plus a mark-up of 0.48% at the time of the 2013 Decision. This concerns the yield on Dutch Government bonds with a five-year maturity, in line with the initial duration of the 2013 loans granted by the Ministry of Economic Affairs and the Region of Noord-Holland. […] the yield was well below 1.02% between 2014 and mid-2022, while since the second half of 2022 the yield has increased in line with the overall uplift in interest rate observed in the market.”
The funding of NewCo
According to the notified measure, “(31) the public funding of NewCo will comprise the following: 1) Circa EUR [1 400-2 000] million, consisting of a combination of equity ([40- 80]%) and long-term debt ([20-60]%) as follows:
- a) Circa EUR [30-60] million of unconditional equity to capitalise NewCo at incorporation. […]
- b) EUR [800-1 100] million of conditional equity specifically and exclusively earmarked for the PALLAS project, i.e. to build the PALLAS reactor and the NHC. […]
- c) EUR [400-800] million of long-term debt specifically and exclusively earmarked for the PALLAS project. […] During the construction period of the PALLAS reactor, a higher interest rate (based on the Commission Communication 2008/C 14/02) will apply assuming an interest margin of [200-600] bps above EURIBOR during construction. Two years after the PALLAS reactor has become operational (“operating date of the PALLAS reactor”), the interest rate will be lowered, to reflect the decreased risk profile of NewCo. This lowered interest rate (which will also be based on the Commission Communication 2008/C 14/02) will not be lower than [50-200] bps (assuming a credit rating of [AAA-CCC] and a […] level of security/collateral). […] Repayment of the principal plus accrued interest will happen linearly in 30 years, starting from two years after the operating date of the PALLAS reactor, which is currently envisaged in 2031-2033. This means that full repayment will be completed around 2063.”
“(32) The Dutch Government has made it clear that no State aid is planned to support the operation of NewCo once the PALLAS reactor starts commercial production.”
Project costs
“(104) The project entails total investment costs (CapEx) for EUR [2-3] billion over the expected lifespan of the project running until 2070. CapEx mainly relate to the PALLAS reactor, as the largest (future) asset of NewCo, but also include investments for the NHC and incremental capitalised investments in ancillary assets on the Petten site that are used (or remain to be used) in the operations of NewCo after the Commercial Operating Date (COD) of the PALLAS reactor.”
“(105) The length of the business plan period is 52 years, from 2019 until 2070.”
“(106) The Dutch Authorities explained that the counterfactual scenario consists in the absence of any alternative project by NewCo. Therefore, the funding gap has been determined exclusively on the basis of the factual scenario.”
Project revenues
“(112) The revenues from the project will stem from the activities of NewCo which can be grouped into three main categories:
(a) Medical radioisotopes […];
(b) Industrial isotopes; and
(c) Research and other services, which include the consultancy & services business (C&S) and MPF services. C&S concerns monitoring and quality testing services, safety analyses, licensing support, consultancy on waste and decommissioning, and various services to continue safe operations”.
The share of each revenue stream are expected to be as follows: “(113) [50-80]% from medical radioisotopes […] [1-5]% from industrial isotopes and [15-30]% from research and other services […], where the research activities represent [1-5]% of the total revenues (on average) for 2033 – 2070.”
Funding gap
“(121) The funding gap has been estimated […] using the Weighted Average Cost of Capital (‘WACC’) as discount factor. Based on the latest available information as of June 2024, the WACC is estimated by the Dutch Authorities at [10-20]%.”
“(122) As concerns the cost of equity, the risk-free rate of 2.5% has been estimated by the Dutch Authorities as the yield of 30-year German government bonds as of 15 June 2024, derived from Capital IQ. The market risk premium (MRP) of 5% has been derived from the 2024 MRP study of KPMG The Netherlands. The unlevered beta of [0.5-2.5] has been calculated based on a peer group of listed companies in the construction business using data from Capital IQ.”
“(123) The Dutch Authorities explain that the resulting [5-15]% cost of equity does not yet include the additional risk premia estimated at [1-10]%.”
“(124) Additional risk premia have been estimated by the Dutch Authorities at [1-10]%, based upon a size premium of [1-5]%, […], and an additional risk premium of [1-5]% for specific risks related to nuclear construction projects. The size premium is justified based on specific characteristics of the project, such as its reliance on a single asset (i.e. the PALLAS reactor), its concentration of revenue sources in only two markets (diagnostic isotopes and therapeutic isotopes) and its operation with a limited number of key clients […] The additional risk premium is justified with reference to the significant uncertainties in the project, for example uncertainties related to offtake in the therapeutic isotopes market.”
“(125) Based on the above, the total cost of equity has been calculated by the Dutch Authorities at [10-25]%.
“(126) As concerns the cost of debt, the post-tax cost of debt has been calculated at [1- 10]% based on the 1-month EURIBOR estimated at 3.579% by Bloomberg as per 15 June 2024, an interest margin of [400-800] bps, which corresponds to a […] rating with […] level of security or a […]rating with […] level of security, and the Dutch corporate income tax rate of 25.80%.”
“(127) The resulting NPV of the project amounts to EUR [-1 – -2] billion, meaning that absent State aid support, the project would not be viable as its NPV, based on the WACC, is negative.”
“(128) To calculate the aid amount and ensure this is limited to the minimum needed to achieve the common objectives pursued, […] the gross grant equivalent on both government debt and government equity is calculated as the NPV of the delta in equity returns resulting from the business case (i.e. the IRR) and the delta in interest charges when applying the actual returns included in the business case for the PALLAS project versus a scenario where the assumed market parameters are applied.
(a) Gross grant equivalent (or aid element) on equity: The gross grant equivalent on equity amounts to EUR [500-800] million. This is calculated by the Dutch Authorities as the NPV of all equity cash flows (i.e. disbursements by the Dutch Authorities to NewCo and dividends paid to the Dutch Authorities by NewCo), using as a discount rate the Cost of Equity (of [10-25]%). The resulting value indicates the ‘shortfall’ in equity returns to reach the required return (i.e. Cost of Equity), i.e. the delta in the IRR of equity cash flows that the Dutch Government is willing to accept versus what is assumed an average market participant (private investor) would require.
(b) Gross Grant Equivalent on Senior Debt: The Gross Grant Equivalent or aid element on Senior Debt equals EUR [100-400] million. As set out above, this is calculated by the Dutch Authorities based on the difference in the interest costs between Q3 2024 and the full redemption of the government loans (end of 2049) by applying an assumed market Cost of Debt (pre-tax) and comparing this with the interest costs that result based on the interest rates from the Draft Credit Agreement. The interest costs in both scenarios are based on the loan balance resulting from the incremental business case including the expected disbursements, interest accruals, mandatory repayments and accelerated repayments based on a cash sweep. The resulting difference in interest costs is discounted using the WACC of [5-20]%. According to the Dutch Authorities, the underlying assumption for using the WACC as the discount rate is that the lower interest rate in the Senior debt instrument provided by the State will lead to an advantage for NewCo which the company should then invest with the aim to yield a return in line with the overall required return for the business (i.e. the WACC).
(c) Gross Grant Equivalent on Old Debt: The Gross Grant Equivalent or aid element on Old Debt equals EUR [200-500] million. The approach to the Gross Grant Equivalent on Old Debt is similar to the approach for Senior Debt, with two key differences: the Gross Grant Equivalent on Old Debt is assessed from Q3 2019 onwards (i.e. first quarter where a loan that is part 40 of this notification is disbursed); and the (difference in) interest costs prior to 1 July 2024 are carried forward (i.e. interest is compounded using the WACC) to 1 July 2024, while the difference in interest after 1 July 2024 is discounted using the WACC, in line with approach for the Senior Debt.”
“(129) The resulting Gross Grant Equivalent amounts to EUR[800 1 700 million], […] This implies that the funding gap is EUR [50-400] million higher than the total Gross Grant Equivalent. From the perspective of the Dutch Authorities, this means that the aid to the PALLAS project is proportionate.”
Commission assessment
The Commission, first, examined whether the public funding [equity & loans] constituted State aid and, more specifically, whether they supported an economic activity. The Dutch authorities did not contest that the equity & loans were funded with state resources, that they conferred a selective advantage and that they could affect trade and distort competition. However, they claimed that part of the activities carried out by NRG and part of those that would be carried out by NewCo were not economic in nature.
Non-economic activities
The Commission decision outlines the Dutch arguments.
“(152) The Netherlands makes the following statements concerning the relevance of the R&D&I Framework in relation to the notified aid measures:
1) The research activities that are carried out by NRG|PALLAS, as well as the research activities that will be carried out by NewCo, are predominantly of a non-economic nature, aimed at creating more pre-competitive knowledge and understanding of nuclear medicine and the use of nuclear energy, and mostly conducted in effective collaboration with other research organisations. In particular, ca. 80% of the research activities carried out by NRG|PALLAS and then by NewCo, both in the field of nuclear medicine and in the field of nuclear energy, do not include the provision of R&D services to undertakings or R&D carried out on behalf of undertakings.
2) In so far as NewCo will provide R&D services to undertakings and will carry out R&D on behalf of undertakings, NewCo will provide these R&D services of an economic nature on the basis of market prices in accordance with section 2.2.1. of the R&D&I Framework. In case of effective collaboration with undertakings, NewCo will comply with section 2.2.2. of the R&D&I Framework, including in particular the provisions under paragraph 29 of the Framework aimed at ensuring that no indirect State aid is awarded through NewCo to the participating undertakings due to favourable conditions of the collaboration.
3) As concerns specifically research in the field of nuclear energy, NRG|PALLAS and its successor NewCo can be considered to be a research and knowledge dissemination organisation as defined by the R&D&I Framework, whose research results are disseminated on a non-exclusive and non-discriminatory basis. In any case, NRG implements a strict separation of economic and non-economic activities (in terms of funding, costs and revenues) so as to avoid any cross-subsidisation of the economic activities of NRG. The same will apply to NewCo as the successor of NRG|PALLAS.
4) As concerns specifically research activities in the field of nuclear medicine, these are currently carried out by NRG|PALLAS via the FIELD-LAB laboratory, which supports the development of new nuclear drugs for cancer treatment by University Medical Centres, start-ups and innovative pharmaceutical companies, and supplies small samples of ready-made radio chemicals for clinical trials. The research activities carried out in the FIELD-LAB are not independent, but do include effective collaboration as defined in the R&D&I Framework. In any case, NRG implements a strict separation of economic and non-economic activities (in terms of funding, costs and revenues) so as to avoid any cross-subsidisation of the economic activities of NRG. The same will apply to NewCo as the successor of NRG|PALLAS.”
Before continuing, it may be necessary to recall that section 2.2.1 of the RDI Framework concerns the pricing of contract research carried out for the benefit of undertakings. Section 2.2.2 refers to collaboration between research organisations and undertakings. Paragraph 29 in section 2.2.2 of the Framework sets out conditions for the prevention of indirect subsidisation of undertakings through collaborative projects.
The Commission response to the Dutch arguments is as follows.
“(153) As regards the alleged non-economic nature of part of the research activities carried out by NewCo, the Commission observes the following:
- Based on the information provided by the Netherlands, it indeed appears that some of the research activities carried out by NewCo will be of a non-economic nature. However, based on the information provided by the Netherlands, the Commission is unable to estimate exactly how much of the research activities carried out by NewCo will be of a non-economic nature.
- In any case, while NewCo will be an important player in nuclear research, the Netherlands indicates that, compared to the HFR, the PALLAS reactor will have a stronger focus on isotope production. This is confirmed by data submitted by the Dutch Authorities, according to which NewCo’s operational costs related to R&D&I are estimated to vary between [5-30]% and [5-30]% of the overall operational costs. In light of the above considerations, the Commission acknowledges that part of the research activities carried out by NewCo will be of a non-economic nature.”
Nonetheless, the Commission concludes that the public funding constitutes State aid. The explanation for this conclusion is not really illuminating. Although it is stated that the Commission was “unable to estimate exactly how much of the research activities carried out by NewCo will be of a non-economic nature” it is not so easy to understand why, on the one hand, the Commission acknowledges that part of the activities will be non-economic in nature while, on the other, it considers the totality of the public funding to constitute State aid. Perhaps the real reason was not that the Dutch authorities could not provide precise data, but that they were unwilling to establish account separation and to commit to implementing safeguards to prevent the economic activities from exceeding 20% of the annual capacity of NewCo. If that were the case, the Commission should have explicitly said so. That would have provided useful guidance, especially given that the public funding in this case is reimbursable which suggests, first, that NewCo will generate enough revenue to repay the state and, second, that revenue from economic activities will probably cross-subsidise the non-economic ones [assuming, of course, that the non-economic activities do not generate sufficient revenue to cover their costs]. At any rate, this case highlights the importance of account separation of the non-economic from the economic activities.
The Commission agreed with the calculations submitted by the Dutch authorities concerning the need and proportionality of aid. Also the Commission did not question the significant difference between the amount of aid and the funding gap of the project, which should have raised questions as to the viability of the project and whether the expected income was much larger than what was formally specified in the funding gap calculations.
Impact on competition
Perhaps the most significant part of the decision was the Commission’s identification of “the outstanding distortions of trading conditions which cannot be avoided (despite the aid being necessary, appropriate, proportionate)”.
First, the Commission explained that “(238) by definition, any aid measure distorts competition and trade, even if the measure effectively facilitates the development of a certain economic activity and even if it is necessary, appropriate and proportionate. In particular, aid measures that support the development of the economic activity of a given beneficiary are likely to undermine other operators of the same economic activity and operators of substitutable economic activities.”
“(239) Despite their being necessary, appropriate and proportionate […], the aid measures in favour of the PALLAS project could have a negative impact on other producers of medical isotopes. Given the at least EU-wide (and, in fact, even global) character of the market for medical isotopes, such a negative impact could affect, not only operators established in the Netherlands, such as for example the company SHINE Europe B.V. […], but also operators established in other EU and EEA countries.”
“(240) However, the impact of the aid in favour of the PALLAS project on competition and trade will be reduced by some mitigating factors, as shown in the following recitals.”
“(241) Firstly, given the importance of the HFR (which serves approximately 30% of the world market and 70% of the European market) and given the capacity limitations of the other existing or planned research reactors; it cannot be expected that the latter will be able to fill the supply gap if the HFR is not replaced by the PALLAS reactor. Further, the history of the project has shown that purely private investment into the construction of any other research reactor is currently highly unlikely. Therefore, the State aid in favour of the PALLAS project is not likely to have any inappropriate crowding-out effect vis-à-vis other reactor projects.”
“(242) Secondly, as regards a potential crowding-out effect vis-à-vis alternative technologies, the Commission observes that, given the expected increase in world demand for medical isotopes and given the foreseen closure of many of the existing research reactors, the construction of the PALLAS reactor (as replacement for the HFR) is unlikely to lead to a situation where there would be no room for innovative projects in a market, such as the medical isotopes one, where purchasers need the presence of multiple producers. The following should in fact be considered: (i) it is uncertain whether and to what extent it will be possible to prolong the operation of some of the existing multipurpose research reactors that are foreseen to be closed; (ii) in the medical isotopes industry, it is important to maintain a production capacity exceeding demand (outage reserve capacity) so as to cope with both planned and unexpected production breaks; (iii) due to their short decay times and to the strict rules for their transportation, at least certain medical isotopes cannot be stockpiled and must be produced continuously so as to be able to reach the patients on time. The above considerations corroborate the view that purchasers of medical isotopes need the presence of multiple producers in the market. This is the reason why the NucAdvisor study recommends diversified investments in Europe including a combination of at least one new reactor, such as PALLAS, and of innovative projects, such as SHINE. In this regard, the Commission notes that, according to the available information, the SHINE project has been supported by both the Dutch Authorities and the US Authorities.”
“(243) Thirdly, according to a 2022 report made for the Dutch Government by KPMG, the market shares of NewCo, the operator of the PALLAS reactor, in the worldwide markets for diagnostic and therapeutic isotopes will be roughly the same as the current market shares of NRG, the operator of the existing HFR.”
“(244) Fourthly, as explained by the Dutch Government, NewCo will allocate costs in such a way as to avoid any cross-subsidisation between its R&D&I activities and the production of medical isotopes. Furthermore, in case of effective collaboration with undertakings, NewCo will comply with section 2.2.2. of the R&D&I Framework, including in particular the provisions under paragraph 29 of the Framework aimed at ensuring that no indirect State aid is awarded through NewCo to the participating undertakings due to favourable conditions of the collaboration. These measures will further diminish potential distortions of competition and trade caused by the aid in favour of the PALLAS project. In addition, part of the research activities carried out by NewCo will be of a non-economic nature.”
“(245) Finally, as pointed out by the Dutch Authorities, any distortions of competition and trade caused by the aid in favour of the PALLAS project will be lessened by the fact that NewCo will repay the public funding, and will charge prices for its medical isotopes that reflect the full production costs. Further, the prices charged by NewCo will include a reasonable profit margin. NewCo will thus implement an FCR [Full Cost Recovery] model, in line with the objectives of the OECD-NEA and of the European Observatory on the Supply of Medical Radioisotopes, thereby contributing to making the medical isotope sector economically sustainable.”
“(246) Concerning the implementation by NewCo of the FCR principle, the Commission takes note that the Dutch Authorities foresee that this shall be monitored by an independent Trustee who shall act on behalf of the Commission in compliance with the Mandate submitted to the Commission by the Dutch Government, which is attached to the present Decision. The Trustee Mandate foresees in particular a “Full Cost Coverage Commitment” and a “No Lowest Price Leader Commitment” to be complied with by NewCo and to be monitored by the Trustee. Pursuant to the Mandate, the monitoring and reporting by the Trustee will enable the Dutch State to demonstrate to the Commission that the Commitments under the Mandate are properly implemented and enforced, so as to confirm in particular that NewCo – when executing the PALLAS programme – behaves in a commercially appropriate manner and does not implement predatory pricing strategies through e.g. cross-subsidisation across commercialised isotopes because of its public funding.”
“(247) As regards specifically the “Full Cost Coverage Commitment”, also referred to as “FCC”, foreseen by the Trustee Mandate, the Commission considers that it is in line with the spirit of the FCR principle developed by the OECD-NEA. In particular, the “Full Cost Coverage Commitment” proposed by the Dutch Authorities takes due account of the OECD-NEA Guidance Document proposing an FCR methodology, which (on page 8) contains the following indications: “It is not mandatory that a reactor operator applies this methodology exactly as described in this document. The methodology provides consistent guidance to all reactors, but some reactor operators may already be using their own full-cost identification and recovery methodology. If they can demonstrate that their methodology is compliant with the full-cost recovery principles established and described in this guidance document, such that all relevant costs are identified and recovered, that will be sufficient. […] Operators have the responsibility to adhere to the principle of full-cost recovery and to ensure it is implemented, respecting applicable domestic accounting law and competition rules. It should be recognised that there may be differences in how such analyses are performed to align with accounting standards and financial reporting. However, this guidance document is for a different purpose and should not be seen as incompatible with those other reports; they all have specific objectives and therefore do not need to be perfectly consistent”. Indeed, the Commission considers that the “Full Cost Coverage Commitment”, as proposed by the Dutch Authorities and monitored by the Trustee, ensures that “all relevant costs are identified and recovered”, as required by the OECD-NEA Guidance Document.”
Conclusion
After finding that the aid was necessary and proportional and after verifying that it would not cause an undue distortion of competition through the establishment of a dominant position or the crowding out of private investment, the Commission authorised the aid.
[1] The full text of the Commission decision can be accessed at:
https://ec.europa.eu/competition/state_aid/cases1/202530/SA_103925_352.pdf
