Packed off? The CJEU annuls the Commission decision allowing nuclear State aid in Hungary

This is the first instalment of a new FSR blog series covering current legal developments impacting the sectors covered by the Florence School of Regulation. It provides an analysis of a recent judgment of the Court of Justice of the European Union concerning the Hungarian Paks nuclear power station.

Background

Paks II is a Russian project to expand Paks, Hungary’s only nuclear power plant. In 2024, it had produced almost half of gross Hungarian electricity production and one third of gross domestic consumption. Paks II consists of two reactors supplied to Hungary by the Russian state nuclear corporation, Rosatom. The engineering, procurement and construction (EPC) contract was concluded in 2014 between Rosatom’s subsidiary—JSC NIAEP—and Paks II. These two new reactors were meant to start operation in 2025 and 2026, respectively. However, the project has been mired in controversy and has suffered many years of delay; construction is now scheduled to start in November 2025. The project has involved allegations of corruption at the national and European levels. Environmental NGOs campaigned vigorously against the project. The then national regulator, who had voiced concerns, was dismissed and replaced. And today, the completion of the project could undermine the effectiveness of eventual EU sanctions against imported Russian nuclear fuels as contemplated in the European Commission’s recent REPowerEU Roadmap.

In a nutshell, on September 11th the Grand Chamber of the Court of Justice (ECJ) ruled on the first plea only and found that the lower court—the General Court (GC)—had failed to properly explain why EU procurement rules could be bypassed, allowing JSC NIAEP to benefit from a €10 billion contract. As the application of these rules is ‘intrinsically linked’ to the assessment of the State aid involved, this reasoning was defective. The ECJ followed its Advocate General’s opinion of 27 February 2025 and annulled the Commission decision.

The Commission Decision

In 2017, the Commission had authorised the State aid for the construction of these two reactors despite the fact that Hungary had directly awarded the project to the Rosatom subsidiary without a proper tender procedure, as mandated by EU public procurement directives. In its decision, adopted at the end of the so-called formal investigation procedure (under Article 108(2) TFEU), the Commission found that the contract was compatible State aid in accordance with Article 107(3)(c) TFEU. As regards the possible procurement breach, the Commission found that the award of the contract to construct the plants could not produce additional distortion of competition and trade on a distinct market—the electricity market—so that the Commission was not required to check whether these award procedures complied with EU public procurement rules. The decision briefly noted that, in any event, a separate infringement procedure (on the basis of Article 258 TFEU) had not led to a finding that Hungary had infringed those rules.   

The appeals

The Republic of Austria is well known for trying to stop the construction of nuclear power plants near its borders as well as further afield in the UK. It has also just unsuccessfully challenged the inclusion of nuclear energy as a ‘sustainable fuel’. In the earlier case of ‘Hinkley’, it had argued in vain that the promotion of nuclear energy conflicted with the principles of environmental protection enshrined in Article 11 TFEU. Austria has not suffered its earlier defeats in the ‘Hinkley’ case, and it has now successfully appealed a ruling of  the lower court —the GC—in 2022 on Paks II by relying on a narrower set of legal arguments. It raised four grounds of appeal before the ECJ, alleging that the GC committed, first, an error of law by finding that the absence of a public procurement procedure for the construction of the two new nuclear reactors did not render the decision at issue unlawful; second, an error of law in respect of the review of the proportionality of the aid measure at issue; third, an error of law as regards the question of the existence of disproportionate distortions of competition and that of the strengthening of a dominant position on the market; and, finally, an error of law as regards the determination of the constituent elements of the aid at issue.

The ECJ only dealt with the first plea. It recalled that ‘the procedure under Article 108 TFEU must never produce a result which is contrary to the specific provisions of the Treaty. Accordingly, State aid which, as such or by reason of some modalities thereof, contravenes provisions or general principles of EU law cannot be declared compatible with the internal market’. It is well established in its case law that in assessing the compatibily of a State aid with the internal market, the Commission must take into account a possible infringement of provisions of EU law other than those relating to State aid, where such an infringement arises from the eonomic activity financed, from the object of the aid or from aspects inextricably linked to the object of the aid.

The GC had not ignored this line of case law, but it had tried to avoid applying it. It defined the object of the aid at issue as consisting solely of ‘the provision free of charge of two new nuclear reactors to the Paks II company for the purpose of their operation’. It concluded that ‘the question of whether the award of the contract for the construction of those two reactors should have been subject to a tender procedure concerns the manufacture and supply of the asset to be provided free of charge and thus precedes the aid measure itself’.

The ECJ however held that the direct award of the contract for the construction of the two new nuclear reactors is an aspect that is inextricably linked to the object of the aid. The organisation of an open, impartial and unconditional tender procedure for the award of a contract for the construction of infrastructure could impact the cost of the investment required and the extent of any advantage granted.

It should be pointed out that the Commission maintained that Hungary’s compliance with the EU public procurement rules had been assessed in separate infringement proceedings, where it had reached the preliminary conclusion that the relevant provisions of Directive 2014/25 were not applicable to the award of that construction contract. An exemption applied. The infringement proceedings were closed. The ECJ was not impressed. It held that the mere closure by the Commission of infringement proceedings cannot be decisive to determine if the measure was consistent with EU law. A mere reference to the infringement proceedings and the application of the exemption from the procurement rules was not a sufficiently well-reasoned approach. The Commission will have to do better if and when it adopts a new decision on Paks II.

FSR Law Blog

The FSR Law Blog is a new series principally authored by the School’s Part-Time Professors and Research Associates working on legal issues. It aims to provide timely and concise explanations and commentary for policymakers, industry professionals, academics, and other stakeholders seeking to understand specific aspects of the evolving legal and regulatory landscape.