Impending changes to the UK nuclear installations liability regime

On 4 May 2016, the Nuclear Installations (Liability for Damage) Order 2016 (the 2016 Order) was made. The 2016 Order effects a number of significant changes to the Nuclear Installations Act 1965 (the NIA 1965) to bring into force in the UK amendments to the Paris Convention¹ and the Brussels Convention² (together,  the Conventions).

The 2016 Order is the culmination of over five years of UK Government consultations on amendments made to the Conventions in 2004 (the 2004 Protocols)³ by the relevant contracting parties.⁴ Importantly, for operators of nuclear generating facilities (referred to in the Conventions as "standard sites"), the 2016 Order significantly increases the maximum liability following a nuclear incident, and broadens the scope of compensation payable to claimants in such circumstances.

The 2016 Order is not expected to have an impact on the already high safety and security standards which are the benchmark for existing UK nuclear operators. However, the existing NIA 1965 requirements for operators to maintain insurance or other security to cover their maximum liability will inevitably become more onerous (and more expensive), and operators and insurers may in fact require Government support in the short term to satisfy these more onerous requirements.
Furthermore, the increased scope and quantum of operator liabilities brought about by the  2016 Order will most likely prompt detailed analyses of indemnity provisions in existing contracts between nuclear site operators and their contractors to ensure that such provisions are fit for purpose and provide adequate protection for contractors, particularly where the previous NIA 1965 liabilities are hardwired into these provisions.

Recap on the Paris Convention

The Paris Convention has been in place since 1960 and, alongside the Vienna Convention,⁵ is one of the cornerstones of international nuclear liability law. The Paris Convention establishes a framework for the recovery of compensation for damage suffered by third parties due to a nuclear incident, centred around a number of key principles including:

• the operator of a nuclear installation has exclusive liability for a nuclear incident;
• the operator's liability is strict and unrelated to fault;
• the operator's liability is limited in amount and time;
• the operator must maintain insurance or other security to cover its maximum liability; and
• exclusive jurisdiction is granted to the courts of one state (usually where the nuclear installation is situated).

Recap on the Brussels Convention

The Brussels Convention operates to provide additional funds to compensate damage as a result of a nuclear incident where Paris Convention funds are insufficient, mainly through public fund contributions. It operates subject to the provisions of the Paris Convention.

2004 Protocol changes

In summary, the 2004 Protocols increase the scope and quantum of liability under, and broaden the application of, the Conventions to ensure that an increased amount of compensation is available to a larger number of claimants following a nuclear incident.

It was the Chernobyl disaster in 1986 that prompted the modification of the Conventions through the 2004 Protocols. Although the former Soviet Union was not party to either the Conventions or the Vienna Convention, Chernobyl confirmed that these conventions were inadequate to ensure sufficient, equitable and rapid compensation after a large-scale nuclear incident.

The changes made by the 2004 Protocols will not take effect until they have been ratified by all contracting parties to the Conventions. This is expected to take place in January 2017. All EU member states who are contracting parties to the Conventions will ratify the 2004 Protocols at the same time.⁶ The making of the
2016 Order will enable the UK to ratify the 2004 Protocols.

Extending the categories of damage

In addition to an operator's liability for personal injury, death and property damage under the existing provisions of the Conventions, the
2016 Order increases the scope of liability under the NIA 1965 to include the following:

• the costs that UK public authorities incur in implementing measures to reinstate the impaired environment, provided that such measures are approved by the Secretary of State for Energy and Climate Change (either before or after the measures are taken);
• loss of income deriving from a direct economic interest in any use or enjoyment of the environment (e.g. a lawful right to carry out activities to exploit a part of the environment, such as fishing); and
• the costs of taking measures to prevent a "grave and imminent threat" presented by an actual or potential nuclear incident, which will be tied into the UK's emergency planning legislation.

Increasing operators' maximum liability

The 2016 Order significantly increases the liability levels of operators of standard sites for a nuclear incident, with such liability rising from the current £140m per incident to €700m, which will continue to increase €100m annually up to a maximum of €1.2bn. The UK Government will continue to be legally obliged to top up such liability to a cap of €1.5bn, where the relevant third party claims exceed the operator's €1.2bn cap.

Operator third party liability levels will also increase from £10m to €70m for low risk installations (such as nuclear disposal facilities and reactors used for research), and third party liability for incidents involving the transport of nuclear substances which are unlikely to cause significant third party damage will increase from £10m to €80m.

Nuclear operators will continue to be required to put in place insurance or other security to cover their increased liabilities under the NIA 1965. Please see below for a more detailed discussion of this issue.

Extending the geographical scope of the Conventions

The 2016 Order gives effect to the extended geographical scope of the Paris Convention, so that claims may be brought in the UK under the Paris Convention (for nuclear incidents which take place in the UK) for damage suffered in non-nuclear countries who are not party to the Paris Convention or nuclear countries who are not party to the Paris Convention but who have in place equivalent and reciprocal liability arrangements (described in the 2016 Order as "qualifying territories").

Due to the fact that the geographical scope of the Brussels Convention does not extend to "qualifying territories", the 2016 Order distinguishes between claims made under the Paris and Brussels Conventions, and claims made under the Brussels Convention only.

Increasing the limitation period for personal injury claims

Finally, personal injury claims made under the Paris Convention may now be made up to 30 years following the relevant nuclear incident. This limitation period has been increased from 10 years, which is the limitation period that will continue to apply to all other Paris Convention claims.

Potential issues for the nuclear sector flowing from the 2016 Order

Insurability of increased liabilities under the Conventions and support required from the Government to bridge the "insurance gap"

As part of the 2011 consultations on the 2016 Order, the Government published two reports prepared by INDECS Consulting Ltd which looked at the insurability of the increased liabilities under the Conventions.⁷

In summary, the reports concluded that:

1. it is likely that existing nuclear insurance pools and mutual insurance companies in Europe will provide most of the increased cover required by the 2016 Order;
2. however, in the short term (two to three years after the 2004 Protocols are ratified), it will be difficult for nuclear operators to obtain insurance that will respond to personal injury claims after 10 years and up to 30 years or claims for damage caused by "authorised discharges" (i.e. authorised discharges/permitted disposals and discharges of radioactive waste which are not considered to be unforeseen events); and
3. consequently, the UK Government should begin work to structure a temporary reinsurance product which provides commercially-priced reinsurance directly to insurers to cover the gaps.

Based on INDECS Consulting's recommendations, the Government confirmed in its response to the consultations that it would "consider stepping in to fill any gap in the provision of commercial insurance or other financial security in return for a charge, if the market fails in this area … subject to any EU or UK law requirements".⁸

Consequently, the 2016 Order confers wide powers on the Secretary of State to:

• approve operators' revised insurance or other financial cover; and
• make arrangements to enable operators to put in place insurance or other financial cover, such as the provision of insurance, reinsurance, guarantees or indemnities.

Clearly, this is encouraging for UK nuclear operators and should avoid a scenario where operators are unable to comply with the requirements relating to insurance and financial security under the 2004 Protocols. However, it leaves various questions unanswered for existing and future UK nuclear operators, including:

• what will be the cost of the expanded scope of insurances that will initially be covered by the existing insurance market;
• what will be the cost of reinsurance provided by the UK Government for personal injury claims commenced 10 to 30 years after an incident and damage caused by authorised discharges (the insurance gap); and
• is there a risk that no commercial insurance product develops to fill the insurance gap and, if this risk materialises, will the Government provide a long term solution for the insurance gap (and at what cost for nuclear operators)?

The European Commission's decision on the Hinkley Point C new-build nuclear project,⁹ recognises that these are issues that the developer, EDF (through its subsidiary NNB Generation Company), and the UK Government, have been looking at closely in the context of the award of a Contract for Difference (CfD) for the project. In the decision, the Commission refers to:

• the "opex reopeners" in the CfD, which will mitigate long-term cost risk for EDF by allowing for an increase (or a decrease) to the "Strike Price" on the basis of known actual costs and revised predictions of future costs, for certain operational costs including insurance; and
• compensation that will be payable to EDF if the facility is shut down due to "nuclear third party liability insurance circumstances including as a result of the UK Government not approving alternative insurance arrangements proposed by the Generator when the UK Government ought reasonably to have done and there being no other approved insurance options open to the Generator".

There will be intense focus on this area in coming months as we approach the ratification of the 2014 Protocols in 2017. The UK Government, and nuclear operators (including existing operators and the operators of planned new-build nuclear facilities in the UK¹⁰), will be closely engaged with the existing insurance market to confirm whether – and at what price – the market will be willing to provide enhanced insurance arrangements to cover nuclear operators' significantly increased liabilities.

Equally, the Government will be working to structure and price reinsurance arrangements to fill the temporary "insurance gap", on the assumption that such gap will exist as per INDECS Consulting's predictions. The Government has confirmed that it will publish further information on such arrangements in the near future and prior to the ratification of the 2004 Protocols.

Implications for existing nuclear site operators and their contractors

There are certain other implications for existing nuclear site operators and their contractors flowing from the 2016 Order.

One particular area that will attract attention is the scope of indemnity provisions in existing contracts for the provision of goods or services to nuclear site operators. Where such provisions are based on the previous NIA 1965 liabilities (i.e. contractors are shielded from liability but only in respect of the previously more limited scope and quantum of liabilities), the relevant contractors could be exposed to liabilities above the previous levels.

Therefore, contractors undertaking work in relation to nuclear installations in the UK who have the benefit of nuclear indemnities should carefully analyse such indemnities to confirm whether they are still fit for purpose in light of the 2016 Order.

Possible circumvention of the channelling provisions of the Paris Convention

There remains a risk that, despite the clarifications in the 2016 Order relating to the geographic scope of the Conventions, foreign shareholders of UK nuclear operators or foreign contractors operating in the UK could be exposed to claims which are brought by claimants domiciled or suffering harm in a country which is not party to the Conventions (such as the US), in respect of a nuclear incident which occurs in the UK.

If such claims are not brought pursuant to the provisions of the Conventions or another internationally accepted nuclear convention, this could result in the channelling principles being circumvented which could, in turn, lead to uncapped and uninsured liabilities for foreign entities from non-convention states operating in the UK.

Historically, this has been a particular concern for US organisations operating in international nuclear markets, where such organisations have sought indemnities (often from the host state) to protect against the possibility of claims being brought in the US for nuclear damage caused in foreign jurisdictions.

The Government's response to the consultation on the 2016 Order highlighted that this concern had been raised by certain respondents who, like various commentators in the nuclear sector, suggested that the concern could be addressed by the UK ratifying the Joint Protocol,¹¹ a treaty that links the Paris Convention and the Vienna Convention. Equally, ratifying the Convention on Supplementary Compensation for Nuclear Damage (the CSC), which is seen as a possible basis for an all-encompassing international nuclear liability regime, could be another way for the UK to manage the risks for foreign entities operating in the UK. The CSC entered into force on 15 April 2015 and has now been ratified by the US and Japan, two significant nuclear generating countries who are not party to either the Paris Convention or the Vienna Convention.

However, the UK Government has thus far declined to ratify either the Joint Protocol or the CSC. Whilst it confirmed in the consultation response that it would consider whether or not to ratify the Joint Protocol once the revisions to the Conventions have come into force, no clear commitment has been made to do so.

When does the 2016 Order come into force?

The majority of the provisions of the 2016 Order will come into force when the 2004 Protocols are ratified, scheduled for the start of 2017.

However, certain provisions have already come into force to ensure that the revised nuclear liability regime can be implemented immediately upon the 2004 Protocols being ratified. In particular, the provisions empowering the Secretary of State to make insurance/reinsurance arrangements are now in force. It is important to note that following ratification there will be no grace period before the changes to the regime will need to take effect.

Finally, certain other regulations¹² and court rules will also need to be amended prior to the 2004 Protocols being ratified. The Government has confirmed that it will make the amending instruments shortly.

Notes

1 The Convention on Third Party Liability in the Field of Nuclear Energy of 29 July 1960, as amended by the Additional Protocol of 28 January 1964 and by the Protocol of 16 November 1982.

2 The Convention of 31 January 1963 Supplementary to the Paris Convention of 29 July 1960, as amended by the Additional Protocols of 28 January 1964 and by the Protocol of 16 November 1982.

3 The Protocol of 12 February 2004 to amend the Paris Convention and the Protocol of 12 February 2004 to amend the Brussels Convention.

4 The contracting parties to the Paris Convention are Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Slovenia, Spain, Sweden, Turkey and the United Kingdom. Greece, Portugal and Turkey are not signatories to the Brussels Convention.

5 Vienna Convention on Civil Liability for Nuclear Damage of 1963 as amended by the Protocol of 1997.

6 Council Decision 2004/294/EC10 of 8 March 2004.

7 Report to Department of Energy and Climate Change on the commercial insurability of the increased liabilities following implementation of the Paris and Brussels Conventions in the UK – INDECS Consulting Ltd, October 2011 and Report to Department of Energy and Climate Change on structure and pricing of suggested solutions to gaps arising from Paris and Brussels implementation, INDECS Consulting Ltd, November 2011.

8 Implementation of changes to the Paris and Brussels Conventions on nuclear third party liability – Summary of responses and Government response to consultation, Department of Energy and Climate Change, March 2012.

9 Commission Decision of 08.10.2014 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 C(2014) 7142 final cor.

10 In addition to EDF and its Hinkley Point C development, Horizon Nuclear Power plans to develop four to six new reactors at sites in Wylfa and Oldbury, and separately NuGen plans to develop three reactors at Moorside, near Sellafield in Cumbria.

11 The 1988 Joint Protocol Relating to the Application of the Vienna Convention and the Paris Convention.

12 Including the Nuclear Installations (Prescribed Sites) Regulations 1983 and the Nuclear Installations (Insurance Certificate) Regulations 1965.