Austria is to launch a legal challenge against the European Union’s (EU) decision to allow billions of pounds of subsidies for Hinkley Point C, casting fresh doubt over the UK’s first planned nuclear reactors in 20 years.

In October, the EU approved the controversial £17.6bn subsidy deal for the power station, which is expected to provide 7% of the UK’s electricity by 2023. David Cameron had previously hailed the subsidy deal between the French state-owned EDF and the UK government as “a very big day for our country”.

But the appeal by Austria, a non-nuclear nation, will be launched by April and could delay a final investment decision by the UK government for over two years.

The Guardian understands that Luxembourg is very likely to support the case in the European court of justice, arguing that the UK’s loan guarantees – over a 35-year period – constitute illegal state aid. Another EU country may follow suit.

“There has been a high-level decision by our chancellor and vice chancellor to challenge the EU decision on Hinkley within two months of its publication in the EU’s official journal,” Andreas Molin, the director of Austria’s environment ministry told the Guardian. The journal’s publication is expected in the next fortnight.

Stefan Pehringer, a foreign policy adviser to the Austrian federal chancellory said: “The Austrian government has announced its readiness to appeal against the EC’s [European Commission] decision concerning state aid for the Hinkley Point project, as it does not consider nuclear power to be a sustainable form of technology – neither in environmental nor in economic terms.”

Work has already begun at the Hinkley site, which the UK government said will have a capacity of 3.3GW, with the electricity it generates bought at a strike-price of £92.50 per megawatt hour, around double the market rate.

EDF had planned to sign a long-awaited funding agreement with its Chinese investment partners in March, thought to be key to settling procurement plans for the £24.5bn build, and the precursor to a final investment decision.

But the lawsuit may delay such plans, and introduce uncertainty about the UK’s attitude towards Hinkley, after elections in May.

Austrian government analysis suggests that European court cases of this nature typically last for one and a half years. But “as this is going to be a more complicated and fundamental case, it will last a little bit longer,” Molin said. “Two years could be a rough guess.”

He added: “If you accept the argument that Hinkley constitutes a ‘market failure’ as put forward by the commission, you could apply it to all other means of electricity production, probably all other forms of energy conversion, and it might even apply beyond the energy sector. We think that the single energy market itself is at stake in this case.”

The EU’s original decision last year surprised many observers, as the then-competition commissioner Joaquín Almunia had previously expressed scepticism about Hinkley’s’ conformity with an exhaustive list of strict state aid criteria.

These govern proportionality, decarbonisation, the potential for market distortion, the definition of ‘market failures’ and, crucially, whether the public monies advance an “objective of common interest” for the bloc.

No grounds for the commission’s volte-face have yet been published, but the Guardian has seen a draft of the EU decision from last October, suggesting that one key decider had been that Hinkley advanced an EU ‘common interest’ around security of supply.

A commission investigation declared itself “unsure” whether the reactor would resolve the UK’s security of supply issues, and was unconvinced that ‘diversification’ of supplies, on its own, would justify the monies involved.

“The commission however accepted that the decision was in line with the Euratom treaty,” the draft ruling says. The Euratom treaty obliges member states to facilitate investments in nuclear power and encourage ventures that lead to the technology’s development.

Molin said that Austria would argue that the Euratom treaty could not be used in this way in state aid cases, but there would be other lines of dispute. “We will try to prove that the commission did not consider all the things which it should have considered and that there were some procedural flaws,” he said.

Minutes from the commission’s internal discussion of the issue show that the EC’s president at the time, José Manuel Barroso, viewed the Hinkley decision as unprecedented, and said that it “touched on a politically sensitive topic”.

No contract for the Hinkley plant was put out to tender, and the ruling sparked outrage among environmentalists in the EU, that shows no signs of dying down.

“The commission took a political decision disguised as a legal one,” Mark Johnston, a senior adviser to the European Policy Centre, told the Guardian. “Barroso thought it would be easier to bend over for Cameron than to defend the single energy market. The significance of the case for energy investments across Europe could not be greater.”