New nuclear: RAB means customers will take the risk

In this week’s budget and spending announcements, funding of £1.7 billion was allocated to helping new nuclear get over the line to a final investment decision before the end of this parliament. Alongside that cash the government published draft legislation that would allow nuclear plants to be developed under a RAB (regulated asset base) model. The RAB approach means consumers take the risk if nuclear construction – and cut the cost of financing. That is because they start to pay when construction begins, so interest payments do not balloon while the plant is under construction.
Consumers are being asked to take considerable risk. BEIS’s impact assessment (IA) discusses “optimism bias” and says data show that nuclear power plants typically have construction periods that are 40% higher than expected at the point of FID in Europe – even when they are not a series build (ie not the first of a kind). On average, across all nuclear plants built since 1990 the construction period was a huge 90% more than expected.
Although Hinkley Point C was expected to take nine years from FID a lot of pre-construction work was undertaken in advance, BEIS says. Tne IA uses likely construction periods at 13 or 17 years.
With such a long construction period the cost of finance is indeed enormous, which makes RAB look attractive alongside. The IA says the cost of a new plant in 2021 prices, with work starting in 2023, would be £68 billion (for a series build) using a Contract for Difference with a 9% hurdle rate. The RAB model cuts that considerably – to £24 billion or £38 billion, depending on whether the hurdle rate is 4% or 6%. Plugging the 90% overrun scenario into those assumptions suggest a RAB model would save £82 billion or £57 billion at hurdle rates of 4% or 6%, respectively – but that is because the CfD approach would cost an eye-watering 120 billion.
BEIS acknowledges that insulating investors from risk is itself a risk for consumers, saying “lf too much risk is taken away from investors, they would lack the incentives needed to take action to reduce the risk of construction cost and duration overruns. lf too much risk is taken away from investors, a RAB model would then lead to higher construction cost and duration.”
Legislation to set up the RAB framework would also insulate investors from changes in the waste management requirements (new nuclear plants have to have a funding framework for nuclear waste in place from the start). It will also have to make arrangements for the new structure, designate a counterparty to manage and transfer funds from consumers and hence suppliers and back it, etc – all of which will eat away at the £1.7 billion allocated to the RAB option.
The government anticipates that it will use the planned new powers to licence a RAB company in Q4 2022. That is expected to refer to Sizewell C – the government has been in “serious negotiations” over using the model for that plant since the beginning of the year. But secretary of state Kwasi Kwarteng MP left the door open for other projects, saying “Nuclear power is crucial to strengthening energy security and reducing our reliance on volatile fossil fuels. I’ve announced plans for a new finance model to encourage private investment and save consumers £30 billion on every large-scale nuclear project”. That could be good news for those hoping to revive nuclear new-build plans at Wylfa Newydd.
Will the model do its job of attracting investors into new nuclear?
Speaking at the recent Westminster Energy, Environment & Transport Forum policy conference ‘Next steps for developing the UK nuclear sector and delivering new build projects’, EDF’s Humphrey Cadoux-Hudson explored the figures behind the RAB option. He said that of HPC’s £92.50/MWh fixed CfD price, only £12-13 was the cash cost of construction. Operation and waste management represented another £25 “and the rest is the cost of finance”. Of that, half would be the cost of capital allowed for a regulated asset and “the other half is the risk of attracting private finance. If we can reduce that the cost of capital should come down”.
So with the risk of cost and time overruns transferred to consumers, does new nuclear look attractive to third party investors? At what price when, other, more familiar, investments are available. Today the UK Competition and Markets Authority (CMA) supported Ofgem’s decision to set a cost of equity of 4.55% – and the IA mid range. Other rates have not fallen quite so low. Germany’s Federal Network Agency reduced the rate of return on capital for new build electricity grids to 5.07% for the four years from 2024. Will nuclear financing be attracted inside BEIS’s ‘high’ IA hurdle rates of up to 6%? That remains to be seen.