Britain is grappling with the problem of inviting the private sector to invest in new nuclear power at a time when prices are struggling to rise. Its solution reduces costs but shifts the risk to consumers.
1. Attract private capital

Jeremy Hunt, the chancellor of the Exchequer, recently confirmed that the UK would back the proposed Sizewell C nuclear power station with £679m of investment.

 

The funding was first announced by the then prime minister, Boris Johnson.

 

It is a sign of the huge investment in new nuclear power stations that the UK plans to see a final investment decision (FID) for a new nuclear power station reached by this parliament (before the end of 2024). Two new prime ministers (Theresa May and Rishi Sunak) agreed the FID by the next parliament (before 2029). A review of the Sedgwell C project has been announced.

 

Jeremy Hunt reaffirmed the project and funding and said: "Our £700m investment is the first state support for a nuclear programme in over 30 years and is the biggest step on our journey to energy independence."

 

Of more interest to investors may be the UK government's decision to take a 50 per cent stake in the Sezwell C project with co-investor EDF.

 

But neither man plans to hold on to those big stakes for long. Once the project, which now has planning permission, reaches FID, both sides hope it will attract new investors so that the UK and EDF can reduce their stakes to around 20%.

 

It is hoped that private capital will be attracted to the project because investors will have confidence in the continued involvement of the UK and EDF in the project, and also because the project will have a different funding model.

Jeremy Hunt, the chancellor of the Exchequer, recently confirmed that the UK would back the proposed Sizewell C nuclear power station with £679m of investment.

 

The funding was first announced by the then prime minister, Boris Johnson.

 

It is a sign of the huge investment in new nuclear power stations that the UK plans to see a final investment decision (FID) for a new nuclear power station reached by this parliament (before the end of 2024). Two new prime ministers (Theresa May and Rishi Sunak) agreed the FID by the next parliament (before 2029). A review of the Sedgwell C project has been announced.

 

Jeremy Hunt reaffirmed the project and funding and said: "Our £700m investment is the first state support for a nuclear programme in over 30 years and is the biggest step on our journey to energy independence."

 

Of more interest to investors may be the UK government's decision to take a 50 per cent stake in the Sezwell C project with co-investor EDF.

 

But neither man plans to hold on to those big stakes for long. Once the project, which now has planning permission, reaches FID, both sides hope it will attract new investors so that the UK and EDF can reduce their stakes to around 20%.

 

It is hoped that private capital will be attracted to the project because investors will have confidence in the continued involvement of the UK and EDF in the project, and also because the project will have a different funding model.

The hope is that the Sezwell C project does not look like a state-owned plant (funded by the government) and that it (indeed the taxpayer) is at risk of cost and schedule overruns.

 

Instead, the government hopes it will be similar to other types of power plant development cycles, in which different investors buy and dispose of stakes as projects move from development, licensing and "shovel-ready" to construction and operation.

 

With each step, the value of the project goes up while the risk goes down, so eventually it becomes an investment for groups such as pension funds, which will accept low returns in exchange for long-term stability, while early investors take profits and reinvest them in other projects with higher returns.

 

Even 60 per cent of the project's £20bn (in 2015 funds) is too much for any one bank or other investor, who would be more likely to join in at £1bn.

 

The UK hopes that after FID (the target is the end of 2024) the project will attract enough investors to enable them to compete on the required initial return on investment.

 

In future, the level of return allowed will be set by Ofgem, the UK energy regulator.

 

2. Turn to the RAB model

 

However, co-investing with the government is not enough to make the Sezwell C project an attractive investment at the moment.

 

The UK government believes the key is to regulate the asset-based model (RAB).

 

The Ministry of Business, Energy and International Strategy (BEIS) set out its view on RABs and compared it to other financing models in the 2021 impact assessment, as RABs require major legislation (now passed).

 

Comparing RABs with reliance on existing funding models, such as contracts for difference (CfD), BEIS said it "believes there are few, if any, strategic investors in the market willing to use the CfD mechanism to fund new nuclear power stations."

 

In fact, BEIS also believes that RAB itself "cannot meet its goal of delivering new projects at a lower cost."

 

It added new funded decommissioning Scheme (FDP) legislation and a new special administration system.

 

What is the regulatory asset-based model?

 

It aims to solve nuclear power's biggest problem: the huge cost of capital and the long-term gap (up to 15 years) between the investment and the return that begins to be made once the power is generated.

 

The British RAB approach aims to address this problem.

 

It has something in common with the US model, which adds nuclear power to a utility's "rate base", but the UK model would restrict project activities in a special purpose vehicle (SPV).

 

SPVS are granted licenses to own and operate projects for a specified period of time. Allows recovery of construction and operating costs and an "allowable return" on the asset during the life of the licence.

 

The key issue here is that regulated companies are allowed to start charging customers immediately at the start of a project and can continue to do so throughout the construction phase.

 

The model for this approach utilising the Sedgwell C project is the Thames Tidal Tunnel (TTT), currently under construction, for which customers will have paid for more than a decade by the time the project is fully operational.

 

The advantages can be huge.

 

The company does not have to pay interest costs for the entire duration of the project.

 

In addition, investors take less financial risk, so they will also invest at a lower interest rate.

 

For projects where financing costs make up the bulk of a project's cost, the impact is dramatic: Advocates say annual costs for consumers of the TTT are cut by more than half compared with traditional financing models.

 

The downside for the client or taxpayer is that they end up bearing most of the risk, whether it's delays, increased costs or outright cancellation.

 

This makes it politically more difficult for RABs in Britain.

 

3. CfD model

 

Hannah Bronwin, then BEIS deputy director (nuclear finance), said when the RAB was proposed that the package was in line with the government's requirement for fiscal responsibility because the project would be "taken off the national balance sheet." It could lower the cost of capital and provide a "complex and flexible approach to risk allocation".

 

Increasing the investor pool is also important, according to Impact Assessment: "Given the limited number of institutions with sufficient capital to invest in such projects, financial market constraints mean that these risks may spread among a small number of investors.

 

"If there is no RAB", because every investor will be taking huge risks and therefore still need a high risk premium to incentivise investment."

 

There is no lack of experience in the energy sector with different financing models. Some have useful lessons.

 

The UK's Contract for Difference (CfD) model was developed to reduce risk for investors by providing certainty about the price of electricity per unit.

 

This reduces the risk of lower returns than expected, which in turn reduces the cost of financing new generation capacity.

 

This can help incentivize on-time delivery - however, it can also lead to higher financing costs for projects that are longer or less certain to be delivered on time.

 

It has been widely used to fund renewable energy, including large offshore windfarms, and has been used to fund the Hinkley Point C project.

 

But under the CfD model, investors would still have to pay for cost overruns and factor them into the price of electricity required for their investment.

 

All of these risks have to be factored into the price of electricity demanded by the developer before the project gets financial approval.

 

Wind and solar projects are less burdensome because they can be built relatively quickly and projects can be built in stages.

 

As a result, a portion of the project income starts early, and construction experience can be learned at an early stage, so the risk of later delivery is lower.

 

4. Opportunities for nuclear energy

 

Nuclear doesn't have that chance.

 

Pre-set prices look very different. Once the plant is up and running, the risks accepted by the developer before and during construction will be forgotten.

 

For example, in a wave of independent generation projects (IPPs) agreed in the 1990s, consortiums bid for the right to build power stations and sell them under contracts called "Build, Own, operate" (BOO) or "Build, operate, transfer" (BOT), in which, after a certain period of time, It is usually returned to the existing company after 20 or 25 years.

 

This is a risk for investors, and it is political: Malaysia, for example, slashed contract export tariffs on five independent power plants after they became operational.

 

Sometimes it's the other way around: in 2012, Hinkley Point C was set at £92.50 (it has since risen in line with inflation).

 

This has been a bad deal for consumers for almost a decade, as the CfD strike price for offshore windfarms has fallen from well over £100 per MWh to £37 per MWh.

 

At the moment, however, the energy crisis and soaring electricity prices have made the price of Hinkley Point C look attractive, while the low price of offshore wind deals means turbine manufacturers are losing money and the industry is under pressure.

 

Under the RAB model, the plant, once operational, would still face price and capacity risk, as its electricity would have to be sold into an unstable market where cheap renewables could push nuclear out of the order of preference, with prices sometimes falling to zero (in contrast to TTT, where TTT's customer Thames Water had no choice, Can only use this service, no other provider).

 

While this may reduce costs, consumer advocates are wary of the RAB model.

 

Alan Whitehead, the Labour energy minister and a long-time observer of the industry, said previous complaints about the RAB model "effectively impose costs on consumers before you know when a particular plant is coming on stream. If there are any delays in the process, consumers simply keep paying... It transfers a lot of risk directly to the customer, who could end up paying for it if you have a serious problem with time."

 

He was referring to American consumers, who have been paying for decades after the nuclear program was canceled.

 

Will it attract investors as expected?

 

In June 2018, Alistair Ray of Dalmore Capital, a fund manager, said in an article in the Financial Times that he liked the RAB model. "The actual cost of the project is reflected in the capital base, which is important in any complex greenfield project."

 

Dalmore Capital is part of a consortium of private investors that supports Tithi's claim to use the new nuclear model: "Nuclear does not need to be completely risk-free to be beneficial."

 

 

The RAB model may not see a glut of investors rushing to fund Sezwell C in FID; But at least it opens the door for discussion.