Unacceptable risk to consumers: “regulated asset base” system to fund UK’s new nuclear reactors

How can we pay for new nuclear power stations? https://www.ft.com/content/4b81682e-cf19-11e9-99a4-b5ded7a7fe3f, Funding methods that work in the water industry cannot be applied to the sector, NICK BUTLER 9 Sept 19,

We are coming to a crucial moment of decision on the future of nuclear power in the UK, with implications for the industry across Europe and beyond. The basic issue is whether nuclear power can be provided at a cost that does not damage industrial competitiveness or impose an unacceptable burden on consumers. Without a positive answer to that question, nuclear will not be able to play a role in the transition to a lower-carbon economy.

Despite a long standing commitment to build 16GW of new nuclear capacity, only one new plant is under construction — Hinkley Point C in Somerset — which will, when eventually brought on stream, impose a long-term burden on UK consumers. The price agreed in 2013 — £92.50 per MW hour — looked extremely expensive then, but the real burden will come from the agreed index-linking of the price for 35 years. That already gives a price of over £100, a number way above those for competing sources of power such as wind, solar and natural gas.

The latest attempt to reduce this headline price slipped out in a consultation paper from the department for business, energy and industrial strategy in the dying hours of former UK prime minister Theresa May’s administration. The suggestion is that future nuclear power projects should be funded through the “regulated asset base” system. Put simply, the Rab would fund new projects from the moment construction begins through a levy on consumers. This would reduce the borrowing costs for the companies building the projects and thus in turn bring down the level of future bills. £92.50 might come down to £80.

This method of funding is a serious option for long-term projects with high upfront capital costs and has been used effectively in the water industry and elsewhere. As a mechanism for funding new nuclear, however, it is far from convincing. Water projects, such as reservoirs and pipeline systems, require large-scale capital investment. But the technology is proven and the construction risks are low. In new nuclear, however, the construction risks are high and to place them on the shoulders of consumers is unfair.

Of course, the dream of any company is to pass the burden of risk in any project to someone else while collecting a guaranteed stream of income once the project is up and running. In this case, however, the unfairness of such an outcome makes the model unsustainable. Consumers cannot be encouraged by the example of one of the few new nuclear stations being built in Europe — Flamanville on the northern coast of France.

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Flamanville began construction in 2007 and was due to come on stream in 2012. When I was working in government a decade ago, I was told that Flamanville would set the example for all new nuclear stations to be built in the UK. Today, Flamanville is still under construction. Earlier this year further faults were found by the French regulator and the commissioning of the station has been put back. The operator EDF has so far been unable to name the date when it will come on stream but has talked of a further delay of perhaps another three years. The cost of the plant was originally set at €3.3bn. Now the estimate is €10.9bn.

Under the Rab funding system, consumers would have been paying a surcharge on their bills since 2007 with nothing to show for it. They would have no leverage over the company building the plant and no scope for compensation. They would also of course have to pay in addition the cost of buying the power they need from someone else. Such an allocation of risk is unfair and unacceptable, and it is hard to think that ministers in a UK government, highly attuned to public opinion when it comes to energy prices, will impose such a system.

What are the implications of this? If the private sector will not fund new nuclear, and if no fair system of allocating costs and risks can be found, the 16GW of capacity required under current energy policies will not be built. That will be true not just in the UK but across most of Europe and perhaps even France, a country committed to nuclear power in the past and where a decision on new nuclear facilities is due to be taken in the early 2020s. Over time, nuclear power will become a source of power only in countries, such as China, where the state can provide full funding for new developments, as well as subsidies to conceal the costs to business and other consumers.

Nuclear’s future in Europe, Japan and the US is limited by these unanswered challenges. Of course there are alternatives. Wind and solar are becoming cheaper, and there is huge scope for energy efficiency. But until large grid-level storage capacity is available, economically viable renewables will always need some back-up — which means gas or, in many countries, coal. If Rab pricing systems are not the answer, is there another way through this dilemma? Next week, I will look at one possible option. The writer is an energy commentator for the FT and chair of The Policy Institute at King’s College London