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Regulated Asset Base system will transfer nuclear’s financial risks to the UK public, rather than the nuclear companies

Some energy experts, however, are sceptical that the promised tidal wave of investment will ever materialise

Cran-McGreehin says one danger of the RABmodel is that it transfers risk to bill-payers rather than the companies building the station.

City institutions have been taking a keen interest in the Tideway’s
progress. Investors are intrigued by the novel way the £4.2 billion
project was financed. The method has been seized on by the government to
kick-start a £100 billion-plus splurge on new nuclear power stations, a
move that could create a giant new market in infrastructure investment.

The not-so-magic ingredient is asking customers to pay more up front and to
guarantee payments in the future. Kwasi Kwarteng, the business secretary,
said the plan would have a “small effect” on bills but did not say by
how much they would go up. Industry experts think each large new station
— and the plan envisages as many as eight — would add between £6-£10
to the average household bill.

The buffer of cash raised from customers can
be used to hammer out problems with power plant designs, and can be eaten
into if construction proves troublesome. The project company is also
allowed to continue to charge customers once the station is working, with
the amount based on the value of the project. The whole arrangement is
monitored by an independent regulator, hence its name: regulated asset base
(RAB) financing.

As a condition of the licence, investors in the project
company are on the hook for a pre-agreed level of cost overruns. The
Department for Business claims the reduction in interest payments could
save consumers £30 billion over the life of a new power station. “In
essence it is reducing the cost of capital by cutting back the construction
risk to investors,” Richard Goodfellow, head of infrastructure, projects
and energy at the City law firm Addleshaw Goddard, said.

Some energy experts, however, are sceptical that the promised tidal wave of investment
will ever materialise. “There is no cheap or easy way to do new
nuclear,” Simon Cran-McGreehin, head of analysis at the Energy and
Climate Intelligence Unit (ECIU), said. “I fear the government’s big
ambitions will prove a distraction that won’t ultimately lead to much.”

Since Johnson threw his weight behind the RAB route, the government has
quickly put in place some necessary stepping stones. Four days after the
nuclear summit at Downing Street, the Department for Business quietly
published the criteria that projects would have to meet. Ministers are
hoping that big British pension funds will buy the bonds and have helped to
clear the way with reforms to the EU’s Solvency II regime, which at
present limits the type of investments that insurers can hold. Goddard sees
groups with a record of investing in infrastructure projects — Canadian
pension funds, for example — as the biggest players. “I would expect
the bulk of the investment — perhaps two-thirds — to come from the big
global infrastructure funds that are already big investors in UK assets,”
he said. “There are some investors who will be put off — either because
of the size of the projects, the timescales, or just because it is

After Sizewell, the pipeline of projects is unclear. Ministers
are keen to push ahead with the on-again, off-again scheme for a new
station at Wylfa on Anglesey. Hitachi, the Japanese industrial group, was
to have built two new reactors there, but the project has now been taken up
by the US engineering giant Bechtel. Senior sources at EDF say it is also
casting a covetous eye over Wylfa as the possible site for another Hinkley
Point design. There have also been discussions on a new plant at Moorside,
close to the Sellafield nuclear site in Cumbria.

RAB financing could also
be adopted for a new type of small reactor. Rolls-Royce, which builds the
power plants for nuclear submarines, has submitted a design to Britain’s
nuclear regulators, while two US providers, Last Energy and TerraPower, are
also weighing options in the UK.

Cran-McGreehin says one danger of the RABmodel is that it transfers risk to bill-payers rather than the companies building the station. His bigger query, however, is whether there is too
much concentration on nuclear. “Governments do from time to time get very excited about nuclear, then cool off,” he said. “I am not convinced allthis will actually come to pass, and in the meantime it risks taking thefocus away from investment in renewable energy.” 

Times 14th May 2022

May 16, 2022 - Posted by | business and costs, UK

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