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Britain’s “Regulated Asset Base” funding method for nuclear power is deemed not likely to work

National Infrastructure Commission model spells trouble for nuclear RAB
funding. Dr Jim Cuthbert questions whether the government’s funding method
for its nuclear power programme provides value for money, given it now
expects the plants to take nearly twice as long to build.

A major part of
the government’s energy strategy is a programme of eight new nuclear power
stations, to be funded by the Regulatory Asset Base (RAB) funding method.
One of the main features of RAB is that it involves consumers paying from
the start of construction for benefits they will only begin to receive when
construction is completed, and the plant is producing electricity.

One of
the key questions that should be answered in assessing whether a RAB-funded
project should go ahead is whether the eventual benefit consumers could
receive, in this case through cheaper electricity charges in the long run,
is enough to compensate them for the opportunity cost of the payments made
while receiving no benefit.

Given the long construction periods now
anticipated for new nuclear plants, it is unlikely that RAB financing will
be able to attain a sufficient cost advantage to do so. In 2019, the
National Infrastructure Commission (NIC) produced a paper on the
application of the RAB approach to nuclear energy, illustrating a
methodology including an approach to answering the above key question.

The NIC paper set out the results of illustrative calculations of the impact of
a range of factors on the likely value for money of RAB projects.
Unfortunately, it is something of a mixed bag. On the negative side, the
results in the paper are not presented in a way that allows the impact of
different factors to be separately identified: and, critically, the NIC
makes a central assumption about the likely length of the construction
period for new nuclear projects only about half of what the government now
assumes. On the plus side, having clarified with the NIC what methodology
it was using in the opportunity cost component of their model, their basic
approach seems sensible.

Although not clear from the original NIC paper,
the length of the construction period has a critical effect on the likely
value for money of a RAB-funded nuclear project. If the NIC’s basic model
is applied to a project with the government’s current assumption of a
13-to-17-year-long construction period, instead of the NIC’s central
assumption of eight years, then RAB nuclear is unlikely to achieve a
sufficient cost advantage over alternative approaches to compensate
consumers for the opportunity cost of their initial payments.

Public Finance 9th March 2023


March 10, 2023 - Posted by | business and costs, UK

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