Assessing investability of new nuclear projects like Sizewell C

The crucial issue here is that the regulated company is permitted to start charging customers immediately after the project begins, and can continue to do so throughout the construction phase.

The downside for customers or ratepayers is that they end up bearing most of the risk, whether that is delays, cost increases, or even complete cancellations.

it is transferring a lot of the risk straight onto the customer and the customer can end up paying through the nose for nothing if you have serious problems in terms of timescales.”

NS Energy, By James Varley 19 Jun 2023

The UK is grappling with the problem of inviting the private sector to invest in new nuclear without interest driving up the price. Its solution cuts costs – but transfers the risk to consumers

UK Chancellor Jeremy Hunt confirmed recently that the UK would back the proposed Sizewell C nuclear power plant with an investment of £679m. The funding had initially been announced by then Prime Minister Boris Johnson. It is a mark of the large investment involved in a new nuclear unit that, despite UK plans to see one new nuclear plant reach Final Investment Decision (FID) in this parliament (ie before the end of 2024) and two achieve FID in the next (before 2029), two incoming Prime Ministers (Teresa May and Rishi Sunak) have announced reviews of Sizewell C. But Sunak’s chancellor Jeremy Hunt reaffirmed both the project and the funding, saying: “Our £700m investment is the first state backing for a nuclear project in over 30 years and represents the biggest step in our journey to energy independence.”

Of perhaps more interest to investors is the UK government’s decision to take a 50% stake in Sizewell C, with co-investor EDF. But neither of the two envisages holding those large stakes for very long. Once the project – which now has planning permission – reaches FID, both hope that it will attract new investors, so that the UK and EDF can reduce their stake to around the 20% level.

It is hoped that the project can bring in private capital because investors will gain confidence in the continued presence in the project of the UK and EDF but also because it will be built under a different financing model.

It is hoped Sizewell C will look less like a state-owned plant where funding comes from the government and it (in effect taxpayers) bears the risk of cost and schedule overruns. Instead, the government hopes it will resemble other types of power plant development cycles, in which different investors buy and dispose of stakes as the project moves from development, to permitted and ‘shovel-ready’, to construction and operation. With each step the project rises in value while the risk falls, so eventually it becomes investable for groups like pension funds which will accept low returns in exchange for long-term stability, while early investors will take their profit and reinvest in other projects where returns are higher.

At £20bn (in 2015 money) even 60% of the project will be too large for any single bank or other investors, which are more likely to join at the £1bn level. But the UK hopes that post-FID (aimed to be at the end of 2024) the project will attract enough investors that they will be in competition on the initial return on investment required. In the future, the level of allowed return will be set by the UK’s energy regulatory authority, Ofgem

Moving to a RAB model

Co-investing with the government is not currently enough to make Sizewell C an attractive investment though. The key to that, the UK government believes, is the Regulated Asset Base model (RAB).

The Department for Business, Energy and International Strategy (BEIS) set out its view on the RAB model and compared it with other funding models in an Impact Assessment in 2021 – required because the RAB model required primary legislation (which has now been passed).

Comparing RAB with relying on existing funding models, such as Contracts for Difference (CfD) BEIS said it “believes there are few, if any, strategic investors in the market with the risk appetite to finance a new nuclear power plant using a CfD mechanism.” In fact, BEIS also considered that the RAB on its own “would not achieve the goal of delivering new projects at a lower cost”. It added new Funded Decommissioning Programme (FDP) legislation and the new Special Administration Regime.

What is the Regulated Asset Base model? It aims to manage nuclear’s biggest problem: huge capital costs and the long gap (as much as 15 years) between investing and starting to earn a return when power is produced.

The UK’s RAB approach aims to address this. It has commonalities with US models that add nuclear to a utility’s ‘rate base’, but the UK version would ring-fence the project activities in a special purpose vehicle (SPV). The SPV is awarded a licence to own and operate the project for a defined period. It is permitted to recover the costs of construction and operation, and also to make an ‘allowed return’ on the asset for the lifetime of the licence.

The crucial issue here is that the regulated company is permitted to start charging customers immediately after the project begins, and can continue to do so throughout the construction phase.

……………………..The downside for customers or ratepayers is that they end up bearing most of the risk, whether that is delays, cost increases, or even complete cancellations.

……………………….There is no shortage of experience in the energy sector of different financing models. Some have salutary lessons………………………………

The burden lies less heavily on wind and solar projects because they can be built relatively quickly and the project can be built in phases. As a result, income from part of the project starts early, while construction lessons can be learned from in early phases so delivery risk in the later phases is lower. Nuclear does not have that opportunity.

Prices set in advance look very different in the rearview mirror. Once the plant is operating the risks accepted by the developer before and during construction are forgotten…………………..

With the RAB model, a nuclear plant will still face price and volume risk once operating, as its power will have to be sold into a volatile market where nuclear can be pushed out of the merit order by cheap renewables and prices can fall to zero at times (a contrast to TTT, whose customer Thames Water has no choice but to use the service and no alternative supplier).

Despite the fact that it may reduce costs, consumer advocates are very wary of the RAB model. Alan Whitehead, Labour’s shadow energy minister and a longstanding observer of the industry, has previously complained that the RAB model “effectively puts costs on the consumer well before you have any idea when a particular plant will come onstream. If there is any slippage in the process the consumer just continues to pay out. …it is transferring a lot of the risk straight onto the customer and the customer can end up paying through the nose for nothing if you have serious problems in terms of timescales.”

He referred to consumers in the USA who were left paying the cost for decades when nuclear projects were cancelled……………….. https://www.nsenergybusiness.com/features/assessing-investability-of-new-nuclear-projects-like-sizewell-c/