nuclear-news

Should USS Investment Builder invest in nuclear power?

Government talks about sharing the benefits if the project comes in ahead of time and cost, but this is fantasy land. Nuclear projects are invariably late and overbudget. From a reputational point of view, USS’s investment in Thames Water has been damaging, but association with Sizewell C could turn out far worse.

Steve Thomas, Coordinating Editor, Energy Policy, Emeritus Professor of Energy Policy
Public Services International Research Unit (PSIRU), Business School , University of Greenwich 5 June 24  https://divestuss.org/news/

The British government is scouring the world for investors willing to invest in its Sizewell C project. USS has been named as one of six investors shortlisted for the project, perhaps with a stake of about £600m. Would investing in Sizewell C using the Regulated Asset Base (RAB) model be a wise investment for USS funds? From a wider perspective, would it contribute usefully to the government’s target of ‘net zero’ greenhouse gas emissions by 2050 and would it offer cheap power?

Sizewell’s predecessor, the Hinkley Point C project to build two EPR reactors has been a disaster both for UK consumers and for its main owner, Electricité de France (EDF). In 2008 when the project was announced, EDF claimed Christmas turkeys would be cooked using power from the plant in 2017 and the government claimed the reactors would cost £5.6bn. By the time the final investment decision was taken in 2016, completion had slipped to 2025 and the cost had gone up to £18bn (2015 money). The price consumers would have to pay for the power was high, £92.5/MWh (2012 money) or about £130/MWh in 2024 money. The one saving grace for consumers was that the price was fixed in real terms and when construction costs escalated, they fell on EDF. In January 2024, the cost and time estimate for Hinkley had increased to £31-35bn (2015 money) or up to £46bn in 2024 money with completion in 2029-31.

Luckily, Britain was not relying on Hinkley to keep the lights on. As a result, in its most recent annual report, EDF announced it was writing off €12.9bn, a large proportion of its investment to date. Press reports talk about the Sizewell project, claimed to be a duplicate of Hinkley, costing about £20bn, implying it could be built for less than half the cost of Hinkley and this is clearly implausible. Even if it could be built for 20% less than Hinkley, that would still imply a cost of nearly £40bn.

European predecessor projects using the same technology as Hinkley and Sizewell, Olkiluoto in Finland and Flamanville in France, have also been disasters taking 18 years to build and coming in at 3-4 times overbudget.

Soon after the Hinkley investment decision was taken, EDF realised its error and abandoned plans to build Sizewell using the same financial model as Hinkley.

For Sizewell it will be happy to supply the equipment, build it and operate it under contracts highly likely to be profitable. It was the risk of owning the plant it was keen to avoid. So, if Sizewell was to go ahead, new investors and a new finance model, the Regulated Asset Base (RAB), were needed, which, if it was to be politically and commercially viable, would appear to take the risk away from the investors but give consumers a lower electricity price. The target investors were institutional funds such as pension funds.

There are two features of RAB that are claimed would make this implausible combination of reduced risk to investors and lower consumer prices possible. Whereas under the Hinkley deal, the price of power was fixed, under RAB, it would be the income of the owners that would be guaranteed and the power price would be whatever it would take to generate that income. Investors would be allowed to earn an agreed rate of return on their investment and recover the operating cost of the plant. So, if the plant costs £50bn to build, the allowed real (net of inflation) rate of return is 8% and the rate of inflation is 2% (the nominal interest rate would be 10%), power would be priced at a level that it would bring in £5bn per year (50 x 10%)  plus the operating cost. This seems to offer an essentially risk-free investment as long as the actual cost of building the plant is set as the asset value.

The cost of finance in the construction period, that is, the interest charged to the construction companies on loans, is a major component of the cost of a nuclear power plant, and is of the same order as the construction cost alone. The costs quoted above do not include finance costs so significantly underestimate the cost. Under RAB, these finance costs would be paid by consumers as a surcharge on their electricity bill in the period from Final Investment Decision (FID) to operation of the plant. Government assumes this period would be 13-17 years and that, claims, on average the surcharge would be £1/month. However, this estimate is based on implausible assumptions on the construction cost and the cost of borrowing and a more realistic estimate would be about £4/month. The cost of the plant would therefore be less because the owners would have their finance charges paid but it would be consumers that paid for this reduction so the resulting reduction in the consumer power price would have been paid for by consumers themselves.

So that the RAB model does not appear to be a blank cheque signed by electricity consumers, the government is making brave promises of incentives, risk-sharing and risk reduction. Risk reduction is not plausible. Hinkley Point C was the fourth (and most recent) order for the EPR technology it uses and the project is going worse in terms of construction cost and time than its predecessors, so it is hard to see why Sizewell should go so much more smoothly. The talk of incentives implicitly suggests the problem with these EPR projects was the owners were not trying hard enough to complete them. Given experience with Hinkley and the other EPR projects financiers will be unwilling to assume any real element of the apparent risk. Financiers have the whip hand in these negotiations, the government has shown no sign of being willing to walk away from the project whereas for financiers, it is just one of many potential investments and if the terms are not attractive, they will walk away.

Lack of interest from investors has forced EDF to suggest it might take a 20% stake in the plant and government has also indicated it would take a stake but the size of this has not been specified. If we assume Sizewell’s cost will be estimated at about £40bn EDF and government take 20% stakes, that would leave £24bn to find and would need many more than the six shortlisted investors.

On the face of it surely the negotiating power of the investors over government makes Sizewell a good investment opportunity for USS. However, leaving aside the clear risks of project delays and cost overruns, the history of nuclear power is of things going wrong in ways few anticipated. The major accidents were all deemed to be inconceivable before they happened and even the most ardent nuclear critics didn’t predict how badly wrong the Olkiluoto, Flamanville and Hinkley Point projects would go.

From a broader perspective would the Sizewell project help meet the UK’s emissions targets? The Conservative administration has a target to get rid of fossil fuels from the electricity sector by 2035 and the Labour Party is more ambitious. However, even if an investment decision on Sizewell was taken this year, it would not be online before about 2040 while any successor projects would not be completed before 2045. So, in simple terms, nuclear power is too little and too late. Even if investors can be persuaded to take on any significant element of the financial risk the majority will fall on consumers. Government talks about sharing the benefits if the project comes in ahead of time and cost, but this is fantasy land. Nuclear projects are invariably late and overbudget. From a reputational point of view, USS’s investment in Thames Water has been damaging, but association with Sizewell C could turn out far worse.

June 8, 2024 - Posted by Christina Macpherson | business and costs, UK