After recent cost overruns and cancellations across nuclear projects, the government is exploring whether a different financing system, known as the Regulated Asset Base (RAB) model, can get new nuclear built.
The government has recognised that nuclear projects are complex to finance and have long lead-in times. To this end, the Department for Business, Energy and Industrial Strategy (BEIS) has consulted on using the RAB model to provide the solution to problems of financing, seen most recently at Horizon’s cancelled Wylfa project and with the National Audit Office's negative analysis of the value for money of Hinkley Point C.
What's the Regulated Asset Base model?
The aim of the RAB model is to bring forward private sector capital at a cheaper cost by raising a levy from consumers, which is then released in stages as construction progresses.
Theoretically, the model should be cheaper than financing through the Contracts for Difference model, largely because it enables earlier payments, decreasing the cost of capital. This revenue also allows for earlier repayment of debt, which means less interest is accrued overall.
The RAB model is already established in the UK as a way of financing a range of infrastructure projects, most notably in the regulated utilities and, recently, the Thames Tideway Tunnel.
ICE’s submission to the consultation looks at whether the RAB model is suitable for nuclear and what further details are needed to ensure value for money and the best outcomes for consumers.
Over the past year, UK nuclear plants generated 19% of total UK power. This makes it the single-largest source of low-carbon electricity in the UK, but it’s in decline as ageing reactors are shut down and decommissioned.
The cost of renewables has fallen dramatically in the past decade. Recent capacity auctions secured offshore wind at prices as low as £40/MWh, significantly lower than the £92.50/MWh at Hinkley Point C.
However, offshore wind is unable to supply electricity 100% of the time. Without effective energy storage technology being developed and capacity being built up, there is a need for reliable baseload power, which nuclear provides.
It’s clear, then, that a balance between nuclear and renewables will be required on the journey to reach and sustain net-zero carbon emissions.
This is why ICE supports the use of a thorough and diligent value for money assessment approach in order to ascertain whether a new nuclear project should be granted a RAB licence and government support package.
We set out clearly in our response that this should compare the project with other low-carbon alternatives, be they renewables or fossil fuels fitted with carbon capture and storage technology.
ICE’s paper earlier this year on reducing the gap between project forecasts and outturns on major infrastructure projects identified that there must be a responsibility on the project proposer to have a mature design from the outset.
This is particularly important in something as inherently costly and complex as new nuclear. Clearly not all risks will be known, but any project proposer for a nuclear RAB model should complete scope, design and exploration before commencement of work to mitigate scope creep or retroactive changes.
Further detail required
There remain many questions that need answering and BEIS is planning to outline further details at a later date. Aspects such as risk apportionment, construction cost overrun, time overrun, approvals and payment sequencing, particularly to ensure consumers are not unfairly burdened with risk, need clarification.
Comparisons are often made between Tideway and new-build nuclear in terms of applying the RAB model and, while some lessons can be shared and learning transferred, there's no ‘one-size-fits-all’ approach. Delivering new nuclear is inherently complex and the ways in which it differs from Tideway shouldn't be underestimated.
It's fair to say that new nuclear power and the RAB model are not without their challenges. But within the timescales required, and at the scale required, the UK cannot achieve net-zero without new nuclear.
The proposal for the RAB model is credible, even though there are still details that need greater consideration, but steps towards alternative financing for new nuclear are welcome.