COVER STORY | FUNDING NEW NUCLEAR


When does new nuclear become investable?


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 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 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 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 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


Above: The risks of financing new nuclear are a perennial problem for government and the private sector Photo credit: Phil Silverman/Shutterstock.com


36 | December 2022 | www.neimagazine.com


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