FUNDING NEW NUCLEAR | COVER STORY
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 the project begins, and can continue to do so throughout the construction phase. The model for this approach at Sizewell C is the Thames
Tideway Tunnel (TTT), now under construction, for which customers will have been paying out for more than a decade by the time the project is fully operational. The benefit may be very large. The company does not
have to cover the cost of interest payments for the whole project during construction. In addition, investors bear less financial risk, so they will invest at lower interest rates too. For projects where finance costs represent a majority of the project cost, the effect is dramatic: the yearly cost to consumers of the TTT, advocates say, is more than halved when compared with conventional finance models. The downside for customers or ratepayers is that they end up bearing the most of the risk, whether that is delays, cost increases or even complete cancellation. That makes the UK’s RAB politically more difficult. Hannah Bronwin, then deputy director (nuclear financing) at BEIS, said when the RAB was proposed that the option met government’s requirements over fiscal responsibility, because the project would be “off the country’s balance sheet”. It could lower the cost of capital and offer a “sophisticated and flexible approach to risk allocation”. Increasing the investor pool is also important and the
Impact Assessment said “given the limited number of institutions with sufficient capital to invest in such projects, financial market constraints mean those risks are likely to be spread among a small number of investors.” Without the RAB “since each investor would be taking a large risk, there would still need to be a high-risk premium to incentivise investment.” There is no shortage of experience in the energy sector of
different financing models. Some have salutary lessons. The UK’s Contract for Difference (CfD) model was developed to reduce risk to investors by giving them certainty over the price which will be paid for a unit of electricity. This reduces the risk of lower-than-expected returns which, in turn, lowers the cost of financing new power generating capacity. It helps incentivise on-schedule delivery – however, it also leads to higher costs of finance for projects which are lengthy, or less certain to deliver on time. It has been widely used to fund renewables including major offshore wind farms and was used to fund Hinkley Point C. But under a CfD model, investors remain responsible for paying for cost overruns and investors factor that into the power price required for investment.
All of these risks have to be factored in to the power price required by the developer before the project can get financial approval. That 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 rear view
mirror. Once the plant is operating the risks accepted by the developer before and during construction are forgotten. For example, a fleet of independent power projects (IPPs) agreed in the 1990s saw consortia bid for the right to build power stations and sell the power produced under contracts dubbed ‘build, own, operate’ (BOO) or ‘build, operate, transfer’ (BOT) where the plant reverted to the incumbent company after a period, typically 20 or 25 years. There was a risk for investors and it was political: Malaysia, for one, imposed dramatic cuts in the contracted export tariff for its five IPPs once they were in operation. Sometimes the opposite is true: the strike price for Hinkley Point C was set at £92.50 back in 2012 (and it has risen with inflation since then). It was held up as a poor deal for consumers for nearly a decade, as CfD strike prices for offshore wind farms fell from well over £100/MWh to as low as £37/MWh. At the moment, however, the energy crisis and spiking electricity prices make the Hinkley Point C price look attractive, while the low prices agreed for offshore wind means turbine makers are losing money and the industry is under pressure. 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. Will it attract investors as hoped? In an article in
the Financial Times in June 2018, Alistair Ray of fund management company Dalmore Capital, told the FT that he liked the RAB model. “The actual costs of the project are reflected in the capital base and this is important in any complex greenfield project,” he added. Dalmore Capital is part of a consortium of private
investors backing the Tithe said of using the model for new nuclear: “Nuclear does not need to be completely risk free to be of interest.” The RAB model may not see an oversupply of investors
competing to fund Sizewell C at FID; but at the very least it has opened the door for discussions. ■
www.neimagazine.com | December 2022 | 37
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