Could the Regulated Asset Base model unlock UK nuclear?

With financing of capital-intensive new nuclear builds proving an insurmountable obstacle for many of the scrapped projects in the UK, the government is investigating new ideas that could make nuclear builds more viable. 

The contract for difference (CfD) model – the main mechanism by which the government supports low-carbon energy projects like renewables and nuclear – sees developers sign a contract with the state-owned Low Carbon Contracts Company, through which they are paid a flat, indexed rate for electricity produced over a 15-year period. The rate paid represents the difference between the strike price and the reference price for the UK electricity market.

While CfD has helped to support the expansion of renewable energy in the UK, there are growing suspicions that it’s not working for nuclear plant projects, which involve higher upfront capital costs, take far longer to build and are expected to produce reliable output for decades.

“The [CfD] system that has enabled the expansion [of renewables], particularly of offshore wind, and therefore the benefits of cost reduction from repeat builds, has not been able to do the same thing for nuclear, because of the different capital profile you need,” says Nuclear Industry Association chief executive Tom Greatrex, who has also served as a Labour Co-op MP and Shadow Energy Minister from 2011 to 2015.

“The National Audit Office did a report into the financing of Hinkley, and one of the things it looked at in one of the appendices was how you could do it at a much lower price.”

One emerging possibility for reducing the cost of nuclear new-build projects is the regulated asset base (RAB) model of financing. The RAB model is already established in the UK as a way of financing monopoly infrastructure projects; there were around £160bn worth of RAB assets in the country in 2018.

In the summer, having identified RAB as a potentially viable model for more cost-effective nuclear financing, the UK Department for Business, Energy and Industrial Strategy announced a stakeholder consultation, closing on 14 October, on how RAB could work for nuclear projects.

In essence, the RAB model would allow nuclear developers to unlock revenue from the eventual users of the plant as it is built. The construction would be split into separate parcels, with payments made after specific milestones are met. The ‘regulated’ part of the RAB name denotes that an independent regulator would be assigned to ensure that these costs are spread equitably between consumers and other stakeholders. But what would be the benefits of the model, when compared to CfD?

“As you meet various different points of construction, they trigger the ability to release some revenue,” says Greatrex, a prominent supporter of introducing the RAB model to nuclear projects. “What it does is reduce the cost of capital, because the ability to attract investment in something where you have returns during the course of construction as opposed to at the end is a very significant difference.”

Cost of capital was a serious sticking point in the financing of Hinkley Point C under the CfD mechanism, with EDF borrowing money to finance the project at 9%. 

“Hinkley Point C would have been roughly half the cost if the government had been borrowing the money to build it at 2%,” University of Oxford professor of energy policy Dieter Helm told the BBC last year. While extensive government borrowing to fund projects might not be possible in the UK’s highly-privatised energy market, unlocking revenue as a plant is built could make nuclear builds much more attractive to a wider swathe of private and institutional investors. 

“We know from various discussions we’ve been involved in that EDF and others have had, that there’s a big group of investors that would not invest under the current mechanism, who are very interested in investing using this type of model,” says Greatrex.          

A vital part of the government’s RAB consultation is working out how the cost of intermittent RAB payments can be spread fairly. Greatrex believes the lower cost of capital that would be unlocked by the RAB model would lead to lower rates once power is being produced, but this gain could be lost if UK taxpayers are lumped with an unfair portion of the payments that are released during construction. This potential inequity has been the focus of criticism from Greenpeace and others. 

“This ‘nuclear tax’ won’t lower energy bills – it will simply shift the liability for something going wrong from nuclear firms to consumers,” said Greenpeace chief scientist Dr Doug Parr.

Greatrex disagrees, and argues that the charity’s long-standing anti-nuclear stance means “it wouldn’t matter what method you were proposing”. But he acknowledges the necessity of having clear mechanisms to distribute RAB costs fairly, and that’s why the independent regulator’s job would be of paramount importance. Is there an existing UK regulator that would be ready to take on the role?

“It couldn’t, or shouldn’t, be the Office of Nuclear Regulation [ONR], because their focus is on safety and security,” Greatrex says. “I think it’s right that the ONR’s regulatory activity is completely separate from what is effectively regulating the process of financing the construction. Again, we don’t know for sure, but I would not be surprised if this is something that becomes a function for [UK energy market regulator] Ofgem along with the other functions the economic regulator has.”  

Only time, and to some extent the results of the government’s RAB consultation, will tell whether RAB will be considered suitable as a means of financing new nuclear in the UK. In the short-term, Greatrex says adoption of the model could influence EDF’s decision on whether to commit to building a new plant at Sizewell, based broadly on the reactor technology and construction methods used at Hinkley. But in the years to come, he argues that financing through the RAB model could be significant for UK nuclear’s long-term prospects. 

“The Wylfa site, which is the Horizon project that is currently suspended, for example – that is a very good site for a nuclear construction, probably the best one in the UK,” he says. “The adoption of a RAB model could see those who currently don’t see a way of being developers come back into the UK as a result of having that type of mechanism.”

Beyond financing, the technical costs of nuclear plant construction need to be lowered to make the technology more economically viable. The Nuclear Sector Deal struck last year between the UK government and the nuclear industry aims to achieve a 30% reduction in these costs by 2030 through innovative technologies and taking advantages of falling costs from repeated projects. RAB may ease the financing obstacle, but the industry must also come up with its own solutions to the economic challenges it faces.

  
“One of the benefits that have been demonstrated with offshore wind and was demonstrated with the French nuclear programme a generation ago, is that when you build the same reactors a second, third or fourth time, you’re able to do that with a supply chain in place, with personnel who have delivered those projects, and the benefits of replication and learning are well-understood,” Greatrex says. 

“This isn’t something that’s unique to nuclear – you see that across all sorts of infrastructure and other construction. While the sites at Hinkley and Sizewell are different, the ability to almost completely replicate, with a couple of slight exceptions, the building programme from one to the other, gives confidence that the cost reduction target can be achieved with a combination of these different factors.”

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