Consumers could pay for new nuclear power plants years before they are built

The government is considering using a controversial financing system to build new nuclear power stations which would see customers charged for construction costs long before a project has actually been built.

The approach, called the Regulated Asset Base (RAB) model, has been described as an “open cheque book” for developers, as consumers could be locked into paying the costs of a project going wrong – like construction taking longer than planned, or prices spiraling – indefinitely until it’s complete.

Shadow energy minister Alan Whitehead MP said: “The problem with this model as applied to new nuclear power stations is that it transfers all the risk of construction from the developer to the customers, with the rather wobbly promise of benefits to come in the future.”

Nuclear power project costs are notoriously unpredictable. Construction schedules often overrun while construction costs are on average 20% more than originally budgeted for. Under most RAB models these over-runs would be passed on to consumers.

The announcement that the government is considering this approach came in early June after months of speculation and secret negotiations over public financing for the Wylfa nuclear plant in Anglesea, north Wales.

The government has been under pressure to bring nuclear development costs down, either by putting up public money or by making an unwieldy nuclear power sector more attractive to a reluctant private investment community.

Industry opposition

The prospect of RAB has already had a material impact on the government’s plans for new nuclear power stations.

Kepco, the Korean state-owned nuclear company, had looked set to rescue the troubles Nugen project at Moorside in Cumbria, but it reportedly has strong reservations about the proposed funding model.

The company is no longer the leading bidder, and has the Korean press claims it has considered pulling out of the project entirely over its preference for the kind of Contract for Difference (CfD) deal given to EDF for Hinkley Point C.

Rising costs

Like other public-private finance models, the RAB model has a sticky history. The government has already supported the use of RAB for the Thames Tideway Tunnel, a £4.2bn project to revamp 15 miles of sewer lines in North London, which Thames Water says a RAB model has helped lower costs.

As well as taking a RAB approach to financing the Thames Tideway, the government offered a “contingent financial support” package which guarantees public money when certain parts of the project go wrong. It’s this transfer of liability first to the consumer, and then also the taxpayer, which helps lower risk and attract investors. A similar package may be offered to nuclear developers.

The approach has led to accusations that costs are too difficult to regulate fairly – because industry has little to lose from them rising.

In 2017, the cross-party British Infrastructure Group of MPs, chaired by Conservative ex-minister Grant Shapps, raised concerns that bill payers had been asked to write a “blank cheque” for the project. The National Audit Office (NAO) has also been critical of the Thames Tideway contract, as it still isn’t clear how much consumers will have to pay.

The idea of a RAB approach has already proven popular with the nuclear industry.EDF boss Humphrey Cadoux-Hudson recently told the Financial Times that he is in talks with dozens of private investors over financing Sizewell C, the French giant’s post-Hinkley nuclear project in Suffolk – and that the RAB model could be pivotal.

Open cheque-book

Unearthed understands that EDF believes using the RAB model for their Bradwell nuclear power project in Essex could add £6 per year onto consumer bills.

But in practise, economics Professor Jon Stern at City University said he has “no idea” how the approach would be applied to nuclear projects reported to cost in the region of £20bn, over four times more than the Thames Tideway Tunnel.

“This strikes me as one of those ideas that people are floating as a trial balloon to see whether or not it might work,” he said. “We’re talking about power stations that’ll be built in 10 or 20 years time.”

Whitehead agrees, adding that the RAB evaluations become complicated as the project cost increases.

“With the history of overruns and cost escalations that there always has been with any nuclear power development, is looks like a pretty open cheque book as far as a possibly undetermined length of customer support,” he said. “And an equally open cheque book in terms of what level of support is going to be expected in order to get any project over the line.”

How does it work?

Not many outside the financial sector will have heard of a RAB – essentially a type of contract drawn up with the backing of government which calculates the costs and profits of a project before it’s started, and divvies out the investor’s profits from day one.

The RAB model was first proposed by the water industry regulator Ofwat in the mid-90s as a novel way of attracting private investors to formerly nationalised industries.

The idea is simple. A government regulator sets a fixed number, the RAB, which attempts to account for all the future costs involved in the completion of a project. The regulator then also sets a fixed rate of return for the investors based on those costs.

For example, the RAB for Wylfa could hypothetically be set at £20bn, and any investors who put up the cash start seeing a rate of return as the project is being built.

The implementation, however, is fiendishly complex. The contentious bit is that the rate of return on the investment is generally recouped by charging consumers from the start.

Whether a fair rate of return is paid out from people’s pockets relies heavily on the regulator correctly estimating some fairly opaque future scenarios, such as construction length, supply chain costs and prevailing economic conditions.

For the government, the RAB approach is a useful way of using the clout of the state to secure investments without putting a project on its balance sheet. Because the RAB is backed by a regulator, which in turn is backed by the government, the investment is seen as very secure – without direct state involvement.

The exact dynamics of what happens if a project runs way over cost are open to negotiation within each individual RAB contract. But the basis is that the majority of the risk is transferred away from those actually responsible for developing a project – and mostly to consumers who pay the investor’s profits long before a project’s finished.

Could it work for nuclear?

In the UK, the RAB approach hasn’t been used for any project as costly as nuclear power plants.

The Thames Tideway Tunnel is the most prominent and expensive example, and has been criticised for the high payouts to investors which consumers have been asked to pay.

Speaking to the Financial Times, Sir Ian Byatt, a former head of the Ofwat, said: “If a company has a big capital project it should put money aside to fund it. Thames [Water] hasn’t done that — it’s paid out every penny in excessive dividends and left Londoners to pick up the bill for the new sewage tunnel.”

Lawyers involved in the Tideway package have said that the government support package was a way of lowering this risk for investors in a way which had “favourable treatment” by EU state aid rules.

But in a review of the Thames Tideway project, the NAO said that it is still unclear how much Thames Water customers will pay for overall. Tunnel costs added £13 a year to the average household bill for Thames Water customers in 2016-17, while the company forecasts the bill impact will rise to between £20 and £25 by the early 2020’s.

Much of the work around taking a RAB approach to financing nuclear power has been carried out by Dieter Helm, professor of Energy Policy at the University of Oxford and a figure respected by government.

Writing in a blog about the model’s application to nuclear last month, Helm highlighted a number of open issues – such as which regulator would set the RAB for nuclear projects, as well as the “very severe lobbying pressures” any regulator would come under when making its RAB evaluations.

Helm concludes that the RAB may be an efficient approach to financing nuclear power, but still doesn’t address fundamental issues about its cost competitiveness with other technology like wind and solar, or what do with all its radioactive waste.

“It is for society to decide whether it wants new nuclear or not,” he said. “The market cannot decide.”