Government ‘under-estimating’ nuclear bills hit, academic warns

The government has been accused of under-estimating the cost to customers of its new support mechanism for nuclear power, which could add £100 onto annual bills if ex-prime minister Boris Johnson’s pledge to roll out a new fleet of plants is honoured.

At a meeting of the All-Party Parliamentary Group on Energy Costs, held at the House of Commons on Wednesday (23 November), University of Greenwich emeritus professor of energy Steve Thomas criticised the use of the Regulated Asset Base (RAB) for nuclear projects.

He said previous bids to launch nuclear power programmes under Margaret Thatcher and Tony Blair had failed due to lack of appetite from private investors.

The government is seeking to reduce the risk of investing in nuclear through the RAB mechanism, which provides developers with a surcharge on energy bills while their projects are being built.

Ministers recently passed legislation to allow RAB, which is has been used for other major infrastructure project such as the Thames Tideway ‘super sewer’, in the nuclear sector.

However, Thomas said EDF’s Sizewell C, which is being lined up to use the RAB, would be “orders of magnitude more expensive and more complicated” than projects previously supported via the mechanism.

He said that RAB reduces developers’ finance costs by transferring them onto consumers, meaning the latter are effectively shouldering the risk premium for the project.

Thomas also told the meeting that the government’s estimate that the surcharge would add about £1 a month is based on “a very serious and very simple error”.

This calculation, said Thomas, uses the real cost of capital as the interest rate, which the Department for Business, Energy and Industrial Strategy assumed would be five per cent.

However, borrowing will be at the nominal cost of the capital, which also takes into account inflation, he said: “The alarm bells will be ringing in your heads now because we don’t know what inflation is going and consumers will be exposed to that risk.”

This could double the figure to £2 a month per power station, which could easily increase the surcharge on customers’ bills to £100 per annum if the government fulfils Johnson’s plan to roll a new fleet of nuclear plants, Thomas said: “It suddenly becomes a significant addition to electricity bills so it’s not trivial and the government is trying to talk it down.”

But the ex-PM’s nuclear programme is unlikely to be fulfilled, like those of his predecessors, he said: “The likelihood is the Johnson programme will fail again: it’s too expensive, nobody will invest in it, the electricity demand is not going to grow enough and at worst, we’ll end up with one expensive white elephant.”

Paul Spence, director of strategy and corporate affairs at EDF, confirmed at the meeting that the government’s calculations about RAB costs are based on the real cost of capital.

But there is “real serious interest” amongst investors  about taking equity in Sizewell C, partly because the company will be replicating much of the work that it has done on its current project at Hinkley Point C, he said: “They see it as an investment proposition because it’s a copy of something we already have.”

Spence added that EDF is already saving money and time on the construction of the second unit at Hinkley Point C through lessons learnt on the first one.

The company is achieving performance improvements of 30 to 35% on elements of the project, like the positioning of reinforcement bars inside the concrete and the pace of pouring the turbine buildings’ concrete base mats, he said.