Ofgem: Sizewell C costs need to be locked down before construction begins

Ofgem has raised concerns that consumers will be left on the hook for potential cost overruns and delays to the construction of Sizewell C.

The regulator has urged the government to ensure that the underlying project costs and schedule estimates are “robust” prior to the government taking a final investment decision on the nuclear power plant.

Ofgem said this is “especially pertinent given the ongoing challenges being experienced by EDF with the construction of Hinkley Point C, which shares many design elements with the proposed Sizewell C plant”.

Hinkley has suffered a series of cost-overruns and delays since EDF gave the final go-ahead to the project in 2016. At the time, the 3.2GW power station was expected to cost £18.1 billion and begin generating power at the end of 2025.

However, it is now on track to begin generating some six years later with the forecast cost of the project almost doubling to £35 billion.

The regulator raises its concerns in response to the government consultation on modifications to the Sizewell C Regulated Asset Base (RAB) licence.

The RAB model, which is designed to cut lending costs by allowing developers to collect regulated payments from suppliers while projects are being built, has been used for other major infrastructure projects such as the Thames Tideway ‘super sewer’.

It effectively means that consumers will be paying the whole cost of the project via supplier levies before the nuclear plant is generating electricity.

Ofgem said that this means “any delays to the project or cost overruns will increase both the amount of consumer money needed to reach the operations phase and the time before consumers benefit from the electricity the plant will generate, thus negatively impacting upon the value of the project for consumers”.

It adds: “Ofgem is primarily concerned that existing and future consumers’ interests are protected and, to that end, that the project achieves value for consumers in the form of a reliable source of electricity that will contribute to the UK meeting its 2050 net zero target.”

In particular, Ofgem calls for transparency around supply chain contracts alongside schedule and quality incentives for contractors to deliver work on time and budget.

It adds: “This is particularly acute given likely investor perception around the likelihood of large construction projects in general, and nuclear power projects in particular, to experience schedule delays and cost overruns (e.g., Hinkley Point C).

“We expect, therefore, that DESNZ will ensure relevant supply chain arrangements are suitably robust before making economic licence modifications, and that the technical aspects relating to relevant licence conditions (e.g., around the capacity incentive) are appropriately scrutinised.”

Ofgem also raises concerns about the possibility that Sizewell C is decommissioned earlier than planned.

It adds: “Of particular concern is that, in an early closure scenario, unless the Secretary of State otherwise directs, the licence will be only partially revoked to facilitate continued funding for decommissioning by consumers.

“Whilst we agree that it is important that decommissioning liabilities are adequately funded, and we support the inclusion of the Funded Decommissioning Plan (FDP) building block on that basis, we do not wish to see a situation where consumers bear the cost of paying for the decommissioning of a nuclear plant from which they may have seen little or no benefit as regards low-carbon, low-cost electricity and security of supply.

“We would welcome a commitment from the Secretary of State prior to these licence modifications coming into force that, should early closure occur, they would consider all funding options available before making any final decisions on recovering any potential shortfall from consumers.”

A Department for Energy Security and Net Zero spokesperson said: “We agree with Ofgem, and are conducting robust due diligence of estimates around Sizewell’s cost and construction time prior to any final investment decision.

“This is part of our wider efforts to end the stop-start approach to nuclear and our new roadmap sets out the biggest expansion of the sector in 70 years.

“Projects like Sizewell C will mean cleaner, cheaper and more secure energy in the long-term and we anticipate charges for large-scale nuclear projects to be around just £1 a month on average on a typical household bill.”

In January, Sizewell C announced that construction work could formally begin after the company triggered its Development Consent Order (DCO) for the project. The developer said it had satisfied all of the conditions imposed when the DCO was granted in July 2022.

The energy secretary at the time, Kwasi Kwarteng, awarded planning permission for the 3.2GW power station against the recommendations of the Planning Inspectorate’s Examining Authority, which raised concerns over its environmental impacts and the lack of clarity over its future water supplies.

The government has so far invested around £2.5 billion in the development of Sizewell C.

Earlier this month, Elexon was chosen to administer a levy which will fund the RAB approach.