RAB model for nuclear funding proposed

The government has outlined plans to bail out new nuclear plants if their construction costs over-run.

The BEIS (business, energy and industrial strategy) department has issued a consultation paper on how the Regulated Asset Base (RAB) model could be used to help finance new nuclear projects.

The publication of the consultation on the RAB model for nuclear follows the recent collapse of plans by Hitachi and Toshiba to build new atomic power plants in Anglesey, Cumbria and Gloucestershire, over financing concerns.

Under the RAB model, which has most notably been used in the UK to finance the construction of the Thames Tideway ‘super-sewer’ underneath London, developers of infrastructure projects can recoup revenues before they are operating.

This is unlike conventionally financed projects, like Hinkley Point C, where the developers have to wait until it is up and running before getting paid.

In its paper, BEIS states that the RAB model could reduce the cost of raising private finance for new nuclear projects with knock on impacts on consumer bills.

However, the document acknowledges the risk with this approach is that suppliers and ultimately their consumers may provide construction-phase funding for a plant that is never completed.

The developers would have an ‘allowed revenue’ for the nuclear projects, using a WACC (Weighted Average Cost of Capital) determined by a new regulator, which would have to be set up to oversee the projects.

The paper also moots a Government Support Package, which would operate in the event of a cost overrun above a pre-defined threshold, disruption in the debt market, certain risks for which insurance is not available in the market, and political risks.

When the project is being developed, the government would set a threshold, known as the Funding Cap, for the project. 

If capital expenditure breaches this cap, the regulator will have the option of deciding whether to call on the GSP or passing on further financing, in the form of higher charges on energy consumers.

Under the BEIS plans, the RAB would be introduced alongside the existing CfD (contract for difference) model for delivering new nuclear projects, rather than as a replacement, with the decision on which is most appropriate for a particular project being made on a case-by-case basis.

The proposals were criticised by Doug Parr, head of policy at Greenpeace UK.

He tweeted: “The point of these proposals is to make it easier for investors to build #nuclear by throwing lots of risk onto the taxpayer.”

But the consultation was welcomed by Sue Ferns, senior deputy general secretary of the union Prospect.

She said: “The new government needs to get serious and deliver on the energy infrastructure the UK needs to keep the lights on and to meet our carbon targets on the way to the goal of net zero.

“Direct public procurement would likely be the cheapest way to fund new nuclear, but an infrastructure spending commitment on this scale is unlikely under the current government.

“So while the RAB model is not a perfect solution, it is an approach that could get nuclear projects over the finishing line.”

Mike Middleton, nuclear practice manager at Energy Systems Catapult, insisted that new nuclear does not need to be expensive and could earn its place within the energy mix driving a net zero economy.

He added that combining government initiatives from nuclear deployment programmes elsewhere in the world, could reduce nuclear project schedules, risks and costs.

He said: “The Nuclear Cost Drivers project delivered by the Energy Technologies Institute looked at both troubled nuclear projects in Finland, France and the United States, and additional lower cost projects in Japan, South Korea and China to demonstrate that there was strong evidence cost reductions could be achieved in the UK, with collective action.

“Firstly, by government, to bring about a sustainable mechanism for secure and affordable funding. And secondly learning from the successful nuclear project deployments in places like Japan, South Korea and China which use repeatable engineering with shorter and more predictable project schedules to reduce the uncertainties of cost and risk. Such projects typically benefitted from higher productivity levels in direct labour and indirect services, demonstrating the pathway to shorter projects with lower costs and less risk.

“The relative contribution that nuclear, renewables and other low carbon technologies should make to the UK’s energy mix is open for debate but nuclear energy can be an important technology in the UK’s transition to a carbon neutral economy and does not have to be expensive.”