Sizewell C to face higher construction penalties to protect consumers from delays

Changes have been made to the terms of Sizewell C’s funding model to ensure consumers are protected from potential construction delays and cost overruns to the nuclear power plant.

The government has introduced a tiered approach to delay penalties with staggered incremental increases and higher penalties for longer delays.

It is one of seven changes made following a consultation on modifications to the Sizewell C regulated asset base (RAB) licence.

Other changes include:

• Amendments to the yield cap
• Deferral of requirement to forecast market revenue until the operations phase
• Changes to revenue support and availability incentives
• Amended definition of allowable capital spend
• Amended definition of force majeure but retaining an exhaustive list
• Changes to the lower and higher regulatory thresholds relating to a ‘relevant change in circumstances’ event

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.

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

The regulator 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”.

The government’s response to the consultation reveals that several respondents raised concerns with the government’s proposed incentives for EDF to deliver the project on time.

In particular, concerns were raised about proposed delays to weighted average cost of capital (DWACC) penalties.

“Some consultees raised concerns about the disproportionate impact of long delays on consumers, recommending that government considers a tiered approach to delay penalties with higher penalties for longer delays,” the response states.

“Other consultees argued that the current proposed DWACC was inappropriate given the risk profile of the asset, calling for penalties to increase based on the period of delay, with minimal penalties in the immediate term subject to incremental increases over time.

“One consultee suggested the DWACC should be calibrated to cover the licensee’s cost of debt but nothing more. There was also a call for further clarity as to how the proposed DWACC had been calculated.”

In response the government has decided to introduce a tiered approach to delay penalties and staggered incremental increases to the DWACC fines.

It adds: “This ratcheting mechanism will also include a grace period until the second anniversary of scheduled commercial operating date (COD), after which point the initial weighted average cost of capital (IWACC) would reduce incrementally over a set period until scheduled COD is achieved.

“This change builds on the responses made to this consultation from those consultees advocating for increasing penalties based on the period of delay. It is recognised that the DWACC is one of multiple licence features which is aimed at incentivising timely delivery.

“This was taken into account when designing this new mechanism. This has led government to conclude that it is not necessary to apply the DWACC from the first point of delay, noting that other delay incentives, such as the yield cap, continue to impact the licensee.”

A spokesperson for the Department for Energy Security & Net Zero said: “Projects like Sizewell C will mean cleaner, cheaper and more secure energy in the long-term.

“As recognised by the National Audit Office, our model can deliver greater value for money for consumers by lowering the cost of financing construction, one of the biggest drivers of new nuclear project costs. This means that we anticipate charges for large-scale nuclear projects to be around £1 a month on average of a typical household bill.

“We are conducting robust due diligence of estimates around Sizewell’s cost and construction time prior to any final investment decision.”

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.

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