This seminar was presented by two senior consultants from Agilia Infrastructure Partners, UK, a specialist infrastructure consultancy firm working at the heart of several challenging large-scale infrastructure projects in Britain. For the Sizewell C nuclear power station project, Agilia supports the Financing and Economic Regulation team of Électricité De France (EDF) Energy (currently the principal private sector promoter for the project) in developing its delivery model, commercial arrangements, investor engagement materials and discussions with the UK Government.
Amar and Chris outlined at the time of writing the strategic case to replace, as a minimum, the existing zero carbon nuclear output in the UK (currently providing 17% of the UK energy supply mix) given that seven of eight of the country’s existing nuclear plants are to cease by the end of 2030. It is based on the belief that nuclear energy provides zero carbon electricity at a large scale, and that nuclear is very supportive for the accelerated roll-out of renewable energy power of a 60-year asset lifespan, contributing to the UK Government’s target of zero-carbon energy in 2050 and well beyond. The presented case study emphasises that on-shore nuclear power provides energy resilience and security of supply for the UK, and that building such new nuclear infrastructure helps meet the Government’s economic policy objectives, including its regional ‘levelling-up’ agenda and the further development of national manufacturing capabilities, including advanced technologies. The new Sizewell C nuclear plant, to be located alongside the existing Sizewell B plant, is currently at an advanced stage of planning, to help meet this UK nuclear energy capacity.
The presentation particularly focused on the difficulties of developing a strong business case and delivery model to attract private sector finance for the major (and long term) scale of investment required, alongside inputs from the public sector including planning consent and regulatory requirements. The Sizewell C business case uses an innovative financing model (for the nuclear energy sector and greenfield projects more generally) as a basis for the planned public-private partnership - namely the Regulated Asset Base (RAB) Model - which is used extensively in the UK to regulate private sector monopoly infrastructure assets such as water, gas and electricity networks and aviation.
Amar and Chris emphasised the key importance of considering a clear and strong policy context from the outset of the project, as the basis for the strategic case presented. They argued that at the time of writing, the UK policy context provides this. The Government, they argued, is committed to nuclear energy being a strong element of a diverse zero-carbon energy supply mix, and is thus (subject to value-for-money) pursuing large scale new nuclear projects with this in mind, in addition to exploring smaller scale reactor projects.
In terms of the business case for the major investment alluded to, they explained how the Sizewell C project seeks to reduce estimated construction costs and risks by various means. They explained it is a direct replica of the Hinkley Point C plant currently under construction, with an established mature European Pressurised Water Reactors (EPR) design which already has UK regulatory approval. It looks to utilise the large UK supply chain already created for Hinkley Point C; and it is located on a site with pre-existing UK electricity transmission connection and capacity. The project is also seen as having a wider role as an Energy Centre in the UK so to use the significant low carbon heat created by the power station by acting, for example, as one of the major platforms for developing the UK’s Hydrogen and Direct Carbon Capture industries.
Amar and Chris explained, however, that financing this massive investment poses cost issues that have been problematic for nuclear plants in the UK in light of the fact that the Government‘s approach is to look to the private sector to meet most of the required investment. Pointing to funding sources including sovereign wealth funds, multilateral development banks and multinational companies in the energy sector plus new sources such as other investment banks and pension funds, they explained that such parties are looking for predictable costs and predictable and/or guaranteed income streams, especially given the long-term nature of the project construction and operation phases for nuclear plants. The two consultants from Agilia outlined how previous UK models, such as the Private Finance Initiative (PFI) and different forms of Public Private Partnerships (PPPs) have presented major shortcomings in terms of offering genuine public-private collaboration/engagement, effective cost control and transparency regarding the sharing of both investment risk and reward which in private sector terms alludes to rate of return that adequately reflect revenue streams and costs. They presented the example of the Hinkley Point C nuclear plant (under construction) which uses the widely-known Contracts for Difference PPP Model – where in the contract, the private sector holds all the construction cost risk and in return the Government ensures investors they are paid a guaranteed ‘strike price’ for electricity until a specified future date (decades in the future) that is primarily generated from anticipated consumer prices but potentially with Government top-ups where necessary. This model, however, has been criticised for potentially high consumer prices and questionable value-for-money outcomes. The presenters pointed to the fact that approximately two-thirds of the Hinkley Point C ‘strike price’ relates to the high cost of capital financing for the project, reflecting risk for the private sector investors especially due to escalating construction costs which are typical for major infrastructure projects.
Amar and Chris subsequently explained how the RAB Model seeks to address such difficulties namely by building in incentives for all the promoters (both private and public) at the project outset; in particular by generating an income stream for the private sector when project construction commences rather than only when completed and operational. They argued that in this way the RAB model offers a better structure for sharing risk among stakeholders between the market (represented by investors, contractors and the developer), consumers and the taxpayer, to incentivise efficient delivery of the project at the best overall value for money. RAB, they further argued, can be used for projects where costs can be passed on to end-users (as in the Sizewell C case) by electricity prices for consumers. In this way, they explained, Baseline Project Cost and Risk Envelope are established which contain all identified costs and risks plus related benchmarks. This approach allows a risk contingency to be held by the delivery company and used to incentivise contractors to deliver on schedule and below the predicted out-turn cost. Cost savings below this baseline may then be shared between the delivery company and consumers. Returns (i.e. consumer revenues) are paid throughout the project construction period, reflecting an agreed investment rate of return. The model, they claimed, provides for on-going scrutiny by an expert (governmental) regulator with a duty to act in the interest of consumers by ensuring that only ‘efficient’ expenditure forms part of the company’s RAB, whilst having regard to the generator’s ability to finance its activities. A Government Support Package, they added, can provide further financing to address remote events (such as market failures and uninsurable risks).
The presentation did much to emphasise how the RAB model offers both incentives and safeguards from the outset of a project for: government, investors, contractors and consumers alike. The Agilia consultants then provided a useful comparison between the outcomes of the RAB Model and a typical PPP Model to explain how the former has the potential to better attract investment for major capital projects in the nuclear sector in the long term. They concluded by arguing that RAB offers promising opportunities for a funding model that can be exploited to deliver further new projects, including potentially both large nuclear projects and small modular reactors (SMRs) in support of the UK Government policy. The Government is to this end addressing legal and regulatory provisions to enable RAB in practice.
This very informative and interesting seminar presentation was followed by a panel discussion with invited commentators that covered major questions, ranging from - the wisdom of the UK Government’s current strategic support for nuclear in the energy mix in light of the successful growth of renewable energy sources such as wind and solar - to questions of how the RAB Model would operate in practice, and how issues of determining acceptable investor rate of return would be addressed, and the danger of high increases in consumer electricity prices arising in the event of escalating construction costs.
The presentation slides of the seminar are available on the OMEGA Centre website: http://www.omegacentre.bartlett.ucl.ac.uk
OMEGA Centre, Bartlett School of Planning, University College London, London, UK
[email protected]