British nuclear turns to tried-and-tested financing model
Britain’s push to pass legislation on a Regulated Asset Base (RAB) model for nuclear power will be welcomed by an industry in search of an affordable financing program.
Nuclear power supply chains have long struggled to find financial backing at a reasonable rate – over two thirds of a plant’s levelized cost of electricity (LCOE) can be taken up by financing alone, according to the OECD NEA – and the failure of governments to commit to the technology amid social resistance has kept investors on the back foot.
However, as more people come to realize that nuclear must play some part in the energy mix if countries are to reach net zero emissions in coming decades, purse strings are starting to loosen, and politicians are starting to take note.
“Nuclear is political and, I hope that after this year when we saw gas prices soaring, they see that there’s a problem coming up and that they need to do something. The nuclear industry has been saying this for years and governments are just realizing now,” says energy, nuclear, and renewables economist, and Project Development Director at the Jordan Atomic Energy Commission Rakan Ayoub.
Some of the countries surging ahead with nuclear power, such as Russia and China, have bypassed private financing concerns by bankrolling any plant through state coffers, and this level of government commitment keeps discount rates at a minimum.
In liberalized energy markets, operators of nuclear must compete with a wide range of energy projects, including renewables, gas, and coal.
When governments sit on the fence over new nuclear regulation and acceptance, investors will either be cautious and ignore nuclear power investments or demand interest rates that, they say, are high enough to cover the potential risks.
Even as a new wave of advanced nuclear reactors prepare to come to market, including small modular reactors (SMRs), microreactors, and molten-salt reactors that claim to close the fuel cycle, investors say they need better assurance from governments that they’ll see their money again, with interest, before they commit.
“We work with nuclear engineers and when they talk about the technology, it’s like they’re talking about a beautiful painting, a Picasso. But at the end of the day, I’m a banker, and I don’t care how beautiful it is. Money costs money,” says Ayoub.
“When the Russian government guarantees Rosatom, Rosatom doesn’t have to worry. CNNC is backed by the Chinese government, so they don’t have to worry. Meanwhile, with other nuclear technologies in general, a political agenda pushes here or there and, before you know it, they’ve pulled the rug out from under our feet. This is a risk, and it has to change somehow so as to move forward.”
Britain changes course
Britain, which produces around a fifth of its electricity from nuclear, is preparing for the end-of-life closure of almost half of current capacity by 2025 and has said that the rise of global gas prices puts its power grid at risk without a reliable nuclear backup.
The only project currently in construction is Hinkley Point C, a 3,200 MW dual-EPR-reactor power station on the southwest coast and, while full financing is still to be finalized, building costs are being covered by France's state-run utility EDF and China's state-run China General Nuclear Power Group (CGN).
Hinkley Point C is already overbudget and behind schedule and other potential nuclear projects, such Hitachi’s at Wylfa Newydd in Wales, and Toshiba’s at Moorside in Cumbria, were abandoned while working under the existing financing mechanism Contracts for Difference (CfD), where operators only begin receiving revenue when the plant begins to generate electricity.
“This is an acknowledgement of the short-sightedness of competitive wholesale markets … Energy-only markets have an inability to attract patient, long-term capital. What they do is they tend to attract 2-, 3-, 5-year turn arounds,” says independent consultant and researcher into regulated markets, Edgardo Sepulveda.
“The Regulated Asset base promises to guarantee long-term investors a reasonable rate of return on their investment.”
Risk sharing of baseline, funding cap, and overrun costs
(Source: British Government via World Nuclear Association)
The Nuclear Energy (Financing) Bill at time of writing is in its report stage in the lower House of Commons before it goes to the upper House of Lords to be read before amendments and final approval, included the RAB to fund future nuclear power stations in the country.
“The Regulated Asset Base model set out in the bill could bring significant amounts of private investment into a nuclear project at relatively low cost by increasing the pool of private investors to include British pension funds, insurers and other institutional investors from our closest partners,” UK minister for Energy, Clean Growth and Climate Change Greg Hands said during the Nuclear Industry Association’s Nuclear 2021 conference.
The RAB model – under which, consumers contribute to the cost of projects during the construction phase – has already been employed for other large infrastructure projects in Britain including the Thames Tideway Tunnel and Heathrow Terminal 5.
Consumers can expect to save more than £30 billion over a project’s lifetime on each new large-scale nuclear power station compared with existing funding mechanisms, the government said.
“The Government’s recently published Net Zero Strategy acknowledges that reliable and affordable nuclear is a vital component of the UK’s future energy mix,” said Chris Ball, Managing Director of Nuclear & Power EMEA at SNC-Lavalin in an emailed response to questions.
“A shift to the RAB model will help to realize these ambitions by providing access to low-rate, long-term sources of finance which would maximize the benefit of new nuclear to the consumer and further reinforce its role as a competitive and secure source of low carbon power.”
The new model will potentially give a solid boost for Britain’s next potential large nuclear project, Sizewell C, a near replica of the Hinkley Point C power station and also backed by France’s EDF.
Meanwhile, the government put by up to £1.7 billion ($2.3 billion) in direct government funding to enable a large-scale nuclear project to reach a final investment decision as part of the Department for Business, Energy, and Industrial Strategy (BEIS) 2021 spending review.
The BEISS added that it is in active negotiations with EDF over the Sizewell C project.
“This is a big vote of confidence in nuclear and a historic step forward for nuclear investment, with new money for a large-scale project, alongside money for modular reactors to enable future projects,” says Chief Executive of the Nuclear Industry Association Tom Greatrex says.
By Paul Day