Utility Week

UTILITY WEEK | 30TH AUGUST - 5TH SEPTEMBER 2019 | 19 Finance & Investment Analysis A ndrea Leadsom was seen as a sup- porter of nuclear energy during her spell as minister of state for energy from 2015 to 2016. However, during the recently appointed business and energy sec- retary's time away from the portfolio, little progress has been made on nuclear. EDF's plant at Hinkley Point is at last being built a€er receiving the sign-off from ex-prime minister Theresa May. However, proposals for new power stations at Wylfa and Moorside have bitten the dust a€er their backers, Hitachi and Toshiba respectively, decided not to proceed. The withdrawal of the two multinationals has le€ the UK nuclear industry uncomfort- ably close to the last-chance saloon. A way out may be found in one of the many items le€ in Leadsom's in-tray by her predecessor Greg Clark. This is a consulta- tion paper outlining how the regulated asset base (RAB), a mechanism that has been used to finance many infrastructure projects such as the Thames Tideway "super sewer", could be extended to nuclear power stations. Removing financial risk The idea of deploying the RAB is chiefly driven by the desire to cut costs by mobilis- ing relatively low return-seeking pension fund capital. Institutional investors have a growing appetite for infrastructure assets, which offer steady returns that are healthier than those on offer from bonds these days. However, pension funds tend to take an interest in infrastructure only once it is oper- ating and generating revenues. This cautious group of investors generally shies away from any kind of construction project because of the risk that they will be le€ empty-pocketed if it is uncompleted. The RAB model is designed to de-risk nuclear projects and offer these institutions the kind of return profile they crave. Under the RAB model, a regulator sets the returns that a project can generate for its investors. According to the Department for Business, Energy and Industrial Strategy (BEIS) consul- tation paper, the regulator would determine the "allowed revenue" developers of nuclear projects could earn, using a weighted average cost of capital (Wacc) formula that the water industry is familiar with. Pension funds like this kind of arrangement, because it offers a good match for their liabilities, which involve pay-outs to investors stretching over many decades. In addition, under the government's blueprint, investors can start to recoup revenues before their asset is up and run- ning. This is in con- trast with conventionally financed projects, such as Hinkley Point C, where they must wait until it is operating before getting paid. But Labour's energy spokesperson, Dr Alan Whitehead, expresses reservations about the idea investors could be paid for yet-to-be-completed projects. "If there was a substantial delay, which is a hallmark of nuclear installations, the pub- lic could find itself paying large amounts of money for nothing, which would not be an appropriate outcome," he warns. Helping hand In a further bid to reassure pension funds, the government's consultation paper moots the creation of what it calls a government support package (GSP). This would be uti- lised in certain circumstances such as a cost overrun or disruption to the debt markets. If costs exceeded a predefined thresh- old, known as a funding cap, the regulator would have the option of calling on the GSP or hiking charges for the plant's customers, according to the government's RAB paper. Richard Black, director of the Energy & Climate Intelligence Unit, believes the mooted offer of this additional support fuels a narrative that nuclear gets special treat- ment compared with other energy technolo- gies. "There's no question of that happening with windfarms or interconnectors or any- thing else," he points out. On the other hand, mobilising lower return-seeking pension fund capital could enable nuclear projects to access cheaper finance. According to a research paper pub- lished this month by Cambridge University's Energy Policy Research Group, the Wacc over the lifetime of a Sizewell-sized power station would be 3.5 per cent, which would work out at a strike price of £53/MWh. However, load- ing all the risk onto the developer, as with Hinkley Point, would require a contract for difference with a strike price of £96/MWh. As well as the steady returns, EDF has also been emphasising nuclear's credentials as a low-carbon source of power that can align with environmental, social and govern- ance criteria, which an increasing number of pension funds have signed up to. EDF is confident, having taken sound- ings from institutional investors, that there is appetite for new nuclear projects if the terms and conditions for securing finance are right. The energy supplier is keen to secure a final investment decision on Sizewell by the end of 2021 or the beginning of 2022. Press- ing the button by that point would enable the company to shi€ teams from Hinkley Point to Sizewell, cutting the risk that they will disband during any hiatus. Last month's publication of the consulta- tion allows the RAB model to be developed to fit this timescale, although a decision has yet to be taken by BEIS on whether it will require full-blown primary legislation, which would inevitably prolong the process. However, Tim Yeo, a former chairman of the House of Commons energy and climate change select committee, worries that intro- ducing the RAB model could prove more difficult than its enthusiasts admit. "It's complicated and will need lot of work," he says. "If RAB allows that to hap- pen, it's good, but if it just means more arguments, that's bad." The consultation period on the govern- ment's proposed regulated asset base model for nuclear closes on 14 October 2019. Last chance for nuclear? David Blackman discusses whether the proposed introduction of the regulated asset base model could revive the fortunes of the UK's ailing nuclear power industry. "If there was a substantial delay, which is a hallmark of nuclear installations, the public could find itself paying large amounts of money for nothing" DR ALAN WHITEHEAD, SHADOW MINISTER FOR ENERGY AND CLIMATE CHANGE

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