In with the old, out with the new – an alternative finance model for UK new nuclear power projects

On 31 March 2022 the Nuclear Energy (Financing) Act 2022 (the “Act”) came into force. The purpose of the Act is to make financial investment in nuclear power stations more attractive for private financiers. The Act is intended to assist the Government in its commitment to achieve net zero carbon emissions by 2050.

RAB model

The Act establishes the way in which a ‘regulated asset base’ (“RAB”) model can be used as a means to provide private funding to the nuclear sector – however, the specifics of how the RAB model will be used in respect of each nuclear project are not included in the Act. The RAB model has been previously used over many years to provide private investment in a number of different large scale infrastructure projects – most notably in recent years, the construction of the Thames Tideway Tunnel project (the super sewer) and London Heathrow airport’s Terminal 5. The aim of the RAB model is for the investors and consumers to share the construction costs and operating risks by way of a charge levied to the consumer. This charge is set and overseen by an independent regulator – in the case of nuclear energy, the charge will be passed to consumers via their electricity suppliers and overseen by the Office of Gas and Electricity Markets (“Ofgem”).

The RAB model has not been used in the nuclear sector previously, with the only recent UK nuclear project being Hinkley Point C, which utilised a Contract for Difference (“CfD”). Using the CfD approach, the developer typically pays for the entire cost of construction in return for an agreed fixed price for electricity output once the plant is operational. Given the immediacy of the repayment by the consumer under this envisaged RAB model, the risk for the investor is considered lower and shared with the consumer. The Government’s analysis suggests this could result in a substantial saving for consumers – potentially £30 billion over the life of the projects under certain assumptions[1]. The RAB model may provide the necessary comfort for investment in the Sizewell Point C project (“SZC”) and other nuclear projects – respondents to the Government’s 2019 consultation on a RAB model for nuclear projects (which included, amongst others, EDF) felt that a CfD approach was not financeable in the current market[2].

A financial implication of the RAB model for government is that a RAB funded nuclear project would likely be classified as being on the government’s balance sheet.

Amendments to the current regime

Given that the RAB model has not previously been utilised in the nuclear sector, the Act makes amendments to the current regulatory regime in order to make the RAB approach more suitable for nuclear projects, including the following:

• Part 1 (Nuclear energy generation projects: regulated asset base model): this Part of the Act sets out the criteria that would allow the Secretary of State (the “Secretary”) to designate a nuclear generation company (the “Company”) as eligible to receive RAB funding. This will involve the Secretary considering the project’s development and value proposition. If the Secretary designates the Company, its existing generation licence will be amended to set out how the relevant project will be regulated and the permitted revenue under the RAB model.
• Part 2 (Revenue collection contracts): The interface between the Company and the electricity suppliers and the revenue stream that will ultimately fund the Company are governed by a revenue collection contract (“RCC”) and managed by the RCC counterparty. The RCC will set out how the revenue is collected and, as the Company can only receive amounts to fund the design, construction, commissioning and operation of the project, how any excess is managed. The Secretary or Ofgem will advise the RCC counterparty of how much revenue must be collected each period as permitted under the Company’s generation licence.
• Part 3 (Special administration regime): Should the Company become insolvent, the ‘special administration regime’ set out in Part 3 of the Act (“SAR”) will apply. The SAR is modelled on the regime set out in the Energy Act 2004 (which was applied in the insolvency of Bulb, one of the many failed UK electricity suppliers, at the end of last year) and allows the Secretary (or Ofgem with the Secretary’s permission) to apply to the Court for an order to appoint a special administrator. As consumers begin paying for the plant before any electricity is generated, there is a risk that in the event of the Company’s insolvency, the consumers could lose out on the benefit of the charges paid prior to the operation of the plant. To mitigate this risk, the special administrator’s objective on a Company insolvency event will be to complete construction and/or keep the plant running.
• Part 4 (Miscellaneous and final provisions): Part 4 of the Act amends the Energy Act 2008 to clarify that secured creditors and security trustees are not ‘associated’ for the purposes of the Energy Act and so are not liable for funding the decommissioning of the plant. This seeks to remove any fear of private debt financiers being held liable for costs in respect of the eventual decommissioning of the plant, which can be very considerable for nuclear projects particularly after first energisation.

Comments

The current situation in Ukraine and the UK government’s new energy security strategy published on 7 April 2022 (the “Strategy”) (for which see our law now[3]), the latter including grand ambitions for new nuclear power deployment in the UK, combined with soaring energy prices make the passing of the Act, which has long been in the pipeline, in hindsight appear more timely, relevant and important. The Strategy promises to provide up to £1.7 billion of direct government funding to enable a nuclear project to achieve final investment decision this Parliament and commits £100 million to support the development of SZC. These promises, together with the publishing of the Act, suggest that SZC is likely to achieve final investment decision soon.

However, there is still a large degree of uncertainty regarding the specifics of how the RAB model will apply and clarity will not be provided until regulations are published outlining this. The Act states that the Secretary must publish a statement setting out the procedure for designating an entity a ‘nuclear company’ and how the relevant criteria must be met. The Act’s explanatory note does not anticipate a new statement being published by the Secretary each time an entity seeks to be designated, but until the first statement is published, it is not clear what the expectation of the Secretary will be.

Finally while the Act and Strategy support low carbon and reliable power supply, the other limb of the old “trilemma”, affordability, will continue to remain a key issue for nuclear power, along with the long lead-in time between a final investment decision and first power, and certainty over the all-in costs of a project including the eventual decommissioning and long term waste management and disposal.

[1] New finance model to cut cost of new nuclear power stations

[2] RAB Consultation Government Response

[3] Energy Security Strategy – an answer to the UK’s energy trilemma?