Construction News

Wed December 01 2021

Related Information

Tideway funding model could save nuclear power industry

27 Oct The government is looking to adopt the finance mechanism used to pay for the Thames Tideway super sewer to rescue plans to construct more nuclear power plants.

A regulated asset base (RAB) funding model could revive plans for a new nuclear plant on the island of Anglesey
A regulated asset base (RAB) funding model could revive plans for a new nuclear plant on the island of Anglesey

The Nuclear Energy (Financing) Bill, currently in Parliament, will have a new section added to introduce a regulated asset base (RAB) model as an option to fund future nuclear projects.

Under this model a company receives a licence to charge a regulated price to consumers. The model enables investors to share some of the project’s construction and operating risks with consumers, lowering the cost of capital.

The RAB model differs from the contract for difference (CfD) approach that was used to finance Hinkley Point C. With the Hinkley CfD, the developer agreed to pay the entire cost of constructing the plant, in return for an agreed fixed price (often referred to as the ‘strike price’) for electricity output once the plant is online. This is ultimately funded by consumers, who will pay the difference between the wholesale electricity price and the final strike price, but consumers do not start paying until the power station is up and running.

In contrast, the RAB model – which was also used to finance the construction of Heathrow Terminal 5 – shares the cost with consumers from the start, reducing the amount of interest owed on loans.

Unlike a CfD where construction risk sits with the developer, an RAB model enable some level of risk-sharing between investors and consumers.

The RAB model will require consumers to pay what the government describes as “a small amount” on their bills during the construction of a nuclear project. These payments avoid the build-up of interest on loans that would ultimately lead to higher costs to consumers once the plant is in operation, it is argued.

The Department for Business, Energy & Industrial Strategy (BEIS) said: “Our analysis has shown that using the RAB model should produce a cost saving for consumers of between £30bn and £80bn compared to funding it through a Hinkley Point C style CfD scheme.”

BEIS still defends the use of the contract for difference mechanism for Hinkley Point C It says that the deal agreed in 2016 “was the right deal for the right time”.

Related Information

However, it recognises that placing the entire construction risk on developers was what ultimately led to the cancellation of Hitachi’s project at Wylfa Newydd in Anglesey and Toshiba’s at Moorside in Cumbria.

Business and energy secretary Kwasi Kwarteng, said: “In light of rising global gas prices, we need to ensure Britain’s electricity grid of the future is bolstered by reliable and affordable nuclear power that’s generated in this country.

“The existing financing scheme led to too many overseas nuclear developers walking away from projects, setting Britain back years. We urgently need a new approach to attract British funds and other private investors to back new large-scale nuclear power stations in the UK.

“Our new model is a win-win for nuclear in our country. Not only will we be able to encourage a greater diversity of private investment, but this will ultimately lower the cost of financing new nuclear power and reduce the costs to consumers and businesses.”

Tim Cooper, a director of construction consultant Arcadis, said: “The funding of high-risk projects has held back investment in UK infrastructure, and the adoption of the RAB model will make projects much more investable. RAB has successfully supported investment using well established technologies in UK water and energy networks. However, even using these technologies, regulators have found it challenging to ensure that providers deliver value to their customers.

“By extending the RAB model to nuclear, government will transfer a great deal of risk to the bill payer.  This will undoubtedly reduce finance costs but paradoxically may result in less focus on the management of the initial construction costs. 

“In a complex and high risk environment like nuclear power, ensuring the highest disciplines around the independent oversight of requirement and change management will be essential to protect the interests of the consumer. We believe that digital systems and deep asset class insight will play an essential role in provide this oversight and assurance.”

Got a story? Email


Click here to view more construction news »