The UK government has announced its support for new nuclear power generation as a reliable, low-carbon source of electricity to help meet increasing demand due to the electrification of sectors such as heat and transport.
The government recognises nuclear as having a key role in the decarbonisation of the electricity sector by providing firm low-carbon power alongside intermittent renewable generation and (in the future) power stations that burn hydrogen or gas with carbon capture and storage. It also recognises the importance of the sector in supporting UK jobs and supply chains.
The Ten Point Plan sets out the government’s support for large-scale new nuclear projects as well as investment in small and advanced modular reactors. It also confirms support to commercialise nuclear fusion technology.
Nuclear power has played an important role in the UK’s current energy mix since the first full-scale nuclear power station was built more than sixty years ago. There is currently only one new nuclear power station being constructed in the UK, Hinkley Point C, and the Ten Point Plan paves the way for the construction of further large-scale nuclear power stations such as Sizewell C in Suffolk.
The full details on how new large-scale nuclear will be financed are not set out in the Ten Point Plan or the National Infrastructure Strategy published on 25 November. Last year, the government consulted on a nuclear regulated asset base (RAB) model and reports that it is still considering responses to this consultation. Alongside considering the RAB model, the government has said that it will continue to consider the potential role of government finance during construction.
The RAB model first emerged in the UK and is associated with the successful privatisation and sustained investment in network and other utility businesses. More recently, the RAB model has been successfully adapted for the Thames Tideway Tunnel project and it is expected to have an important role in encouraging investment in other complex infrastructure projects including carbon capture utilisation and storage.
The RAB model differs from many other private finance models, such as the now retired PFI and PF2 models, as it allows for the project to earn revenue during the construction period which enables debt to be serviced (rather than being rolled up and capitalised) during construction and allows equity investors to earn a return from day one. The model also allows for the sharing of construction risk between the project and its contractors, on the one hand, and consumers, on the other. Together with a government support package to address low probability, high impact risks, these features resulted in Thames Tideway Tunnel attracting private investment with a very low cost of capital.
Large-scale nuclear projects are very capital-intensive and have a long construction period (with relatively low operating costs once constructed). This means that financing costs make up a large proportion of the overall cost of delivering new nuclear projects making them a good candidate to potentially benefit from a RAB-based model to bring down the cost of financing.
Advanced nuclear fund
The government has also announced up to £385 million of investment in emerging nuclear technologies as part of an Advanced Nuclear Fund. This includes:
- up to £215 million to be invested in small modular reactors (SMRs) to help develop a domestic smaller-scale power plant technology;
- up to £170 million for a research and development programme on advanced modular reactors to help unlock efficient production of hydrogen and synthetic fuels; and
- an additional £40 million to develop the regulatory frameworks and support UK supply chains in order to bring these technologies to market.
The government hopes that its investment in SMRs will unlock up to £300 million private sector match-funding.
The Ten Point Plan demonstrates that the government views nuclear power as an important contributor to low-carbon electricity and an essential component in the UK’s energy generation mix into the 2050s and beyond. The highly anticipated and much-delayed Energy White Paper that is expected to be published before the end of 2020 should provide further details on the future role of nuclear, and may include further details on how new large-scale projects will be financed and the government’s role in this.
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© Herbert Smith Freehills 2021