The Nuclear Energy (Financing) Act 2022 received Royal Assent on 31 March 2022 (c. 15)[1]. The Act was designed to facilitate investment in new nuclear power stations, supporting the delivery of the Government's commitments made in its 2020 Energy White Paper and in the Prime Minister's Ten Point Plan[2], and thereby 'contributing to the Government meeting its legally binding[3] obligations to achieve net zero carbon emissions by 2050'.

Days after the Act received Royal Assent, the Prime Minister launched the British Energy Security Strategy[4]. This Strategy includes new nuclear generation "ambitions" such as:

  • To establish a Great British Nuclear ("GBN") vehicle by the end of the year. The GBN will be tasked with helping projects through every stage of the development process and developing a resilient pipeline of nuclear generation new builds.
  • To have up to eight new nuclear reactors "progressed" by 2030. It is not clear whether this is in addition to the two reactors planned for Sizewell C (SZC) mentioned below, each of 1.6GW. The GBN will have a key role here, with the expectation that a selection process will be kicked-off in 2023, with the intention that the Government will enter negotiations with the most credible projects as soon as possible.
  • To have up to 24GW of installed nuclear generation capacity (25% of total GB demand) by 2050 – almost twice that of the peak year in 1995.
  • To develop an overall siting strategy optimizing the use of the UK's existing eight designated nuclear sites: Hinkley, Sizewell, Heysham, Hartlepool, Bradwell, Wylfa, Oldbury and Moorside. The Wylfa site is singled out in the Strategy for special mention, underscoring that credible negotiations are already underway with Bechtel and Westinghouse for a new nuclear generation project on this site[5].

The Strategy also re-states existing Government commitments to new nuclear generation, including the Government's commitment:

  • To provide up to £1.7 billion of direct government funding to enable one large-scale nuclear project to Final Investment Decision (FID) this Parliament (i.e. before May 2024). Since there is only one project that could realistically achieve this milestone, this must be a reference to up to £1.7 billion of funding for SZC; perhaps as part of the Government's expected 20% equity stake in the project[6].
  • To provide a further £100 million to SZC to help it develop the project.
  • To invest £210 million for the development of Small Modular Reactors (SMRs) with Rolls Royce.
  • To establish and fully fund, before the end of 2022, a £120 million Future Nuclear Enabling Fund to progress new nuclear.

In previous articles[7] we examined the NAO's 2016 and 2017 comments on nuclear newbuild:

"We had previously described the need for greater certainty in the government's and regulators' decisions to improve market confidence in the pipeline of investment and contracting opportunities"
NAO (2016) Nuclear Power in the UK, HC511 Session 2016-17, 13 July 2016.

Perhaps galvanised by energy security concerns (e.g. arising from the crisis in Ukraine) and by fast escalating energy prices, the Act and the Strategy combined now, finally, seem to be paving the way for certainty and for the "pipeline of investment and contracting opportunities".

That the leaders of the UK's two main political parties have a track record of supporting the development of new nuclear generation in the UK will, no doubt, also foster the greater certainty that the developer, investor and contracting markets had needed:

Prime Minister's Questions, Hansard, Volume 710, debated Wednesday 9th March 2022

The Prime Minister

It is thanks to the policies that this Government have pursued that we are dependent on Russian gas for only 3% of our gas needs, unlike virtually every other European country. It is thanks to the massive investment we have made in renewables that we are—as I have said many times in this House—the Saudi Arabia of wind power, producing more offshore wind than virtually any other country in the world. By the way, this may be news to some of his party, but I think the right hon. and learned Gentleman just committed to supporting more nuclear power. Great news! There is more joy in heaven over one sinner that repenteth than over a hundred others. Those were the people who cancelled our nuclear efforts during the time they were in power—they did completely the wrong thing. I am delighted to now welcome them into the fold. {emphasis added}

Keir Starmer

Come off it! Labour is pro-nuclear….

Whilst the leader of the Liberal Democrats has not been supportive of the nuclear elements of the new Strategy nor of the new Act as it passed into legislation, it is worthwhile remembering that Sir Edward Davey, as Secretary of State for energy, agreed to the Hinkley Point C (HPC) nuclear deal with EDF in 2013[8]. So the market is unlikely to be unnerved by dissent on the nature of the delivery model or the extent of the ambition..

The Act envisages the use of a variant of the Regulated Asset Base ("RAB") model to fund future nuclear power stations in Britain – a model which has successfully delivered significant infrastructure assets in other sectors, such as the £4.2 billion the Thames Tideway Tunnel project ("Tideway") in the waste water sector.

As was the case for Tideway – whose investors from the start of construction were Allianz, Amber, Dalmore and DIF – the UK projects' market (e.g. Response to BEIS Consultation on RAB Model for New Nuclear Projects (ipfa.org)) has endorsed the RAB model for new nuclear. It has also said it could substantially increase the pool of private investors willing and able to invest in new nuclear generation (potentially to include pension funds, insurers and other institutional investors) during construction.

Under the support mechanism used for HPC – which was underpinned by a Contract for Difference (CfD) – EDF had to finance the development and construction of the project itself. HPC will only begin receiving revenue, and hence EDF will only start to generate a return, when the HPC facility starts generating electricity. Whilst the CfD based arrangement was sufficient to encourage EDF to develop HPC on a one-off basis, the arrangement proved incapable of encouraging the successful delivery of follow-on large scale nuclear generation projects, such as Hitachi's project at Wylfa Newydd in Wales and Toshiba's at Moorside in Cumbria – both of which projects were cancelled by the developers after significant development costs were incurred. Even EDF was unprepared to proceed with SZC on the basis of the CfD arrangements that it had used for HPC.

Under the Act's new RAB model, consumers will start paying the nuclear developer during the construction phase (i.e. investors won't have to wait until the operational phase to start getting a return on each allowable £ spent). Despite hitting the consumer bill much earlier, the overall bill to the electricity consumer is, though, expected to be much lower under the RAB than under the HPC's CfD arrangement. It is estimated that the RAB for a project like SZC could lower the cost to UK consumers by more than £30 billion over its life[9].

In subsequent articles in the coming weeks we will examine the Act in more depth. We will try to understand how the GBN might assist with the definition and delivery of the nuclear pipeline outlined in the Strategy. We will look at the lessons learned from Tideway and try to understand whether the Act will facilitate the successful delivery of the Strategy's objectives.

If you have any queries on the act or any other nuclear questions, please contact Andrew Newbery, Paul Green or Robert Armour.

Footnotes

[1] Nuclear Energy (Financing) Act 2022
[2] 18 November 2020, The Ten Point Plan for a Green Industrial Revolution
[3] 12 June 2019, Climate Change Act 2008 (2050 Target Amendment) Order 2019
[4] 7 April 2022, British energy security strategy
[5] Wylfa: UK minister visits US hoping for nuclear deal
[6] 27 March 2022, Sizewell C nuclear power station: Government to take 20% stake
[7] 27 June 2017, What next for the nuclear market after NAO report
[8] 2 August 2021, Ed Davey's nuclear U-turn
[9] 26 October 2021, New finance model to cut cost of new nuclear power stations