3 Financing new nuclear
36. At the most recent estimate, the price for
each reactor at Hinkley Point C was expected to be £7 billion.
In the current economic climate, finding such large sums of money
is difficult. In this section we explore how new nuclear projects
might be financed and what steps the Government can take to encourage
investment into the sector.
Where will the money come from?
37. There are three main options for financing
new nuclear power stations:
- Funding raised by governments
(or state-owned utilities);
- "on balance sheet" funding where private
power companies (or consortia) raise new debt and/or equity against
their whole asset base; and
- "project financing" where private companies
borrow debt for a specific project where the debt is linked to
the revenue generated from the project (rather than being linked
to the corporate sponsor).
38. To date, the vast majority of nuclear power
stations around the world have been funded either by governments
or on balance sheet. Energy and Infrastructure Finance highlighted
two examples of nuclear power stations that had been funded through
a project financing model (EDF's Dunkerque plant and Olkiluoto-3
in Finland) but suggested that both of these instances could be
considered as special cases.
39. DECC expects that the first new nuclear plant
in the UK will be funded on balance sheet but also recognises
that "it is considered unlikely that large scale and rapid
expansion of nuclear generation involving multiple parallel build
could be financed in this way".
This is because most European utility companies are not currently
in a position to take on large amounts of debt.
RWE npower's outgoing Chief Executive, Volker Beckers,
confirmed this view, telling us that "it is very clear that
without the financial sector, the energy sector alone is not able
to stem all these required investments".
In other words, if there is to be a large amount of new nuclear
in the UK (more than the 16GW that is currently on the table)
then we cannot rely on large utilities to deliver this investment
through balance sheet funding. It is worth noting that under DECC's
"low cost" 2050 Pathways scenario, there is more than
40GW of nuclear power in 2050.
40. The cheapest source of funding for the construction
of new nuclear power plants would be the UK government (the plant
could then be sold to a utility company once operational). This
is because with its very good credit rating, the Government can
borrow money at a cheaper rate than the private sector and therefore
the overall cost of projects will be lower. However, we recognise
that this approach is not compatible with the Coalition's current
policies. This means that it is likely that without a change of
heart within Government project financing will be required for
future new nuclear power plant in the UK.
Barriers to raising finance
41. There are a number of risks that may act
as barriers to raising finance for new nuclear power stations.
These include revenue risk, policy risk, and construction risk.
42. Revenue risk occurs because nuclear power
stations have high upfront costs. Investors need confidence that
the price for electricity generated over the lifetime of the plant
will be sufficient to ensure a return on their investment.
43. Policy risk is the danger that future policy
changes might impact on the profitability of a project. For example,
changes to rules on carbon emission targets or to the carbon price
in the future could affect the profitability of nuclear plant
over the course of its lifetime.
44. The possibility of delays and cost overruns
during the construction phase is known as "construction risk".
Unfortunately, the nuclear industry does not have a good record
in this area. Many
witnesses highlighted the on-going new build projects at Flamanville
(France) and Olkiuoto (Finland) where costs have almost doubled
from the original budgets and completion dates have slipped by
at least four years.
However, as noted in chapter 2, an EPR reactor has been delivered
on time and to budget in China.
45. The success or otherwise of the first new
nuclear power plant built in the UK could have a significant impact
on subsequent plant. DECC told us that "if the first new
nuclear plant are built to time and cost in the UK this could
open up different sources and approaches to financing the construction
phase of nuclear plant in the UK".
Of course, the reverse is also true; if the kinds of delays and
cost overruns that have been witnessed at Flamanville and Olkiuoto
were to occur in the UK, this could close down the possibility
of raising project finance for subsequent projects because the
construction risk would be too great for investors to contemplate.
The Government's solutions
CONTRACTS FOR DIFFERENCE
46. The Government has set out plans to reform
the electricity market through the Energy Bill 2012, which at
the time of writing had completed the Committee Stage in the House
of Commons. This includes the introduction of Contracts for Difference
(CfDs), which will address both revenue and policy risk by guaranteeing
long-term prices for the energy generated from nuclear power stations
through private law contracts (which cannot be changed retrospectively
by future governments). We commented extensively on these proposals
in our pre-legislative scrutiny of the Energy Bill.
47. There is a great deal of uncertainty about
the so-called "strike price" for new nuclear (the price
that generators will receive for each unit of energy produced).
At the time of writing, the Government was still in negotiations
with EDF over the strike price level for Hinkley Point C (despite
the Minister's hope to have reached an agreement by the end of
2012). Some witnesses
believed that the Government was not in a strong negotiating position
and that there was a perverse incentive for EDF to inflate costs
in order to receive a higher strike price.
Vincent de Rivaz (EDF) rejected this accusation, arguing that
"if I was increasing the cost to get a strike price that
would not be competitive, I would be saying that nuclear is not
competitive, that is not my job, I am in the job to demonstrate
that nuclear is competitive".
The Minister appeared to be convinced by this argument.
When pushed to give an indication of the level of strike price
EDF was seeking, Mr de Rivaz told us that the figure of £140/MWh
was "rubbish", but would not comment on the figure of
Butler (author of a blog on energy and power for the Financial
Times) thought that "£100 [per megawatt hour] would
be the absolute top band" and that "That figure [£100/MWh]
is valid if supported by an open demonstration of the cost calculations
but must include a complete and unequivocal acceptance of all
the risks by the plant operators. It would be unacceptable to
find that such a figure had been agreed and then discover that
the risks had been transferred to the taxpayer or the consumer.
48. We note that the President of the Sustainable
Development Committee in the French Assemble Nationale, Jean-Paul
Chanteguet, is reported to have stated that the revised build
cost of Flamanville is expected to deliver a price for electricity
at 74/MWh. It will be important to establish whether this is directly
comparable to the UK context in relation to the ongoing negotiations
for the strike price for Hinkley Point C.
49. We support the introduction
of Contracts for Difference as a way of reducing revenue and policy
risk for nuclear new build projects. However, new nuclear should
not be delivered if the price is too high. It is essential that
any contract represents value for money for the consumer. We
reiterate the recommendation made in our pre-legislative scrutiny
of the draft Energy Bill that at the very least, the nuclear strike
price should not be higher than that given to offshore wind, which
is hoped to be around £100/MWh by 2020. We further note that
other low-carbon technologies are likely to receive strike prices
significantly below this level and that nuclear will need to offer
advantages compared with these technologies if it is to deliver
good value to consumers.
50. Transparency about how the nuclear strike
price will be set is still a major area of concern. Even
though Mr de Rivaz took issue with the notion of discussions in
"smoke filled rooms", several witnesses were not reassured.
Supporters of Nuclear Energy were concerned that the process might
present a reputational risk for nuclear power in general.
Nick Butler told us:
I think we need real transparency in what they are
asking for in terms of support prices and where that is going
to feed through to consumers. I think this should be an open discussion,
rather than done in what somebody said was a smoke filled room.
It should be an open exchange of what the data is and who is going
to take the risks if the costs are higher.
51. Both EDF and the Minister insisted that the
outcome of the negotiations would be transparent.
We make our recommendation on this matter in paragraph 58, below.
GENERIC DESIGN ASSESSMENT
52. The Generic Design Assessment process (described
in paragraph 28) should help to reduce construction risk because
it will lessen the chances of design changes being made after
construction has begun (see paragraph 28).
UK GUARANTEES SCHEME
53. The UK Guarantees Scheme was announced by
the Chancellor of the Exchequer and Chief Secretary to the Treasury
in July 2012. The Government hopes the scheme will help to encourage
private sector investment in infrastructure projects, in part
by reducing construction risk. The aim is to give investors confidence
that the Government will step in if projects go wrong by providing
expenditure and liabilities on financial assistance of up to £50
billion in support of infrastructure investment. This includes
not only the provision of guarantees, but also loans or "any
other kind of financial assistance (actual or contingent)".
Humphrey Cadoux-Hudson (EDF Energy) told us that the scheme "could
be a very important element of the financing [of Hinkley Point
C]". We note
that press reports published after we had finished taking evidence
suggested that EDF was indeed exploring whether the UK Guarantees
scheme could help to support the Hinkley Point C project.
Rupert Steele (Scottish Power/Iberdrola) said "When we [NuGen]
get to [final investment decision] stage, around 2015, then the
Government's guarantee scheme will no doubt be one of the things
that we will look at along with other options".
54. The UK Guarantees scheme
may help to bring forward investment in Hinkley Point C, but it
is not clear whether support will still be available for nuclear
new build projects that are further away from making a final investment
decision (such as the NuGen and Horizon projects). Given
the important role for nuclear generation in the UK's future energy
mix, the Government should extend this support to all nuclear
new build projects, which may require increasing the amount of
available assistance to more than £50 billion. (We note that
the UK Guarantees scheme does not involve expenditure, as long
as the guarantees are not called in.)
55. Professor Steve Thomas (University of Greenwich)
suggested that the only way to deal with construction risk was
through "full cost pass-through to consumers. In the UK context,
this could be done through escalators in the CfDs so that if construction
costs did overrun, the price paid would cover these additional
agreed that "investors want cast-iron guarantees that bill
payers will pick up the tab when the nuclear industry does not
deliver what it promised".
56. Mr de Rivaz told us EDF was not asking for
construction risk to be taken into the Contract for Difference
and stated very clearly that "we are not asking the consumers
to take the construction risks".
Rupert Steele (Scottish Power/Iberdrola) was more equivocal and
said "it will either be necessary to allow for that [construction
risk] in the strike price or to have some kind of adjustment mechanism".
57. When we asked the Minister whether construction
risk would be reflected in the Contracts for Difference, he told
us that "there will be a price deal, clearly, but there will
also be a negotiation around costs, because exactly the point
you have made is the point that any commercial organisation would
make in these circumstances".
However, he later went on to add "there is certainly going
to be no fundamental difference between the approach we take to
nuclear and the approach we take to other generating types".
We take this to mean that construction risk will not be incorporated
into CfDs for nuclear.
58. As discussed in paragraphs
50-51, above, there is still a great deal of concern about the
level of transparency of the strike price negotiations between
nuclear developers and the Government. Although Mr de Rivaz told
us that construction cost overruns would not be incorporated into
the strike price for the Hinkley Point C project, the Minister
was less clear on this point. We urge the Government to
set out in its response to this report who is going to take the
risk of construction costs being higher than anticipated: consumers
(by incorporating this risk into Contracts for Difference), taxpayers
(through the UK Guarantees scheme) or project developers.
59. An alternative solution to the problem of
raising finance for new nuclear power stations was suggested by
Energy and Infrastructure Project Finance, who argued that if
the nuclear industry could offer units of a smaller size (perhaps
comparable with the size of a typical modern gas-fired power plant),
then the amount of capital required would be less and hence the
financing difficulties would be diminished.
We note that there have recently been reports in the press of
other countries, including Russia and China, trying to develop
a small, modular reactor.
Witnesses from the engineering institutions told us about a South
African design for a 160MW "pebble-bed" reactor, which
could be used individually or combined into "four pack"
or "six pack" clusters, which would generate similar
amounts of power to a conventional large nuclear power station.
New technologies, such as the pebble bed reactor, are covered
in more detail in Chapter 6.
60. We recommend that DECC
monitors progress toward developing small nuclear reactors, so
that the possibility of including these as part of the UK energy
mix remains open.
47 Ev w30, Ev w8,Ev w86 Back
The Dunkerque plant supplies a local aluminium smelter and debt
was secured against cash-flows relating to the operation of this
plant, rather than revenue for the nuclear power station.Olkiluoto-3
is not yet operational.Ev w11 Back
Ev 81 Back
Ev w11 Back
Mr Beckers stood down as CEO in January 2013 and was succeeded
by Paul Massara. Back
Q 11 Back
Ev w30 Back
Ev w36, Ev w35 Back
KPMG International, Construction Risk in New Nuclear Power Projects
- Eyes Wide Open, 2011 Back
NAO, The nuclear energy landscape in Great Britain, April 2012,
p 33, Ev w28, Ev w30, Ev w8, Ev w86, Ev 102 Back
Ev 81 Back
Ev 81, Q 339 [Mr Butler] Back
Energy and Climate Change Committee, First Report of Session 2012-13,
Draft Energy Bill: Pre-legislative Scrutiny, HC 275-I Back
Q 421 [Mr Hayes] Back
Ev w8, Q 353 Back
Q 254 Back
Q 421 [Mr Hayes] Back
Qq 236-238 Back
Ev 118, Q 331 Back
Ev w37, Qq 231 - 234 Back
Q 311 Back
Q 328 Back
Qq 238, 286, 422-3, 432-3 Back
Infrastructure (Financial Assistance) Bill, Research Paper 12/54,
House of Commons Library, 12 September 2012 Back
Q 202 [Mr Cadoux-Hudson] Back
"EDF seeks state backing on nuclear site", Financial
Times, 11 February 2013 Back
Q 202 [Mr Steele] Back
Ev w30 Back
Ev 102 Back
Q 195 [Mr de Rivaz], Q 202 [Mr de Rivaz] Back
Q 195 [Mr Steele] Back
Q 423 [Mr Hayes] Back
Q 428 [Mr Hayes] Back
Ev w11 Back
"Nuclear energy: Flexible fission", Financial Times,
14 February 2013 Back
Q 191 [Mr Earp] Back