RAB for nuclear generation: managing competing priorities

Photo by Riccardo Annandale on Unsplash

BEIS’ July consultation on a Regulated Asset Base model offers an alternative financing approach for nuclear new build. 

Financing issues sank NuGen and Horizons’ projects in the UK. The price determined under the CfD model adopted for Hinkley Point C has come in for heavy criticism, particularly in light of falling prices for other low-carbon technologies. No nuclear generation projects have been fully financed by the private sector anywhere in the world, so, if nuclear is to provide firm low carbon energy as part of the UK’s 2050 energy mix, an alternative solution is required.

Could a RAB approach address these issues, attract investment into new nuclear and deliver firm, low carbon power affordably? Perhaps. But, we foresee a number of challenges that the proposed new arrangements need to overcome. In this blog, we discuss the need to strike the right balance between value for customers and attracting investment.

Efficient costs will be difficult to determine

The costs of nuclear new build projects are on a significantly different scale to previous investments under RAB models. Establishing a level of efficient costs for the various elements of the project will be vital to delivering value for money for consumers.

An ever-present challenge for regulators is that they have less information than the companies they regulate (they face information asymmetry). It will be challenging for any regulator to determine the level of efficient costs of new build nuclear. 

Given the scale of conventional nuclear plants, there will only ever be a small number built. Different designs and construction techniques add further complexities to the development of comparable unit costs.  Even if a fleet approach is adopted, with multiple sites using the same design, site-specific factors (e.g. topography, distance from water supply) create significant differences in costs.

The difficulty of getting a firm fix on costs will be compounded by the uncertainty the companies themselves face, particularly early in the project (e.g. prior to preliminary ground work investigations). 

The regulatory regime will need to take this into account and allow for an evolution of cost levels over time. A key policy decision is the point in the project at which the allowed RAB value is set.  

One way of resolving this issue would be to adopt a “stage-gate” approach to determine allowable costs. At defined points in the project, the economic regulator would set a firm cost allowance for the next stage of the project. Stages further into the future would be based on indicative costs, with opportunity to refine them over time if an appropriate justification is agreed. Through this mechanism, the Regulator could maintain pressure on the company to deliver efficient costs, while neither party would need to agree a firm cost for the entire project while these are still uncertain.

A price control process represents a barrier to entry

Price controls are very resource intensive, for both companies and the regulator. One company in the water industry is understood to have spent over £20m during one of its price controls. 

The most recent price controls in energy (RIIO-2) and water (PR19) have both featured higher evidential requirements to back up company proposals compared to previous price controls. This is designed to make sure companies demonstrate consumer benefits and value for money for all of their proposals. However, it also increases the time and resources needed to complete the process.

While we expect the process for nuclear new build to be more focussed than network price controls, it would still represent a significant investment.

Our assumption is that RAB discussions will be required early in the project (pre-Final Investment Decision) and thus would need to be funded by investors while there is still uncertainty about whether the project will go ahead. Given the level of spend on new-nuclear projects on Hinckley Point C pre-FID and on projects such as Moorside and Wylfa Newydd (that are not going ahead in their current forms), investors will remain cautious about incurring significant pre-FID costs.

The regulatory regime should be designed to acknowledge this burden. The adoption of the stage gate approach could help to minimise the burden of the economic regulation process early in the project’s lifecycle.

The process must balance rigour with burden

Successful price controls require good policy decisions and good process (see our blog here).

The process surrounding a future Economic Regulatory Regime for nuclear new build must recognise the tension between the work needed to demonstrate efficient costs and the need to deliver value for money for customers.

Karen Dawson is an Associate of Complete Strategy, with over 30 years’ experience working in the energy industry, including nuclear new build projects and RAB price controls.

Ben Haden is a Senior Manager at Complete Strategy, he has worked closely with nuclear new build developers in the UK and more recently focusses on network company price controls under RIIO-2.