BEIS’ July consultationon 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 our previous blog, we covered the tension between value for money and attracting investment. Our second blog considers safety.
Safety responsibilities must not be blurred
Existing nuclear regulation focuses on safety, with the site licensee responsible for safety according to the principles laid down by the Office of Nuclear Regulation (ONR). A central part of the ONR’s approach is that the responsibility for safety related decisions sits with the site licensee, not the regulator.
Safety requirements in the monopoly networks sector are usually more prescriptive. For example, the iron mains replacement in gas (driven by the Health and Safety Executive) or drinking water pipes (driven by the Drinking Water Inspectorate), where there is more prescriptive clarity on the level of acceptable risk (e.g. by approving target kms of pipe replacements).
Taking these requirements into account, economic regulators make decisions on allowable costs and schemes, and have the final say on what companies are funded to deliver.
The arrangements defined by the Economic Regulatory Regime for nuclear new build would need to avoid unintentionally transferring decisions on safety-related expenditure from licensees to the economic regulator. This will require a different approach to regulation than the model that often applies to the regulation of monopoly networks.
Affordability must not compromise safety
Cost and safety decisions in the nuclear sector adopt the principle that risk should be ‘As Low as Reasonably Practical’. In fact, ONR guidance explicitly states that affordability is not a legitimate factor in safety decisions.
Economic regulators typically aim to optimise risks and costs, with affordability for customers a central concern.
Unless the Economic Regulatory Regime explicitly recognises the ONR’s guidance, there will be a tension between the ONR’s regulations, which view safety as paramount, and economic regulation that seeks to balance safety and cost considerations.
Education on nuclear culture, safety and regulation will be critical for all
Nuclear safety is ingrained into working practices throughout nuclear companies and the nuclear supply chain. It requires clear policies, training and operational processes. These are more onerous than those that apply to network businesses.
Training will be essential for both investors and regulatory staff working on a new ERR to provide clarity and understanding of the overriding priority for safety and the responsibility of everyone in the nuclear sector for maintaining safety standards.
The economic regulator will not be able to exclude itself from this requirement, given that its tone will influence company behaviour. While the economic regulator may not require technical nuclear safety expertise in-house, its staff must reflect the culture and attitude that safety cannot be compromised. This attitude should also feed into the regulator’s thinking on the approach to cost efficiency and incentivisation.
This could mean that a specialist economic regulator should be established for nuclear, rather than giving this responsibility to a larger existing regulator, where this culture would be diluted.
Coordination between nuclear regulators should help to maintain an appropriate balance
To address the balance between safety and affordability, the ONR and new economic regulator will need to work closely together, as well as working with nuclear generators.
The ONR should play a key role in helping the new economic regulator fit into the nuclear industry and building an appropriate nuclear safety culture of its own.
See NS-TAST-GD-005 5.4.2