The Fukushima Daiichi nuclear disaster in Japan 10 years ago seemed to some to underline the dangers in this type of power generation. As a disaster, it ranked in severity alongside Chernobyl in 1986. But, while that could be blamed on lax safety standards in the old Soviet Union, this was Japan, one of the world’s most technologically capable nations.
Fukushima gave impetus to anti-nuclear movements, most notably in Germany. Angel Merkel and her government responded to pressure to phase out nuclear power, which at the turn of this century supplied almost 30% of Germany’s electricity needs. The first few stations closed quickly, within weeks of the Fukushima disaster. The final closures will be next year, making 17 in all, and marking the end of Germany’s nuclear ambitions, in favour of a future based on renewables.
Other countries have chosen a different route, including in Britain, where prospects for renewables are good. The COP26 summit in Glasgow, surging international gas prices (and to a lesser extent oil prices) and the need to provide for a huge shift towards electricity as part of the clean energy transition provide the impetus.
The question, which the government has been grappling with, is how to fund new nuclear. There are already misgivings about the financing of the large-scale Hinkley Point C plant in Somerset, which will cost at least £23 billion to build. According to the National Audit Office, the agreed strike price for electricity from the plant will add £50 billion to consumers’ cost over its 60-year life. The government is also uncomfortable with the fact that, as well as being funded by the French state-owned energy giant EDF, it is also backed by the China General Nuclear Power Group. Professor Dieter Helm of Oxford University pointed out that the costs could have been halved if financed by British government borrowing.
This is the dilemma. “Nuclear power provides a source of reliable, low-carbon electricity, and it is widely recognised that its role will need to grow to reduce carbon dioxide emissions in order to mitigate climate change,” the World Nuclear Association says. “One of the principal barriers to the necessary expansion is the challenge associated with securing competitive financing for new nuclear plants.
“A nuclear power plant as an investment is fundamentally no different to that of any large infrastructure project: it is characterised by high upfront capital costs and a long construction period, followed by a lengthy payback period.”
History has come out with two models for financing nuclear power stations, the Association says. Either the cost and risks are taken on by governments - and this is how most have been paid for - or they are taken on by large private sector firms, typically big energy utilities.
It was interesting, therefore, to see the British government announce £210 million of grant funding for a new nuclear business, the Rolls-Royce Small Modular Reactor business, alongside £195 million of funding from Rolls-Royce, BNF Resources and Exelon Generation. The funding in this case is not for individual reactors but a development programme which, according to Rolls-Royce, could see a string of these small reactors, each sufficient to power roughly a million homes.
Rolls-Royce, which has been in the nuclear business since 1950, is upbeat about a programme which could contribute to the UK’s low-carbon future and generate 40,000 manufacturing jobs, as well as a UK-dominated supply chain. The government’s seed funding of the project does not, however, say anything about who will buy these stations and how they will be paid for.
For this, and for other nuclear stations, the government favours a so-called RAB, or regulated asset base model, and it has placed this at the centre of its Nuclear Energy (Financing) Bill. As the government itself explains it: “Under this model a company receives a licence from an economic regulator to charge a regulated price to consumers in exchange for providing the infrastructure in question. The model enables investors to share some of the project’s construction and operating risks with consumers, significantly lowering the cost of capital which is the main driver of a nuclear project’s cost to consumers.” It allows developers to unlock some of the cost from eventual users.
In its briefing notes, the Department of Business, Energy and Industrial Strategy (BEIS) highlights the differences between RAB and the contract for difference approach used for Hinkley Point C. While insisting that contract for difference was right for its time (2016), given that no nuclear power stations had been built for many years, officials say that consumers could have saved between £30 billion and £80 billion over the lifetime of that project with an RAP approach.
Most in the industry have welcomed the government’s decision to move forward with the RAB financing model, though it has not yet been tried in the UK on nuclear, only Heathrow Terminal Five and the Tideway Tunnel. And some warned that it may be no panacea.
“The chosen financing model – the so-called Regulated Asset Base (RAB) model – is not without problems,” said Phil McNally, net-zero researcher at the Tony Blair Institute. “In principle, the model should lead to cost savings. However, these savings would be eroded if the project was to run over on construction time and cost. And such overruns have been a common theme of nuclear projects in the past.”
It is much too soon to conclude that anybody has solved the nuclear funding dilemma.
About the author
David Smith has been Economics Editor of The Sunday Times since 1989. He is also chief leader-writer, assistant editor and policy adviser. David is the author of several books, including Free Lunch: Easily Digestible Economics; and Something Will Turn Up: Britain's Economy Past, Present and Future