The UK government’s energy white paper, published in December 2020, confirmed that the country’s net-zero ambitions meant that fossil fuels are not a part of the UK’s energy future. 

Current forecasts in the UK are that electricity demand will double in the next 30 years, due in large part to the proliferation of electric vehicles powered from the grid instead of from fossil fuels. Alongside this, the recent shortages of gas and the resultant skyrocketing of gas prices have highlighted to both the UK government and the public at large the vulnerability of the UK’s gas supply, as well as the potential for exploitation by less friendly foreign governments.

The UK government’s energy white paper, published in December 2020, confirmed that the country’s net-zero ambitions meant that fossil fuels are not a part of the UK’s energy future. Coal is out, and natural gas is likely to follow. All future energy projects must be low-carbon. Predominantly that means wind power, as our breezy island is ideal for large-scale onshore and particularly offshore wind farms; however, the volatility of most renewable energy sources means that other low-carbon energy sources have to be considered in parallel.

Therefore, front and centre of the government’s planned solution for energy generation between now and 2050 is nuclear power, seen as necessary in order to combat the volatility in supply of wind and solar power, which is expected to comprise the bulk of electricity generation in 2050. As it stands, nuclear accounts for approximately 15 percent of the UK’s energy supply. However, almost all of the UK’s current domestic nuclear supply is expected to be decommissioned by 2030. With the government planning to more than treble the UK’s nuclear power generation from 46 terawatt hours (TWh) in 2020 to around 150 TWh in 2050, the government has highlighted the importance of building new nuclear power projects.

The main problem, as ever, is cash.

Most of the UK’s focus over the last 10 to 15 years has been on renewing its existing, large-scale plants. Foremost amongst these is Hinckley Point C, currently under construction and expected to be complete in 2026. However, arguably the biggest criticism faced by the promoters of Hinckley Point C was the funding model.

Hinckley Point C will be paid for using the “contracts for difference” model that has been adopted by the government since the Energy Act 2013. Under this arrangement, the construction of the project is financed entirely by private sector funding, procured by its developer―in this case, EDF. To mitigate the risks associated with the project, the government and developer agree to a “strike price” for all future energy purchases once the project is online―a price that doesn’t fluctuate with changes to the wholesale market. The guaranteed strike price―usually above predicted market rates―provides financial certainty for the developer and underpins a stable financial model for the project. The strike price is in turn funded by the government imposing a levy on all electricity supply companies, the cost of which is then passed on to consumers and end users.

In the case of Hinckley Point C, the high strike price negotiated by the UK government attracted significant criticism, not least from the National Audit Office, on the basis that the government had committed consumers to a very high fixed price for the electricity generated. Critics of the contracts for difference model have also observed that developers are generally unable to secure financing at rates anything like as low as those available to the government―and as with Hinckley Point C, these higher financing charges can become a significant contributor to overall project costs.

Following the adverse publicity associated with Hinckley Point C, the nuclear energy industry and government agreed that the contracts for difference model would not be adopted for future nuclear projects.

The leading alternative funding structure is the “regulated asset base” model, and it is this model that the government intends to adopt, through the Nuclear Energy (Financing) Bill 2021-2022.

The proposal in the bill is that the government would negotiate an arrangement with a specially regulated nuclear company, pursuant to which the company would receive regular payments from electricity supply companies to help fund the construction of a new nuclear facility by the nuclear company. The cost of those payments would be expected to be passed on to the electricity supply companies’ customers.

The intention is that this source of funding will reduce the need for private sector financing and thus reduce the cost burden on the nuclear company, without the government having to commit to a strike price. The bill has thus attracted broad support from the industry and investors, including EDF, who have indicated that their plans to construct two new EPR reactors at Sizewell C should be able to progress once the government has adopted a regulated asset base model. However, because this model requires an immediate cost burden to be passed onto end users and consumers, it has historically proven unpopular with successive UK governments. There are additional concerns with the current proposals that construction cost overruns will be passed to consumers, which would both increase pressure on consumers and disincentivise value engineering.

It remains to be seen whether the Nuclear Energy (Financing) Bill, in its current form, will pass both houses of Parliament and receive royal assent. There is nevertheless political impetus to get the bill approved; once passed, the government’s stated intention is to announce financial approval for EDF’s new reactors at Sizewell C in the current Parliament (so by 2024).

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