Why taxpayers will share the pain of cost of building Sizewell C nuclear power plant
It was as long ago as 1982, back in the pre-privatisation days of the Central Electricity Generating Board, that the idea of building a new nuclear power plant in Suffolk – Sizewell C – was first mooted.
At that time, construction had yet to begin on the neighbouring Sizewell B, which for now remains the youngest of Britain’s operating nuclear power plants.
The first planning application was filed as long ago as 1989 and there have been countless false starts since.
The theoretical cost of construction was pushed up when Margaret Thatcher‘s government insisted that any company building a new nuclear power station would also have to have funding in place for not only its construction but also for the disposal of waste and the eventual decommissioning of the plant.
That proved a major obstacle to new nuclear build which was then further held up by Tony Blair’s reluctance to take on opponents of new nuclear build in his own party – although, in 2006, he eventually committed to the cause, as did his successor, Gordon Brown.
Hinkley Point C, the UK’s first new nuclear power station in a generation, was the upshot.
New financing key to unlocking nuclear
Yet the construction of the Somerset plant is years behind schedule. EDF, the French energy giant building it and which will construct Sizewell C, originally envisaged it opening in 2017. Hinkley Point C is also billions of pounds over budget.
And the coalition government’s decision to guarantee EDF a fixed price for the energy generated at Hinkley Point C, which was necessary to persuade the French company to go ahead with the project, was subsequently heavily criticised.
The National Audit Office (NAO) said the agreement had locked consumers into a “risky and expensive” project – although, ironically, the deal now looks good value following this year’s spike in wholesale electricity prices.
The NAO’s report did, though, make subsequent governments wary, once more, of new nuclear build.
Theresa May immediately demanded a review of Hinkley Point C on becoming prime minister and, even though her government ultimately approved the project, she also took note of a suggestion in the NAO’s report that new funding models be considered for subsequent new nuclear power stations.
That, in a nutshell, is why it has taken so long for Sizewell C to finally get off the ground. These plants are so monstrously expensive to build that no private sector company is willing to bear all of the risks themselves without some support from government. It is also why the likes of Japan’s Hitachi and South Korea’s Kepco have reluctantly walked away from building new nuclear plants at Wylfa on Anglesey, Oldbury in Gloucestershire and Moorside in Cumbria.
So key to unlocking the project has been coming up with a new way of financing it.
The solution
The government’s solution is the funding model known as Regulated Asset Base (RAB) – the means by which other major infrastructure projects, such as the £4.3bn Terminal 5 at Heathrow Airport, have been financed.
Under this arrangement, rather than guarantee whoever builds Sizewell C a set price for the electricity it generates, taxpayers will be taking risk alongside other investors.
This is why the government is investing an initial £700m in the construction of the plant although, with the total cost likely to come in at between £20-£30bn, that will only go so far.
The other elements in the RAB model include electricity consumers – households and businesses – paying for the plant while it is still under construction through their bills.
This is how, for example, the £4.13bn Thames Tideway tunnel now under construction is being financed. A share of the cost of the project, which is aimed at preventing sewage spills into the Thames estuary as well as future-proofing London’s sewerage system for expected population growth, is being met by customers of Thames Water on their bills.
The arrangement means taxpayers share in the pain of any cost-overruns. Other crucial aspects of the RAB model include an ‘economic regulatory regime’ (ERR), overseen by an independent regulator, who determines the extent to which investors and taxpayers will share the risks by setting the amount of revenue that EDF will be allowed as it builds Sizewell C.
Unknown sums but less risk
The government has yet to make clear the sum that billpayers will have to contribute towards the new power station but newspaper reports have suggested it will be in the region of an additional £1 per month per customer.
The Department for Business, Energy and Industrial Strategy said today that the lower cost of financing a large-scale nuclear project through this scheme was “expected to lead to savings for consumers of at least £30bn on each project throughout its lifetime” compared with the existing arrangements governing the financing of Hinkley Point C.
Big Carl, the world’s biggest crane, in action at Hinkley Point C nuclear power plant near Bridgwater in Somerset
So in theory, while there is a risk attached to building Sizewell C, the funding model proposed appears to be less risky than the way in which Hinkley Point C has been financed. The ultimate cost to electricity consumers in the latter case was dictated simply by a decision made a decade ago on the price that EDF would be promised for its power. It currently looks good value but, for much of the last decade, it has not.
Yet the RAB model does have its critics.
Less incentive to control costs
Steve Thomas, emeritus professor of energy at the University of Greenwich, has argued that, by removing construction risk from EDF, the company has less of an incentive to control construction costs. With Hinkley Point C, EDF has had to bear the cost of any over-runs. With Sizewell C, taxpayers would be on the hook.
Professor Thomas argues that this is particularly worrying because he believes EDF’s cost estimates are too optimistic. He has also argued that the £1-a-month levy on household bills, should it come to pass, is also potentially flawed because of assumptions it is making about borrowing costs.
Less risky, for now, appears to be the ownership of Sizewell C. Objections to the involvement of the Chinese state-owned company China General Nuclear, originally raised by the May government, have resulted in the company now being bought out of its interest in Sizewell C. The project will instead be jointly owned by EDF and the UK government – although there has been speculation that new investment could also be brought in from the sovereign wealth fund of the United Arab Emirates.
There are, though, some other objections. The idea of building small modular reactors by companies like Rolls-Royce has won support on the basis that the technology could be cheaper and more scalable than big projects like Sizewell C. They would also, in theory, involve less cost in adapting the national grid.
Prime Minister Boris Johnson during a visit to EDF’s Sizewell B nuclear power station in Suffolk.
The EDF question
Another risk concerns EDF itself. The company recently had to be bailed out and fully nationalised by the French government following the spike in wholesale prices.
But this means EDF is now effectively run at the behest of the French government. France is also anxious to build new nuclear power plants. Should EDF become cost-constrained it is perfectly plausible that the French state would direct it to focus on its domestic projects rather than its ones overseas.
There have already been hints of this.
EDF’s former chairman and chief executive Jean-Bernard Levy, who was effectively fired by President Macron after opposing nationalisation, was a strong supporter of Sizewell C but was hampered by the French government’s constant demands for more information on the project.
One final risk is that electricity demand does not increase in the way that the government is assuming and that Sizewell C’s output may not be needed.
However, with electricity demand projected to double as the UK decarbonises, that feels less worrisome than some other factors – and particularly now Vladimir Putin’s war on Ukraine has highlighted the importance of the UK having more indigenous sources of energy.
The energy regulator has confirmed plans for a massive upgrade to the UK’s energy grids, adding £108 to customer bills by 2031.
Ofgem said on Thursday that the £28bn investment over the next five years would bolster resilience in the transition to a renewable energy future and that much of the bill would be offset by increased efficiency.
It pointed to estimated savings for households of around £80 because of the planned investment in gas and power infrastructure, leaving a net additional contribution of £28.
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Ofgem said the £28bn sum formed part of an estimated £90bn to be invested in the energy networks by 2031, with “adaptive” funding arrangements helping to shield customers from volatility in the market.
Most of the funding announced on Thursday will go towards maintaining gas networks, which will remain a key source of energy as green power capacity is built up further.
“Investing now to maintain world-class resilience and expand grid capacity is the most cost-effective way to harness clean power, support economic growth and protect the country from gas price shocks like the one seen in 2022”, Ofgem said.
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Then, Russia’s invasion of Ukraine and Europe’s refusal to buy Russian gas in response, meant that energy bills hit unprecedented levels and gave birth to the wider cost-of-living crisis as higher energy costs were passed on across the economy.
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Ofgem made its announcement as costs of government energy policy and other upgrades make the biggest upwards contributions to household bills. However, the budget moved to take away some costs from April next year.
Ofgem boss Jonathan Brearley said: “The funding announced today will keep Britain’s energy network among the safest, most secure and resilient in the world. The investment will support the transition to new forms of energy and support new industrial customers to help drive economic growth and insulate us from volatile gas prices.
“But this is not investment at any price. Every pound must deliver value for consumers. Ofgem will hold network companies accountable for delivering on time and on budget, and we make no apologies for the efficiency challenge we’re setting as the industry scales up investment.
“We’ve built strong consumer protections into these contracts, meaning funds will only be released when needed and clawed back if not used. Households and businesses must get value for money, and we will ensure they do.”
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‘It’s either keep warm or eat’
A Department for Energy Security and Net Zero spokesperson said: “This government is taking action to bring down energy bills for families, with the budget taking an average £150 of costs off bills in April, and expanding our £150 Warm Home Discount to over six million families.
“Upgrading our gas and electricity networks after years of underinvestment is essential to keep the lights on and ensure energy security for our country. Without these plans, which were first set out under the previous government, costs would spiral and our security would be compromised.
“The only way to bring down bills for good and get off the fossil fuel rollercoaster is with this government’s mission to deliver clean homegrown that we control.”
The UK government is being urged to take even stronger action to tackle the ongoing crisis of families unable to afford baby formula milk.
The prime minister backed limited reforms to the market to help parents save money but will not yet support more radical changes.
Sir Keir Starmer confirmed support for better public health messaging to inform parents that cheaper brands are nutritionally equivalent when compared with the most expensive.
A ban on spending store loyalty points on baby formula will also be lifted.
They were among recommendations made by the Competition and Markets Authority which investigated the baby formula industry and described the price rises in recent years as unjustifiable.
A newborn. File Pic: iStock
In the House of Commons the prime minister said: “For too long parents have been pushed into spending more on infant formula.
“They were told they’re paying for better quality and left hundreds of pounds out of pocket.
“I can announce today that we’re changing that. We will take action to give parents and carers the confidence to access infant formula at more affordable prices, with clearer guidance for retailers on helping new parents use loyalty points and vouchers together.”
It comes two-and-a-half years after a Sky News investigation revealed the extreme measures families were taking to feed their babies.
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Parents described how they had resorted to stealing to feed their infants, some were watering down formula milk or substituting it for condensed milk.
The British Pregnancy Advisory Service described the situation in 2023 as a “national scandal”.
Campaigners told Sky News the UK government needed to go further to address the crisis.
Co-founder of Feed UK Erin Williams told Sky News: “It is progress, they promised to look at this enormous nationwide problem and they have.
“At the moment women are still not routinely getting important information before giving birth – this should be given proactively to everybody and that will be a big win.
“The prime minister though needs to be tougher on the baby formula companies.
“Their marketing claims, their unjustified pricing – it’s stacked against families who just need to feed their babies safely.”
The UK government stopped short of accepting all of the recommendations made by the CMA.
More radical ideas such as a price cap on baby formula are not being considered.
Charities have also told Sky News the situations some families find themselves in have not eased.
Founder of the Hartlepool Baby Bank, Emilie De Bruijn, told Sky News the demand they see from desperate families is “constant and unmanageable”.
She said: “Parents are really feeling the pinch right now, and demands on baby banks are rising and it can feel quite relentless.
“We are pleased to see the extension of the National Breastfeeding Helpline alongside measures such as allowing parents to use points and vouchers.
“It is important that parents are supported to feed their children in whatever way they want and we hope that steps will continue to be taken to reduce the cost of formula and increase understanding that all brands are nutritionally the same.”
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