Why taxpayers will share the pain of cost of building Sizewell C nuclear power plant

Published

1 year ago

November 29, 2022

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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.

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.

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.

Business

Hunt calls Dorneywood summit to boost flagging UK stock market

Published

5 hours ago

April 27, 2024

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Hunt calls Dorneywood summit to boost flagging UK stock market

Jeremy Hunt is convening a summit aimed at enticing more companies to London’s stock market amid an accelerating exodus of businesses being picked off by overseas and financial predators.

Sky News has learnt that the Treasury has invited the bosses of some of Britain’s most prominent private companies to attend a meeting next month at Dorneywood, the chancellor’s weekend country residence.

Sources said the day-long event on 16 May would target entrepreneurs behind potential flotation candidates from the fintech and biotech sectors.

Bim Afolami, the City minister, and Lord Petitgas, the prime minister’s chief business adviser, will also be present, alongside key government officials and executives from the London Stock Exchange, the sources added.

In the invitation, a copy of which has been seen by Sky News, the Treasury said attendees and the chancellor would “discuss the UK’s capital markets and how they can support innovative, high-growth companies such as yours to achieve your growth ambitions”.

“The UK’s capital markets play a key role in our economy: driving growth, creating jobs and facilitating investment.

“The government is committed to ensuring that the UK remains the best place for companies to grow, and is already taking forward an ambitious programme of reforms to improve the competitiveness of the UK.”

Dozens of companies, including the likes of digital banks Monzo and Starling Bank, are understood to have been on the invitation list.

The Dorneywood summit has been planned for several months, according to officials, who denied that it was being staged in response to a glut of companies which have announced in recent weeks that they are in receipt of takeover bids or that they would unilaterally delist from the London market.

Approaches this week for Anglo American, the £30bn mining giant, and Darktrace, the cybersecurity company, have exacerbated the impression of a growing ‘de-equitisation’ of the UK stock market.

Although neither of those deals have yet to be formally agreed, a string of others have, including International Paper’s bid for DS Smith, the FTSE-100 paper and packaging group, which was revealed by Sky News last month.

Other companies which have agreed deals with suitors include Virgin Money, which is set to be bought by Nationwide in a £3bn deal.

Yet more, such as the Royal Mail parent International Distributions Services and the music royalties company Hipgnosis Songs Fund, are in receipt of serious takeover approaches.

While frenetic periods of mergers and acquisitions are far from uncommon, bankers and investors point to a dearth of attractive new opportunities to deploy capital because the flow of initial public offerings has been so slow.

Many of the companies that London would have hoped to attract, including the private equity firm CVC Capital Partners and the chip designer ARM Holdings, opted to list in Amsterdam and New York respectively.

The perception of London’s decline is being heightened by the decisions of boards to move their existing UK listings to other international exchanges, with TUI Travel and Flutter Entertainment, the gambling group behind Paddy Power, among those to relegate their London market presence.

Bosses of companies as large as Shell, the oil behemoth, have also begun to acknowledge publicly their frustration at what they perceive to be a gulf between their intrinsic valuation and that which the public markets are attaching to them.

Earlier this month, the boss of E-Therapeutics, a fast-growing but loss-making biotech company, described the London stock market as “broken and closed” as he announced plans to delist it and pursue a New York flotation at a future date.

This weekend, one government insider said the Dorneywood meeting would be important because it would highlight to fast-growing British companies that listing overseas “is not all milk and honey”.

A number of the UK-based businesses – such as Arrival, Cazoo and Benevolent AI – which went public in Europe and the US during the now-faded boom for special purpose acquisition companies – have seen their valuations crash, with some subsequently cancelling their listings.

“We need to explain to companies why London’s capital markets are the right place for these businesses to go public,” said one government source.

A Treasury spokesperson said: “The chancellor is meeting with a number of firms to hear their reflections on UK markets and what more the government and regulators can do to support their growth.”

Business

Russia sanctions-busting? Big questions remain over UK car exports

Published

2 days ago

April 26, 2024

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Russia sanctions-busting? Big questions remain over UK car exports

The extraordinary, unprecedented and largely unexplained flows of millions of pounds of British luxury cars into states neighbouring Russia continued in February, according to new official data.

Some £26m worth of British cars were exported to Azerbaijan in February, according to data from HM Revenue & Customs.

The numbers show that in the latest quarter this former Soviet state with developing economy status was the 17th biggest destination for UK cars, bigger than long-established export markets such as Ireland, Portugal and Qatar.

Azerbaijan’s ascent has coincided almost to the month with the imposition of sanctions on the export of cars to Russia.

British cars are banned from being sent into Russia, both as “dual use” goods, which could be repurposed as weapons, and, for any cars over the value of £42,000, under specific luxury goods restrictions.

However, even as UK car exports to Russia plummeted to zero, they have risen sharply to states neighbouring Russia, including Kazakhstan, Kyrgyzstan, Georgia and, most notably of all, Azerbaijan.

While it is impossible to prove where those shipments end up eventually, there is plentiful anecdotal evidence that these countries are being used as conduits to smuggle banned goods to Russia.

The latest HMRC data shows that in the three months to February, the average value of the cars being sent to Azerbaijan was over £115,000, making this small, relatively poor economy one of the most high-value luxury car markets in the world – alongside Switzerland, Luxembourg and Saudi Arabia.

The total value of UK car exports to Azerbaijan in the two years since the invasion of Ukraine and the imposition of sanctions is now £523m. That compares to £58m in the immediately preceding two years.

Britain’s motor lobby group, the Society of Motor Manufacturers and Traders (SMMT), has insisted that this 800% increase can be explained by domestic factors in the Azerbaijani economy – and is not connected with Russian sanctions.

An SMMT spokesperson said: “UK carmakers comply with all trade sanctions and would condemn any party putting that commitment at risk. Car exports from UK factories to Azerbaijan have grown since 2019 due to multiple factors, including significant new model launches, pent-up demand and a growing domestic appetite for UK luxury cars. Indeed, UN data shows that just two cars of any origin have been officially exported from Azerbaijan to Russia this year.

“We have never ruled out the possibility that third parties might exploit any vulnerabilities in the sanction regime, and manufacturers do everything in their power to prevent this. Any UK-built vehicle on sale in Russia found its way there without their authorisation. This is a fast-moving global issue covering products from multiple sectors in many countries deploying sanctions, and tackling any vulnerabilities requires a coordinated, global response.”

However, while United Nations (UN) data suggests the quantity of cars being officially exported to Russia remains low, that same evidence suggests that, far from behaving like a normal car market, Azerbaijan does seem to be funnelling cars off elsewhere into Central Asia.

Contrary to the SMMT’s analysis, which suggests the car exports can be explained by domestic factors, car exports from Azerbaijan have risen by 4,800% since the invasion of Russia, with most of the cars destined (according to UN data) for Kazakhstan, Kyrgyzstan, Georgia and the United Arab Emirates.

According to UK government sources, these states are understood to be widely used as conduits for goods into Russia.

Cars are not the only British goods to have seen a large spike in exports to Central Asia and the Caucasus – so too have components and machinery used to make weapons. In a visit to Kyrgyzstan this week, Foreign Secretary Lord Cameron admitted that Russia is using central Asian countries to sidestep sanctions and build its “war machine”.

Business

Post Office inquiry: Former complaints handler executive says she never ‘knowingly’ did anything wrong

Published

2 days ago

April 25, 2024

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Post Office inquiry: Former complaints handler executive says she never 'knowingly' did anything wrong

A former top Post Office executive has told the Horizon scandal inquiry she never “knowingly” did anything wrong and did not remember a 2010 email saying that cash balances in sub-postmasters’ branch accounts could be remotely accessed.

Angela van den Bogerd, who held various roles over 35 years at the organisation, made the comments after opening her evidence on Thursday by saying she was “truly, truly sorry” for the “devastation” caused to wrongly convicted sub-postmasters.

Her roles at the Post Office included handling complaints about its Horizon software, which was provided by Japanese firm Fujitsu.

More than 700 Post Office managers were prosecuted between 1999 and 2015, after the system made it seem like money was missing from branches. At the time, the company insisted Horizon was robust.

Ms van der Bogerd, who was played by Coronation Street actress Katherine Kelly in the ITV drama Mr Bates Vs The Post Office, had previously not spoken publicly since a 2019 High Court case.

At the time, Judge Peter Fraser criticised her testimony and said she “did not give me frank evidence, and sought to obfuscate matters, and mislead me”.

Jason Beer KC, lead counsel to the inquiry, challenged Ms van den Bogerd’s opening statement, as he accused her of not saying sorry for her own role in the scandal.

Ms van den Bogerd, who resigned as the Post Office’s business improvement director in 2020, said she regretted missing significant documents and apologised for “not getting to the answer more quickly”.

She said: “But with the evidence I had and the parameters of my role at the time, I did the best I could to the best of my ability.”

Ms van den Bogerd added: “I didn’t knowingly do anything wrong and I would never knowingly do anything wrong.”

The inquiry heard that Ms van den Bogerd was sent an email in December 2010 informing her Fujitsu could remotely amend cash balances in branch accounts via Horizon.

She told the inquiry she had no memory of it and only became aware of the issue in a January 2011 email.

The inquiry was shown a transcript of a meeting that same month between her and sub-postmistress Rachpal Athwal, who was sacked after being wrongly accused of stealing £710 before being reinstated.

In the meeting, Ms van den Bogerd said Horizon could not be accessed remotely by anyone from the Post Office, without mentioning that Fujitsu could, the inquiry heard.

Mr Beer asked: “Are you saying that what you said overall there is accurate?”

Ms van den Bogerd replied: “So that is accurate. I go on to talk later about Fujitsu, I believe”. Mr Beer said it was inaccurate because she had not given the full picture.

The inquiry also heard that, prior to a High Court case in 2019, Ms van den Bogerd made a witness statement in 2018 in which she said the first she knew of the possibility of inserting transactions into the system remotely was in the year or so before.

Mr Beer told the inquiry: “That was false.”

She replied: “Well, at the time I didn’t think it was.”

Pressed further on the issue, she said the messaging on remote access was “constantly changing” and that colleagues had been “very strong” that such access was “impossible”.

Ms van den Bogerd was also asked about an October 2014 email she and other senior staff were sent by Post Office media officer Melanie Corfield, which discussed what the response should be if anyone asked about remote access to Horizon.

The email said: “Our current line if we are asked about remote access potentially being used to change branch data/transactions is simply: ‘This is not and never has been possible’.”

Mr Beer said: “You knew that was false from multiple sources by then, by now, didn’t you?”

Ms van den Bogerd appeared flustered, before replying: “Clearly I was aware of that and just didn’t pick this up… it didn’t register with me at the time, but obviously from what we’ve discussed then this was incorrect terms of reference of a flow of information, yes.”

She added she was “certainly not trying to cover up… it wasn’t just me, there were other people party to the same information”.

Meanwhile, earlier in the hearing, the former executive said she agreed with Mr Beer that using words such as “exception” or “anomaly” to describe computer bugs had been an “attempt to control the narrative”.

The inquiry continues.