Building New Nuclear: the challenges ahead - Energy and Climate Change Contents

3  Financing new nuclear

36.  At the most recent estimate, the price for each reactor at Hinkley Point C was expected to be £7 billion.[47] In the current economic climate, finding such large sums of money is difficult. In this section we explore how new nuclear projects might be financed and what steps the Government can take to encourage investment into the sector.

Where will the money come from?

37.  There are three main options for financing new nuclear power stations:

  • Funding raised by governments (or state-owned utilities);
  • "on balance sheet" funding where private power companies (or consortia) raise new debt and/or equity against their whole asset base; and
  • "project financing" where private companies borrow debt for a specific project where the debt is linked to the revenue generated from the project (rather than being linked to the corporate sponsor).

38.  To date, the vast majority of nuclear power stations around the world have been funded either by governments or on balance sheet. Energy and Infrastructure Finance highlighted two examples of nuclear power stations that had been funded through a project financing model (EDF's Dunkerque plant and Olkiluoto-3 in Finland) but suggested that both of these instances could be considered as special cases.[48]

39.  DECC expects that the first new nuclear plant in the UK will be funded on balance sheet but also recognises that "it is considered unlikely that large scale and rapid expansion of nuclear generation involving multiple parallel build could be financed in this way".[49] This is because most European utility companies are not currently in a position to take on large amounts of debt.[50] RWE npower's outgoing Chief Executive, Volker Beckers,[51] confirmed this view, telling us that "it is very clear that without the financial sector, the energy sector alone is not able to stem all these required investments".[52] In other words, if there is to be a large amount of new nuclear in the UK (more than the 16GW that is currently on the table) then we cannot rely on large utilities to deliver this investment through balance sheet funding. It is worth noting that under DECC's "low cost" 2050 Pathways scenario, there is more than 40GW of nuclear power in 2050.[53]

40.  The cheapest source of funding for the construction of new nuclear power plants would be the UK government (the plant could then be sold to a utility company once operational). This is because with its very good credit rating, the Government can borrow money at a cheaper rate than the private sector and therefore the overall cost of projects will be lower. However, we recognise that this approach is not compatible with the Coalition's current policies. This means that it is likely that without a change of heart within Government project financing will be required for future new nuclear power plant in the UK.

Barriers to raising finance

41.  There are a number of risks that may act as barriers to raising finance for new nuclear power stations. These include revenue risk, policy risk, and construction risk.

42.  Revenue risk occurs because nuclear power stations have high upfront costs. Investors need confidence that the price for electricity generated over the lifetime of the plant will be sufficient to ensure a return on their investment.[54]

43.  Policy risk is the danger that future policy changes might impact on the profitability of a project. For example, changes to rules on carbon emission targets or to the carbon price in the future could affect the profitability of nuclear plant over the course of its lifetime.[55]

44.  The possibility of delays and cost overruns during the construction phase is known as "construction risk". Unfortunately, the nuclear industry does not have a good record in this area.[56] Many witnesses highlighted the on-going new build projects at Flamanville (France) and Olkiuoto (Finland) where costs have almost doubled from the original budgets and completion dates have slipped by at least four years.[57] However, as noted in chapter 2, an EPR reactor has been delivered on time and to budget in China.

45.  The success or otherwise of the first new nuclear power plant built in the UK could have a significant impact on subsequent plant. DECC told us that "if the first new nuclear plant are built to time and cost in the UK this could open up different sources and approaches to financing the construction phase of nuclear plant in the UK".[58] Of course, the reverse is also true; if the kinds of delays and cost overruns that have been witnessed at Flamanville and Olkiuoto were to occur in the UK, this could close down the possibility of raising project finance for subsequent projects because the construction risk would be too great for investors to contemplate.[59]

The Government's solutions


46.  The Government has set out plans to reform the electricity market through the Energy Bill 2012, which at the time of writing had completed the Committee Stage in the House of Commons. This includes the introduction of Contracts for Difference (CfDs), which will address both revenue and policy risk by guaranteeing long-term prices for the energy generated from nuclear power stations through private law contracts (which cannot be changed retrospectively by future governments). We commented extensively on these proposals in our pre-legislative scrutiny of the Energy Bill.[60]

47.  There is a great deal of uncertainty about the so-called "strike price" for new nuclear (the price that generators will receive for each unit of energy produced). At the time of writing, the Government was still in negotiations with EDF over the strike price level for Hinkley Point C (despite the Minister's hope to have reached an agreement by the end of 2012).[61] Some witnesses believed that the Government was not in a strong negotiating position and that there was a perverse incentive for EDF to inflate costs in order to receive a higher strike price.[62] Vincent de Rivaz (EDF) rejected this accusation, arguing that "if I was increasing the cost to get a strike price that would not be competitive, I would be saying that nuclear is not competitive, that is not my job, I am in the job to demonstrate that nuclear is competitive".[63] The Minister appeared to be convinced by this argument.[64] When pushed to give an indication of the level of strike price EDF was seeking, Mr de Rivaz told us that the figure of £140/MWh was "rubbish", but would not comment on the figure of £100/MWh.[65] Nick Butler (author of a blog on energy and power for the Financial Times) thought that "£100 [per megawatt hour] would be the absolute top band" and that "That figure [£100/MWh] is valid if supported by an open demonstration of the cost calculations but must include a complete and unequivocal acceptance of all the risks by the plant operators. It would be unacceptable to find that such a figure had been agreed and then discover that the risks had been transferred to the taxpayer or the consumer.[66]

48.  We note that the President of the Sustainable Development Committee in the French Assemble Nationale, Jean-Paul Chanteguet, is reported to have stated that the revised build cost of Flamanville is expected to deliver a price for electricity at 74/MWh. It will be important to establish whether this is directly comparable to the UK context in relation to the ongoing negotiations for the strike price for Hinkley Point C.

49.  We support the introduction of Contracts for Difference as a way of reducing revenue and policy risk for nuclear new build projects. However, new nuclear should not be delivered if the price is too high. It is essential that any contract represents value for money for the consumer. We reiterate the recommendation made in our pre-legislative scrutiny of the draft Energy Bill that at the very least, the nuclear strike price should not be higher than that given to offshore wind, which is hoped to be around £100/MWh by 2020. We further note that other low-carbon technologies are likely to receive strike prices significantly below this level and that nuclear will need to offer advantages compared with these technologies if it is to deliver good value to consumers.

50.  Transparency about how the nuclear strike price will be set is still a major area of concern. Even though Mr de Rivaz took issue with the notion of discussions in "smoke filled rooms", several witnesses were not reassured.[67] Supporters of Nuclear Energy were concerned that the process might present a reputational risk for nuclear power in general.[68] Nick Butler told us:

I think we need real transparency in what they are asking for in terms of support prices and where that is going to feed through to consumers. I think this should be an open discussion, rather than done in what somebody said was a smoke filled room. It should be an open exchange of what the data is and who is going to take the risks if the costs are higher.[69]

51.  Both EDF and the Minister insisted that the outcome of the negotiations would be transparent.[70] We make our recommendation on this matter in paragraph 58, below.


52.  The Generic Design Assessment process (described in paragraph 28) should help to reduce construction risk because it will lessen the chances of design changes being made after construction has begun (see paragraph 28).


53.  The UK Guarantees Scheme was announced by the Chancellor of the Exchequer and Chief Secretary to the Treasury in July 2012. The Government hopes the scheme will help to encourage private sector investment in infrastructure projects, in part by reducing construction risk. The aim is to give investors confidence that the Government will step in if projects go wrong by providing expenditure and liabilities on financial assistance of up to £50 billion in support of infrastructure investment. This includes not only the provision of guarantees, but also loans or "any other kind of financial assistance (actual or contingent)".[71] Humphrey Cadoux-Hudson (EDF Energy) told us that the scheme "could be a very important element of the financing [of Hinkley Point C]".[72] We note that press reports published after we had finished taking evidence suggested that EDF was indeed exploring whether the UK Guarantees scheme could help to support the Hinkley Point C project.[73] Rupert Steele (Scottish Power/Iberdrola) said "When we [NuGen] get to [final investment decision] stage, around 2015, then the Government's guarantee scheme will no doubt be one of the things that we will look at along with other options".[74]

54.  The UK Guarantees scheme may help to bring forward investment in Hinkley Point C, but it is not clear whether support will still be available for nuclear new build projects that are further away from making a final investment decision (such as the NuGen and Horizon projects). Given the important role for nuclear generation in the UK's future energy mix, the Government should extend this support to all nuclear new build projects, which may require increasing the amount of available assistance to more than £50 billion. (We note that the UK Guarantees scheme does not involve expenditure, as long as the guarantees are not called in.)

Alternative approaches

55.  Professor Steve Thomas (University of Greenwich) suggested that the only way to deal with construction risk was through "full cost pass-through to consumers. In the UK context, this could be done through escalators in the CfDs so that if construction costs did overrun, the price paid would cover these additional costs".[75] Greenpeace agreed that "investors want cast-iron guarantees that bill payers will pick up the tab when the nuclear industry does not deliver what it promised".[76]

56.  Mr de Rivaz told us EDF was not asking for construction risk to be taken into the Contract for Difference and stated very clearly that "we are not asking the consumers to take the construction risks".[77] Rupert Steele (Scottish Power/Iberdrola) was more equivocal and said "it will either be necessary to allow for that [construction risk] in the strike price or to have some kind of adjustment mechanism".[78]

57.  When we asked the Minister whether construction risk would be reflected in the Contracts for Difference, he told us that "there will be a price deal, clearly, but there will also be a negotiation around costs, because exactly the point you have made is the point that any commercial organisation would make in these circumstances".[79] However, he later went on to add "there is certainly going to be no fundamental difference between the approach we take to nuclear and the approach we take to other generating types".[80] We take this to mean that construction risk will not be incorporated into CfDs for nuclear.

58.  As discussed in paragraphs 50-51, above, there is still a great deal of concern about the level of transparency of the strike price negotiations between nuclear developers and the Government. Although Mr de Rivaz told us that construction cost overruns would not be incorporated into the strike price for the Hinkley Point C project, the Minister was less clear on this point. We urge the Government to set out in its response to this report who is going to take the risk of construction costs being higher than anticipated: consumers (by incorporating this risk into Contracts for Difference), taxpayers (through the UK Guarantees scheme) or project developers.

59.  An alternative solution to the problem of raising finance for new nuclear power stations was suggested by Energy and Infrastructure Project Finance, who argued that if the nuclear industry could offer units of a smaller size (perhaps comparable with the size of a typical modern gas-fired power plant), then the amount of capital required would be less and hence the financing difficulties would be diminished.[81] We note that there have recently been reports in the press of other countries, including Russia and China, trying to develop a small, modular reactor.[82] Witnesses from the engineering institutions told us about a South African design for a 160MW "pebble-bed" reactor, which could be used individually or combined into "four pack" or "six pack" clusters, which would generate similar amounts of power to a conventional large nuclear power station.[83] New technologies, such as the pebble bed reactor, are covered in more detail in Chapter 6.

60.  We recommend that DECC monitors progress toward developing small nuclear reactors, so that the possibility of including these as part of the UK energy mix remains open.

47   Ev w30, Ev w8,Ev w86  Back

48   The Dunkerque plant supplies a local aluminium smelter and debt was secured against cash-flows relating to the operation of this plant, rather than revenue for the nuclear power station.Olkiluoto-3 is not yet operational.Ev w11 Back

49   Ev 81 Back

50   Ev w11 Back

51   Mr Beckers stood down as CEO in January 2013 and was succeeded by Paul Massara. Back

52   Q 11 Back

53  Back

54   Ev w30 Back

55   Ev w36, Ev w35  Back

56   KPMG International, Construction Risk in New Nuclear Power Projects - Eyes Wide Open, 2011 Back

57   NAO, The nuclear energy landscape in Great Britain, April 2012, p 33, Ev w28, Ev w30, Ev w8, Ev w86, Ev 102 Back

58   Ev 81 Back

59   Ev 81, Q 339 [Mr Butler] Back

60   Energy and Climate Change Committee, First Report of Session 2012-13, Draft Energy Bill: Pre-legislative Scrutiny, HC 275-I Back

61   Q 421 [Mr Hayes] Back

62   Ev w8, Q 353 Back

63   Q 254 Back

64   Q 421 [Mr Hayes] Back

65   Qq 236-238 Back

66   Ev 118, Q 331 Back

67   Ev w37, Qq 231 - 234 Back

68   Q 311 Back

69   Q 328 Back

70   Qq 238, 286, 422-3, 432-3 Back

71   Infrastructure (Financial Assistance) Bill, Research Paper 12/54, House of Commons Library, 12 September 2012 Back

72   Q 202 [Mr Cadoux-Hudson] Back

73   "EDF seeks state backing on nuclear site", Financial Times, 11 February 2013 Back

74   Q 202 [Mr Steele] Back

75   Ev w30 Back

76   Ev 102 Back

77   Q 195 [Mr de Rivaz], Q 202 [Mr de Rivaz] Back

78   Q 195 [Mr Steele] Back

79   Q 423 [Mr Hayes] Back

80   Q 428 [Mr Hayes] Back

81   Ev w11  Back

82   "Nuclear energy: Flexible fission", Financial Times, 14 February 2013 Back

83   Q 191 [Mr Earp] Back

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Prepared 4 March 2013