Draft Nuclear Regulated Asset Base Model (Revenue Collection) Regulations 2023

Alan Whitehead Excerpts

Monday 6th February 2023 General Committees

[Graham Stuart]

I will wait for historic refreshment, if such there is, although I am sure the hon. Gentleman recognises that the RAB model is designed to ensure that, given the capital requirements and intensity, it lowers the cost of capital, thereby making the investment more desirable, which it does by sharing some of the risks. Our calculation is that it therefore leads to a lower cost to the public purse in the long term.

The draft regulations have been informed by a full public consultation—undertaken last year between 14 June and 9 August—which sought views on the proposals to replicated the CfD framework and the various differences needed for the RAB model. We received 40 responses from organisations and members of the public, who were, for the most part, supportive of the proposals.

During the passage of the Act, Members of this House and the other place raised some concerns in respect of which I hope I can offer suitable reassurance. Perhaps most important were the concerns about the potential impacts of RAB levies on consumers. Through our consultation, we sought views on the inclusion of measures to prevent suppliers from passing on the costs to vulnerable consumers. Having considered the responses, we remain of the view that it would be better to mitigate potential impacts on vulnerable consumers through holistic measures that deal with people’s overall energy bills, rather than tying actions to these regulations specifically. We do not believe this is the appropriate point in the process to bring in measures to protect vulnerable consumers.

[Dr Alan Whitehead (Southampton, Test) (Lab)]

By mentioning “holistic” arrangements, the Minister gives me the opportunity to ask one of my questions now rather than later. What on earth does that mean? What are the Government proposing to do with their holistic examination of measures across the board, rather than going through the regulations? If they are going to do a holistic examination, will that have any impact on anyone in particular, and will it be publicised?

[Graham Stuart]

Like the hon. Gentleman, when I hear the word holistic it tends to get my nose twitching. To use other language, the point is that this is not the appropriate moment to address that. However, as the hon. Gentleman well knows, we are consulting and will come forward with a new system to protect vulnerable consumers from April 2024 onwards. We feel that it is elsewhere in the overall energy system that we are best able to intervene to protect vulnerable customers from such costs, or indeed other costs in the system, whereas to come in specifically at each structure we set up to encourage generation would create a system that is over-complex and might, through that complexity, not deliver in the way that both he and I would wish to protect the most vulnerable.

Relevant measures include those recently announced in the November autumn statement—this is where I fill out the hon. Gentleman’s holistic insight—such as the cost of living payments to households on means-tested benefits and for pensioners, not to mention the £37 billion of Government support for the cost of living previously announced in 2022. I hope this is getting more and more holistic for the hon. Gentleman.

Members should be reassured that the likely impact on household bills because of the nuclear RAB would be low. We have estimated that for a generic project approved in this Parliament, it would cost each typical household dual-fuel bill approximately £1 a month on average during the construction phase. I believe, given the scale of this project, that that is proportionate, given the benefits nuclear offers for our electricity mix. Ultimately, by having nuclear power we will deliver a lower-cost system for consumers than if we relied on intermittent, low-carbon power sources alone.

To touch briefly on scope, the regulations will not apply to suppliers in Northern Ireland.

--- Later in debate ---

[Dr Whitehead]

It is a pleasure to serve under the chairmanship of my near constituency neighbour and central south co-ordinator, Dame Caroline.

We are not talking about the principle of RAB this evening, because we discussed that at some length in our deliberations on the Nuclear Energy (Financing) Bill —or the 2022 Act, as it now is. Some Members will recall that at the time I had considerable reservations about not necessarily RAB in its entirety, but how it would actually operate in the context of a really large, complex, long-lived project in a way that had not been tried before. Even when programmes have been tried before, such as the Thames Tideway project, they were about raising money for a project that is finished and done and that is the end of it. In this instance, we are committing ourselves to provide support over not just the construction phase but the operational phase and most of the life of the project. In addition, we are putting in a mechanism that will be funded—sort of—through the RAB mechanism for the low-carbon contracts company administering the project. Perhaps I shall say more on that in a moment.

The big issue in all this is with the complicated, long-term and expensive scheme. As the Minister said, the RAB method essentially does not exactly share the risk of the project but puts most of it on the customer. Effectively, the customer underwrites a lot, and not just the cost. Indeed, the theory goes that if the customer underwriting is well spent, well sorted out and known to be reliable, it can reduce the cost of capital and the outcome of the project in the price that customers eventually pay for energy, if all goes really well. If things do not go so well—this is one of the things discussed in the deliberations on the 2022 Act—the customer can pay a huge amount of money to deal with cost overruns, the possible cancellation of the project and all those sorts of things.

Some of the issues were addressed at the time in amendments to the Bill, but others remain a considerable risk for the customer over a long period of time. This statutory instrument is about putting the scheme in place so that it runs for the whole course of the project and runs, we hope, as well as it possibly can in terms of making all those things work. It does not actually add anything to the customer protections that a number of us asked about at the time of the 2022 Act and continue to question now.

The issue that is related to that and that the Minister has mentioned this afternoon is that the RAB proposal as we discussed it—so I understood—in the deliberations on the Bill was about, shall we say, getting a way of supporting one particular nuclear power station, namely Sizewell C. It was pretty much designed for that particular purpose. Indeed, most of the material relating to impact assessments and so on related to the RAB scheme as it applied to Sizewell C, and that has been carried through in, among other things, the impact assessment relating to this SI, which says, among other things:

“The illustrative modelling assessing the opportunity cost of the reserve fund and collateral is based on the potential impacts of one new large-scale nuclear power plant built using the RAB model.”

However, the Minister has characterised this model as one that can be applied to the new generation of nuclear power stations, a fleet that the Government have already said—for example, in the energy security policy paper—is their ambition for the future. But we have nothing in the impact assessment, which has ducked the issue, and we have had no further discussion on the impact that a number of new nuclear power stations—perhaps having a long-run RAB behind them—all at the same time would have on customer bills overall.

The Minister said that he thinks the cost of the RAB would be about £1 on customer bills. I do not in any way want to suggest that the Minister has not put the entire picture to us, but as I understand it the cost of £1 is at the beginning of the curve of the RAB process as it goes through the entire construction and operational life of that particular power plant. The £1 cost is only the cost at the very beginning of that process, when we are just beginning to get the construction phase under way. A cost of at least £10 and probably much higher than that—indeed, £10 was a figure put forward by the promoters of Sizewell C—would be the more likely level on bills as the construction phase came to an end and the operational phase began. Then, over a long period of time, that might degrade.

It is at least £10 and perhaps more like £20, so it is important that we put the record straight on what the customer cost is likely to be from this project alone, let alone from other projects that may come up in future. Of course, that £10 per annum is based on the project going well and there being no overruns, no possible cancellations and so on; it could be a lot higher, so it is very important that we keep a very close eye on what the customer cost will be over the period as far as the RAB is concerned. Will the Minister comment on that when he responds?

I note that, as the Minister has also said, the mechanism of the RAB’s operation is akin in many ways to, but not quite the same as, contracts for difference. Of course contracts for difference are managed, in terms of the levy that is collected to pay the people who are constructing and running facilities—mainly wind—by the Low Carbon Contracts Company, which is the company in the middle of the whole process, as it were; it collects the money and disburses it.

At the moment, the LCCC has rather an issue with the fact that the inversion between strike price and reference price means that it finds itself sitting on a huge pile of money. By the way, that is a good thing; it is a good way of CfDs working if money comes back to the LCCC when the relationship between the strike and reference prices is inverted. However, does that money sit in LCCC’s reserves, or does it go back to customers? In this instance, there is a suggestion that the extra money should go back to customers, but there is no mechanism to allow that to happen. There is a suggestion that the money goes back to the supply companies that have been levied to raise the money for the CfDs in the first place, but there is no requirement for those supply companies to pass the money on to customers.

The reason I raise that is because it is more than possible that a similar situation could arise with the Low Carbon Contracts Company in the event that the cost of projects at various stages is less than has been budgeted for. Under those circumstances, the LCCC, being the agent for the collection of the levy for RAB and the dispersal to the Sizewell C company, in this instance, could find itself sitting on large surpluses. There is no mechanism in regulations to cover how those surpluses should be judged, such as if they should be considered as something on account. If the surpluses are deemed not to be on account, what happens to them? Does the Low Carbon Contracts Company just sit on customers’ money, rather than handing it back to them, even though there is a surplus, or does it have an obligation to hand it back? I would be grateful for the Minister’s comment on that potential problem; I am not saying that that will necessarily occur, but it is a distinctly possible.

[Graham Stuart]

It is highly unlikely.

[Dr Whitehead]

Well, just two years ago we thought it was highly unlikely that the LCCC would be giving away £1.4 billion with CfDs, so there we are.

On the subject of the LCCC, we have observed something that the Minister did not really give prominence to: we are actually talking about two levies. There is a support levy and an operational cost levy, both of which are separate—they are calculated as separate—but collected by the LCCC.

The interesting thing about the operational levy is that it is effectively collected by the LCCC to pay itself. The pay under the operational levy is by no means minimal; indeed, the impact assessment puts it as rising to about £700 million a year by 2024-25. That is an LCCC estimate, but it is the cost that the LCCC will recover through the operational levy, which the company itself sets.

There appears to be a bit of solipsism at work. The LCCC seems to be responsible for deciding what it will collect, for collecting it, and then for deciding on the next levy and so on. What regulation will be in place to ensure that the operational levy is collected in a reasonable manner, providing for reasonable operational costs, rather than being a subjective levy on the basis of what the LCCC thinks it is going to do?

[Alan Brown]

The shadow Minister is right to highlight the strange position that has been established. Was he as surprised as I was that the estimated payroll costs for this financial year—2022-23—are £400,000, with a total spend of £560,000, as we debate these regulations today in February 2023?

[Dr Whitehead]

I thank the hon. Gentleman for that intervention; he is quite right to be a little surprised about that. This might be what is called anticipatory investment—the LCCC giving itself a lot of expenditure and, indeed, collecting it back, in advance of determining what its work will actually consist of. I understand that, of course, it has to gear itself up, staff itself and so on. It is interesting to see the figures for the considerable staff cost for the LCCC, which is what most of the levy will go towards. I, too, am a little surprised that it starts from quite a high point and runs up to a rather higher point, rather than starts from nothing much and then goes up from there.

I asked in an intervention what the Minister means by a holistic appraisal, which is a particularly unfortunate way to describe what the Department proposes to do in terms of appraisal, particularly regarding vulnerable people. I hope that the Government will better spell out, in the not-too-distant future, what that holistic appraisal will consist of and how it is going to work.

Finally, paragraph 14.5 of the explanatory memorandum talks about the monitoring and evaluation of the system. It is suggested that this will be a matter for review in 2025. For the Committee’s convenience, let me read out the statement from the Secretary of State about the fact that this instrument does not include a statutory review clause. He says:

“It is not considered appropriate to include a statutory review clause for policy reasons—in order to retain confidence in the stability of the revenue stream.”

I see what he means: if there was a statutory review clause, the investors who are going to pour in to support Sizewell C might think that the rug could be pulled from under them, so there should not be one.

However, the Secretary of State also says in his statement:

“There are existing review plans for the operational costs levy rates to be next reviewed in 2025, and internal plans to monitor and evaluate the effectiveness of the RAB policy as necessary or appropriate.”

There will, then, be a review, even though there is no review under the instrument as it stands. Is it the Minister’s intention that that non-review review, which will apparently take place in 2025, should be public, on the record and published in some form, so that we are all party to how the RAB performs and to whether anything needs to be done to it as it goes through its life?