Nuclear Energy (Financing) Bill (First sitting)

Alan Whitehead Excerpts

Committee stage
Tuesday 16th November 2021 Public Bill Committees

[The Chair]

In that case, let us start with Her Majesty’s official Opposition, represented by Alan Whitehead.

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

Q Good morning. Could I start with the Sizewell C company, and could you let me know, from the point of view of the company that has been set up for the purpose of developing Sizewell C, how you view the emergence of the RAB—regulated asset base—model as a way of funding the project at Sizewell C in particular?

Julia Pyke: I think the emergence of the RAB model is very welcome. We obviously believe that the country very much needs nuclear, to support the growth of renewables and to produce electricity when the wind is not blowing and the sun is not shining. It is very important that we deliver nuclear in a way that reduces the cost to consumers to the greatest extent it can, and we believe that the RAB model is a way of doing that and enabling private finance.

A point that is not always made about the introduction of private finance is that if we want a nuclear fleet, which, you will not be surprised to hear, I believe would be a good thing, then always relying on taxpayer funding for that fleet is not necessarily going to promote the growth of a fleet, whereas getting nuclear on to a financeable footing means that the country can size the fleet to need rather than to the availability of taxpayer funding from time to time.

[Dr Whitehead]

Q Mr Powell, Hitachi was very much involved with the Horizon consortium that pulled out of other nuclear plants a little while ago, which I believe was on the grounds that they could not sort out the financing of those projects. If the consortium had been offered in effect a RAB model to develop those projects, would you have had a different view?

David Powell: Just to make things clear, I represent GE Hitachi, which was helping with the technology supply for the project that Horizon and Hitachi was taking forward. Hitachi was one of the main participants in trying to push forward the project at Wylfa, and I think that one of the big issues was the project’s financing aspects. It takes considerable time and a lot of effort to build two large-scale reactors, and I think that the RAB model could have helped. Obviously that is history now, and we would have to go back and look at that, but I think it would have helped at least in being able to move forward with the project.

[Dr Whitehead]

Q Mr Waite, Westinghouse is the owner of Springfields Fuels.

Michael Waite: That is correct.

[Dr Whitehead]

Q I think Springfields has a series of difficulties in the continuation of its nuclear fuel and nuclear rods business. What difference would the construction of Sizewell C make to its viability as a future supplier of nuclear fuel rods and associated activities for the UK market and, indeed, the international market?

Michael Waite: As you say, Springfields has been fuelling the majority of the UK’s nuclear fleet for almost 75 years. It is the exclusive supplier to the advanced gas-cooled reactor fleet, which will all have retired by the end of this decade. Whether Sizewell C moving forwards under a RAB would mean a supply of fuel from Springfields has yet to be determined. From a Westinghouse perspective, we see RAB as part of the solution for enabling further nuclear projects after Sizewell C. Certainly, the 2035 zero-carbon targets for the electricity generation sector require there to be further projects., If we could start a project at Wylfa and deliver our AP1000 technology under RAB, that would absolutely take its fuel from Springfields for the life of the facility and secure the life of the plant.

[Anthony Browne (South Cambridgeshire) (Con)]

Q I am interested in the allocation of risk between companies and consumers. Obviously, one of the problems with the contracts for difference model is that you bear the construction risk, the political risk and so on, whereas with the RAB model you do not. If there are cost overruns, is there a risk that the consumer ends up paying for it rather than you and that you do not have the right incentives to control costs?

Julia Pyke: The first thing I would say is that, of course, it is very important that the developer remains incentivised to minimise construction spend consistent with building safely and to time. The introduction of the RAB model will enable Sizewell to move ahead, so, primarily for consumers, not only will they need the electricity that Sizewell can produce but electricity bills will reduce when it comes on, because the alternatives to nuclear as the producer of electricity when the wind is not blowing and so on will cost more. Overall it will reduce consumer bills. It is, as you say, very important that we get the incentive regime right so that, although risk is shared with consumers, developers are always incentivised.

--- Later in debate ---

[Alun Cairns]

Thank you.

[Dr Whitehead]

Q Ms Pyke, you mentioned that you are basically responsible for getting the money in for Sizewell C. What hurdle rate do you anticipate that the investments will come in at as a result of RAB?

Julia Pyke: RAB is designed to attract low-cost capital, and the cost of capital will be set competitively. We anticipate a competition, which should drive down the cost of capital, between equity investors. We also anticipate that the cost of debt, which will actually be the majority cost of the project, will be set competitively. We do not have a hurdle rate, and deciding that hurdle rate will obviously be in part a matter for Government in terms of what will offer value for money. The Government’s impact assessment talks about example hurdle rates and we anticipate that the return will be somewhere in the region of the Thames Tideway tunnel rate, plus possibly some premium for it being nuclear, which is a novel asset class for private sector money in the UK.

[Dr Whitehead]

Q You have absolutely correctly drawn attention to the impact assessment, which as you know projects a number of hurdle rates that could transpire below the 9% that is effectively the implied rate for Hinkley C. The calculations for the difference between what would have happened with a CfD as opposed to RAB depend on what hurdle rate comes out as a result of that. I wonder if you are able to give us any better indication of the area the hurdle rate is likely to fall to as a result of RAB being applied to the investments you are seeking?

Julia Pyke: We think the relevant rates to look at are the rates that are currently determined by Ofgem for investors in the £200 billion of existing UK regulated assets. That is the range that we anticipate will be relevant.

[Dr Whitehead]

Q Which is what?

Julia Pyke: As the Government have put in their impact assessment, you can run this at percentages over inflation that equate to the existing market in investing in RAB. I do not want to suggest a particular number—that would not be appropriate, because we are going to set the cost of capital competitively—but you can see the ranges that the Government have used, which they have based on the evidence of what is invested today in RAB assets.

[Dr Whitehead]

Q Yes, but they have used that with what the impact assessment calls an “optimism bias assumption” behind it. What is your view of the optimism bias assumptions that you might have to make about the hurdle rate you are going to get? I am sorry you are not able to give even a range of percentages this morning.

Julia Pyke: Do you mean whether I think the Government have been overly optimistic in assessing the likely cost of capital to be derived through competition? Is that your question?

[Dr Whitehead]

Q No. I take it from the impact assessment that they are trying to price in, if at all possible, what they regard as the almost inevitable optimism bias in terms of initial figures. I am afraid it is a staple of nuclear calculations that there is usually a pretty optimistic bias in the initial calculations that the project will run exactly on cost calculations and exactly on time.

Julia Pyke: I think we are talking about two things here. There is optimism bias in relation to the outturn capital costs. The Government have taken a cautious approach to applying optimism bias to the capital costs, given that we are replicating the Hinkley design, using the experienced team, and we can see the savings made in unit 2 compared with unit 1. In relation to the cost of capital, it is entirely sensible for the Government to have based their calculations on the existing market of investment in regulated asset base industries in the UK. I do not think there is an optimism bias issue around their evaluation of existing investment rates.

[Dr Whitehead]

Q But you would perhaps conclude that at least you can go to a 6% hurdle rate, if not better?

Julia Pyke: I would conclude no such thing. What investors choose to bid will be a function of how attractive the product is to the equity, what else is available in the market—it will be a whole range of considerations, but essentially it will be in the area of the existing investments in regulated assets in the UK, which are publicly available.

[Dr Whitehead]

Q I think you would appreciate that the whole question of what RAB saves over a period of time depends on that hurdle rate?

Julia Pyke: Indeed, it does depend on the hurdle rate, but—

[Dr Whitehead]

But you are not able to help us this morning.

Julia Pyke: I do not think anybody is questioning the assumption that, in moving to a RAB from a contract for difference model, the cost of capital will come down, so it will save money compared with a contract for difference model.

[Dr Whitehead]

Q But we do not know how much?

Julia Pyke: We cannot know how much, because it will be set in the future through competition.

[The Chair]

Unless any other of our colleagues have a one-minute question, we are at 10.24 am and that very neatly brings us to the end of our time. [Interruption.] I am afraid we only have one minute, Alan; one yes or no question, perhaps?

--- Later in debate ---

[The Chair]

Thank you all very much for being here. We will start with Her Majesty’s loyal Opposition and Dr Whitehead.

[Dr Whitehead]

Q Good morning, everybody. I would like to start with Sue. As you will know, we have had quite a lot of dialogue about Springfields nuclear fuels, the role that Springfields nuclear fuels has played in providing fuel for the UK nuclear industry, and the role that it might play in the future. Could you briefly take us through, first, the problems that Springfields nuclear fuels has at the moment and, secondly, what role you consider it might play should the Sizewell C project go ahead?

Sue Ferns: Certainly. At the moment, Springfields nuclear fuels faces a bit of a crisis, primarily due to the earlier than expected rundown and closure of the AGR—advanced gas-cooled reactor—fleet, which has been its major component of fuel manufacture, not the only but the major one. The effect of that is that from January of next year it will be producing only 55 tonnes of AGR fuel, compared with a normal load of about 200 tonnes. That obviously has implications for the workforce and it means that that plant will be operating in deficit as from January of next year.

There have been protracted discussions over the course of the year. We have seen two rounds of redundancy notices issued to the skilled and specialist staff on the site, and there is a danger, in the face of continued uncertainty, that more of those specialist skills and expertise will be lost.

I should say that fuel manufacturing is the key function of Springfields nuclear fuels but there is also much wider expertise. It provides a range of other services to the nuclear industry and is seen as a key part of the UK’s nuclear expertise. We very much fear for the future and are in active discussions with the company and Government about that.

There is both a short-term and a longer-term challenge, and a longer-term opportunity. If more nuclear power stations are constructed in the UK, we can see a good fuel load for Springfields from about 10 years’ time onwards, but the problem is that unless we solve the short-term hiatus in fuel orders, those skills and expertise will be lost and will not be easily recovered, if at all. The opportunity is for Springfields, as it was recognised in the nuclear sector deal, to continue as a centre of nuclear excellence and expertise as our unique UK fuel manufacturing capability, able to provide fuel to reactors in the UK of all types, and potentially to plants in other parts of Europe as well.

[Dr Whitehead]

Q Charlotte and Simon, you have been very involved in union representation at Hinkley Point C, and in the discussions on the transfer of skills and labour from Hinkley Point C, as it progresses, to the development of Sizewell C, as it progresses in its earlier stages. What is your view on the soundness of those possible arrangements, and what sort of saving to the project as a whole might arise from that doubling up of the workforce and skills between the two nuclear plants, and indeed the cloning of one nuclear plant with another in the Sizewell C model?

Charlotte Childs: The conversations that we have had with EDF in terms of building a nuclear supply chain, and the skills required to build both of those projects, and further projects, mean that the decision on the RAB funding model, hopefully leading towards a final investment decision in the near future, creates a really great opportunity for the timelines of those projects to line up, and for the skilled workforce who are needed at Hinkley Point to just about finish what they are doing there in time to move over to Sizewell. It creates certainty for the nuclear supply chain and for those who have gone through a training programme with Hinkley.

We have negotiated some industry-leading processes to ensure that people from the local area can go from low to no qualifications into qualified trades and apprenticeships. It creates an ongoing opportunity for those people and job security that we do not generally see in the construction sector. Time is of the essence. To maximise the benefit for the nuclear supply chain and drive down costs, because it is already in place, it is imperative that those decisions are made sooner rather than later.

Simon Coop: I reiterate those points. With regard to Hinkley Point C, it is really a no-brainer to adapt those transferrable skills and move them into Sizewell C in order to ensure that costs do not spiral out of control. There is a clear model already in use that we can learn from to move into Sizewell C. The timing of that transfer is of the essence in ensuring that we do not lose the skills from one project and that we develop and move them forward into Sizewell C. Urgency is needed to move that project forward as soon as possible in order to maintain the skills from Hinkley Point at Sizewell C. Any kind of developments have to be in line with industry standards, and we also have to make sure that any misgivings or fore learnings that we establish from Hinkley Point C are clearly ironed out as we move forward to Sizewell C. The replica gives us the opportunity not just to learn from what we have done but at Sizewell C to improve and iron out any problems that we have had to maximise value for money for all vested parties.

[Dr Whitehead]

Q Is it your view that the present workforce in Hinkley understand that possible process, and that they have, in principle, a willingness to relocate should that sort of model go ahead in the development of Sizewell C?

Simon Coop: The UK workforce are absolutely flexible and they are highly skilled. In construction, the same key workers with the key skills have moved to projects. I do not see that being a major problem in future construction projects. As a result of talking to the company, there are already plans to transfer the operational skills at Hinkley Point B to Hinkley Point C. Those operational skills are currently transferring and people are keen to move on and use those skills at the Hinkley Point C project. There should be no difference in terms of transfer to future construction projects.

[Alan Brown]

Q My question is to Ms Childs. I got a letter from GMB Scotland asking me as a Scottish Member of Parliament to support new nuclear projects because of the jobs that they create. I certainly understand the value of jobs because I come from a constituency where we welcome new jobs, but does the £20 billion for Sizewell C give a good enough return on the jobs created? I would argue that that money could be used to create a manufacturing process or more jobs around the UK rather than that £20 billion being spent at one location. Have those types of discussions happened within the union?

Charlotte Childs: We are a member of that organisation, so the letter you received and the policy that we have set is based on a wide-ranging discussion with our members. In response to your suggestion about investment in manufacturing, it is not a this or that situation, is it? Scotland in particular has benefited greatly from the current nuclear civil generation, and the zero carbon generated by Torness and Hunterston B have contributed to southern Scotland consistently hitting the 2030 target, working alongside other renewables like wind to provide green energy. Without heavy investment in new nuclear projects we will not reach our net zero targets, and Scotland has set itself an even more ambitious target of 2045 to reach net zero. That simply will not be possible without having a consistent and reliable baseload that is net zero in its production of energy.