Nuclear Energy (Financing) Bill

Alun Cairns Excerpts

2nd reading
Wednesday 3rd November 2021 Commons Chamber

[Alun Cairns (Vale of Glamorgan) (Con)]

Thank you, Mr Deputy Speaker, for calling me to speak in this important debate. I declare an interest as the chairman of the all-party parliamentary group for energy security.

The development of new nuclear power stations in the UK is long overdue. Right hon. and hon. Members have made excellent points about the need for energy. The period of outright objection more than 20 years ago, and the stop-start nature of progress in the last decade, have largely stemmed from the funding challenges faced by new nuclear power stations.

The Bill is a major positive and significant step to help to meet our net zero carbon agenda and to secure our energy supply, which has come into clear focus in recent weeks. The challenge of the gas supply and the variability in renewable sources have led to a sharp rise in energy costs, the bankruptcies of many providers and an alarming worry for constituents. Some businesses have even been forced to operate at reduced capacity because of energy supply challenges. Europe as a whole has been exposed as vulnerable to other states’ decisions.

New nuclear diversifies the supply, delivers energy from within the UK, and offers a reliable, stable and clean source of energy that can form a major part of our baseload electricity needs. As my hon. Friend the Member for South Cambridgeshire (Anthony Browne) said, diversification is important and nuclear is fundamental to providing the necessary energy security.

The argument in favour of nuclear power has been won among the public for some time, yet until now, we have not been able to develop projects that minimise the financial risk to the public as taxpayers and as consumers. The regulated asset base financing model is therefore a significant positive step that I strongly support, because it has the capacity to reduce the cost of capital to allow projects that would otherwise remain on the drawing board to move forward.

Much of the policy’s success will focus on assessing risk. RAB has been used successfully in other major infrastructure projects around the world, and there is no reason it cannot be used for new nuclear, but its evolution will not be straightforward. The challenge will come in assessing and costing the risks faced by developers. New nuclear is different from some of the more predictable models that RAB has been used for, so we will have to be open and candid about the challenges as we develop the policy.

The biggest challenges of developing new nuclear come in the early construction stages when operation is typically 10 years or more away and when design problems and implementation faults emerge. They often lead to significant cost overruns and the need for changes at a huge cost financially and with long delays. Those uncertainties have hampered the development of new nuclear through more traditional financing models for so long. RAB will help, but the risks and costing the risks will remain.

I was closely involved in Wylfa Newydd, the Horizon proposal by Hitachi on Anglesey, and along with my right hon. Friend the Member for Tunbridge Wells (Greg Clark), developed a third-third-third finance plan between the UK taxpayer, Hitachi and the utility companies to bear the risks of the early stages in particular. Despite the Government offering a third of those capital costs, including covering the financing costs in the proposal, the project stalled. I pay tribute to my hon. Friend the Member for Ynys Môn (Virginia Crosbie) who is working tirelessly to keep the project alive. I am optimistic about its future. That highlights the challenges, but does not negate the risk or the assessment of the risk. RAB certainly overcomes the challenges of financing costs, which is welcome, but I ask the Minister to recognise that central to the policy’s success is assessing the risk and, therefore, the costing of the risk. Any further detail as the Bill passes through the House and the other place will be helpful in reassuring investors, policy makers and operators in the process.

The RAB policy is an excellent fit for SMRs and AMRs, and will be even more so once the first concept has been proven. The repeat structures of SMRs and AMRs will allow such projects finally to get off the ground significantly. I gently remind the Minister that when the nuclear strategy was launched, my right hon. Friend the Member for Tunbridge Wells and I visited Trawsfynydd in north Wales to highlight how it and Wylfa on Anglesey were both perfect sites for small modular reactors. I hope that he will recognise that as policy initiatives develop.

I want to support the Minister and the Bill’s proposals. This is a welcome, major and positive step in satisfying our energy demand, achieving our climate goals and securing our energy needs and supply. Assessment of the risk is central. As I mentioned, despite challenges we sought to overcome with fair and generous offers, challenges will remain, but RAB will play a big part in overcoming them. The detail of how we assess and cost the risk as part of the RAB model will be fundamental to giving confidence to investors and the nuclear industry.

Nuclear Energy (Financing) Bill (First sitting)

Alun Cairns Excerpts

Committee stage
Tuesday 16th November 2021 Public Bill Committees

[Matthew Pennycook]

Q Just to be very clear, because I think this has implications for the funding model, do you not think that that minority stake, and the potential force-out divestment by the Government, has any implications for the RAB funding model for Sizewell C?

Julia Pyke: I think that Sizewell C can raise money under the RAB model. How CGN intends to go forward with a financial investment in Sizewell C is a matter for CGN and the Government.

[Alun Cairns (Vale of Glamorgan) (Con)]

Q As we have highlighted, the benefits of the RAB model are that it reduces the cost of finance and provides financial certainty for any project—those are two key inhibitors in the development of new nuclear fleet. However, the construction of nuclear power stations is inherently uncertain because of the risk associated with it, and costing that risk is extremely difficult. Are you satisfied that the Bill gives the Minister the opportunity to assess the cost of that risk effectively? The alternative would be the failure of the RAB model, which would undermine the fleet generation that we would like to see.

Julia Pyke: I think that the Bill is a great framework under which there is a lot of detail to be developed, and we would expect more detail to be developed in relation to designation and the conditions of eligibility. While I could hardly deny that the cost of nuclear builds has had some uncertainty in some cases, what is not uncertain is whether nuclear works and the technology works. I think there are no cases worldwide of nuclear projects that have been abandoned for technical reasons. The industry knows how to make nuclear power stations work. So I think that there is a degree of uncertainty about the exact cost, but the whole point of building a replica of Hinkley is to minimise that uncertainty, benefit from all the lessons learned and get nuclear on to a stable, repeat-build footing.

David Powell: We designed our SMR BWRX-300 on the basis of proven technology. So we know very much the cost base for that technology, and it is really in our interest and that of investors to ensure that we can deliver to time and to budget on that. With respect to the build, we would obviously want to try to minimise any impact and risk of cost and schedule overruns, because we see this as building a fleet of smaller reactors out of a more modular-type approach.

[Alun Cairns]

Q Mr Waite, in asking you the same question, may I add a supplementary to gain greater context? Is the RAB model’s success dependent on an in-principle Government commitment to a fleet of nuclear power stations rather than just one or two?

Michael Waite: I do not think it is implicit, actually. We have heard about fleet benefits. What I think RAB does do, though, is ensure accessibility to the UK market for non-foreign-sovereign-owned entities. Under a CfD approach, frankly only large foreign Government-owned entities can stand that up-front cost. Then you are potentially delivering electrons, but you are delivering a foreign Government’s objectives and strategies rather than benefiting from the UK Government’s objectives.

[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.

Nuclear Energy (Financing) Bill (Second sitting)

Alun Cairns Excerpts

Committee stage
Tuesday 16th November 2021 Public Bill Committees

[Anthony Browne]

Okay. That is all my questions, thank you.

[Alun Cairns (Vale of Glamorgan) (Con)]

Q This is a question just for Mr Woods—sorry—because of the small modular reactor interest. The benefits of RAB for the industry and for traditional build are quite obvious, but there are still risks. There is a risk in construction, and therefore costing that risk and building it into the RAB financing is a challenge. We were given evidence this morning by those who believe that a fleet will mean that things de-risk as we go along. There is, at least, a concept, and there is a proven record of design that works, but that is not necessarily the case with SMR. I am playing devil’s advocate. I can see that RAB would be extremely attractive to SMR going forward, but we are still at the concept stage, rather than having proof that it works in the way that we all hope it will.

Alan Woods: Let me break that down in terms of the proven part. Our design and our plant use proven technology. At the base of the reactor island, there is a pressurised water reactor. It is the same as what Rolls-Royce has designed, built and operated for the past 60 years in the submarine programme. We do not have the same set of requirements as the submarine programme, but it is the same core technology. Is it proven? Yes, it is absolutely proven. We know it works and that we can build it. We are building them today.

The rest of the turbine island plant is designed to use products that are already available in the market today. We are not designing a power plant that requires us to invent a specialist product here or a specialist product there and that has never been made before. It is designed to use products that exist in the market. Even though it is a steam turbine, it is a commodity product we can buy. All the constituent parts at our plant are proven technology. Our civil module approach has been proven by our partner, Laing O’Rourke, which is making modules of this nature today at Worksop. We will expand that facility to replicate and grow that module manufacturing capacity. The constituent parts are all proven. There is no technology innovation at the plant that is questionable as to whether it will reach the right technology-readiness level.

Then we come to our ability to manufacture and join the modules together. Again, this is not a technology challenge. It becomes more of a logistical challenge and there is plenty of evidence in other industries—in fact, inside Rolls-Royce—where we manage those logistics from the supply chain to the module facilities to the delivery to site and to the installation and commissioning of them.

I do not accept that we are not proven technology; we absolutely are. As I said, we have built into the design, intentionally from the outset, technologies and features that remove the risks associated with traditional construction. It is no longer a very large construction project; it is a factory of products. For example, when we build the power plant, we assembly the modules on site where an average of 500 people are assembling the parts. We do that to move those jobs into the module facilities and the supply chain and into the factory environment where we are manufacturing the same products over and over again in a production line environment.

[Alun Cairns]

Thank you.

[The Chair]

Do any of the other witnesses want to answer the question?

Chris Ball: There are two aspects to the question. First is the one about proven technology, which Alan has covered. Secondly, there is taking the lessons learned and leveraging the skills and capability within the UK nuclear industry. If we look at Hinkley Point C from unit 1 to unit 2, we see broadly in the order of a 20% reduction in time scales and costs as we take the lessons from unit 1 on to unit 2. Clearly, if we carry on with that same trajectory at Sizewell C, it will be 40%. I am not suggesting that it would necessarily get to 40% but one would assume it would be in excess of 20%. That is a benefit. Going back to the RAB model, leveraging the experience of Hinkley Point C affords good protection against the risks of cost and schedule overrun. Equally, leveraging those lessons into the SMR programme and from the skills and capability that have been built up on existing nuclear programmes is the benefit from all programmes.

My big fear for us as an organisation, which has several thousand engineers in the UK, is that disruption to workflow means that we lose the lessons learned from the industry. That is not to the benefit of the UK, job creation and the cost of our energy.