Nuclear Energy (Financing) Bill (First sitting)

Anthony Browne Excerpts

Committee stage
Tuesday 16th November 2021 Public Bill Committees

[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.

[Anthony Browne]

Q To press home that point, how do you make sure that the right incentive for the companies for Sizewell C also ensures the costs remain under control, rather than simply being passed on to consumers?

Julia Pyke: Because the cost overruns will be shared, so the developers will take a significant proportion of cost overruns.

[Anthony Browne]

Q David, do you think the balance is right, in terms of shared risks between consumers and the companies?

David Powell: Yes. I think it needs to be fair. Clearly, what we are trying to do from a GE Hitachi perspective is really focused on driving down the cost of capital of our plants. The capital cost is a key part of that, of course, and clearly that part of the development that we are working on at the moment is to develop small modular reactors, with a key focus on reducing those costs by making the construction as simple as we can through modular build and using as much of the factory environment as we can. That obviously helps to reduce the costs of construction, as well as the risks of construction and the schedule of those. Like all technology developers, we have a reputation that we want to uphold, so our focus is trying to minimise the cost of that electricity for consumers by managing the projects very well.

[Anthony Browne]

Q Obviously you want to manage the projects well and guard your reputation, but big infrastructure projects such as nuclear power stations have in the past been subject to cost overruns. How do you manage that risk? Julia said it is shared between consumers and the companies, but in what way would it be shared? Is it 50:50? If you have a project that risks running out of control, how do you manage the risk to make sure there is as much benefit to the consumer as possible, or at least as little disbenefit, and what is the process for that?

Julia Pyke: One of the reasons that we are so keen to go ahead with Sizewell is that it is a copy of Hinkley, and it is in copies—fleet builds—that you get down construction risks. Hinkley has two units, and you can see how much easier it is to build unit 2. Common sense tells you it is because you are doing it again. We are very much hoping that Sizewell will be treated as units 3 and 4, and we believe—consistent with ideas about fleets of SMRs—that it is in repeat build where you get down costs. Nuclear in the UK has suffered from a considerable series of ones of a kind, followed by an extremely lengthy gap in construction. Nothing has been built since Sizewell B was turned on in 1995. It is by copying, the fleet effect, making sure that we learn all the lessons and using the same experienced team.

In terms of the proportion of risk sharing, it is not fixed yet, but around 50:50 is not an improbable outcome.

[Anthony Browne]

Q You will be applying for a licence to have the RAB model, and I am interested in your thoughts on the designation regime and whether the Secretary of State should have the power, or the regulator. It will obviously be a long process to apply for it and get the rights. In your business plans, that will be a huge part of the whole process.

Michael Waite: I missed out on the last question so I am happy to answer this one. On the designation process, there is not a huge amount of detail in the Bill about what the requirements are for a company project to be designated. In the 2019 RAB consultation process, we entered some fairly detailed feedback which suggested that RAB, as well as being a very positive way forward for construction and operation financing of nuclear power, could also be very effectively utilised for the development phase of a nuclear power plant project. That development phase for a technology that was mature, preferably generic design assessment-licensed, could enable the de-risking of a project under the watchful eye of the regulator, where they are learning about the project, such that when it enters the construction phase, there is a significantly lower risk profile. From a Westinghouse perspective, I would say that that designation process could take place prior to the construction phase and benefit both the project company, of course, and also ultimately the ratepayer and Government through lowering the risk profile of the overall project.

[Anthony Browne]

Q On the question about who should do the designation, Julia made the point earlier that—

[The Chair]

I am sorry. Maybe I am just getting old, but I cannot hear what you are saying. Could you speak up a bit?

[Anthony Browne]

Sorry. I am also interested in the point about who should actually do the designation. Julia, you made the point earlier that you would have a system that responds to need, as it were. Could you see this becoming just an ordinary function of the regulator, or should it always be the Secretary of State who does it?

Julia Pyke: I think that is very much a question for the Government, and it will partly depend on which organisation has invested the time and money in doing due diligence on the readiness and maturity of the project.

[Anthony Browne]

Q David, do you have any thoughts on the designation?

David Powell: I agree with Julia: clearly, that is a decision for the Government. As Mike said before, it is quite important that we look at where the designation actually starts from as well, because there is a huge part of developing nuclear projects prior to getting to construction. With the Horizon project, we saw the amount of money that Hitachi had spent—over £2 billion—and it did not get to that final investment decision, so that is an important consideration as well.

Michael Waite: If I could address the same point, I absolutely think it should be the Secretary of State who has that final authority, predominantly because there are such a large number of moving parts of the project. It is not just about maturity: it is about value for money, and is that value for money just in terms of pence per kilowatt-hour, or is it UK content? There are a very large number of very broad aspects that can be assessed.

[Anthony Browne]

Q My last question is this: obviously, one of the purposes of the regulated asset base is to open up investment opportunities for UK pension funds and so on to invest in nuclear, and they obviously want reasonably reliable long-term returns. What criteria are needed from the RAB model to make it an investable proposition for UK funds? If you draw the criteria far too tightly, it would not be very attractive, but if you made it too generous it would not be good value for the consumer, so I am just wondering what you, as people out to encourage investment, are actually looking for. What do you think is needed? I do not know who is in the best position to answer that one.

Michael Waite: None of us is in the investment community.

[Anthony Browne]

I know, but you have relations with the investors and you know what they are looking for.

Michael Waite: Indeed.

Julia Pyke: And it is my job to raise the money.

Michael Waite: Absolutely, the pension funds historically are great supporters of operating nuclear power plants, because those are some of the most consistent returns on investment possible. The construction phase and development phase are something different, so it is all about the risk profile for them. As I said, the more you can de-risk a project, the more it can become investable by those institutions.

[Anthony Browne]

Q But are you looking for particular things about the RAB model that will help your conversations with investors while providing value for consumers?

Julia Pyke: A consumer prices index-linked investment stream is likely to be very attractive to people with CPI-linked liabilities, such as British pension funds. Increasingly, the financial investment community is very much interested in environmental, social and governance issues, and whether or not their investment is making a difference. I think that nuclear has a fantastic track record of making a positive difference: not only does it produce low-carbon electricity, but it is a great leveller-up. It has got a great track record of offering well-paid, highly skilled, unionised jobs. It also has a very good track record with the environment itself, and the land outside the power stations. Those three things coming together will make it an investment that can fit very well into the portfolio of companies that want to make a difference with their money.

[Anthony Browne]

Q I agree with the levelling-up point, although that is more a political thing rather than—

[The Chair]

I am sorry, Anthony, I can’t hear what you are saying; you are mumbling.

[Anthony Browne]

I do not know whether the microphone is working. I agree with the levelling-up point, although that is more a political thing rather than, presumably, one of the criteria that the investors would use.

David Powell: Just one operational point. Julia has spoken of the confidence that the Government will bring to the investment community, and we have seen that there are companies that want to invest in projects, but we would very much like that to be operational. Getting the investment early on is quite hard to do, so the confidence from the Government’s approach on the RAB model would help to provide that confidence to the investment community.

[Anthony Browne]

That is the whole purpose of the RAB model. That is all my questions. Thank you.