Nuclear Energy (Financing) Bill

Jonathan Edwards Excerpts

2nd reading
Wednesday 3rd November 2021 Commons Chamber

[Greg Hands]

My hon. Friend makes a good case for supporting this Bill, which will allow the financing options to expand our nuclear power base. I appreciate his support for Hinkley Point, as the MP for a nearby area.

[Jonathan Edwards (Carmarthen East and Dinefwr) (Ind)]

Is not the problem with the Government’s proposals that the new financing model, which is very favourable, goes towards only one technology? Are the British Government not therefore picking a winner from the available technology options? Does that not go against Conservative ideology?

[Greg Hands]

No, actually. In fact, the ability to add levies or extra payments on to bills is already in place for multiple technologies. It is not there for nuclear alone. The broad concept exists for other technologies, too.

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[Greg Hands]

I, too, do not often agree with Tony Blair, but it was good to see his conversion in the end, albeit that it took him 10 years. I have always been a passionate supporter of nuclear power, right since I was first elected in 2005, which was round about the time of that Labour volte-face. I was a strong supporter of Labour’s changing its view at that time; it is just such a pity that there was a lost decade before it came to that view.

Let me move on—

[Jonathan Edwards]

Will the Minister give way?

[Greg Hands]

No, I am going to make some progress. I have already given way to the hon. Gentleman.

The Bill could help to get new projects off the ground throughout Great Britain, including, potentially, the Sizewell C project in Suffolk, which is the subject of ongoing negotiations between EDF and the Government, as well as potential further projects, such as on the Wylfa site in Wales.

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[Alan Brown]

Will the Minister give way?

[Jonathan Edwards]

Will the Minister give way?

[Greg Hands]

I am going to make a bit more progress. I have taken a lot of interventions, and the time for this debate has been a little curtailed.

The Government are introducing this Bill at a time when the cost of energy is on all our minds. We are committed to making the transition to low-carbon power affordable to households and businesses. Nuclear is part of a low-cost future electricity system and helps to reduce our exposure to volatile global gas prices. The measures in the Bill mean that we can keep nuclear in the mix at a lower cost than would otherwise be the case.

Under the Bill, the Secretary of State will be able to designate a company to benefit from a RAB model, provided that it satisfies certain criteria. This will empower the Secretary of State to insert new conditions into the company’s electricity generation licence to permit the company to receive a regulated revenue in respect of the design, construction, commissioning and operation of a nuclear project. A RAB model allows a company to charge consumers to construct and operate new infrastructure projects. It allows the company’s investors to share some of the project’s construction and operating risks with consumers, overseen by a strong economic regulator. That in turn significantly lowers the cost of capital, which is the main driver of a nuclear project’s cost to consumers.

[Jonathan Edwards]

rose—

[Angus Brendan MacNeil (Na h-Eileanan an Iar) (SNP)]

rose—

[Greg Hands]

I will make a little more progress.

RAB is a tried and tested method that has successfully financed other large UK infrastructure projects. The introduction of a special administration regime will prioritise the plant’s opening and continuing to operate in the unlikely event of a project company’s insolvency. That will protect consumers’ investment in the plant and ensure that they realise the plant’s benefit. Members should know that this legislation is not specific to one project, as I have already said, and could be applied to nuclear projects across Great Britain.

[Jonathan Edwards]

Will the Minister give way?

[Greg Hands]

I will make progress.

The RAB model could open up opportunities for British companies and our closest

partners to develop new projects and technologies, including the Wylfa Newydd site in Anglesey and small modular reactors, as well as the Sizewell B project.

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[Dr Whitehead]

The hon. Gentleman is right to say that the build cost and financing of a nuclear power station has to include not just the obvious things that we think are associated with a nuclear power station, but all the other infrastructure around that nuclear power station and contributions to decommissioning costs. That is what we are talking about in terms of an overall financing package, and that is why a financing package has to last over the whole life, effectively, of that nuclear power station. I do not intend to move on from the financing of Sizewell C, because that is essentially what this Bill is all about. It is about all those things that the hon. Gentleman mentions, so far as that particular project is concerned.

This plant, if it goes forward—we hope it will go forward with something like this kind of financing—would cover a substantial part of what the Climate Change Committee considers necessary in the mix of low-carbon energy to drive power towards net zero by 2050. I have mentioned that it thinks about 8 GW to 10 GW of new nuclear power would be needed to complement a predominantly renewable power line-up so that firm power considerations are met, without being in such numbers that it puts the development of renewables into jeopardy. That 8 GW to 10 GW includes new nuclear power, but also the one existing power station that will probably last beyond the 2030s in Sizewell B.

Hinkley and Sizewell C together therefore would go a long way towards meeting that assessment by the end of the decade, with two 3.2 GW power stations with reactors in each, and the remaining Sizewell B power station continuing in action. It is not surprising then that we are talking about nuclear financing, which is pretty much all the Bill covers. Exam question: how do we finance an unfinanceable nuclear plant when we know we have got to do it because there is no other option? Even if we did decide to repeat the frankly disastrous device of providing a CfD for the plant at Hinkley, which is likely to produce power at twice market cost, it still would not work, because that does not solve the problem of getting investors into the plant for the lengthy period before production starts. There are ways in which nuclear finance can be sorted out.

[Jonathan Edwards]

I thank the hon. Gentleman for the very considered manner in which he is presenting his case. Is there anything in his mind that would stop the UK Government using this new financing model for other technologies, such as the tidal lagoon in Swansea, or is it blatantly unfair that one technology has a very favourable financing scheme, while another technology that could provide many of the solutions that he seeks is stuck on contracts for difference?

[Dr Whitehead]

The hon. Member mentions tidal power. Of course, a regulated asset base system can be used for any sort of major infrastructure project—and indeed has been already, as I will come to. I do not see the discussion on that system as being about just nuclear power, but a method of funding a large infrastructure project that has certain requirements that must be met by continuous funding throughout its operation. He is right that infrastructure projects other than nuclear in the energy sector could and should be funded by that system.

The National Audit Office discussed those options when it reviewed the decision making and value for money that the CfD process for Hinkley entailed. The route adopted by the Government, after much internal wrangling and delay, is a regulated asset-based model that is essentially constructed along the lines that it has been used for already in capital projects such as Heathrow terminal 5 and the Thames Tideway project. That is, the whole project is part-funded by the proceeds of a levy on bills. The levy varies in size during different phases of the project and, in the latter phases of production, lowers or even goes negative if the project’s income exceeds the ceiling of allowable costs under RAB.

There are substantial advantages to the RAB model for making the project investable. It provides returns for investors as the project proceeds rather than at the end of it, as does the CfD model, which allows investment to be brought into the frame for the project from sources that might otherwise baulk at the timetable between investment and return. It also reduces the hurdle rate for investment in the project, thereby in theory substantially reducing the overall cost of financing the project and likely resulting in cheaper prices for the energy produced by the plant.

There are also substantial risks with RAB that need to be managed. It places the cost and risk of financing the project on the shoulders of customers, in this instance electricity bill payers, which adds to bill costs through a levy on their bills before anything has materialised. In the event of the plant not being completed, it lumbers them with bill costs without the benefit of the plant for which they have paid producing relatively cheaper electricity.

RAB also adds to the burden of bills unpredictably if the project overruns on cost or time—both of which, as we know, nuclear plant development is rather prone to. The extension of the construction period for a project, when the highest effect is felt on bills, lengthens that higher take period. An increase in cost may also cause revisions to be made to allowable costs ceilings, and hence cause heavier costs on bills.

We are in somewhat uncharted waters with a project such as Sizewell C because of its size, complexity, timescale and investment costs compared with the more modest sums and shorter timescales involved in existing RAB projects. Nuclear power stations elsewhere in the world have been funded along RAB lines, but have simply not been completed, which has left consumers with a huge bill and no benefit.

In short, we need to go into this kind of arrangement with a clear eye about the advantages and risks of a RAB model for nuclear. As far as we can, we should attempt to mitigate the risks and play up the advantages. It is workable, but only if the Government have a serious plan.

The Government have sought to alleviate at least some of the disadvantages by introducing to the Bill a special administrative regime for the project in the event of a failure of the company involved during construction. We will look carefully at those provisions, but they seem to be a useful commitment to ensure the robustness of the overall project, even if its prime developer fails to deliver. We also accept that provisions in the Bill on who may be involved in legacy and decommissioning costs will help to clarify the risks for security trustees and secured creditors.

There is much to agree with in the Bill, given the evident need to secure a mechanism that enables Sizewell C to be developed and come into production at a reasonably early date. There are measures to lower the overall cost of the project so it is investable and less price inefficient than its immediate predecessor, and to ensure that the project stays on track and delivers at the end of it. However, there are still many questions to be answered, particularly on the robustness of the RAB model under circumstances where the inevitable “optimism bias” of project costings—that candid acknowledgement comes from the Bill’s impact assessment—proves to be disadvantageous and costly to consumers who, after all, are supposed to be paying up for a benefit later on. It is important that we look at such matters carefully, with a clear eye on consumer protection, and do not just assume that the mechanism will milk customers for whatever it takes to produce an outcome in the end.

We need much greater clarity about the Government’s intentions on the difficult situation concerning Chinese investment in Sizewell. That may not be central to the Bill and the RAB model, but it is indirectly affected. The project’s overall shape will be affected by whether the Government take over the Chinese share, offer it to other investors or even calculate that RAB is a sufficiently powerful tool to enable investors easily to come in and scoop it up once the Secretary of State’s investment agreement provisions are untangled. We need to know in the Bill’s early stages what the Government will do about that and through what mechanisms.

As the Bill progresses, the Government can expect Labour’s overall support but also a proper, critical eye on aspects of the mechanisms they are adopting and a particular emphasis on protecting the people, who will either stand to benefit from a reliable power station producing needed energy at reasonable cost if it goes right or suffer grievously if it goes wrong. In other words, the customer must be first in our minds in taking such decisions, and we will stand up for them as the Bill progresses.

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[Chris Skidmore]

That depends on the potential for innovation for the future. We have an energy crunch coming down the line with perhaps just a single nuclear plant open by 2030 and, at the same time, we will move from existing nuclear fission reactors through to small modular nuclear reactors, advanced modular nuclear reactors and, ultimately, fusion.

As science Minister, I assigned Government investment for the spherical tokamak for energy production units. We need certainty and a clear strategy for where the nuclear pathway is going beyond the existing reactors and to front-load that investment now. I will come to why the RAB model is so important as it allows that front-loading.

As I mentioned, nuclear power has resulted in an annual saving of 22.7 million tonnes of CO₂, the equivalent of taking one in three cars off the road. The Government’s proposal to adopt the regulated asset base funding model for nuclear power is bold and ambitious, but it is also needed. The beauty of the funding model is that it inherently encourages a wider range of private investment in new nuclear projects, reducing the UK’s reliance on overseas funding.

As it stands, developers are forced to provide the finances for construction up front and begin receiving revenue only when the station starts generating electricity. Even in the best of times for energy markets, which we certainly are not in now, that lack of certainty diminishes how investable nuclear power projects are. As we have seen, sadly, with the nuclear projects at Moorside and Wylfa, our current funding model is simply not fit for purpose; 5.8 GW of nuclear energy, just over half our current supply of nuclear power, was lost directly because funding could not be secured. Those locations have both been described as highly desirable sites for new nuclear power plants, but even after the Government offered to take the equity, provide all the debt finance and back a revenue-stabilising mechanism, private investors still had to walk away.

[Jonathan Edwards]

I do not question the hon. Gentleman’s expertise or knowledge on this issue, but perhaps he can help me out. From the Minister’s letter, and from what the hon. Gentleman himself has said during the debate, we know that 12 of the UK’s 13 current nuclear reactors are scheduled to close by 2030. The main argument for large nuclear is the baseload protection it gives that other technologies cannot provide, but it seems to me that it is highly unlikely, even with this new financing model, that a large new nuclear plant will be built before 2030. The question that arises from that for me—I admit that I am not an expert—is, how will that baseload be covered while we are waiting for the new large nuclear plants to be built?

[Chris Skidmore]

That is a very important question. It is not just 2030 that I am concerned about, but 2025. Nuclear currently accounts for 18% of electricity generation. The current closure rate of plants means that by 2025, nuclear will go from 18% down to 10%, so we will lose 8% of energy supply in the next three years alone. We will not be able to cover that gap; the hon. Gentleman is absolutely right. We are behind the curve here, which is why the Bill is vital. No one should vote against it tonight, because to do so would simply be to kick the can further down the road.

Nuclear also provides a fantastic opportunity to level up. Think of the jobs that it can provide: no one who lives near an area in which there is a nuclear power plant is against nuclear. Hinkley C in Somerset, relatively near my constituency, provides 30,000 jobs, of which 70% are local. It offers enormous potential for creating a sustainable pipeline of skill and talent for the future.

On the RAB funding model, others have asked during the debate, “What about other technologies?” The RAB model has also been established and received strong support from investors in other large infrastructure projects. Indeed, RAB-based funding has provided the funding mechanism for numerous financings of offshore wind transmission cables and infrastructure, as well as Legal & General’s financing for Mutual Energy’s Gas to the West gas network expansion project in Northern Ireland.

Yet the real advantages of this new funding system will come in relation to emerging innovative nuclear energy technologies. As anyone who is interested in reaching net zero will be aware, plans to develop third-generation nuclear reactors are well under way, with British companies such as Rolls-Royce leading the way. Some of those innovations—I have mentioned small modular nuclear reactors—have been designed to be able to be mass-manufactured at one site, powered by an SMR nuclear power plant, and then shipped domestically or internationally, massively reducing the cost. That brilliant technology will have the added benefit, I believe, of helping to power hydrogen electrolysers, which are highly more efficient if they are given a supply of heat. In turn, those will be able to decarbonise sectors that are the most difficult to decarbonise—the hard-to-abate groups that energy cannot touch, which need liquid fuel. The potential for nuclear heat and energy to generate hydrogen I think has the potential, in turn, to generate a clean energy revolution.

Those exciting technologies look to radically shake up the international energy supply system, but it is only through an adequate and appropriate funding model that we can take full advantage of their possibilities. As we have seen with the recent rise in global energy prices, energy security must be at the forefront of all our minds when debating policy. One of the best ways to avoid the situations that the world currently faces is by having a diversified energy supply, nuclear included. Additionally, it is only through the correct development and deployment of innovative technologies that we can both secure our energy supply system and achieve our net zero obligations. Net zero by 2050 is the ultimate mission for our generation and one that we must achieve as quickly, efficiently and effectively as possible. The RAB funding mechanism provides a clear path for nuclear to play its part in that mission.