Nuclear Energy (Financing) Bill (Second sitting)

Matthew Pennycook Excerpts

Committee stage
Tuesday 16th November 2021 Public Bill Committees

[Dr Whitehead]

Thank you.

[Matthew Pennycook (Greenwich and Woolwich) (Lab)]

Q Richard, you have spoken with great insight about the balance between the advantages of the RAB model and the risks that come with it for consumers, and also about how those consumers might be better protected. Will you give the Committee your take on what we have learned from those infrastructure projects that have benefited from a RAB funding model, such as Thames Tideway or Heathrow terminal 5? Was the peak of costs on consumers within the estimated range at the start of the project, leaving aside cost and time overruns? How accurately can you predict the peak cost for consumers and ensure that it comes within a set range, if—as may be the case—amendments to protect consumers are not ultimately adopted? How accurate is the forecasting of the total impact on consumer bills?

Richard Hall: On those two specific projects, Heathrow and Thames Tideway, I cannot give any insight. I am not particularly close to those individual cases. It is fair to note that in both cases the cost of capital brought forward by the model seems to have been low, in particular in the case of Thames Tideway. On nuclear, I simply go back to the point that there is a large base of literature looking at historical cost overruns and the extent to which things come in on budget. That tends to display fairly consistently that these types of projects are very likely to be subject to optimism bias at the time that they are procured—a belief that they will be cheaper than they actually will be.

In addition to the costs and dates I mentioned from the BEIS impact assessment suggesting the average levels of cost overruns, look at a couple of other examples from academia: Sovacool et al. looked at a global example of 180 new nuclear plants and found that 97% of them came in over budget and that the average cost overrun was 117%; and Flyvbjerg et al. found that in a sample of 194 nuclear plants, the median cost overrun was 68% and the median schedule or construction-time overrun was 40%. That is a fairly large sample set of projects, and the analysis tends to suggest considerable optimism bias for new nuclear—it tends to come in late and over budget.

[Matthew Pennycook]

Q I have one follow-up question. Leaving aside the particular problem historically in nuclear projects with overruns, will you elaborate on how the order of magnitude with this particular RAB—or a RAB that the Bill would facilitate for something like Sizewell—increases the amount of risk for consumers vis-à-vis those RABs that have been used on other infrastructure problems, which are smaller? Does the order of magnitude of the potential RAB we are talking about—independent of the dynamics around nuclear—inherently increase the risk significantly, just because it is so much bigger?

Richard Hall: I think potentially it could, simply because of the scale of the project. The cheapest cost estimate in the impact assessment is that, for a Hinkley Point C-sized plant put forward on the RAB model, it would cost about £24 billion. That is the cheapest estimate, so we are talking about extremely chunky consumer spend.

[Matthew Pennycook]

Thank you.

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

Q Richard, following on about costs, you said that Hinkley Point C was estimated at £24 billion. Even if we say that Sizewell is £20 billion, we heard that Rolls-Royce is hoping to build five small modular reactors, which will be about £10 billion. If we look at consumer protection, value for money and achieving net zero—particularly heat decarbonisation—if I gave you £30 billion, would you spend it on nuclear, or would you do something different with such levels of capital?

Richard Hall: It is hard to see a case for this being the most cost-effective way to spend money on generation. A lot of the argument for whether we need new nuclear or not comes down to whether it is perceived as being useful to provide a balanced generation mix, so that it is available when other forms of low-carbon generation are not available. On that point, I note that the Government are more confident on the need for new nuclear than some of their advisers are. The Committee on Climate Change’s sixth carbon budget work from last December shows a range of pathways to net zero by 2050, some of which involve new nuclear. It talks about it being “possibly” needed, not definitely needed.

The National Infrastructure Commission’s 2018 national infrastructure assessment recommended that the Government consider bringing forward one new large-scale nuclear plant in the 2020s—but only one, suggesting that in general terms the cost reductions in renewables were so sharp and likely to continue that a pivot to renewables appeared a better bet than backing nuclear more forcefully.

The case for whether new nuclear is needed is ambiguous at this stage. Could you get better value for money from investing in other things? I think the challenges of making our homes energy-efficient so that we stop spending so much on energy and reduce emissions should be tackled as a priority.

--- Later in debate ---

[The Chair]

Are there any other questions from Members?

[Matthew Pennycook]

Q I have two open questions for the panel. The first is on clause 1 of the Bill, which I hope you have had a chance to look at, on designating a nuclear company. In previous evidence sessions, some of the witnesses who attended suggested there might be a lack of detail. What are your thoughts on whether there is sufficient detail in the Bill, both on who designates a company and how you designate an appropriate company?

Tom Greatrex: I am sorry, but you cut out slightly. I think you were referring to clause 1 and designated companies, but I missed the question.

[Matthew Pennycook]

Sorry, Tom. From what you have seen, is there enough detail and clarity in the Bill about who designates a nuclear company and whether that is appropriate, and is there enough in there to be clear about whether we are designating the appropriate type of company?

Tom Greatrex: Thank you; I understand the question now. The detail of the designation process is set out in subsection (3) of clause 1, on procedure. I am not absolutely sure that it necessarily gives the full, detailed approach to the designation and who the designation will be of. As this is a framework Bill, we work on the assumption that the detail of that will be set out in regulations subsequently. We are quite comfortable with that being the approach. The broad principle is set out in the Bill, and I think that gives us enough to go on for now.

Rebecca Groundwater: The transparency piece and the openness of the process was mentioned by our members, but the assumption is that the detail will follow.

Tom Thackeray: I don’t think we have picked up strong views from our membership worrying about the level of detail in the Bill at present. I note from the previous comments that political statements and backing are really important in this industry, and making sure there is no ambiguity around the backing that the Government provide. Perhaps that leads us to a decision on who should do the designating, with Secretary of State-level backing for it. We can take further soundings from members on that.

[Matthew Pennycook]

Q My second question is on the total amount of nuclear capacity we require going forward. I am quite clear in my own mind that the Bill is primarily about Sizewell C, but we have had talk of nuclear fleets, SMRs and what might come forward in years and decades to come. Do any of you challenge the Climate Change Committee’s central scenario of its balance pathway, which is that we need 10 GW total nuclear capacity by 2035, and 8 GW of new build. If you take Sizewell B and C and Hinkley, we are talking about a remaining gap of 1.6 GW to 2.5 GW. Do you work on that assumption? Do you think it should be higher or lower? I am trying to get the sense, beyond Sizewell C, of what this funding model might be used for.

Tom Thackeray: I think we are comfortable that the Climate Change Committee’s analysis in the balance pathway is a reasonable assumption. We think nuclear will be a strong part of the energy mix in the years ahead. Obviously, we will need a much bigger electricity capacity up to 2050. As we learn more about the process and the cost of technology starts to drop, there might be slight adjusting of those assumptions in years ahead, but at the moment we do not diverge markedly from what the CCC has said.

Rebecca Groundwater: We are aligned with the CCC report. I have nothing further to add.

Tom Greatrex: It is important to underline that the CCC scenario is for 2035 and towards the sixth carbon budget. I think it is broadly in the right area. The 2050 net zero modelling that was published alongside the energy White Paper has a broader range to 2050. We have to bear in mind, looking beyond 2035 towards 2050 and net zero overall, that the overall proportion of our energy that will come from electricity will be high. It is reasonable to assume that we will be beyond 10 GW by 2050, although 10 GW by 2035 is probably the right ballpark figure.

[Virginia Crosbie]

Q What more do you need to see from the UK Government to get us back into leading in this critical sector on the global stage? We have had the energy White Paper, the Prime Minister’s 10-point plan and the net zero strategy announced by the energy Secretary a few years ago. We have the RAB nuclear financing model and we had a good presence from nuclear at COP26 in Glasgow. What more do we need?

Rebecca Groundwater: I would go back to that stability and the pipeline of opportunities that are viable. The supply chain is ready and equipped with the people, skills and capability. It is world class. We have a brilliant energy sector here in the UK. In the market forces piece, it is unclear which one will take the lead out of all the technologies. It has caused uncertainty, and that is not what the supply chain needs. When we talk about the supply chain, we are talking about the breadth of it. Each organisation has different needs, but they need that investment piece; they need to know where to upskill and when; they need to know the timescales.

That is why this legislation going through quite quickly is helpful, because it showcases that decisions can be made now to drive forward investment in what is needed. That ongoing dialogue and conversation—the message, “This is serious, and we’re taking it forward,”—will give that stability and the ability to the financial markets to come in. We know they are talking about the sustainability goals and we know that parts of the supply chain are struggling with how to implement them and what that will mean for them, depending on their size. That wider conversation now needs to start to break down a little, so that we are looking at how that impacts each of the different sectors. That way, we can drive it forward and bring it all together.

Tom Greatrex: All the things you mentioned have been important, significant and welcome for the sector over the last period. This legislation is key, as I mentioned previously. As for what else we need, we know that development of the taxonomy is ongoing—the Treasury has an expert group leading on that. It is important that the taxonomy is objective and avoids some of the mess the Europe-level taxonomy has managed to get into, in terms of setting a framework for investment in infrastructure that will contribute to a low-carbon future and to net zero. The requirement will be to pace delivery of agreements, to enable projects to go forward—for example, negotiations are ongoing between EDF and Government on Sizewell C, although that goes beyond the scope of the Bill, and with others on the SMR programme; last week’s announcement was very welcome. A number of things are in the purview of Government to deliver—siting, for example. We need all those things to happen. If I were to characterise what is needed in one phrase, it would be: an appropriate sense of urgency, given the urgent situation of our current and future power mix requirements.

Tom Thackeray: I would echo many of the points the others made: detailing objective, sustainable finance taxonomy for the UK including nuclear will be really important over the next few years. More holistically, there is the extent to which the Government can build out their export and skills strategy, taking advantage of the technology developments we are making in a lot of the clean areas. I have a slight concern, not in the nuclear sector but potentially in other green economy areas, that there will be a squeeze on the labour market, with multiple industries going after the same labour pools, which will probably put a brake on our capacity. We need to think really strategically about some of that stuff.

You invited general comments about the 10-point plan. In some areas, there is a need to detail the routes to market for things like the hydrogen economy. That goes back the points the other Tom made about pace of delivery and urgency. However, having just come back from Glasgow, I think it really hit home how far advanced the UK is in some of these plans compared with others. We can always ask for more, but I think we are genuinely world leading in a lot of these areas.

--- Later in debate ---

[Kirsty Blackman]

Q Would you be happy to pay more money on your energy bill in order to fund new renewables, for example?

Doug Parr: Yes. I have always been very clear that there are particular hazards around new nuclear developments, whether it is waste, the terrorist threat, what to do with them or security issues. That is why I think, as a society, it is worth avoiding those hazards and, if necessary, paying a bit more. In practice, there are models out there by, for example, Imperial College that say that no more new nuclear is on the cost-effective pathway, given the cost of renewables. Theoretically, I can say that. In practice, I am not sure that is the situation we are facing.

[Matthew Pennycook]

Q I have a two-part question for the panel, but in particular for Professor Thomas. The Bill is clearly designed to facilitate primarily Sizewell C. I still think there is a lack of clarity about Chinese investment in that project and how that interacts with the Bill’s intentions. What is the panel’s understanding—and specifically Professor Thomas—about what is in the October 2016 strategic investment agreement and what provisions are there in that agreement that would allow the Government to remove CGN from the project? Related to that, we had a number of questions earlier about the £1.7 billion allocated to nuclear in the Budget. The Budget line says that that funding is there:

“to enable a final investment decision for a large-scale nuclear project in this Parliament, and the government remains in active negotiations with EDF over the Sizewell C project.”

What is your understanding of what that means and can you comment on potentially the use of that £1.7 billion as it relates to the RAB funding mechanism? It is a very different two sets of scenarios, if we are talking about whether that £1.7 billion is for a buy-out of the CGN minority stake or potentially put in as part of a pot of money alongside the funds generated from RAB.

Professor Thomas: If we go back to the 2016 agreement, CGN agreed to take a third of the Hinkley Point C project: the construction and the operation of the plant. It agreed to take 20% of the Sizewell B/C project up to final investment decision. It has an option to take 20% of the construction and operation of the plant if it goes ahead and for Bradwell, there is the 66% of CGN and 33% of EDF. EDF and CGN have spent about £0.5 billion developing the plans to the point they have reached so far. Let us say it is going to take another £0.5 billion to get to final investment decision—that is at the most. So £1.7 billion seems a bit too much for that. The wording of the £1.7 billion is very vague. Some people have assumed it will be an 8.5% stake, or whatever £1.7 billion works out as.

In terms of how you would get CGN out of Sizewell C, I think it is really dependent on what happens to Bradwell B. It is clear that CGN’s presence in the UK is for only two reasons. First, to build the Bradwell B plant, and the price for that is its involvement in Sizewell C and Hinkley Point C. The other is to get the British safety regulator’s endorsement of its technology. If it is not going to be allowed to build Bradwell B, I cannot see why on earth it would be interested in putting money into Sizewell C. It is not CGN’s technology, it would provide nothing and it would not be particularly profitable. So if Bradwell B is abandoned, the Sizewell C CGN problem will solve itself. Can you briefly repeat me the gist of the second part of your question?

[Matthew Pennycook]

Q I think you have answered it in part, but it is about your understanding of how that £1.7 billion might potentially be used in a Sizewell C project and how that, in a sense, relates to the RAB funding mechanism set out in the Bill.

Professor Thomas: The CGN EDF consortium have spent about £0.5 billion so far, and they have some more money to spend to get to the final investment decision. They would then expect to sell that work to the company that actually builds and operates the plants, so they would get their money back. If Sizewell C goes ahead, it is sort of alone. It seems to make more sense to see it as a stake in the plant, which might encourage institutional investors to go in. If they saw Government involvement, they might think that it will probably not be allowed to collapse, but it is up to the Government to provide a bit more clarity about what they expect the £1.7 billion to do.

[Alan Brown]

Q I have a question for Stephen Thomas. We heard this morning that the Sizewell C company is looking for a 60-year contract under the RAB funding. Does that mean that, effectively, bill payers will be paying for the asset before it comes into use and can generate electricity, and that they will continue to pay for it once it has reached its end of life? Are there any protections in the Bill? If Sizewell goes ahead and then goes offline early in the way that Dungeness went offline and had to be shut down seven years early, would the bill payer still be stuck paying for that under the RAB model, or is it possible to have recovery mechanisms in order to counteract that?

Professor Thomas: I think there is a lot of missing detail in the RAB proposal, and one of the biggest elements of missing detail is how much the surcharge for consumers will be during the construction phase. The Government have said that it will be a maximum of about £10 per year per consumer. That makes no sense, because it would yield about £6 billion. In the context of a project that the Government said would cost between £24 billion and £40 billion, plus financing costs, £6 billion is a nice little present, but it will not be much of a game-changer. We need to see much more clarity about what that cost will be, because if it is to make a big change to the cost of power from Sizewell C, it has to be quite a significant surcharge. We also need to include that in the price of power. At the moment, we are talking about £60 per megawatt-hour and completely forgetting the £6 billion, or however much it will be, that consumers will put in during the construction phase.

In terms of what happens if the plant has to close early, there is a big problem with decommissioning. Decommissioning funds work on the basis of discounted cash flow—in other words, a liability that falls due in 50 years. You have to have enough money in place now, plus the interest it would earn for 50 years, to pay off the debt. If the plant closes early, you do not earn all that income and you have to bring forward the process of decommissioning, so there will be a big hole in the decommissioning funds.

I remind members of the Committee that the decommissioning funds that we have in the UK have continually failed. Consumers have paid three or four times over, only for the money to disappear and not be available for decommissioning. Decommissioning is a very serious issue. It appears to disappear because of the belief that you can invest a sum of money at 2.5% or 3%, in real terms, for 100 years. That is not the case, I am afraid—not on the historical evidence.