The UK government has set an ambitious target to quadruple nuclear capacity from 6 GW to 24 GW. This would supply a quarter of our electricity in 2050.
To meet this goal, the UK needs to address challenges hindering the successful delivery of nuclear new build programmes. One of the challenges is funding and financing. It is difficult to fund and attract financing into a sector where projects can take over a decade to build and cost tens of billions of pounds. We estimate that, before interest charges, the capital costs to meet the 2050 target could be over £100 billion.
As construction at nuclear power station Hinkley Point C progresses, the UK government is finalising negotiations on the regulated asset base (RAB) framework for funding the next nuclear project, Sizewell C. It is the first time this funding model will be used in the UK nuclear sector. By using RAB, the government aims to attract new pools of private investors, such as pension and insurance funds, to finance UK nuclear projects.
To deliver the 19 GW of new nuclear capacity to meet the government’s ambition will involve a combination of large-scale and small modular reactors (SMRs). This is the mandate of the newly established government body, Great British Nuclear (GBN). GBN announced a shortlist of six bidders in its competition to secure Small Modular Reactor (SMR) technology for the UK programme on 2 October 2023.
We believe that greater certainty and increasing government participation in the sector are crucial to attract private investment into UK nuclear. This can be achieved by:
greater clarity from government on funding support. This means increased levels of direct government funding initially combined with a vision and clear roadmap on how industry stakeholders can reach the targeted 24 GW capacity. It would give investors more clarity and help build trust and confidence in the sector
streamlining and more efficient RAB allocation. This means support can be allocated to multiple projects and technologies in parallel. It also needs to be an enduring process that is robust and repeatable. Instead of sequencing RAB negotiations for subsequent projects, we could use elements of the cluster sequencing process for carbon capture and storage to have a more streamlined process for allocating RAB. We suggest a high-level framework of how this could work.
In this article we explore the actions needed to improve funding and financing of nuclear projects beyond Sizewell C.
Nuclear in the UK energy mix
The UK will need more home-grown, affordable and low-carbon electricity by 2050.
UK electricity consumption is projected to nearly double from current levels by 2050 as electrification of transport and heat accelerates, according to the Future of Energy Scenarios 20231.
Renewable power is expected to meet most of the increase in future electricity demand, but electricity from non-intermittent sources will be needed as well.
Nuclear can play this role by providing large volumes of low-carbon baseload electricity generation, while helping create a more balanced and diversified electricity system.
The war in Ukraine has pushed energy security and affordability to the forefront. The British energy security strategy makes it clear that developing additional nuclear power capacity is central to increasing energy security while decarbonising the economy. The strategy pledges strong government support and leadership to accelerate civil nuclear deployment in the UK. It also sets the ambitious target of increasing nuclear generation capacity to 24 GW to meet up to a quarter of projected electricity demand by 2050.
Building over 19 GW of nuclear capacity
Great British Nuclear was set up in spring 2023 to help achieve the 2050 capacity target.
When Hinkley Point C becomes operational, and if the review to extend the life of Sizewell B by another 20 years is successful, the UK will still have a nuclear capacity shortfall of over 19 GW to reach the target of 24 GW by 2050 (see figure 1).
The plan to achieve this ambitious target is not yet known, but SMRs are set to become an important part of the future UK energy mix. A Rolls-Royce led consortium announced it could build up to 10 SMRs by 2035 and a total of 16 units in the future. GBN is proceeding with its competition to secure SMR technology for the UK programme and the announcement of six shortlisted bidders is a key milestone.
Figure 1. Current and future nuclear capacity in the UK
Note: If the review to extend the operational life of the Sizewell B power station is successful, it is expected to continue to provide 1.3 GW capacity until 2055.
The cost of the new UK nuclear fleet
It is hard to estimate the cost of building a nuclear power station due to construction delays and budget overruns being commonplace.
We estimate that over £100 billion (2022 prices) is needed to deliver a 19 GW nuclear new build programme, based on overnight costs (the cost without interest).
However, the actual cost to deliver the programme will be significantly higher after inflation and the cost of financing. Interest costs often make up a substantial part of the final cost of building a nuclear plant as they are incurred over long construction periods.
Both creditors and equity investors typically expect higher returns for funding nuclear over renewable projects due to associated complexity, scale and market illiquidity.
For example, Hinkley Point C had a Weighted Average Cost of Capital (WACC) of just under 10 per cent in the Contract for Difference (CfD) regime. Whereas the International Energy Agency estimated that the WACC for offshore wind is between 4 and 7 per cent. It is important to note that developers are not protected from construction risks in the CfD regime, and the cost of capital will have evolved for both nuclear and renewables in the past year due to rising interest rates.
The cost of finance is likely to depend on the technology deployed (SMRs versus large scale) and how the proposed RAB funding model is applied.
The technologies pursued and opportunities to learn can also help improve the capital costs of nuclear projects.
Focusing on a single or limited number of reactor designs could improve construction delivery performance.
Series production of nuclear reactors can also make manufacturing more efficient.
For example, the unique characteristics of SMRs can help manage their capital costs better compared to large reactors. Projected capital costs vary significantly depending on parameters such as reactor size, the maturity of the reactor design, build time, opportunities for modularisation, the level of component standardisation, production and assembly methods3.
The following SMR features can help manage costs:
manufacturing a higher proportion of components in a factory rather than on site. A controlled environment helps increase the quality of the components, minimise weather-related disruptions (reducing the probability of component failure and human error) and improve safety of construction
standardising, streamlining and simplifying design. The learning effect helps increase efficiency in construction, operation and decommissioning as well as reduce testing and maintenance activities
These features and economies of series production through multi-unit plants could help overcome the lack of economies of scale once the technology and construction methods are proven with nth of a kind reactors.
Funding UK nuclear: from CfD to RAB
Private financing of nuclear new build projects in deregulated electricity markets is fraught with challenges.
There are not many institutions with large enough balance sheets and the ability to take on long-term projects needed for nuclear new build. Development expenditure (DEVEX) can be substantial. And with the risk of delivery and cost overruns, policy risks as well as uncertain returns divided between a small number of investors, each can require a high premium in return.
Indeed, the cost of financing can reach up to 67 per cent of the levelised cost of electricity of a nuclear power plant, according to the OECD Nuclear Energy Agency – although RAB and similar models are expected to reduce it significantly4. Hinkley Point C’s CfD has been criticised for its high projected overall cost, driven largely by the high cost of capital, especially considering the steady fall in CfD strike prices for renewable technologies since the Hinkley Point C CfD was signed (although renewable costs are now beginning to rise).
The cancellation of the Moorside and Wylfa Newydd nuclear projects made it clear that if the UK wants to expand its nuclear fleet, we need more state participation and a new approach to sharing development and construction risks.
This led the UK government to introduce RAB as the financing model for future nuclear new build for the first time in the UK. Previously the model was used to attract private investment into public projects by offering fixed, long-term returns on investment for developers. RAB was used for the successful financing of the Thames Tideway Tunnel and Heathrow Airport’s Terminal 5, although both projects are significantly smaller in scale than a nuclear power plant.
In RAB for nuclear new build, consumers would start to pay the developer through electricity bills from the start of construction and share the risk of cost overruns.
In the case of high risk and high impact events, taxpayers will also take on a share of these risks5.
The reduction of risk for the individual investor should provide the potential to lower the financing costs of the project, and ultimately help reduce consumer electricity bills. Given the timescales of nuclear power, the cost of financing has a greater impact on consumer electricity bills and a lower cost of capital can drive significant benefits.
The future financial regulator is expected to set incentives for efficient construction and operation of the project while also ensuring that prices for consumers are not set too high. This would ensure the fair sharing of cost and risk between investors and consumers.
Funding and financing challenges
Nuclear new build projects require vast amounts of capital.
Sizewell C is projected to cost more than £20 billion. The government confirmed it will be eligible for RAB financing and the Development Consent Order for the plant was issued in summer 2022. It has also committed £679 million to the project - this is the first time in three decades the government is directly investing in the sector. Through this investment, the government will own a 50 per cent stake in the project along with its developer. It hopes the rest of the capital will be raised from a range of investors.
Even if funding and financing for Sizewell C are raised, and the construction progresses according to plan, a vast amount of capital is needed to meet the 24 GW capacity target by 2050.
We see several potential challenges to the long-term funding and financing of the sector. These include scaling and transferring RAB, and attracting investment.
Scaling and transferring RAB
Discussions between the government and EDF are being finalised to establish the RAB for Sizewell C. These negotiations have taken a considerable amount of time and effort on both sides because of the risks involved for all parties and the volume of investment required.
EDF will use European Pressurised Reactor technology and much of the same delivery capability, experience and supply chain for Sizewell C that had been created for Hinkley Point C.
If RAB proves a successful financing model, it could be used to develop further large-scale reactors across the UK and play a role in the SMR programme too.
With appetite to build nuclear power plants beyond Sizewell C currently uncertain, new developers will need to enter the UK market to fill the gap. Therefore, several questions arise:
Does the UK government have the capability to run multiple RAB negotiations in parallel? Sequencing the negotiations on projects could hinder delivering the capacity on time for 2050. How can the negotiations on the next project be made more efficient? Can the government make the process more efficient and focus resources on projects that have a higher chance of succeeding?
Is there an alternative, potentially more competitive way, to negotiate, allocate or auction RAB to several projects at the same time?
How would risk premiums work in more streamlined processes? Safety records, reputation and ability to deliver technology and keep the project on track are crucial in the nuclear industry. Without such guarantees, investors may demand larger premiums.
Can/should RAB be applied to technologies such as small and advanced modular reactors? How does the technology proposition and new delivery methodology change the terms and conditions of the RAB that is currently being negotiated for Sizewell C? Is the same level of risk transfer required? SMRs need less capital and it may be easier to raise debt financing. The assembly and manufacturing methods of some designs could make their construction more predictable, making it easier to access new insurance products. An evolving RAB or government support package (GSP) is envisaged for SMRs. As more projects are delivered and a track record is established, government support – necessary to bring down capital costs initially – is likely to be gradually reduced or stopped altogether (similar to offshore wind auctions).
Can debt capital markets successfully support the rollout of a new nuclear fleet under the RAB framework? The level of debt issuance needed may stress the existing debt market capacity given the high capital needed for nuclear projects. Market players would need confidence in the UK economic regulator overseeing RAB to participate in debt issuance and support projects. HM Treasury is likely to need an off balance sheet classification decision to allow it.
For the first time, the government is also looking to enable large, institutional financiers with longer-term investment horizons to invest in illiquid asset classes, including nuclear infrastructure. The need to fund the energy transition and support the UK economy following the COVID-19 pandemic make this approach even more compelling. To this end, the Financial Conduct Authority finalised the rules for a new category of open-ended authorised funds, the Long-Term Asset Fund (LTAF), in October 2021 to allow a wider range of investors to invest in long-term, illiquid assets.
Investors interested in nuclear will need to navigate challenges including:
Specific investment mandates. A small number of funds include nuclear in their list of prohibited investment types, making it impossible for them to invest in nuclear. Other funds need to consider carefully how nuclear fits into their environmental, social and governance (ESG) frameworks for investing.
Evaluation and pricing of nuclear risk. Nuclear projects are complex and need the understanding of a wide range of risk factors. Both UK pension and insurance funds are new to investing in this area. Negative perceptions of nuclear safety – especially those highlighted by the media, questions on its sustainability, spiralling costs and construction delays will increase the perception of risk, adding to the difficulties of assessing and pricing it.
New financing environment. Financial conditions have tightened over recent months as central banks, including the Bank of England (BoE), have raised interest rates to combat multi-decade high inflation. Interest rates could rise further, which, alongside quantitative tightening by the BoE, will mean tighter financing conditions will persist for some time to come.
Increasing attractiveness of nuclear to investors
Addressing the challenges to funding and financing could help to boost investor confidence. The government needs to provide more clarity on the future of the industry, including funding support.
The government should take a clearer stand and scale up funding support significantly to revive the UK nuclear industry, as also referenced by the Mission Zero report and the Spring Budget 2023.
This support must take several forms:
increase equity funding of future nuclear projects – in line with the new Subsidy Control Regime. The government already announced it would invest £679 million in the development phase of the Sizewell C project, making it a 50 per cent shareholder in the development company. Initially, GBN will focus on completing its SMR technology competition and co-funding the winning technology or technologies. To increase market confidence, the government needs to consider how it will build on its investment for future projects and provide more clarity on funding SMRs
provide specific risk protection, if necessary
provide grants to stimulate technology development and innovation. This is in addition to existing grants such as the £385 million Advanced Nuclear Fund (for small and advanced modular reactors), the £120 million Future Nuclear Enabling Fund, the £75 million Nuclear Fuel Fund (to preserve the UK front-end nuclear fuel cycle capability) or the over £400 million that has been pledged for nuclear fusion
provide clarity on approaches to attracting new developers and operators as well as UK site strategy
create an integrated nuclear programme/pathway to show how government policy will support the delivery of 24 GW by 2050. The last strategy was published in 2013, followed by the nuclear sector deal five years later that was refreshed in 2021. Given the UK’s new capacity target, these need to be updated to provide the policy certainty and transparency necessary to build trust and confidence among investors.
It is key that, with the establishment of GBN, an integrated nuclear programme is created to bring clarity in several areas, including:
a pipeline of nuclear projects. How achievable is the 24 GW ambition?
the balance between tried-and-tested designs and new ones (such as SMRs versus advanced modular reactors and fusion). Choosing mature, standard designs, along with experienced project development, management and construction teams, and their established supply chains can help implement lessons learnt, reduce costs and risks, and make investors more comfortable about investing in nuclear projects
the balance between large scale and modular reactors in the target capacity
the government investing in the development phase of Sizewell C. Will this model be replicated in future development projects (either large scale or modular)?
How to make RAB or other financing models more easily transferable to other projects and technologies?
Given the effort it took for the government to negotiate the RAB framework for Sizewell C, it needs to establish a more streamlined and competitive process to allocate RAB funding to multiple projects at the same time.
Elements of cluster sequencing for carbon capture and storage (CCS) could be used to design a process to allocate funding to nuclear new build projects.
Figure 2 shows how this sequencing process could look. Track 1 and Track 2 could target to deliver a specific capacity (for example 5 GW each) by a specific date (for example by 2035 and 2040, respectively).
Track 1 could prioritise projects with higher technology maturity levels to deliver a specific carbon budget target, whereas Track 2 could take a longer-term view and support less mature technologies that have wider system benefits. These could include dispatchability, higher temperature heat and affordable hydrogen production.
Track 2 could be adjusted based on learnings from Track 1 and subsequent Tracks can be run to deliver further capacity in the future if the process is successful.
The government may also want to continue to engage with companies that were unsuccessful in Track 1 leading up to Track 2. This could include providing feedback on why the application was unsuccessful, highlighting additional areas for improvement and encouraging continued engagement. This could ensure the applicant builds on its submission and is better positioned for the next Track rather than being discouraged.
Each Track could start with the publication of a range of documents to bring clarity to the process:
entry criteria guidance – covering technology readiness level (mature versus novel technology); progress on design, licensing and regulatory engagement; progress on development consents, permits and stakeholder engagement; cost estimates; technical expertise; potential socioeconomic benefits and procedures for managing specific risks. The criteria need to be set appropriately to attract the right balance of feasible projects that will deliver the target in line with the UK’s decarbonisation ambitions and desired electricity mix at the proposed date
roadmap – this could cover the submission deadline, the timeline and the various milestones for the process
parameters for RAB negotiations – this could cover the level of government funding (DEVEX and CAPEX, government support package and revenue support) in sufficient detail to give applicants enough clarity on the funding available before they enter the process.
Communicating the entry criteria, the roadmap and the parameters for RAB negotiations could give project developers and investors clarity and confidence in the process. Announcing the shortlisted projects on time, giving regular updates on RAB negotiations and concluding the negotiations within the timeframe specified in the roadmap would strengthen confidence and reduce regulatory uncertainty in the nuclear sector.
A prerequisite to setting Track negotiations would be for the government to have a site strategy.
Figure 2. Project sequencing for nuclear new build
Addressing funding and financing barriers will be key to delivering new build nuclear projects successfully in the UK. While progress is being made to innovate nuclear funding mechanisms, attracting financing at such a large scale will inevitably be challenging and it will be necessary to target all pools of capital and capital markets. Reducing regulatory uncertainty and providing clarity on future processes will be essential to build confidence and trust among investors.
National Grid, Future of Energy Scenarios 2023 (FES 2023), Data workbook, EC.03.
According to FES 2023, Data workbook ES.05-08, nuclear output in 2022 was 41 TWh, which is equivalent to 14 per cent of the total UK electricity output of 294 TWh that year.
These risks include the remote risk of construction cost overruns (support for funding cost overruns above a pre-determined funding cap), debt market disruption, non-political uninsurable risk (the government acting as an insurer of last resort) and political risk (yet to be defined).
