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UK consults on RAB model to finance nuclear new build

  • United Kingdom
  • Energy and infrastructure - Nuclear


On 22 July 2018, the UK Government issued its consultation on a proposed new funding model for new nuclear power plants, as an alternative to the contracts for difference regime which supported EDF’s new nuclear power station at Hinkley Point C in Somerset. The RAB Model for Nuclear: Consultation on a RAB model for new nuclear projects, is available here, and closes on 14 October 2019. The Department for Business, Energy and Industrial Strategy (BEIS) is seeking views from stakeholders on a nuclear regulated asset based (RAB) model and its high-level design principles, including the risk-sharing arrangements.

The consultation follows announcements earlier this year foreshadowing the RAB model as a potential way to support nuclear new builds in the most cost efficient way. It also reinforces the government’s view that, as more and more existing nuclear and coal power plants come offline in the coming decades, and as the UK continues towards its ambitious world-leading net zero 2050 target, new nuclear generation will play a crucial role for low-carbon ‘firm’ (i.e., always available) power in 2050.

In essence, the RAB model seeks to de-risk nuclear new build projects, more than the alternatives (including contract for difference and direct investment), in turn reducing the cost of capital and attracting new investors (such as pension and insurance funds), and thereby reducing the cost to consumers.

RAB summary

The proposed model, the “Regulated Asset Base” or “RAB model” is well-known in the context of other UK monopoly infrastructure, but has not been used in nuclear or other electricity generation projects. The first and (to date) only time it has been used to support a single asset construction project was on the £4.2 billion Thames Tideway Tunnel (TTT) sewage project, in 2016. As BEIS notes, its implementation in the nuclear sector will require additional considerations, recognising that new build nuclear projects are greater in scale and face specific challenges that were not relevant to TTT.

The essence of the RAB model is that the company (the developer/operator) receives a licence from an economic regulator, following an extensive and structured due diligence process to ensure the project is viable and represents value for money. The licence grants the company the right to charge a regulated price to users (being licensed suppliers, who will pass the costs on to their customers) in exchange for provision of the infrastructure in question. The charge (the ‘allowed revenue’) is based on a set of ‘building blocks’ that enable the company to recover its efficient costs (initial capex and opex) plus a return on investment (subject to efficiency tests).


Source: BEIS, RAB Model for Nuclear Consultation, 22 July 2018

The charges (the allowed revenue) would be set by an independent regulator who will hold the company to account to ensure any expenditure is efficient and in the interest of users. A cornerstone of the RAB model is a duty on the regulator to ensure that the operator is able to finance its activities (the so-called “duty to finance”). This relative certainty of revenue, coupled with the fact that revenues can commence during the construction phase, is expected to significantly reduce the cost of capital (the “WACC” or investor return).

Nuclear new build projects have a very high cost of capital compared to other generation technologies (and indeed other infrastructure projects). Dieter Helm, in a 2018 paper advocating for the nuclear RAB model (here), suggested that the cost of capital is so dominant that it can explain as much as almost half the costs of a project. This is largely due to the significant initial capital outlay, the risk of construction delays and cost overruns (especially where the supply chain is under-developed), and the significant time-delay until revenue commences (even without unexpected delays).

By significantly reducing the cost of capital, the RAB model aims to thereby ultimately reduce the cost of nuclear for consumers. BEIS notes in the consultation that this is consistent with the National Audit Office’s report on Hinkley Point C (available here).

Nuclear RAB key features

In the consultation, BEIS identifies the following features which they believe are needed for a nuclear RAB model:

1. Government Support Package (GSP): Government protection for investors and consumers against specific remote, low probability but high impact risk events.

These might include (for instance):

  • risk of cost overruns above a remote threshold (a “funding cap”);
  • disruption to debt markets;
  • certain risks which are uninsurable (or not insurable at efficient prices); and
  • political risks.

Of particular focus will be the way the funding cap is set and the implications if it is exceeded (for instance, investors could fund the excess and have this reflected in higher charges, the government could fund taking commensurate ownership or governance rights, or the government could discontinue the project and make a discontinuation payment to investors).

2. Economic Regulatory Regime (ERR): A fair share of costs and risks between consumers and investors. This relates to the ‘building blocks’ summarised above.

Of particular focus will be:

  • The way the WACC (the cost of capital) is calculated and how/whether it will change over the life of the project (as it does with the TTT).
  • The depreciation model, being essentially the profile of how initial capital expenditure is recovered over the life of the project. The diagram below shows an illustrative “straight line” profile:

Source: BEIS, RAB Model for Nuclear Consultation, 22 July 2018

The allocation of construction cost risks (ie, the risk of construction cost overruns). BEIS currently favours the ‘ex ante’ cost settlement, whereby construction cost under/over-runs are assessed against a baseline which is set at the time the licence is granted, following extensive due diligence. The baseline would include provision for reasonable risk contingencies. The illustration below shows how this risk sharing approach could work, with amounts that “go on the RAB” meaning they are ultimately consumer-funded:

Source: BEIS, RAB Model for Nuclear Consultation, 22 July 2018

3. Regulator: An economic regulator to operate the ERR.

BEIS notes that no entity currently carries out this role in the nuclear sector, and so a new body or existing entity would need to be appointed to carry out this role. It does not however single out any candidates (it does not mention Ofgem, for instance). It does however note that other regulators in the nuclear sector, including the Environment Agencies (EA) and the Office of Nuclear Regulation (ONR), would retain their complete statutory independence.

BEIS also makes clear that the process of assessing and granting a nuclear RAB licence and associated Government Support Package would remain separate from other regulatory processes such as the Development Consent Order (DCO) and granting of the Nuclear Site Licence (NSL).

4. Revenue Stream: A route for funds to be raised from energy suppliers to support new nuclear projects, with the amount set through the ERR, during both the construction and operational phases.

Of particular focus will be:

  • The design of the intermediary body (akin to the Low Carbon Contracts Company (LCCC) in the context of CfD payments) who would be responsible for collecting payments from suppliers and making RAB payments to nuclear operators. The insolvency-remoteness of such entity, and the credit support arrangements it will have in place with suppliers, will be scrutinised by investors.
  • The way the allowed revenues are received by the operator. For instance, BEIS has indicated that it could be a variable £/MWh price (output based) or that it could consider alternative models like the capacity based payments which apply to the capacity market.

    Under one model proposed, the operator would sell its power on the wholesale market and receive a top-up to the extent this is less than the allowed revenues, and could be required to account for revenues in excess of the allowed revenues (a mechanism that would produce a similar result to the CfD strike price).

    BEIS has also indicated that it will expect operators to be incentivised to behave commercially during operations to maximise market revenues, including being incentivised to respond to the pattern of energy demand (for example, by carrying out refuelling and planned maintenance in low-demand periods).

The consultation at this stage only sets out high level design principles, so much of it is still open to change following stakeholder feedback and further consultations. Any new policy will require primary legislation to implement. The process of developing and enacting such policy is likely to take at least 18 months.

If you would like to talk to a member of our specialist energy or nuclear team to discuss this consultation or any other opportunities or challenges in the nuclear sector, please contact the team below.