Collaboration for UK nuclear – does a Regulated Asset Base model hold the key? By Vince Zabielski

Many, including EDF energy, have pushed for a Regulated Asset Base (RAB) funding model to be put in place at the nuclear new-build plant, Sizewell C, and across the industry – bringing the funding approach firmly into the spotlight for the energy sector. RAB funding has enjoyed success when used for funding notable UK infrastructure projects, such as the Thames Tideway ‘super-sewer,’ but critics claim its use would just pass costs onto end-users. For a sector currently faced with debate over its funding, with Sizewell C near collapse, its future is up for grabs.

RAB explained
In short, the RAB model passes the costs of developing a project through to the end users, allowing Governments to encourage private investment in large public infrastructure projects by ensuring that investors will not lose their investment. As such, the overall costs of the project can be lower, as interest rates on borrowing decline in line with risk. But how much lower? EDF Energy has stated that the cost of finance represents a staggering two-thirds of the Hinkley Point C price. Under an RAB model, the risk for investors would be reduced to the point the cost of financing would be on par with the Government’s cost of borrowing.

For nuclear plants and other energy sector infrastructure projects this makes RAB a perfect fit. The end cost is divided between so many consumers that the small addition to their energy bill should not be felt by most.

So, what’s the catch?
The key problem with RAB funding in the energy sector, and nuclear in particular, is that the development of new build projects is often plagued with cost overruns, delays and technical issues. For example, almost every major nuclear project in the West has been plagued by delays and cost overruns.

So, should RAB funding be used for one of these catastrophically-delayed projects, the consumer would suffer directly from the cost-overrun. Under this scenario, confidence in using the RAB model for future projects would be shaken, threatening application of the model on future new-build projects. The application of the RAB model for new nuclear cannot simply be a ‘blank cheque’ to the developer, but must have a comprehensive suite of checks and balances built into it. This is a formidable, but not impossible, task.

Projects must be built on-time and on-budget, and this can be done by identifying and eliminating risks from the outset. The developer must be focused entirely on delivering a safe and reliable power plant but with minimal delays or cost increases.

As with all things, this is easier said than done. A key first consideration is using a ‘nth-of-a-kind’ design that has been successfully built to plan elsewhere. Cutting-edge technology might promise the world, but until suppliers have built and installed it elsewhere, it is an unknown quantity that introduces risk.

Similarly, when choosing suppliers, firms should opt for those that are just as much a known quantity as their tried-and-tested design. Suppliers with a recent, successful track record have shown that they can work to budget and timescale with the current team they have. If they performed well last year, then they will likely produce the same results for you this year.

Equally, if a supplier has a successful track record, firms should let them do the job as well as they know how. Asking a reactor vendor to alter their methods, for example, undermines the entire purpose of selecting a vendor with a proven history of success by forcing them into untested waters.

Finally, it is important to prevent risks being pushed onto the supplier that they cannot control. This simply serves to hide a growing risk, as each group assumes it is the responsibility of another. Risks must be identified early and mitigated quickly, and the skeleton in the closet of the energy sector – especially when it comes to nuclear builds – is that this risk-management has failed in recent decades. RAB funding won’t address this, and consumers will bear the cost if the issue is left unaddressed.

In the worst case, the RAB model may even exacerbate sub-par project planning and risk management, as developers that can pass costs on to end-users would be less concerned about overruns – it’s not their finances on the line. Under an underregulated RAB model, the consumer winds up footing the bill no matter how incompetently the developer proceeds.

In similar systems abroad, checks and balances on what can be placed in the RAB that serve to mitigate this problem. For example, the ‘rate base recovery’ model used by some US jurisdictions also passes on the costs of new infrastructure to the end-user. However, the difference between this and direct passthrough RAB funding is that an independent prudency board evaluates all costs, and any imprudent spending cannot be passed on, encouraging the developer to mitigate risk to prevent costly overruns.

The way forward
To develop a robust nuclear RAB financing model that is adaptable to wider adoption by the energy sector, we must first establish a regulatory framework to clearly set out the legal and regulatory underpinnings of RAB models specific to the nuclear sector.

The regulations should define the levels of risk that exclude a project from consideration for RAB funding. Developers must demonstrate that they have a viable, buildable and bankable project that has identified and mitigated all major risks. Project spending should be demonstrated as necessary and prudent before it is added to the RAB, ideally even before it is spent.

This regulatory framework must address the strength of the management systems and incentive frameworks for the project; the self-assessment of the project developer’s systems and programmes; and the capacity for these programs to self-improve over time.

Lastly, an independent expert panel could serve the same function as the US-style prudency boards, but with a more active real-time role in the project. There is a great potential for the RAB model to facilitate cost-effective public infrastructure projects in the energy sector, but to win consumer confidence it must – in its fundamental design – address the chronic nuclear sector problems of cost-overruns and poor project risk management.

Developing a new RAB model specific to the nuclear sector that includes not only robust protections for the investors, but also for consumers, could be a giant first step in funding reform for the energy sector as a whole. The Government should act quickly, as we are running out of time to provide reliable carbon-free electricity to the national grid.

Pillsbury Winthrop Shaw Pittman
Vince Zabielski is Senior Lawyer at Pillsbury Winthrop Shaw Pittman, a leading international law firm with offices around the world and a particular focus on the energy & natural resources, financial services, real estate & construction, and technology sectors. Recognised by Financial Times as one of the most innovative law firms, Pillsbury and its lawyers are highly regarded for their forward-thinking approach, their enthusiasm for collaborating across disciplines and their unsurpassed commercial awareness.

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