Energy & Infrastructure Insight - Issue 2

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Page 13 of 23

14 UK GOVERNMENT CONSULTS ON RAB MODEL FOR SUPPORTING NEW NUCLEAR BUILD IN THE LAST EDITION OF OUR ENERGY & INFRASTRUCTURE INSIGHT, WE DISCUSSED THE UK'S NEW-BUILD NUCLEAR PROGRAM AND THE VARIOUS CHALLENGES IT IS FACING. IN PARTICULAR, WE NOTED THE ANTICIPATED PUBLICATION OF BOTH AN ENERGY WHITE PAPER AND A CONSULTATION ASSESSING THE REGULATED ASSET BASE (RAB) MODEL AS A POTENTIAL ALTERNATIVE TO THE FIT CFD MODEL FOR FINANCING UK NUCLEAR NEW-BUILD. The anticipated Energy White Paper has yet to appear. The Department of Business, Energy & Industrial Strategy (BEIS) has, however, published its Consultation (Department of Business, Energy & Industrial Strategy, RAB Model for Nuclear – Consultation) on a RAB model for new-build nuclear projects and sought industry's views on the same. Accordingly, the Government has proposed a bespoke nuclear RAB model, based on the banked Thames Tideway Model, but with nuclear-specific adaptations. The Government's fundamental objective is to de-risk new- build nuclear projects so that they can secure an investment grade rating to support equity financing from institutional infrastructure investors (such as pension funds) and debt financing in the form of low-cost, long-term 'nuclear bonds'. To understand how this de-risking might be achieved one first needs to understand the RAB Model, and then how it might be applied to nuclear. THE EVOLUTION OF THE RAB MODEL FOR NUCLEAR NEW BUILD The RAB Model is a form of economic regulation which is already widely used for U.K. monopoly infrastructure assets (water, gas and electricity networks). Under this model, the Project Company receives a license to build, finance, operate and maintain an asset and charges users for the cost of doing so. As the Project Company incurs development and construction costs, the Project Company's expenditure is included in the RAB subject to an efficiency test (which assesses whether those costs were efficiently incurred). Based on the RAB, the Regulator then determines the level of charges which the Project Company can pass to end-users (consumers). These charges are also are adjusted periodically to reflect changes in circumstances, including inflation. In the Thames Tideway Tunnel project, the U.K. Government recognized that the high capex requirements, high complexity and consequent major construction risks meant the private sector would not finance that project at a sufficiently low cost without greater public/private risk sharing. In these respects, new-build nuclear bears many similarities to Thames Tideway. When developing the Nuclear RAB Model, BEIS used the Thames Tideway RAB model as a starting point but proposed certain modifications—primarily to reflect the even greater construction costs and risks associated with new-build nuclear.

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