Energy & Infrastructure Insight - Issue 2

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FOUR "KEY" FEATURES OF NUCLEAR RAB MODEL The Government has identified four specific features that would be required to de-risk new-build nuclear and therefore substantially reduce the cost of capital: One A Government Support Package (GSP) to protect investors and consumers against certain low probability but high impact risk events deemed otherwise 'unbankable'. Specifically, the risks that the GSP would protect against include: i. Remote Construction Cost Overruns – through: i. Contingent Equity Support for funding cost overruns above a pre-determined Funding Cap; and ii. Discontinuation Payment to cover all senior debt (and potentially some equity) where the Funding Cap is exceeded and neither the equity investors nor the Government wish to fund further cost overruns; ii. Debt Market Disruption – through a temporary Liquidity Facility; iii. Non-political Uninsurable Risks – whereby the Government would act as an 'Insurer of Last Resort'; and iv. Political Risks – through a mechanism still to be clarified. The quid pro quo of these protections is that returns to shareholders would be capped, and in the event of certain delays/costs overruns, even suspended. Two An Economic Regulatory Regime (ERR) to ensure the fair sharing of cost and risk between investors and consumers. Based on certain "building blocks" (including return on capital, depreciation and operating costs), the Regulator would determine the Allowed Revenue that would enable the Project Company to recover its costs and generate a return on capital to finance those costs. In a deviation from the classical RAB model, the Project Company would be entitled to recover all of its forecast Project Costs according to a base-case based on global benchmarking and due diligence undertaken prior to grant of the RAB licence (the so-called 'ex-ante' approach). This contrasts with the classical 'ex-post' approach described above whereby Project Costs are only included in the RAB if they have been efficiently incurred. Importantly, the Project Company would also receive Allowed Revenue from 'Day One' of construction. This should significantly reduce financing costs, given it would allow the Project Company to start servicing its debt from the outset rather than incur substantial amounts of interest on loans that would otherwise be fully outstanding for the duration of the 5- 10 year construction period. Finally, up to a pre-determined Funding Cap, a certain percentage of cost overruns will be shared between consumers and than equity investors. A diagram showing the alignment between capital costs, RAB build-up and financing sources is set out below: Image source: BEIS RAB Model for Nuclear - Consultation on a RAB Model for new nuclear projects, July 2019 Three A new, independent economic Regulator, to regulate the ERR and be responsible for protecting the interests of consumers, while having regard to the ability of the Project Company to raise finance. Four A variable Revenue Stream mechanism, providing a £/MWh price (calculated periodically by reference to the Allowed Revenue), allowing for adjustment by the Regulator as circumstances change, and through which funds can be raised from electricity suppliers (and ultimately electricity consumers). 15 Capital Costs Remote Outturn Cost Remote Cost Overrun Funding Cap Baseline RAB Build-up Financing Cost Overrun Risk Contingency Project Costs Potential additional Regulatory Settlement Investors or HMG equity or discontinuation [X%] excluded [X%] goes on RAB Capital costs logged on to RAB up to baseline 100% financed by equity Debt and equity financed Debt and equity financed

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