BREAKINGVIEWS-UK’s nuclear push may hand investors a cushy deal

By Yawen Chen

LONDON, July 18 (Reuters Breakingviews) - Brookfield’s BAM.TO reported plan to take a 25% stake in the Sizewell C nuclear project would mark a big vote of confidence in Britain’s atomic energy revival. But while it suggests that private capital could play a role in funding the country’s energy security, taxpayers are likely to take much of the risk.

The Canadian giant is no stranger to infrastructure, but nuclear power comes with high upfront costs, delays and cost overruns. Sizewell C could cost up to 40 billion pounds ($54 billion) to build, the Financial Times says, up from the latest government estimate of 20 billion pounds.

Britain’s track record is far from reassuring. Take Hinkley Point C, which was majority owned by EDF. Construction began in 2017 and was originally expected to be completed in 2025 and cost 18 billion pounds. It is now unlikely to be operational before 2030, with the overall cost revised to up to 35 billion pounds in 2015 prices. EDF had little protection against those delays as the chief backing it got from the government came from energy price commitments, which kick in when the plant is running.

Bringing in private investors may therefore require a new approach. That’s why the government passed legislation in 2022 so that the Sizewell C plant will be financed via a model seen in utilities like water companies or energy networks, dubbed the regulated asset base (RAB). That model fixes an allowed return to investors by passing on costs to consumers. Crucially, it allows a project to generate revenue from the moment construction begins, instead of only when it becomes operational.

The closest precedent is probably London’s Thames Tideway Tunnel, which funded the construction of a new sewer. There, consumer bills are charged enough to cover a blended return to debt and equity investors, or weighted average cost of capital (WACC), of 2.5% over inflation while the project is under construction. Given the risks in nuclear, industry experts reckon a WACC of 4% above inflation is more likely, equivalent to a nominal rate of 6%. And, as with Thames Tideway, nuclear plants will likely require a commitment from the government for it to compensate investors if cost overruns exceed a certain threshold.

That’s means the RAB model could easily end up becoming pretty expensive. The National Audit Office’s modelling suggests that the WACC of a hypothetical nuclear project could rise to 9% if expenses were to come over budget by between 75% and 100%. As Hinkley Point showed, that’s quite plausible.

UK Prime Minister Keir Starmer may not have much choice. The government says it needs new nuclear power stations to help its transition to net zero and ensure energy security threatened by Russia. And Chancellor Rachel Reeves will be loath to fund them all on balance sheet, given the country’s fiscal state. Brookfield’s interest shows that institutional investors may be able to step up. But while the financing looks “private”, the real backstop is public.

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CONTEXT NEWS

The UK government is closing in on a final deal to secure private investment into the Sizewell C nuclear power project. Its 84% stake in the development is expected to be diluted to around 47.5%, with Canadian investor Brookfield Asset Management, British energy supplier Centrica and French energy giant EDF holding the remainder, the Financial Times reported on July 9 citing people with knowledge of the ongoing negotiations.

Brookfield is likely to take a 25% stake, with Centrica buying 15%, the report said.

France’s state-owned EDF, which is leading the development of the site, said on July 8 it would reduce its holdings to 12.5%.

UK energy secretary Ed Miliband said in June that Sizewell C would be the beginning of a “golden age” for nuclear in Britain. He also said the project would be “majority public funded”. The government has committed 14.2 billion pounds.