Breakingviews - UK's nuclear push may hand investors a cushy deal
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 begun 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, opens new tab 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, opens new tab 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 loathe 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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