In this article, IF volunteer Sol Woodroffe, considers the intergenerational fairness of the government’s financing models for Hinkley Point C and Sizewell C.
Building a nuclear power station: an intergenerational decision
Building a nuclear reactor is very expensive. In fact, the financing costs are the most expensive part. According to the World Nuclear Association, capital costs for new nuclear power stations account for at least 60% of their Levelised Cost of Electricity (LCOE). The LCOE is the total cost to build and operate a power plant over its lifetime divided by the total electricity output dispatched from the plant over that period. This means that when we talk about the price of nuclear, we are really talking about the price of borrowing to cover the upfront costs.
Specifically, when determining whether a government should invest in nuclear power, the cost depends on how much the government values cheap electricity for future generations. The decision to build a nuclear power station is a truly intergenerational one. This graph from the World Nuclear Association highlights how different discount rates affect the value for money of nuclear energy compared with other energy sources:
This shows that the relative capital intensity of building a nuclear power station means that the more we discount future generations, the less worth it nuclear energy seems from today’s standpoint.
The discount rate the government chooses to use on public infrastructure projects is, to some extent, determined by interest rates. But it is also an ethical choice about how much the government cares about future generations. The lower the value placed on future generations, the higher the discount rate used, and so the more expensive nuclear energy seems.
On the face of it, the UK government’s decision to build two enormous nuclear reactors should be a source of optimism for young people. Nuclear energy is one of the safest and cleanest forms of energy. In many parts of the world, it is also one of the cheapest. Decarbonisation, energy security and industrial strategy are all part of the motivation for building these reactors. Many of the UK’s current reactors were built in the 70s and 80s and will retire by the early 2030s. Without new capacity, the UK will lose a major source of low carbon power. Arguably, it’s a sign of the UK government daring to invest for future generations. And yet, a closer look at the financing of the two reactors tells a different story…
What are Hinkley Point C and Sizewell C
Hinkley Point C is the first new UK nuclear station in a generation. It uses the European Pressurised Reactor (EPR) design and, when complete, will be one of the largest nuclear power stations in Europe. According to EDF Energy, each of its two reactors will produce enough electricity to supply roughly 7% of the UK’s electricity demand. Construction was authorised by Theresa May’s government in September 2016. The original target was to have it running by 2025, but EDF now forecasts first power no earlier than 2029–2031.
Sizewell C is a close imitation of Hinkley planned for the Suffolk coast. The UK government approved the development in July 2022 and committed public equity financing in November 2022. Because the Hinkley supply chain and licensing work already existed, ministers argued that a second EPR project would reduce design and regulatory costs. Sizewell C will have enough capacity to power around six million homes when operating.
What went wrong and why?
Both projects are running well behind their initial projected timelines, and both have run worryingly over budget. These two things are interrelated. Long construction periods push up financing costs. Again, the cost of finance here is all-important. Over a long construction period, during which there are no revenue streams from the project, the interest on funds borrowed can compound into very significant amounts (World Nuclear Association, 2023).
HPC’s original cost estimate was about £18 billion but now is projected to a whopping £31–£35 billion. Moreover, our research on the “nuclear premium” estimated the additional cost of power from Hinkley Point C for its 35-year initial contract period, compared to onshore wind and solar power, would be £31.2 billion and £39.9 billion respectively. Sizewell C’s projected cost has ballooned from an initial estimate of around £20 billion to £38 billion (in 2025 pricing), nearly doubling the original figure.
The cause of these cost overruns is clear. EDF has complained that the UK lacks the building infrastructure and productive capacity for such a massive project. This kind of capacity is built up over time and requires beginning with smaller projects and then gradually scaling up. To some extent, the government has acknowledged this mistake and so began to invest in the small modular reactor programme in the UK, but from the perspective of the taxpayer, it all seems too little too late.
Who is paying for these power station?
Ultimately, the UK taxpayer is paying for both power stations. But from an intergenerational fairness perspective, the key questions are which taxpayers and when. The government has an option to borrow and shield the current taxpaying generation from footing the bill, but rising UK borrowing costs and increasingly jittery bond markets mean this would come at a serious cost.
Hinkley Point: paid for by Gen Z and Gen Alpha
The financing model for each power station is very different. For Hinkley point, the government has agreed on a Contract for Difference. This means that private companies must cover the upfront costs, with the knowledge that they receive a guaranteed price for their energy when the costs are finished.
EDF, the French national energy company, and CGN, the Chinese national energy company, shouldered much of the initial capital cost. In return, the government guarantees a price of £92.50/MWh (in 2012 £) for 35 years of output.
There were serious advantages to this model from a public financing perspective. The main advantage was that the investors took on the construction-cost risk: the UK taxpayer has arguably not been punished because Hinkley Point’s financial costs have so enormously overrun.
Nonetheless, this model ultimately kicks the financial burden down the road. Ultimately, today’s Gen-Z and Gen Alpha will be made to pay for this deal.
This is because the guaranteed price will likely be a rip-off. The average price of energy today in terms of 2012 pounds is £50–55/MWh. The falling price of clean energy alternatives means that we should expect the real price of energy to fall over the next few decades. Therefore, it seems highly likely that the fixed price will be a seriously uncompetitive rate for future UK consumers.
Sizewell C: a fairer distribution of costs
The financing of Sizewell distributes the financing costs more fairly between generations. To pay for the reactor, the government switched to a Regulated Asset Base (RAB) model. This means that consumers begin contributing to the project’s financing through small charges on their energy bills while the plant is still under construction, rather than waiting until it generates electricity. The model provides investors with a regulated return during construction, reducing their exposure to financing risk.
The RAB model allows investors to share construction and operational risks with consumers, which in theory lowers the cost of capital. Since capital costs make up the majority of nuclear project expenses, this could make Sizewell C substantially cheaper overall, if delivered as planned.
The key drawback is that taxpayers and consumers shoulder significant risk. If total costs rise above around £47 billion, private investors are not obliged to inject additional equity, leaving the taxpayer exposed to cost overruns.
From an intergenerational fairness perspective, the financing model is somewhat fairer as it smooths the cost of construction between generations. Nonetheless, the future taxpayers are the ones most exposed to the risk of cost overruns.
The cost of decommissioning
Historically, the cost of decommissioning nuclear power stations has been gravely underestimated in the UK. Decommissioning costs will be faced by generations well into the future, and so whether the state considers them massively depends on the chosen discount rate. Ultimately, the more the government values future consumers, the more seriously they must take these massive costs.
Sizewell and Hinkley both have operating lives of 60 years. However, with Sizewell, future taxpayers are exposed to the risk of ballooning decommissioning costs, whereas with Hinkley the operator must fully cover these costs.
Think of the children
When these large public infrastructure projects are discussed, the focus is often on whether government has negotiated value for money for UK taxpayers. But if the government wants to claim nuclear is a forward-looking investment, it must prove future generations won’t be the ones footing the bill.
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