Nuclear energy plans contain a ticking time bomb for our bills
Andy Mayer: INSTITUTE OF ECONOMIC AFFAIRS > BLOG > POLICIES > ENERGY AND ENVIRONMENT
The Government’s nuclear plans create incentives for nuclear power companies to overcharge consumers, by linking prices to the firms’ own claims about costs, and by taking a stake in the outcome. The UK intends to fund new nuclear, starting with Sizewell C, through a charge on power bills, paying out to companies while the projects are being built (potentially 13-17 years), and recouping that money later, if possible, by reducing any further subsidy on generation. It is a similar model to renewables, bar that those payments are only made after the power is being delivered. That difference means the capital risk of project failure is transferred from the nuclear developers to the public, putting up bills.
The Government claim this ‘Regulated Asset Base’ method of financing saves money, by comparing the scheme to the very expensive and privately financed scheme for Hinkley Point C. But the latter is simply a waste of money not a credible benchmark. The Government is consulting on the model’s detail but has made it clear that level of payments will reflect costs estimated by the company, not any value-for-money target, which again transfers the risk of overspending to the public.
“During the construction phase of the project the relevant licensee nuclear company’s allowed revenue would be primarily calculated by reference to amounts required to service the financing costs to build the nuclear plant. During operations the calculation of the allowed revenue would include consideration of the various costs in operating the plant and, at that point, Ofgem would need to take into account the relevant licensee nuclear company’s forecast market revenues (‘FMR’) in determining the amount which the revenue collection counterparty must pay to (or receive from) the relevant licensee nuclear company under its revenue collection contract.”
The Government will set the rules for payments in the nuclear licence conditions, while OFGEM, the energy regulator and supposed consumer voice in the process, sets the payment amount, but only according to those rules. However, the Government has created a conflict of interest in the process by setting out plans to take a 20% public stake in Sizewell C, and likely all future nuclear power stations. This part-nationalisation means the Treasury will benefit directly from any overspending and creates an incentive to collude with the companies in the setting of the rules. It’s a stark example of a regulatory capture risk, and the error of assuming that public actors always have good motives (see Public Choice Economics).
OFGEM will need to perfectly second-guess when the company’s cost claims are reasonable or inflated, according to rules set by a body with a stake in making that difficult. OFGEM in turn will be advised on these issues by expertise from the nuclear industry, which will have a stake in giving advice generous to the companies. Independent regulation is extremely difficult where one party has a near monopoly of knowledge. At every stage of this plan, despite the cost-of-living crisis, there is no independent champion for the consumer interest and no market pressure for the company to hit cost or delivery targets. Just incentives to encourage overspending.
It is unlikely the Government will change course, ensuring nuclear business risks lie with industry not the public through a return to market mechanisms. It is unlikely they will address their conflict of interest by halting part-nationalisation. But they could reduce it by linking prices to international benchmarks such as lower subsidies or tariff prices in other countries, rather than bespoke rules for every project, decided by a Minister. They could reduce the risk of regulatory capture by compelling transparency on cost claims and OFGEM decisions. The companies will claim commercial confidentiality, but this is cakeism. You can either be a genuinely commercial business taking on commercial risks, or a part-owned state corporation transferring those risks to the public. You cannot be both, and if you are the latter your business decisions should not be private, transparency becomes the best way of encouraging competition from cheaper, faster rivals.
OFGEM lacks credibility as a consumer champion, despite consumer protection being their fundamental duty. It is too big, and the parts concerned with very specific industry regulation, of this type, are too close to both industry and the Business Department. The proposals would benefit again from breaking consumer protection out of the current regulator, creating a body, obsessed purely with keeping bills down, to challenge the rest. Or this role could be left to the market, with groups like the Consumer Association on an equal footing with industry as statutory consultees.
Left as a matter largely for the Government and industry, the certain outcome will be waste, inefficiency, and higher bills. A ticking time bomb for the cost-of-living as the number of projects increases, and there is no check and balance on the spiralling costs.
