Editor’s note: This letter has been written by Dr James R Cuthbert and others
Letter to
Right Hon Ed Miliband MP
Secretary of State for Energy Security and Net Zero
Department for Energy Security and Net Zero
55 Whitehall
London
SW1A 2HP
Cc: Sir Geoffrey Clifton-Brown, Chair Public AccountsCommittee (PAC)
Cc: Secretariat, PAC.
Cc: Rt Hon Lord Hunt of Kings Heath, Minister of State (Minister for Energy Security and Net Zero).
Cc: Sarah Jones, MP, Minister of State (Minister for Industry).
Cc: Comptroller and Auditor General.
Cc. Secretariat, ESNZ Committee.
Dear Secretary of State,
We write as a group of senior academics, former civil servants and nuclear regulators, citizen scientists and NGOs concerned about the very poor value for money likely to result from the decision to use the Regulated Asset Base (RAB) finance mechanism in the construction of proposed new nuclear power plants in the UK.
1 Public Accounts Committee (PAC)
RAB is a topic which came up in the evidence given to the PAC enquiry into ‘Decarbonising the Power Sector’.
Specifically, in the oral evidence session on 23 March 2023, (Q91), the Permanent Secretary to the Dept. for Energy Security and Net Zero stated:
“Bill payers will be paying a small amount of money through the regulated asset base model, the RAB model, before the plant is operational: it will be a very, very small amount. In the long run that will produce a much cheaper cost of financing as well.”
This evidence was reflected in para.18 of the Committee’s report, which reported the Department’s belief that RAB financing would be cheaper in the long run.
2 National Infrastructure Commission (NIC)
In 2019, the NIC developed a model for evaluating the value for money of a RAB model, relative to other approaches, like funding by contract for differences. Part of this model involved developing an approach for determining whether the benefit users eventually receive under RAB would adequately compensate them for the opportunity cost of their initial payments.
This aspect of the NIC model depends on a number of parameters: important for present purposes are the length of the construction period, and also consumers’ personal discount rate for money. This personal discount rate represents a consumer’s time preference for money: that is, the amount they discount future payments or benefits. Also relevant to the NIC model are the significant risks of cost overruns, since they are differentially transferred to the consumer under RAB.
3 The effect of increases in construction length
In 2019, the NIC’s central assumption for the construction length of a nuclear project was 8 years. However, in their 2021 Impact Assessment (IA) for the RAB model, the Government assumed that the length of construction period would be between 13 to 17 years, based on research it commissioned. (Note that the IA uses as its definition of construction period the length of time from investment decision to plant completion.) It is clear, therefore, that the length of construction period relevant for assessing RAB opportunity costs is now much longer than the NIC had assumed in 2019.
In fact, it turns out that length of construction period is a critically important parameter in assessing opportunity costs. Research undertaken in this group has involved plugging longer construction period assumptions into the type of approach adopted by NIC for assessing opportunity costs. This research indicates that, on making realistic assumptions about consumers’ personal discount rates for money, the chances of consumers being adequately compensated for the opportunity costs of their initial payments look distinctly remote, given the longer construction periods now in prospect.
4 Construction cost overruns
The commissioned research cited in the IA estimated that out-turn construction cost was typically 20-100% above the estimate at Final Investment Decision. Given that Hinkley Point C, 8 years after the Final Investment Decision was taken and still 5-7 years from completion, remains 95% over budget, this strongly suggests that the IA estimates on construction cost overrun are likely to be underestimates. This is yet another factor which will bear on the relative value for money of RAB-funded projects.
5 Department for Energy Security and Net Zero (ESNZ)
The argument is sometimes put forward that RAB initial charges are so trivial that they can effectively be ignored: this was essentially the argument put to the PAC by the Department of ESNZ in their evidence as quoted in Section 1 above. This is a dangerous fallacy. For example, initial calculations undertaken in this group, based on what is known about the costs which have already been incurred in Sizewell C before FID, strongly suggest that RAB charges to consumers would be substantial and then continue to steeply rise.
Contrary to the impression given by the Department for Energy Security and Net Zero in their evidence to the PAC in 2023, therefore, RAB financing of nuclear power is likely to prove a catastrophically poor bargain for the charge payer, in the light of the likely magnitude of the charges, and the implications of the increased construction lengths now in prospect.
The implications of this are so grave that we think it would be appropriate for your department to justify their March 2023 PAC evidence in the light of the latest estimates of construction period length.
In particular, it is difficult to see how any claims can be made in this area without providing the modelling results on applying something like the NIC approach to assessing opportunity costs, while assuming the government’s own estimates on project duration, and making appropriate assumptions about consumers’ personal discount rates for money. Given the differential effect of construction cost overruns on RAB charges, the government’s own estimates of construction costs should also be brought in to any such assessment.
For our part, we would be happy to provide you with the modelling which leads us to question the impression given by the ESNZ evidence to the PAC.
We look forward to hearing from you.
Yours sincerely,
Dr James R Cuthbert
Former Scottish Office Chief Statistician
Dr Keith Baker FRSA
Research Fellow in Fuel Poverty and Energy Policy
Glasgow Caledonian University
Prof Andrew Blowers OBE
Emeritus Professor of Social Sciences
Open University
Dr Frank BoultonMD
Former Honorary Consultant Physician & Advisor to HM Armed Forces
Prof Peter Bradford
Adjunct Professor, Vermont Law School
Vice Chair, Board of the Union of Concerned Scientists
Former Member, U.S. Nuclear Regulatory Commission
Prof Tom Burke
Founding Director of E3G
Chairman of the Editorial Board of ENDS
Visiting Professor at Imperial and University Colleges
Dr Sarah J Darby
Emerita Research Fellow, Energy Programme, Environmental Change Institute
University of Oxford
Dr Paul Dorfman
Chair, Nuclear Consulting Group
Visiting Fellow, Science Policy Research Unit
University of Sussex
Alison Downes
Executive Director, Stop Sizewell C
Prof Nick Eyre
Emeritus Professor of Energy and Climate Policy
Founding Co-Director of Zero Carbon Energy Research Institute
University of Oxford
Dr Ian Fairlie
Vice President, CND
Dr Gregory B. Jaczko
Former Chair, US Nuclear Regulatory Commission
Prof Mark Jacobson
Professor of Civil and Environmental Engineering
Director, Atmosphere/Energy Program
Stanford University
Dr Phil Johnstone
Research Fellow
Science Policy Research Unit
University of Sussex
Dr. Petar Kardjilov
Union of Scientists, Bulgaria
Member, Nuclear Transparency Watch
Dr Bernard Laponche
Expert en Politiques de l’énergie et de Maîtrise de l’énergie
Former Director, French Agency for Energy Management, and Nuclear Safety Technical Advisor to French Govt Minister for Regional Planning and the Environment
Prof Amory B. Lovins
Adjunct Professor 2020–24, Adjunct Lecturer
Department of Civil and Environmental Engineering
Stanford University
Prof Ian Lowe
Emeritus Professor, Science, Technology and Society
Griffith University
Councillor Lawrence O’Neill
Chair, UK/Ireland Nuclear Free Local Authorities
Dr Stuart Parkinson
Executive Director
Scientists for Global Responsibility
Jonathan Porritt CBE
Sustainability Campaigner & Writer
Honorary Fellow, Institute of Corporate Responsibility & Sustainability; Institute of Environmental Sciences; Chartered Institution of Water and Environmental Managers; Royal Town Planning Institute; Society for the Environment; Distinguished Fellow, Schumacher Institute
Prof Susan Roaf
Emeritus Professor, Architectural Engineering
Heriot-Watt University
Pete Roche
Energy Consultant
Prof Andy Stirling
Professor of Science and Technology Policy
Co-director Centre on Social, Technological and Environmental Pathways to Sustainability
University of Sussex
Prof Peter Strachen
Energy, Sustainability and Society Research Group
Aberdeen Business School
Robert Gordon University
Oliver Tickell
Journalist, author, environmental campaigner
Dr Stuart Parkinson
Executive Director
Scientists for Global Responsibility
Prof Steve Thomas
Coordinating Editor, Energy Policy
Emeritus Professor of Energy Policy
University of Greenwich
David Toke
Reader in Energy Politics
University of Aberdeen
Andrew Warren
Chairman, British Energy Efficiency Federation
Honorary President, Association for the Conservation of Energy
14th October 2024
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