This article explains why the Regulatory Asset Base (RAB) funded Sizewell C nuclear project is likely to be classed as “on book” in national accounts terms. This has profound implications for the future of the project. In particular, once on book funding approaches are available, it should be possible to fund Sizewell C more cheaply than will be possible under RAB. There will also no longer be any need to burden consumers directly with paying tens of billions of pounds worth of subsidy.
What is RAB funding?
RAB is a method for funding capital expenditure which was introduced in privatised utilities in the UK, like water. A version of RAB has now been developed for funding new nuclear projects, with the original intention of keeping the capital expenditure involved off the Government’s books.
The way nuclear RAB would work is that during the construction of the plant, the operating consortium is able to recover the loan charges (i.e. interest charges and depreciation), as a levy on the electricity supply companies. They will then pass this levy on to electricity consumers. During the production phase, the levy is also likely to contain an element for operating costs.
Important points to note about this RAB approach are, firstly, that it involves consumers paying compulsory RAB charges from the start of the construction phase of the project. Secondly, for a project like Sizewell C, RAB charges will involve consumers paying a subsidy to the operating consortium. The exact amount of this is currently unknowable but will certainly amount to tens of billions of pounds (according to the report on Sizewell C produced by the Subsidy Advice Unit).
Who decides?
The decision whether Sizewell C should be on or off the Government’s books is made independently by the Office for National Statistics (ONS), in adherence to internationally agreed norms of national accounting. In order to maintain the independence of ONS in this decision-making role, they do not get involved in policy formulation, and will only make a final decision when the details of the scheme have been finalised.
This type of decision is not a clear-cut matter. It involves ONS making a judgement based on a number of criteria which are set out in the published guidelines. The sorts of criteria to be considered include:
- Are any charges involved more akin to a form of taxation, or a fee for a service?
- Is the scheme a form of concession arrangement, where the operator builds the asset and is then re-imbursed by users? Who bears the risks in that arrangement?
- How great is the degree of public sector control?
Why a RAB scheme for nuclear should be on the Government’s books
Against each of these criteria, the arguments for classifying a RAB scheme like Sizewell C as being on book are very strong.
For example, consider whether nuclear RAB charges are a fee, or a tax. Because of the 13 to 17 year length in prospect for the construction period, it is very unlikely that any eventual cost advantage when Sizewell C is constructed would adequately compensate consumers for the compulsory charges they will have paid during the initial period. So paying nuclear RAB charges is not an economically rational decision which an individual consumer would make to fund their electricity consumption. That is, nuclear RAB charges are akin to a tax, rather than a fee.
Or looking at nuclear RAB as a concession arrangement. To be off book, the concession operator has to bear the risk of fluctuations in demand. But because of the way Sizewell C is funded by a compulsory levy on consumers, there is clearly no demand risk for the operating consortium: so, again, the scheme should be classed as on book.
As regards to the degree of Government control, the likely situation as we now know it is that:
- the Government will be the major shareholder,
- will provide the majority of senior debt,
- is arranging subsidies, (paid by the consumer) worth tens of billions of pounds,
- is on the hook for any very large cost over-runs,
- and is able to provide guarantees, indemnities, and other unspecified benefits to other shareholders.
In this situation it would be surprising – indeed, many would argue, scandalous – if the Government were judged not to be in ultimate control of the project.
Against all three criteria, therefore, Sizewell C should be classified as on book. And since the first two of these criteria do not depend on the amount of private equity finance the Government attracts, the overall conclusion would stand even if the Government were to attract more private investment than currently looks likely.
The Government now appears to be recognising that a nuclear RAB scheme would be on book
Subsequent to an earlier draft of this note being shared with the Department for Energy Security and Net Zero, and with ONS, indications have emerged that the Government is beginning to recognise the likely on book status of nuclear RAB. For example, an article in the Telegraph of 7 December 2024 stated that “A key issue ministers are grappling with is the need to put the full cost of the Sizewell project – which could be anything between £20bn and £40bn – on the public balance sheet.”
This is welcome: but it means that the RAB approach now has to be justifiable against other possible on book approaches: and this has important implications.
This is not so much a problem, as an opportunity
In fact, something which the Government seems not to have recognised is that this situation opens up a range of opportunities, and enables it to get round some of the downsides which are inherent to the RAB approach.
One of the downsides of RAB, as with other forms of public/private partnership like private finance initiatives (PFI), is the high cost of private finance relative to public sector borrowing rates. Paying the high cost of private finance is traditionally justified as the price of risk transfer to the private sector. But, in practice, the degree of risk transfer is limited. It is much more likely that the high cost of private finance reflects the strong bargaining position the private sector is in, since if the Government hopes to achieve off book status, the option of cheaper public sector borrowing is not available.
Once the on book status of nuclear RAB is accepted, the bargaining position of potential private sector finance providers is greatly weakened, and the Government should be able to drive a much harder, and cheaper, deal. If indeed they feel it is still worth accessing private finance at all.
Secondly, there is the question of who pays the subsidy. Under RAB the subsidy is paid by the consumer. Once the off book requirement no longer applies, that opens up the option of the subsidy being paid in whole or in part from general government revenues. It is the classic role of the state to invest now for long term strategic returns. So it is more socially just for the state to fund all or part of the subsidy from general taxation, rather than laying the cost on consumers in the form of a concealed, and essentially very regressive, form of taxation.
Overall
Overall, now the likely on book status of nuclear RAB is becoming clear, a radical rethink is required. The Government should:
- explore what the cheapest on book solution is;
- abandon the pursuit of high cost private finance, unless this comes with clear advantages;
- no longer plan to burden the unfortunate consumer with paying for any subsidy through what amounts to an open ended, unjust and regressive form of taxation;
- and, in the light of what it comes up with, it should consider whether the whole project is worth pursuing at all.
A note giving fuller details of the arguments in this article can be accessed here.
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