Nuclear Energy (Financing) Act 2022

Policy background

2. The Government has made important commitments to eliminate its contribution to greenhouse gas emissions. This includes the passage of legislation that requires the UK to bring all greenhouse gas emissions to net zero by 2050, as well as subsequent commitments to reduce carbon emissions by 78% and to decarbonise the electricity system by 2035. This will require rapid, significant changes in the energy sector: it is expected that total UK electricity supply will need to double by 2050 and electricity from low-carbon sources will need to quadruple, in order to deliver the UK’s commitment to become a Net Zero emissions economy by that year.
3. A key part of this will be to secure the transition to a clean electricity system that is reliable and affordable for energy consumers. This will require a substantial deployment of renewable technologies, alongside technologies such as nuclear which can provide energy to consumers when the wind is not blowing, or the sun does not shine.
4. Large scale nuclear power plants are the only proven technology available today to provide continuous, reliable and low carbon electricity. However, the UK’s existing nuclear fleet will be almost completely retired by 2030, and the Government’s analysis shows that the UK is likely to need nuclear generation beyond the new plant being constructed at Hinkley Point C. To meet the challenge of net zero, the Government is working to bring at least one more new large-scale project to final investment decision in this Parliament subject to all relevant approvals, whilst rapidly exploring the development of new nuclear technologies beyond conventional large-scale plants. These goals were set in the 2020 Energy White Paper.
5. To support this goal, the Government has considered a range of approaches to securing private finance in the design, construction, commissioning and operation of nuclear assets, to complement the Contracts for Difference (CfD) model that has been used to finance construction and operation of the Hinkley Point C nuclear plant. Regardless of the funding model, the Government’s aim is to agree an approach to financing the design, construction, commissioning and operation of new nuclear projects that can deliver value for money for electricity consumers, whilst achieving a fair and appropriate allocation of risks between investors, consumers and taxpayers.
6. The Government consulted on a Regulated Asset Base (RAB) model for new nuclear projects in July 2019. A response to this consultation was published in December 2020 and confirmed the Government’s assessment that the model is a credible basis for financing large-scale nuclear projects.
7. The RAB model is a well understood financing model that has received significant quantities of investment from the private sector over the last 30 years in industries including water and energy. In 2016 the RAB model was successfully modified and applied for the first time to a single asset construction project – the £4.2 billion Thames Tideway Tunnel project.
8. Under the RAB model introduced by this legislation, an eligible nuclear company would receive payments in relation to the design, construction, commissioning and operation of a new nuclear energy generation project from electricity suppliers (who would be expected to pass these costs onto consumers through their electricity bills). The Secretary of State will modify a designated nuclear company’s electricity generation licence to insert new licence conditions, giving them a right to receive a regulated revenue in relation to the provision of the infrastructure in question. In so doing it could bring significant amounts of private investment into nuclear projects at relatively low cost. Given that the cost of finance is the main driver of overall project costs, this should lead to better value for money for consumers over the life of a nuclear RAB Project.
9. It is the Government’s intention that in the first instance the model would be used to support investment in the design, construction, commissioning and operation of large-scale nuclear, however it remains open as a means to support the financing of emerging nuclear technologies.
10. To support the RAB model, and to protect the interests of consumers, the legislation introduces the Special Administration Regime (SAR) to apply to nuclear RAB projects. In the very unlikely event of a company’s insolvency, the Secretary of State, or the Gas and Electricity Markets Authority (the governing body of Ofgem, and for purposes of these notes, referred to as ‘the Authority’) with the Secretary of State’s permission, would be able to apply to the courts for the appointment of a special administrator whose objective would be to secure that electricity generation commences, or continues until it is no longer necessary for the order to remain in force. The SAR does not change the position that the company must continue to comply with all of its regulatory and legal duties and responsibilities, including compliance with safety, security and environmental provisions related to the power plant and the site on which it is located.
11. Implementing a SAR is intended to reduce the risks of consumers being deprived of the intended benefits from contributing to funding the building of a nuclear power plant using a RAB model should a relevant company become insolvent. It also reduces the risk of requiring a replacement source of electricity generation, which would further increase the cost of electricity to consumers.
12. The Act also contains a further measure to help facilitate private financing in nuclear projects, specifically to amend the Energy Act 2008 to make technical changes to the regime of Funded Decommissioning Programmes (FDP). All nuclear power stations have a finite life, beyond which it is not safe or economically feasible for them to continue to operate. After this period, the power station must be decommissioned. Prospective operators of nuclear power stations are obliged to submit an FDP to the Secretary of State. The FDP must set out the site operator’s costed plans for dealing with its future decommissioning and waste management liabilities. It is a criminal offence for a new nuclear developer to start construction work on any buildings with nuclear safety significance without an approved FDP in place.
13. Currently, the Secretary of State has the power to unilaterally modify an FDP to impose obligations on bodies corporate which are ’associated’ with the site operator. It is possible that the existing legislation could potentially be interpreted in such a way that security trustees and secured creditors could be at risk of falling within the scope of this power, making it less likely that a nuclear project will attract debt investment. The legislation therefore clarifies that the activities of these entities are not caught by the definition of being ‘associated’ with a site operator to the extent that they relate to the management and enforcement of security interests relating to the project, as they do not hold significant influence over its day-to-day decision making. This will facilitate the ability of projects to raise debt investment.
14. The legislation is made up of the elements set out below.

Nuclear Energy Generation Projects: Regulated Asset Base Model

15. The RAB model for nuclear energy generation projects would give an eligible nuclear company the right to a regulated revenue stream throughout the design, construction, commissioning and operations phase of a new nuclear project. This will be funded by a charge placed on electricity suppliers, with the expectation that this will ultimately come from consumers through their electricity bills.
16. The Act allows for the Secretary of State to designate a nuclear company that is eligible to receive the benefit of the RAB special licence conditions. They can do so only if the company meets the criteria for designation and having undertaken consultation with named persons.
17. Once the Secretary of State has served and published a notice to designate a nuclear company, they have the power to amend that company’s existing electricity generation licence accordingly. This allows the Secretary of State to insert the special conditions to implement the RAB model for the company and set out how the Project will be regulated and its allowed revenue calculated. Amendments may also be made to the licence terms.
18. The designation of a nuclear company ceases to have effect either when the company enters into a revenue collection contract to receive payments in relation to its allowed revenue (provided this occurs before the expiry date), 5 years from the date of the designation notice (subject to any extensions by the Secretary of State), or if the designation notice is revoked or lapses in accordance with conditions attached to it. The Secretary of State is required to consult named persons before making modifications to a nuclear company’s licence whilst the designation is in effect. Once a company has its licence modified to provide for the RAB model, and it has entered into a revenue collection contract, the Secretary of State is only able to modify its licence in very limited, specific circumstances.
19. As the current electricity regulator for Great Britain, the Authority will regulate the nuclear company in accordance with the terms and conditions of its modified licence. The Authority will do so in keeping with its existing statutory duties including its principal objective of protecting the interests of existing and future electricity consumers.
20. The Secretary of State can use their power to designate and then modify the licences of multiple nuclear companies to benefit from a nuclear RAB model, provided that in each case the designation criteria and procedural requirements are met.

Revenue Collection Contracts

21. It is important that legislation allows for a stable flow of funding between consumers (through their suppliers) and a nuclear company which holds a generation licence which has had RAB licence conditions incorporated into it (a ‘RAB licence’). The Act allows the Secretary of State to give effect to a revenue channel necessary for the nuclear RAB model to function. This includes a power for the Secretary of State to designate a revenue collection counterparty and direct it to enter into a revenue collection contract with a nuclear company that has been designated by the Secretary of State for the purposes of the RAB model. The Act also allows for the Secretary of State to make regulations to implement the mechanics of the revenue stream, including placing obligations on electricity suppliers.
22. For the purposes of the revenue stream, it is intended that the payments made to the nuclear company under a RAB model would be calculated by reference to a ‘forecast allowed revenue’ determined by the Authority at the start of a charging period, in accordance with the RAB licence. It would be within the power of the Authority to determine the allowed revenue forecast under the terms of the RAB licence. The Authority would calculate the Allowed Revenue throughout the lifetime of the project in accordance with the licence. The legislation allows the company to appeal to the Competition and Markets Authority (CMA) any decision made by the Authority which, in the opinion of the CMA, relates to the allowed revenue of the company, as long as the right to appeal is set out in the initial licence modifications made by the Secretary of State. Under existing legislation, the nuclear company would also have the right to bring an appeal against any decision of the Authority to modify its licence (see section 11C of the Electricity Act 1989). At the end of the charging period, the Authority would conduct any reconciliations to reflect any outstanding amounts due to the nuclear company for that period, in accordance with the RAB licence.
23. During the construction phase, it is expected that the nuclear company would receive an amount equal to the full forecast allowed revenue, as it would not yet be generating and selling power. Where the nuclear power station is operational (including in the commissioning phase), for the purposes of forecasting revenue, the Authority would determine a market revenue, in accordance with the RAB licence conditions. It is intended that the Authority would then deduct this amount from the forecast allowed revenue that the nuclear company is entitled to receive over the course of the charging period. Reconciliation would take place to address any discrepancies between forecast and actual amounts.
24. Following this, the Authority would inform the revenue collection counterparty how much it needs to collect over that charging period from electricity suppliers, in order for the nuclear company to receive its forecast allowed revenue. Once collected, the revenue collection counterparty would then pay the nuclear company. The combination of market revenues and the additional amount collected from suppliers would aim to ensure that the nuclear company received its forecast allowed revenue in each period.
25. Where the market revenue is greater than the forecast allowed revenue, then payment equal to the difference, as determined by the Authority, would be made by the nuclear company to the revenue collection counterparty. This would ensure the company only receives the revenue necessary to meet its costs and expenditure incurred in the course of performing its activities in relation to the design, construction, commissioning and operation of the nuclear project.
26. The cost to the revenue collection counterparty of its payment obligations to a nuclear generation company, as well as the operational costs of the revenue collection counterparty, will be met by licensed electricity suppliers in Great Britain (subject to any relevant exemptions), who may share this with electricity consumers. Suppliers will be charged by reference to their share of the Great Britain (GB) electricity market. Where the revenue collection counterparty receives payments back from nuclear companies under revenue collection contracts, these will be passed back to suppliers according to their market share.
27. Aspects of the operation of the revenue collection counterparty will be subject to controls by the Secretary of State. This is designed to ensure the protection of suppliers and ultimately consumers.

Special Administration Regime

28. The RAB model requires suppliers to contribute to the funding of new nuclear projects from the start of construction and likely through to most of operational life, thus reducing the project’s cost of capital. It is expected that these costs will be passed on to consumers. To protect the interests of consumers, the legislation introduces a Special Administration Regime to apply to these projects.
29. This provides the Secretary of State, or the Authority, with the Secretary of State’s permission, with a power to apply to the courts for the appointment of a special administrator (a ‘nuclear administrator’) in certain circumstances, including the very unlikely scenario of an economically regulated nuclear company’s (a ‘relevant licensee nuclear company’) insolvency. The objective of a special administration order (a ‘RLNC administration order’) would be to complete construction and/or keep the plant running, until it is no longer necessary for the order to remain in force.
30. Implementing special administration is intended to reduce the risks of consumers being deprived of the intended benefits from funding the building of a nuclear power plant using a RAB model should a relevant licensee nuclear company become insolvent. It also reduces the risk of requiring a replacement source of electricity generation, which could further increase the cost of electricity to consumers.
31. Where rescue cannot be achieved and it is unnecessary for the RLNC administration order to remain in place, the Secretary of State, the Authority or the nuclear administrator with the consent of the Secretary of State, may apply to the courts to bring the RLNC administration to an end. The circumstances where those persons may apply to end the appointment of the administrator include where the objective of the RLNC administration cannot be met. It is considered that once the administration has ended, the Secretary of State may prepare a Nuclear Transfer Scheme where the nuclear installation and/or site is to be decommissioned or cleaned up. This would bring the plant under the control of a public body, or to the Nuclear Decommissioning Authority (NDA) or a publicly owned company who would be responsible for decommissioning the plant.
32. The Secretary of State can provide financial assistance in connection with a RLNC administration order for the purposes of achieving the objective of the RLNC administration order. It is expected that the Secretary of State would make provision in the licence of a relevant licensee nuclear company for the purposes of raising the funds to cover costs which would arise in connection with a RLNC administration order.

Funded Decommissioning

33. All nuclear power stations have a finite life beyond which it is not safe or economically feasible for them to continue to operate. After this period, the power station must be decommissioned. Prospective operators of nuclear power stations are obliged to submit a funded decommissioning programme to the Secretary of State. This must set out the site operator’s costed plans for dealing with its future liabilities in relation to decommissioning, waste management and waste disposal, and how the operator will make financial provision to meet those liabilities. The programme must be approved by the Secretary of State before construction on the power station can start. The policy was legislated for in the 2008 Energy Act.
34. Sections 46 and 48 of the 2008 Energy Act give the Secretary of State the power to unilaterally modify an FDP, both at the time of its original approval and at any point thereafter. In particular, the Secretary of State has the power to make modifications to an FDP to impose obligations on bodies corporate which are "associated" with the site operator.
35. The Government considers that the original intention behind these provisions was to provide the Secretary of State with flexibility to impose FDP obligations, where necessary, on entities who would be expected to have a substantial degree of influence over the operator’s normal activities, for example the operator’s group companies and substantial equity investors.
36. However, it is possible that the legislation could potentially be interpreted in such a way that other participants in the financing for a new nuclear project, such as security trustees and secured creditors, could be at risk of falling within the scope of the definition of bodies corporate ‘associated’ with the site operator due to the action they take, or are entitled to take, with regard to the management and enforcement of security. Neither of these types of entities would have a substantial degree of control over the operator’s normal activities. Given the potentially large costs that could be imposed through this power, their potential inclusion within the scope of Section 67 has made it much less likely that bodies of this type will become involved in the financing of new nuclear projects. The Act therefore clarifies that entities like secured creditors and security trustees will not be classed as being ‘associated’ with a site operator simply by virtue of rights, powers or shares that they hold in connection with the management and enforcement of security interests relating to a project. This will facilitate the ability of projects to raise senior debt.