Welcome to “a new golden age” for nuclear power, said Ed Miliband, the energy secretary, as he signed off the £38bn (if we’re lucky) Sizewell C mega-plant in Suffolk. It will certainly look golden from the point of view of Centrica. The owner of British Gas is investing £1.3bn for a 15% equity stake in Sizewell on terms that look attractive for it.
Centrica’s explanation of the mechanics behind Sizewell’s financing were more helpful than the government’s because it demonstrated how far ministers have had to go to attract private investors for a project that was once advertised to cost £20bn.
In short, Centrica reckons it will make an internal rate of return above 12% if Sizewell arrives at £40bn (all the numbers being in 2024 prices). But the revealing part was what happens if costs overrun and the construction bill ends up at £47.7bn. In that case, the company’s rate of return will still come in above 10%. That is in nominal terms, so one has to knock off inflation, but it’s still a decent number. And – critically – it is as low as it could go. After £47.7bn, taxpayers or billpayers are on the hook.
Chris O’Shea, Centrica’s chief executive, called the terms “acceptable” and the stock market agreed. Centrica’s shares rose 4% and analysts at Jefferies noted “robust protections”. The Canadian group, La Caisse, with a 20% stake, and the UK’s Amber Infrastructure (7.6%) are the other investors alongside the state itself (44.9%) and French developer EDF (12.5%).
It is hard to believe HM Treasury imagined even a couple of years ago it would have to be quite so generous to attract private sector investors. That, unfortunately, is the reality of higher government borrowing costs. It all flows into the financing of big projects. So does the experience of overruns and delays at Hinkley Point C, the plant in Somerset that is due to come on stream in the 2030s. So does the need to lock in investors for years.
The option of carving out private investors entirely at Sizewell was a nonstarter: you need somebody to be incentivised to hold management’s feet to the fire in the hope of landing close to the headline £38bn. Centrica, as the 20% owner of the UK’s nuclear fleet, is as good as any for that task (even if it’s not clear what La Caisse and Amber offer). It’s just that the private sector has said, in effect, that it would accept some of the risk of cost overruns – but not too much and not to a degree that would seriously eat into returns.
Meanwhile, the state is providing most of the debt, which is the greater part of the overall funding package, to the tune of £36bn to be channelled through the misleadingly named National Wealth Fund. In essence, this is a big heave from the government to make Sizewell happen.
What does it mean for consumers? Well, a £1-a-month charge on electricity bills from this autumn for a decade, for starters. That is how the “regulated asset base” model works. But the mystery – still – is what we’ll pay for Sizewell’s electricity eventually.
Here is the government’s less-than-clear claim: the project “could” create savings of £2bn a year versus the alternative of relying on renewable sources, mainly onshore and offshore wind. That is because Sizewell’s higher capital costs are “outweighed by the benefits of reduced network, interconnector and balancing costs”. In other words, nuclear power is easier to connect to the grid and its output is firm.
Put that way, there is still an argument for doing more nuclear. But the “could” reflects the risk of cost overruns, which, if they become severe, will have to be recouped in bills. The “golden age” depends on Sizewell’s ability to hit its budget.
