Collaborative rather than conflicting funding models must be adopted for nuclear projects to progress, writes Vince Zabielski, Senior Lawyer at Pillsbury Winthrop Shaw Pittman.
Every year, over 80 million passengers pass through Heathrow Airport and the global transport hub is every bit a British success story. But the construction of Terminal 5 is as much a success story for the Regulated Asset Base (RAB) model, which has successfully funded not just the airport, but the Thames Tideway Project as well.
Attention has since turned to whether the RAB model could help the nuclear sector, which is often riven by funding issues. Supporters of RAB argue it will significantly lower the cost needed to build new nuclear plants, while opponents insist that it is an invitation for the developers to adopt a cost-no-object approach to project development.
Which view is correct? Well, it turns out, both – to an extent.
What exactly is the RAB?
Before we look at the merits of using the RAB model for nuclear power, let’s first take a look at what it is and how it works.
Simply stated, the RAB model is a mechanism for the government to encourage private investment into large public infrastructure projects by guaranteeing that the investors will not lose their investment. The guarantee is in the form of a pass-through of costs of the RAB to the end-users of the product or service to be provided by the project.
For example, in a large-scale water project, the water company would build necessary infrastructure, such as a new reservoir or pipeline, and the developer would be given permission by the government regulatory body to pass the costs on through to the end users as part of their monthly water bill.
Because of the relatively inelastic demand for water – everyone needs it – and with the government-backed recovery mechanism, the costs of borrowing money through the use of the RAB model are reduced to a rate that is close to that which the government itself would expect to pay. This drastically reduces the amount of money that goes to the costs of borrowing, putting more money into building the project and less in the hands of the bankers, which should result in lower overall project costs.
Another benefit of the RAB model is that, because the investment is not at risk, it attracts patient capital, with potentially a very long recovery period. The long recovery period and the low interest rate, coupled with a large consumer base, makes the model particularly attractive for building nuclear power plants. Everyone needs electricity, and most people will not notice a few extra pounds tacked on to the end of their bill to ensure that there is a reliable stream of electricity coming to their home or business.
Sounds perfect – so what is the problem?
The ‘nuclear’ problem
There is a major underlying problem with nuclear new build that its proponents seem unwilling to acknowledge: most, if not all, recent nuclear new build projects have been largely a financial disaster. Almost every major nuclear project in the West has been plagued by delays and cost overruns, and some have experienced major technical problems that have eroded public confidence. Stated simply, nuclear power plants just don’t get built on time and on budget anymore, and that is a big problem.
Moreover, it seems that every delay on contemporary nuclear new-build projects is in the order of years or, in some cases, even decades. Likewise, the cost overruns are of epic proportions. Some new-build projects in Europe – you know which ones – have had cost overruns that are not “merely” in the millions of euros, or even the tens or hundreds of millions, but run into the billions.
And the problem isn’t limited to Europe. Recent projects in the US have fared no better, with one failing so spectacularly that it bankrupted one of the world’s oldest and most experienced nuclear plant suppliers. Is there something about building a nuclear plant that is so difficult and so special that no one can do it anymore? Why isn’t anyone asking what happened and how we can fix it?
It wasn’t always this way. Building nuclear plants was once a mature industry and plants were delivered regularly on time and on budget. By all accounts, the Westinghouse-designed pressurised water reactor at Sizewell B in the UK was a success and was delivered largely on time and budget. Although it was the first pressurised water reactor built in Britain, it was a mature design and was built by a team of construction contractors and designers at the peak of their powers.
Significantly, the design of Sizewell B was already proven before the first shovel went in the ground. It was the latest in a series of “four-loop” Westinghouse pressurised water reactors that had already been built at the Trojan and Callaway plants in the US, which were in turn an evolution of earlier successful plant designs. Sizewell B may not have represented much in the way of new thinking but has proven to be a remarkably dependable power station.
More recently, the Barakah plants in the UAE, which are being delivered by KEPCO, the Korean nuclear power company, have been built largely on time and reportedly on budget. The Barakah units, while updated with the latest safety equipment and design philosophy, are the latest evolution of a Combustion Engineering design that traces its roots back to the early 1970s.
Application of the design for use in desert conditions like those found in the UAE, had already been proven at the Palo Verde plant in Arizona, in the US. In both the case of Sizewell B and Barakah, the designs were mature and had a demonstrated track record of “buildability”. The lesson here is not to be too close to the cutting edge if you want to build a nuclear plant on time and on budget.
The solution to this first problem – building on time and on budget – comes down to identifying and eliminating risks from the very beginning. Unless this fundamental problem is openly and honestly addressed, nuclear power development in the UK will suffer just as it has in the rest of the West. From the moment when the initial decision to build a nuclear plant is made, the entire focus of the developer should be on finding the minimum-risk path to delivering a safe and reliable power plant, and there are five key considerations to bear in mind.
In my opinion, choosing a proven “nth-of-a-kind” design that has been successfully built to plan is the most important first step. Do not go for the latest and greatest technology that the supplier has not quite figured out how to build. You do not want any first-of-a-kind technology in your new nuclear plant – let someone else be the trailblazer. All you want is safe and reliable electricity.
Secondly, choose a supplier or consortium of suppliers with a recent and successful track record of building nuclear plants. While some suppliers may have a glorious history, many of the engineers and project managers that contributed to the success of legacy projects may have retired, taking their experience with them.
Thirdly, do not tell the reactor vendor how to do their job. Let them come in with their proven methods and supply chain, and let them deliver your plant efficiently and cheaply.
Fourthly, do not make the supplier change the proven design to accommodate your engineering staff’s brilliant ideas. The more the design is changed, the more risk is inserted in the project.
Finally, do not push risks that the supplier cannot control onto the supplier; it just adds costs and sets the stage for future disputes. Successful new build nuclear projects do not just happen – every potential risk related to the project needs to be identified and mitigated. And from my viewpoint, that just does not happen anymore, and the RAB will not solve this underlying problem.
In fact, the RAB model may tend to exacerbate sloppy project planning and sub-par risk management. The major problem with building a new nuclear plant using the existing RAB model is that there is little incentive for the developer to identify and mitigate risks in order to build it on-time and on-budget. The developer has no skin in the game – after all their investment is safe come hell or high water. Under the existing RAB model, the consumer winds up footing the bill no matter how incompetently the developer proceeds.
In other countries that have a similar system, there are checks and balances on what can be placed in the RAB. For example, some jurisdictions in the US have a system known as “rate base recovery” that is very much like the UK RAB model. The “rate base” is effectively the same as the UK RAB, and the utility is permitted to earn a specific rate of return on the rate base. Like the UK RAB, this system could encourage a misbehaving utility to spend as much as possible, in order to maximise the rate base, and thus the return that the utility receives on the rate base.
However, under the US system, the costs of new infrastructure are passed on to the rate-payer (i.e. the customer), but only to the extent that the costs incurred were “prudent” as determined by an independent prudency board. The system serves to protect against abuses of the system, depending on how well the prudency board does its job. Of course, the flip side of this approach is that the developer’s investment in the RAB is not unquestionably and inviolately protected, which could result in a slightly higher cost of borrowing.
As it is, the RAB system here in the UK lacks even the loose oversight of a prudency board, and its regulatory and legal underpinnings are less than robust. In fact, the RAB is based more on common practice than it is on a solid regulatory basis. For a nuclear RAB to work, a new set of regulations should be developed specifically for nuclear new build that address the identified weaknesses of the existing RAB model.
A new RAB regulatory model
All of the pieces of this puzzle exist to allow a prudent implementation of a RAB model for new nuclear projects. We just need to put the puzzle together.
The first step should be establishing a regulatory framework that clearly sets out the legal and regulatory underpinnings of a nuclear-specific RAB model. These regulations should define which projects will be acceptable from a risk management perspective.
Before consideration is even given to applying the RAB model, the regulations should require that a developer demonstrate that they have a viable, buildable and bankable project that has identified and mitigated all major risks. This would require greater efforts in the planning and design phase, with ongoing processes that identify and mitigate project risks as they come up. It would also require an advanced state of design at the approval stage rather than the “design-as-you-go” approach used in many nuclear new build projects today.
The regulations should require that all this project planning is completed to a satisfactory level before a project could even be considered for inclusion in the RAB model.
This regulatory framework would also need to address the adequacy of the management systems and incentive frameworks for the project. The regulations would not need to proscribe any particular approach, but they should rather be outcome-based. Also, the project developer’s systems and programmes should be required under the nuclear RAB regulations to have ongoing self-assessment and improvement features so that they improve over time.
One additional critical feature of a new RAB nuclear model would be an independent expert panel that serves the same function as the US-style prudency boards, but with a more active hands-on role in the project. Project spending should be demonstrated as necessary and prudent before it is added to the RAB, ideally before it is spent. While this would add to the administrative burden and require a more active role by the regulator, it would (together with the risk management requirements) ensure that the project represents real value for the ratepayer’s money.
The supporters and detractors of the existing RAB model for use in nuclear both have valid points. The RAB model has the potential to drastically reduce the cost of new nuclear development in the UK, but could also open the door to massive cost overruns, with the ratepayer taking all the pain for the developer’s mismanagement of the project. What we need to do is listen to both sides and develop a new nuclear RAB model that keeps the benefits of the existing model while fixing the problem areas. It should be a relatively straightforward task; it’s just a question of starting.