Last Energy

Financing Nuclear in the UK: The Regulated Asset Base (RAB) model vs. Contract for Differences (CfD)

Financing nuclear projects to compete in the free market

Michael Crabb

Across the clean energy sector, financing projects is one of the greatest challenges for both energy producers and buyers. Given the necessary contributions of nuclear to net-zero carbon goals, finding the solution is also time-sensitive.

In response to longstanding financing hurdles in the nuclear industry, the UK government recently acquired cross-party support for a new funding method for nuclear projects: the Regulated Asset Base (RAB) model, introduced by the Nuclear Energy (Financing) Bill, which came into effect in the spring of 2022. 

The RAB diverges from traditional methods of financing nuclear power: most notably, the “contracts for difference” (CfD) model, which funded the Hinkley Point C nuclear reactor project. While the RAB endorses a much-needed pro-nuclear sentiment, it is not a silver bullet to the industry’s issues with financing.

With hopes for improved funding models – and more nuclear – in the energy sector, we’ll distinguish between the RAB and CfD models, highlight the key issues created by the RAB, and consider how the appropriate model can fund a pro-nuclear future.

Regulated Asset Base (RAB) vs. Contracts for Difference (CfD)

The RAB model is a type of economic regulation that issues a small surcharge on consumers’ bills. In the UK, the RAB is already widely used for water, gas, and electricity networks.

Applied to nuclear projects, consumers’ payments would be used to release revenue during the construction of a plant. According to proponents of the RAB, ongoing revenue from taxpayers would: 

  1. Reduce the cost of capital 
  2. Attract more investors 
  3. And deliver affordable and reliable nuclear power. 

Compared to the RAB, the contracts for difference (CfD) model requires that developers finance the construction of a nuclear project and bear the associated risks. Under a CfD, the developer agrees to pay the entire cost of plant construction, in return for an agreed-upon price (the “strike price”) for electricity output when the plant starts generating power. 

The Rundown on RAB: 3 Things To Consider 

While the RAB model encourages private investment into public nuclear projects, the financing system is notably controversial

Ideally, the goal of any nuclear project is to generate zero-carbon, reliable, and affordable energy. At a glance, the RAB seems to align with that objective. However, as a public-private finance model, the RAB model may produce unintended consequences for individual consumers and the energy industry at large.  

Before applying the RAB model to nuclear projects, what do governments, project companies, and energy consumers need to know? 

1. Risk Sharing is Difficult to Regulate

The RAB is a funding model that offers “risk sharing” between investors and consumers, meaning that consumers contribute indirectly toward the construction of a project by paying a small amount through their energy bills. 

At its best, the RAB attracts private investors to fund public projects with the incentive of a lower, more reliable rate of return, even in the beginning stages of construction. At its worst, the RAB has been called an “open cheque book” that incentivizes developers to overspend on construction. 

Particularly for large and complex nuclear projects, these costs may be too difficult to regulate fairly, since investors may actually benefit when projects go wrong. Over time, this system may create more financial complexity while reducing incentives for project delivery and regulatory efficiency. Through it all, taxpayers are left to cover the accumulating costs.  

2. Taxpayers are Liable from Day One

The RAB guarantees a longer rate of return on investment, which is generally recouped by charging consumers from the first day of construction. 

Though beneficial for investors, this defining feature is also contentious. Under the RAB model, the “fairness” of the rate of return depends on the project regulator, and whether they correctly estimate the construction length, supply chain costs, and other economic conditions. 

Regardless of the accuracy of the estimates, consumers start contributing to these costs in the early stages of a new-build nuclear project. Their contributions – and the backing of the regulator by the government – are intended to offer greater certainty and security for investors.

3. The RAB Has No Track Record in Nuclear 

To date, the RAB model hasn’t been used in the UK nuclear industry. For a smaller-scale application of the RAB in the UK, many experts point toward the Thames Tideway Tunnel project (TTT), a £4.2 billion sewer project with a planned completion date by 2025. 

On paper, the TTT is a worthwhile investment, but the project is not without its critics. Under the RAB model, it remains unclear how much customers will pay for the tunnel construction. The estimated cost of the TTT is £4.2 billion: much smaller than large-scale nuclear projects, which can cost closer to £20 billion. 

In the U.S., the sole example of a RAB-like model can be found in the recently commissioned  Vogtle nuclear power station. The advanced nuclear project is notoriously over-schedule and over-budget, with Georgia Power customers bearing far more of the costs than originally predicted. 

In March 2019, U.S. Secretary of Energy Rick Perry announced the financial close for up to $3.7 billion to fund Units 3 and 4 of Plant Vogtle. This comes on top of $8.33 billion in taxpayer-backed loan guarantees, originally secured by the Southern Company’s Georgia Power and its partners in 2010. In 2023, Georgia Power announced that the project delayed again, raising its share of the costs by an additional $200 million

The RAB model, with its risk-sharing approach for customers, in conjunction with nuclear energy's track record of substantial budget overruns, raises the possibility that customers may bear the financial burden of these significant cost overruns.

Leveraging the Power of CfDs and Power Purchase Agreements (PPAs)

While there are no successful applications of the RAB model to nuclear projects, the CfD – essentially a governmental version of a Power Purchase Agreement (PPA) – is used around the world to create sustainable energy markets.

Using a PPA, a third-party developer installs, owns, and operates an energy system (in this case, a nuclear reactor) on a customer’s property. The customer purchases the power output for a set period.

At Last Energy, we leverage investors’ familiarity with PPAs and the small, transportable design of small modular reactors (SMRs) to supply affordable, high-quality energy within an existing market construct. 

A Problem of Size – and the Antidote of Familiarity

The CfD was originally used by EDF Energy to finance Hinkley Point C: the first new nuclear power station built in the UK in over 20 years. Construction of Hinkley Point C began in December 2018, and the plant is projected to start generating electricity by June 2027. 

Like other large, conventional nuclear projects, Hinkley Point C has been subject to delays and cost hikes. Each Hinkley reactor produces 1630 MWe, but SMRs could provide an energy output of 20-300 MWe each and be built in a factory reducing on-site costs and delays. 

As evidenced by Hinkley Point C, the primary issue with CfDs isn’t nuclear: instead, it’s a problem of size. The RAB model can make sense for large-scale projects; but for SMRs, particularly fully modular micro-SMRs, leveraging existing financing structures in the energy industry can control the costs of nuclear projects. 

CfDs have a track record of success in the offshore wind industry and other renewable energy projects. Relatedly, PPAs are an increasingly common method of financing renewable energy projects. In 2021, more than 137 companies in 32 different countries signed PPAs; and in 2022, American Clean Power reported that PPAs were the primary offtake mechanism used by corporate energy buyers, accounting for 80% of contracted capacity

When applied to small-scale nuclear, PPAs work independently of fluctuating energy prices and public support, which mitigates risks for both energy producers and buyers – and facilitates the delivery of carbon-free power.  

Allowing Nuclear to Compete in the Clean Energy Market

To attract investors to nuclear projects, developers and governments should use familiar financial structures that deliver the product we all want: affordable, carbon-free power, and in the spirit of transparency that consumers deserve. 

If we want to unlock the full potential of nuclear, it must be allowed to compete with other sustainable energy projects. To achieve this objective, we don’t need to create a new RAB-based infrastructure; instead, we simply need to utilize existing funding models. 

Whereas the CfD model offers a transparent strike price, the RAB encourages overspend and shifts the risk of development from private investors to consumers, who must shoulder the burden if the project goes wrong. The CfD doesn’t compensate investors for cost overruns: a potential deterrent to investors, but a necessary incentive to control costs of nuclear projects and support their competitiveness in a free market.

Fundamentally, CfDs allow nuclear to compete with other energy sources in the market. Without competition, we can never create a market; and without allowing nuclear to enter the existing market, we may never acquire the funds needed to transition to clean, baseload power.