The Changing Landscape for Nuclear in the United Kingdom
Nuclear power has reached an inflection point in the UK. With ambitions to secure clean energy at scale and at pace, the UK government has been strongly supportive of it as an energy source and is presently determining the practical pathway to deliver 24 GW of nuclear power by 2050 [1]. Despite its chequered history and the need for further education among the general population, stakeholders across the sector are supportive of a national energy mix that incorporates nuclear power.
Historically characterised by high upfront costs and sizeable payback periods, nuclear energy has frequently struggled to attract investment. Cost of capital has remained a considerable barrier for private investment – site preparation, engineering and construction have been significantly more expensive than for equivalent natural gas projects [2]. As a result, generating a return on any investment in the UK has frequently been seen as a challenging and unpredictable process. Construction of plants has been further hampered by a complex and onerous licensing processes.
However, the tide appears to be turning for nuclear in the UK. According to a survey conducted by FTI Consulting earlier this year, views of global institutional investors largely mirror the government’s optimism, with 64% seeing it as a low-carbon fuel suitable for ESG investing, and 96% expressing interest in, and awareness of, the UK’s next nuclear power station, Sizewell C [3]. In an increasingly volatile, long-term energy market, investors have expressed interest in predictable energy sources at fixed prices and see nuclear as a safe and reliable homegrown energy opportunity.
Among the general population, perspectives are more nuanced and highlight the need for knowledge-building across the population. A second FTI Consulting survey of UK adults revealed that while 75% viewed nuclear energy as having a role to play in addressing climate change and providing a viable route toward net-zero, only 32% saw it as a particularly low carbon source of energy generation [4].
Views also differed between generations, with the older Generation X and Baby Boomers highlighting more concerns around waste and safety. Conversely, younger Generation Z and Millennials appear focussed on emissions and efficiency [4]. To capitalise on the current momentum around nuclear energy and ensure it reaches its potential in the UK, there is a need to proactively correct these misconceptions.
Overcoming challenges of the past
The share of energy generated by nuclear power has steadily declined in the UK in recent years. Today, five remaining nuclear plants produce around 16% of the UK’s electricity, however, all but one reactor are set to retire by 2030 [5]. Despite Government investment into both Sizewell C and the Hinkley Point C nuclear power plant in Somerset, the Labour Party has openly criticised the slow pace and inadequate investment [6]. This is in spite of overarching cross-party support and investment into the development of the UK’s nuclear industry.
Sources of criticism have been varied. The debate over £92.50/MWh ‘strike price’ for Hinkley Point C; false starts for Horizon at Wylfa and NuGen at Moorside; volatile UK sentiment towards Chinese investment in critical infrastructure; and the stop-start nature of the UK’s approach to small modular reactors (SMRs), have combined to muddy the waters for nuclear new builds, leaving a turbulent investment landscape.
However, the UK Government is determined to reduce the risk on investment and provide a clear commitment to the creation of a 21st Century nuclear fleet. Specifically, it has implemented a new nuclear regulated asset base model (RAB) to help fund “future nuclear projects, providing support for their design, construction, commissioning, and operation” [7].
Under the model a portion of the risk associated with a nuclear project is shifted from developers to consumers – energy companies manage the infrastructure project and generate revenue through bills, as well as being offered Government subsidies [7]. For investors, this long-term commitment from the Government provides increased confidence by guaranteeing a longer rate of return and reducing the upfront investment risk.
The RAB model offers several other advantages: it overcomes issues with contracts for difference by removing volume, construction and timing risk, as well as a high fixed strike price which can penalise consumers. It also retains the use of private finance – keeping investment off the Government balance sheet; and solves the “time inconsistency” problem, to offer long-term stable financing.
Technological advancements – Sizewell C: the next generation?
Sizewell C looks set to be the first infrastructure project to capitalise on the favourable investor and political landscape. Built on the Suffolk coast alongside existing Sizewell reactors, it will generate 7% of the UK’s energy, supplying electricity to six million homes for at least 60 years [8]. It will replace fossil-fuel energy, saving around nine million tonnes of carbon emission each year and delivering electricity at a cost that is competitive with other low-carbon sources [8].
As the first state investment in a new nuclear power station since 1987 which leverages a uniquely advantageous funding structure, Sizewell C offers an opportunity to accelerate the development of critical national infrastructure at a time of ongoing volatility in global energy markets [9].
Technological developments also provide the opportunity to leverage the supply chain and other capabilities developed by Hinkley Point C, with Sizewell’s two reactors a near identical copy. Drawing on existing learnings from Hinkley’s construction, and with a design already approved for use and its safety scrutinised, the project will be cheaper and more efficient to construct, a critical piece of the investment case [10].
Nuclear power’s ESG renaissance
Growing stakeholder interest in climate change presents both opportunities and challenges for nuclear in the UK, and the integration of environmental, social and governance (ESG) factors into the investment process has led investors to assess ESG factors on an equal plane as profit generation [4].
While there are clear risks, particularly as investors demand alignment with shifting ESG frameworks, investor confidence in the ESG credentials of the nuclear industry remains high in the UK [4]. Indeed, Chancellor Jeremy Hunt recently announced that the technology would be recategorised as “Environmentally Sustainable” and, while subject to criticism from some parts of the investment community, the EU has also similar steps to add nuclear power plants into its taxonomy [11].
To ensure the industry moves on from its chequered history with the support of the investment community, it must demonstrate excellence in environmental stewardship, social responsibility and good governance.
Where next?
The next 12-18 months are pivotal for the UK’s nuclear power industry, as Sizewell C works to reach FID and begin construction. Government, investors, and the public will be essential stakeholders during this period. The positive classification of nuclear in the UK taxonomy and public consultations on the RAB funding model will likely see the emergence of certain sustainability challenges, which will need to be carefully managed in order to protect and enhance the industry’s social license.
With growing demand for clean energy and enhanced public and political interest in energy security, nuclear provides an increasingly attractive investment proposition. Thanks to reworked financing models and Government backing, which will likely remain no matter the outcome of the anticipated general election in 2024, historic concerns around cost of capital and investment risk are being meaningfully addressed. Simultaneously, technological developments, particularly a proliferation of SMRs, will serve to further reduce the risks associated with undertaking new nuclear projects in the UK and build public confidence in this critical UK industry.
References
[1] UK Parliament (2023), Delivering nuclear power: Government Response to the Committee’s Eight Report. https://publications.parliament.uk/pa/cm5803/cmselect/cmsctech/1897/report.html (accessed 28 October 2023).
[2] World Nuclear Association (2020), Financing Nuclear Energy, https://world-nuclear.org/information-library/economic-aspects/financing-nuclear-energy.aspx (accessed 3 October 2023)
[3] In April 2023, FTI Consulting surveyed approximately 200 institutional investors around the globe with an average $80 billion in assets under management (AUM).
[4] In September 2023, FTI Consulting surveyed approximately 1000 representatives of the UK general population (18+ years old) based on a random and quota-based selection process.
[5] UK Department for Energy Security and Net Zero (2023), Energy Trends and Prices Statistical release: 20 March 2023, https://www.gov.uk/government/statistics/energy-trends-and-prices-statistical-release-30-march-2023 (accessed 27 September 2023).
[6] UK Parliament House of Lords Library (2021), Nuclear power in the UK, https://lordslibrary.parliament.uk/nuclear-power-in-the-uk/ (accessed 3 October 2023)
[7] UK Department for Energy Security and Net Zero (2022), Development costs and the nuclear Regulated Asset Base (RAB) model, https://www.gov.uk/government/publications/development-costs-and-the-nuclear-regulated-asset-base-rab-model (accessed 27 September 2023).
[8] UK Department for Energy Security and Net Zero (2023), New steps to speed up construction at Sizewell C, https://www.gov.uk/government/news/new-steps-to-speed-up-construction-work-at-sizewell-c (accessed 27 September 2023).
[9] UK Department for Business, Energy & Industrial Strategy (2023), UK government takes major steps forward to secure Britain’s energy independence, https://www.gov.uk/government/news/uk-government-takes-major-steps-forward-to-secure-britains-energy-independence (accessed 3 October 2023).
[10] Sizewell C Supply Chain (2023), What is Sizewell C, https://www.sizewellcsupplychain.co.uk/what-is-sizewell-c/ (accessed 3 October 2023).
[11] The Rt Hon Jeremy Hunt MP (2023), Spring Budget 2023 Speech, https://www.gov.uk/government/speeches/spring-budget-2023-speech (accessed 3 October 2023).
About the Research
- Please note the general convention for rounding was adopted, so not all sums add up to 100%.
- Respondents were randomly selected via a quote-based selection process.
- For more information on the methodology for both surveys, please contact [email protected]
| The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.
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