Nuclear's new playbook: the rise of RAB

Spotlight on Sizewell C

The government recently turned to the Regulated Asset Base (RAB) model to finance the major new nuclear power project at Sizewell C in Suffolk. The RAB model has been a significant factor in crowding in significant public/private equity and debt capital, including foreign direct investment from major pension funds, and the National Wealth Fund. Ultimately, RAB will enable Sizewell C to provide low carbon energy for around six million homes. The success of the RAB model at Sizewell C could therefore potentially set a precedent for future nuclear projects, both grid scale and smaller, balancing the need for clean energy with affordability and investor confidence.

How RAB works at Sizewell C

At its heart, the Nuclear RAB model allows nuclear projects to be funded by regulated charges on consumers during construction, shares risks more broadly, ultimately lowers financing costs which in turn attracts more private investment, all under the watch of a government regulator. The RAB model, already used for major infrastructure projects like water and transport infrastructure and energy networks, allows investors to receive returns during construction, funded by regulated charges on consumers. This approach aims to reduce the high upfront costs and risks that have, to date, tended to deter private investment in nuclear energy.

Under the RAB model, the project developer is allowed to collect revenue from consumers through regulated charges before the plant is completed and operational. This is different from traditional models, (including the CfD model), where investors only start earning returns once the plant becomes operational. The financial risks of construction - such as cost overruns or delays - are effectively shared between investors and consumers, rather than falling solely on the developer. This sharing of construction risk reduces the risk premium for investors, as investors can start earning returns earlier, face less risk, and as a result the cost of borrowing money (cost of capital) is lower. This can make the overall project cheaper for consumers in the long run.

With a government regulator overseeing the project, setting the allowed revenue and monitoring costs and progress during construction, RAB ensures transparency and protects consumers from excessive charges. The regulated return and risk sharing would appear to be attractive to a wider range of investors, including pension funds and infrastructure funds, who might otherwise avoid nuclear projects, considering them too risky.

Could RAB also work for SMRs

Great British Energy – Nuclear recently selected Rolls-Royce SMR Ltd as preferred bidder to deliver the first three SMRs in the UK, from 2030 onwards, providing low carbon energy to approximately three million homes. However, with SMRs still requiring upfront capital, and noting the RAB model’s ability to enable early and stable revenue streams, it will be interesting to see whether RAB might also be used to help make SMR projects more attractive to private and institutional investors, thereby assuring programme delivery, particularly during the early stages of SMR roll out. Applying the RAB model to SMRs could potentially open up non-government sources of financing, reduce costs, and accelerate deployment, enabling SMRs to play an earlier role in the energy transition to low-carbon energy (subject of course to the technology, sites and requisite grid connection being available).

However, the model might still need to be adapted to reflect the smaller scale and potentially faster construction timelines of SMRs compared to traditional nuclear plants. It is interesting to note, however, that whilst the government has indicated that the Nuclear RAB model could be used for SMRs in the future, especially to attract private investment and lower financing costs, no formal decision or announcement has been made that specifically commits the Rolls-Royce SMR projects to the RAB model.

Authors Kirsti Massie and Chris White, experts in Stephenson Harwood’s nuclear team – which guides clients through the legal complexities of financing, regulation, and construction of nuclear new build projects around the world.