Welcome to our three witnesses. Before I call on them to give evidence, I remind all members of the Committee that the questions that we ask today and, indeed, the contributions that we make during the detailed discussion of the Bill from Thursday onwards must be strictly on what is written down in the Bill and may not be on anything else. They may not be about things that you wish were in the Bill but are not; they must be simply about those things that are in the Bill, and nothing beyond that. The other thing is that we must stick to the timings given in the programme motion, which the Committee has agreed. That means that when we get to 10.25 am, no matter who may be speaking, I will require you to stop speaking and the first witnesses to leave. That may seem harsh, but we stick firmly to the timings agreed in the programme motion. No discourtesy is meant to any of you.
Will any member of the Committee who has an interest to declare please do so?
I would like to draw attention to my entry in the Register of Members’ Financial Interests. It is a matter of public record that I was employed in the nuclear sector prior to my election.
Thank you. I will now call the first panel of witnesses, all of whom are appearing here in person, I am glad to say. We have Julia Pyke, director of financing at the Sizewell C company; David Powell, vice-president of nuclear power plant sales and head of UK business development at GE Hitachi Nuclear Energy; and Michael Waite, director of new plant market development at Westinghouse Electric Company. I thank all three of you very much for taking the time and trouble to be here. Could you briefly introduce yourselves?
Before I ask the Committee for relevant questions, are there things that the witnesses would particularly like to say about the Bill? Have you particular views about the Bill that you would like to get across, or are you content simply to answer questions that may be put to you?
Good morning. Could I start with the Sizewell C company, and could you let me know, from the point of view of the company that has been set up for the purpose of developing Sizewell C, how you view the emergence of the RAB—regulated asset base—model as a way of funding the project at Sizewell C in particularQ ?
I think the emergence of the RAB model is very welcome. We obviously believe that the country very much needs nuclear, to support the growth of renewables and to produce electricity when the wind is not blowing and the sun is not shining. It is very important that we deliver nuclear in a way that reduces the cost to consumers to the greatest extent it can, and we believe that the RAB model is a way of doing that and enabling private finance.
A point that is not always made about the introduction of private finance is that if we want a nuclear fleet, which, you will not be surprised to hear, I believe would be a good thing, then always relying on taxpayer funding for that fleet is not necessarily going to promote the growth of a fleet, whereas getting nuclear on to a financeable footing means that the country can size the fleet to need rather than to the availability of taxpayer funding from time to time.
Q Mr Powell, Hitachi was very much involved with the Horizon consortium that pulled out of other nuclear plants a little while ago, which I believe was on the grounds that they could not sort out the financing of those projects. If the consortium had been offered in effect a RAB model to develop those projects, would you have had a different view?
Just to make things clear, I represent GE Hitachi, which was helping with the technology supply for the project that Horizon and Hitachi was taking forward. Hitachi was one of the main participants in trying to push forward the project at Wylfa, and I think that one of the big issues was the project’s financing aspects. It takes considerable time and a lot of effort to build two large-scale reactors, and I think that the RAB model could have helped. Obviously that is history now, and we would have to go back and look at that, but I think it would have helped at least in being able to move forward with the project.
Q Mr Waite, Westinghouse is the owner of Springfields Fuels.
Q I think Springfields has a series of difficulties in the continuation of its nuclear fuel and nuclear rods business. What difference would the construction of Sizewell C make to its viability as a future supplier of nuclear fuel rods and associated activities for the UK market and, indeed, the international market?
As you say, Springfields has been fuelling the majority of the UK’s nuclear fleet for almost 75 years. It is the exclusive supplier to the advanced gas-cooled reactor fleet, which will all have retired by the end of this decade. Whether Sizewell C moving forwards under a RAB would mean a supply of fuel from Springfields has yet to be determined. From a Westinghouse perspective, we see RAB as part of the solution for enabling further nuclear projects after Sizewell C. Certainly, the 2035 zero-carbon targets for the electricity generation sector require there to be further projects., If we could start a project at Wylfa and deliver our AP1000 technology under RAB, that would absolutely take its fuel from Springfields for the life of the facility and secure the life of the plant.
I am interested in the allocation of risk between companies and consumers. Obviously, one of the problems with the contracts for difference model is that you bear the construction risk, the political risk and so on, whereas with the RAB model you do not. If there are cost overruns, is there a risk that the consumer ends up paying for it rather than you and that you do not have the right incentives to control costsQ ?
The first thing I would say is that, of course, it is very important that the developer remains incentivised to minimise construction spend consistent with building safely and to time. The introduction of the RAB model will enable Sizewell to move ahead, so, primarily for consumers, not only will they need the electricity that Sizewell can produce but electricity bills will reduce when it comes on, because the alternatives to nuclear as the producer of electricity when the wind is not blowing and so on will cost more. Overall it will reduce consumer bills. It is, as you say, very important that we get the incentive regime right so that, although risk is shared with consumers, developers are always incentivised.
Q To press home that point, how do you make sure that the right incentive for the companies for Sizewell C also ensures the costs remain under control, rather than simply being passed on to consumers?
Yes. I think it needs to be fair. Clearly, what we are trying to do from a GE Hitachi perspective is really focused on driving down the cost of capital of our plants. The capital cost is a key part of that, of course, and clearly that part of the development that we are working on at the moment is to develop small modular reactors, with a key focus on reducing those costs by making the construction as simple as we can through modular build and using as much of the factory environment as we can. That obviously helps to reduce the costs of construction, as well as the risks of construction and the schedule of those. Like all technology developers, we have a reputation that we want to uphold, so our focus is trying to minimise the cost of that electricity for consumers by managing the projects very well.
Q Obviously you want to manage the projects well and guard your reputation, but big infrastructure projects such as nuclear power stations have in the past been subject to cost overruns. How do you manage that risk? Julia said it is shared between consumers and the companies, but in what way would it be shared? Is it 50:50? If you have a project that risks running out of control, how do you manage the risk to make sure there is as much benefit to the consumer as possible, or at least as little disbenefit, and what is the process for that?
One of the reasons that we are so keen to go ahead with Sizewell is that it is a copy of Hinkley, and it is in copies—fleet builds—that you get down construction risks. Hinkley has two units, and you can see how much easier it is to build unit 2. Common sense tells you it is because you are doing it again. We are very much hoping that Sizewell will be treated as units 3 and 4, and we believe—consistent with ideas about fleets of SMRs—that it is in repeat build where you get down costs. Nuclear in the UK has suffered from a considerable series of ones of a kind, followed by an extremely lengthy gap in construction. Nothing has been built since Sizewell B was turned on in 1995. It is by copying, the fleet effect, making sure that we learn all the lessons and using the same experienced team.
In terms of the proportion of risk sharing, it is not fixed yet, but around 50:50 is not an improbable outcome.
Q You will be applying for a licence to have the RAB model, and I am interested in your thoughts on the designation regime and whether the Secretary of State should have the power, or the regulator. It will obviously be a long process to apply for it and get the rights. In your business plans, that will be a huge part of the whole process.
I missed out on the last question so I am happy to answer this one. On the designation process, there is not a huge amount of detail in the Bill about what the requirements are for a company project to be designated. In the 2019 RAB consultation process, we entered some fairly detailed feedback which suggested that RAB, as well as being a very positive way forward for construction and operation financing of nuclear power, could also be very effectively utilised for the development phase of a nuclear power plant project. That development phase for a technology that was mature, preferably generic design assessment-licensed, could enable the de-risking of a project under the watchful eye of the regulator, where they are learning about the project, such that when it enters the construction phase, there is a significantly lower risk profile. From a Westinghouse perspective, I would say that that designation process could take place prior to the construction phase and benefit both the project company, of course, and also ultimately the ratepayer and Government through lowering the risk profile of the overall project.
Sorry. I am also interested in the point about who should actually do the designation. Julia, you made the point earlier that you would have a system that responds to need, as it were. Could you see this becoming just an ordinary function of the regulator, or should it always be the Secretary of State who does it?
I agree with Julia: clearly, that is a decision for the Government. As Mike said before, it is quite important that we look at where the designation actually starts from as well, because there is a huge part of developing nuclear projects prior to getting to construction. With the Horizon project, we saw the amount of money that Hitachi had spent—over £2 billion—and it did not get to that final investment decision, so that is an important consideration as well.
If I could address the same point, I absolutely think it should be the Secretary of State who has that final authority, predominantly because there are such a large number of moving parts of the project. It is not just about maturity: it is about value for money, and is that value for money just in terms of pence per kilowatt-hour, or is it UK content? There are a very large number of very broad aspects that can be assessed.
Q My last question is this: obviously, one of the purposes of the regulated asset base is to open up investment opportunities for UK pension funds and so on to invest in nuclear, and they obviously want reasonably reliable long-term returns. What criteria are needed from the RAB model to make it an investable proposition for UK funds? If you draw the criteria far too tightly, it would not be very attractive, but if you made it too generous it would not be good value for the consumer, so I am just wondering what you, as people out to encourage investment, are actually looking for. What do you think is needed? I do not know who is in the best position to answer that one.
Absolutely, the pension funds historically are great supporters of operating nuclear power plants, because those are some of the most consistent returns on investment possible. The construction phase and development phase are something different, so it is all about the risk profile for them. As I said, the more you can de-risk a project, the more it can become investable by those institutions.
A consumer prices index-linked investment stream is likely to be very attractive to people with CPI-linked liabilities, such as British pension funds. Increasingly, the financial investment community is very much interested in environmental, social and governance issues, and whether or not their investment is making a difference. I think that nuclear has a fantastic track record of making a positive difference: not only does it produce low-carbon electricity, but it is a great leveller-up. It has got a great track record of offering well-paid, highly skilled, unionised jobs. It also has a very good track record with the environment itself, and the land outside the power stations. Those three things coming together will make it an investment that can fit very well into the portfolio of companies that want to make a difference with their money.
I do not know whether the microphone is working. I agree with the levelling-up point, although that is more a political thing rather than, presumably, one of the criteria that the investors would use.
Just one operational point. Julia has spoken of the confidence that the Government will bring to the investment community, and we have seen that there are companies that want to invest in projects, but we would very much like that to be operational. Getting the investment early on is quite hard to do, so the confidence from the Government’s approach on the RAB model would help to provide that confidence to the investment community.
Good morning. I will direct my initial questions to Julia.Q
Ideally, the Bill is supposed to facilitate Sizewell C going ahead. Julia, you said that you view Sizewell C as units 3 and 4 of Hinkley Point C. Given that we are consistently told that the learning from the design of Hinkley Point C went on to Sizewell, why has the taxpayer committed £1.7 billion in the Budget to take Sizewell C to a final investment decision?
The £1.7 billion and its use is not published and not available to us. I think there is an assumption that it is for a Government investment in Sizewell C. Whether or not that money is for spending before you reach a final investment decision, or is a Government investment, is the type of investment decision for the Government and not for us.
There has been no express discussion about the use of the £1.7 billion in the Budget as pre-development funding for Sizewell C, no. The Government do discuss how it is that we may get from where we are now to a final investment decision, but there is no explicit linking of the £1.7 billion and that discussion.
Q Okay. So if the Bill goes through and we have the right regulated asset base model, would you still be expecting up-front money from the taxpayers to get that final investment decision, even though the design has already been undertaken?
We believe that the regulated asset base model—David and Michael will want to comment—is designed to come into place at financial close. The question of how nuclear projects get from where they are now—in the case of Sizewell the project is very mature, with a design and a team, and we have applied for consents; projects that are further behind obviously have a lot further to go and need a lot more money—is its own question. The regulated asset base model is designed to give the private investment community sufficient confidence in investing in nuclear that nuclear can go ahead and take its place in the electricity mix, which benefits consumers. The model is not necessarily designed to be a solution to the period from conception to financial close.
Q This is probably something that I am just not clear on myself, but in terms of the regulated asset base model that the Bill facilitates, what kind of contractual period are you looking for in terms of payback? What would you expect the Government to enter into in terms of the length of contract for revenue payments?
If you look at the roughly £200 billion of regulated assets in the UK across the national grid transmission lines, distribution lines, water companies and airports, the regulated asset base model will track the lifetime of the asset. In the case of a UK European pressurised reactor, the operational lifetime is around 60 years.
Q What about decommissioning and the disposal of radioactive waste after that? Would that be at your company’s risk or would there be some sort of revenue payment for that as well beyond the 60-year lifespan?
I think nuclear is unique among electricity-generating technologies in pricing in the cost of decommissioning and waste disposal up front. In the gas price, you do not see the cost of dealing with climate change. In the price for other forms of electricity generation, you do not see waste disposal priced in, but in the case of nuclear, the cost of decommissioning and waste management and disposal is priced in to the electricity price.
Q The regulated asset base model is clearly separate from contracts for difference, but in terms of the 60-year payback, you are looking for a lifetime asset. Would you also expect to agree a strike rate for the sale of electricity, what with the electricity generation price aspect? Would that be a risk that goes with the company?
A regulated asset base model will tend to pay for the asset to be available. We expect the electricity to be sold at market price and for the regulated asset base model to either provide a top-up, in the way the CfD does, if the costs under the RAB are above the then electricity price, or to pay back in if we see spiking electricity prices, in the way we have done recently, during low wind speeds and the gas price spike. It is two-way.
Q But would the price fluctuation on wholesale electricity prices sit with yourselves, or would you expect that minimum floor price to minimise risk?
Q Okay. The Government estimate that using the regulated asset base model will save consumers between £30 billion and £80 billion. How realistic are those projected savings?
I believe that the Government have done its calculations very carefully and cautiously, so I believe they are very realistic. They are comparing the cost of money under a contract for difference with the cost of money under a regulated asset base model. It is important to remember that the cost of money is by far the dominant cost to consumers. We need nuclear, and we need to get the cost of nuclear down. The dominant cost of nuclear to consumers is the cost of money, so it is entirely plausible that the Government’s figures have been carefully calculated and are right.
Q Have yourselves or GE Hitachi had discussions with the Government about this—“Here is what the cost of borrowing is, so we predict that these are the savings that will accrue if we go to a regulated asset base model”? Thirty billion pounds is a huge saving—£80 billion even more so.
We have, of course, looked at the savings. The most important saving to consumers is that, in building nuclear, consumer bills will go down. Models without nuclear are more expensive—I think the Secretary of State himself has said that in Parliament. That is a major reason to go ahead with nuclear, and it is a major reason to introduce the most cost-effective way of financing nuclear, which the Government has concluded is the RAB.
If I can help with that question, from the perspective of GE Hitachi, we are focused on small modular reactors in the UK. While the cost of those is considerably less than the cost of the Hinkley plants, the output is of course a lot less, at 300 MW or so. If you are going to build a fleet of those, which is where we would like to go in the UK—using that repeatability model and a standard licence design, so that once it is designed and licensed it can go through being built repeatedly, which is very much a factory output-type of approach—you very quickly get to the capital cost of something similar to a Thames Tideway project, which was £4 billion. I know that the RAB model is focused around large-scale nuclear projects, but we would also like to see that applied to small reactors or at least be considered. As yet, we have not done any analysis—all our focus has been on looking at costs, and the models have been on the contract for difference approach—but we would like to look at how that RAB model would apply, from the Government’s perspective as well.
Q Sorry, but we are talking about looking forward for yourselves.
You are hoping that RAB will facilitate the small modular reactors as well. Would that be a 60-year operational contract you would be looking for?
That is a matter for discussion with the Government and BEIS, but our plant design life will be 60 years, in a similar way to the Hinkley and Sizewell reactors. So, yes, potentially. That really depends on what the developers and investors would like to see.
Q Going back to you, Julia, the Secretary of State determines value for money, as per the Bill, in terms of entering into a contract and signing off. How does someone like me, in Opposition, get to understand the figures, particularly the in-built cost of disposal of radioactive waste? How do I understand what is built into the figures that the Secretary of State can sign off under the Bill?
I do not know what plans the Government has to explain the arrangements, but I imagine it will be in line with the principles of transparency. There is a lot information available about Hinkley. Michael made the great point earlier that value for money is around many things; it is the electricity price including the price of decommissioning, but it is also around UK content and around jobs. We will have 70% UK content; we will give rise to around 70,000 jobs. We give work to over 3,000 British businesses. So value for money is a wider metric than just the cost. There is a lot of information available on our supply chain plans and UK content, and I think there will be a lot of information available around the calculation of the RAB price.
Jobs in construction, using the National Audit Office metric, are around 70,000. Permanent jobs to operate the plant would probably be around 900 in ordinary state, plus several thousand more when there are maintenance outages, which are approximately every 18 months.
In the Bill, there is not currently a clear apportionment of risk between the constructor, the developer, the investors and the consumers. It is clear that if we are developing and constructing a project, there are two approaches to ensuring there are no overruns and minimising the chances of cost and schedule difficulties. You can either take a carrot or a stick approach. If the stick is applied to the developer and the constructor, there is necessarily a larger contingency applied from day one. If I remember correctly, in the Hinkley point original negotiations there was a £2 billion contingency for potential problems and cost overruns for a first-of-a-kind project in the UK. That sort of contingency allocation can be minimised by taking more of a carrot approach, where fees and profits can be at risk but a developer and constructor is not risking losing money on the job. There are many mechanisms in place that can incentivise on-time and on-budget operation without apportioning too much risk to the construction community.
Clearly, based on the information that the Government have put out on the RAB model, it is designed to help lower the overall cost of nuclear by lowering the cost of capital and the cost of financing. From the information I have read and discussions before, there is potentially a significant saving on large-scale projects such as Sizewell. We would hope that from building a fleet of SMRs you would be able to gain the same benefits for consumers. As I said, we have focused on trying to reduce the capital cost of the plant through simplifying the design. Add that to the benefits of the RAB model, which can help to reduce the cost of that capital through the reduction in financing, as well as increasing the incentive to deliver on schedule, there is an ideal way to try to reduce the overall costs of nuclear for consumers. We need more nuclear in the UK in order to meet the decarbonisation targets by 2035.
Yes. I think it a brilliant question, and the answer is that in the contract for difference the construction cost overrun risk is priced in up front, so consumers pay regardless of whether you incur a construction cost overrun. That makes the capital expensive and, because it does not pay until the station turns on, you run up interest for the long construction period of nuclear. In the RAB model, the construction cost overrun risk is not priced in up front, which reduces the cost of capital. The consumer, in paying £92.50 for Hinkley, is prepaying for the risk of construction cost overrun; in the RAB model there is a possibility, which we will do everything we can to minimise, of a construction cost overrun.
An example of how the RAB model will give people more certainty to get on with repeat build is that they have put in 46% more steel at unit 2 than at unit 1 in the same timeframe. It is a combination of not pricing in the construction cost overrun risk up front, and introducing more predictability into nuclear new builds, so we stop having huge gaps between construction in which the workforce has to relearn every time you start again.
No, I do not believe that we can. We have to make nuclear financeable, like offshore wind, and look for that fleet-build, cost-minimisation approach. The offshore wind industry has done a great job through being able to predict the opportunities to build more wind farms. We want that same fleet approach, and we want predictability so that people can have careers, and the workforce can learn and keep getting down the costs.
With AP1000, we can benefit from a global fleet effect. We have four operational reactors, which are breaking national and industry records. Two are approaching completion of construction, commissioning and fuel load in the US, and will bring a tremendous number of lessons learned and fleet benefits to the UK. Certainly, a potential AP1000 construction project at Wylfa and other sites can be enabled only by RAB being part of the financing solution.
It is pretty much the same, but we are clearly developing our BWRX-300 to be a global SMR technology. We are already working with several countries, looking at the first deployment of that. We also see the UK very high in that priority list—again, bringing that fleet-build mentality and 60 years of designing these types of reactors. We are able to bring a lot of experience and know-how to that. Part of that is to try to reduce the costs of nuclear overall. We are very encouraged by seeing the RAB model, and hope that it can be applied to fleets of SMRs in the UK.
I think it provides more opportunity for UK investors to come forward. We have spent a lot of time and money developing our reactor design, so we are quite well ahead now in developing projects, which is really the next stage. I think the Government funding that was announced will help the development of UK SMRs, and one of the big things that RAB does is help the development of projects. You need investors for those projects.
I think that having a stable CPI-linked project will make it possible for UK financial investors. That is a great thing; you can create a virtuous circle with the money of British pension funds investing in apprenticeships, skills and jobs for younger people in Britain, as well as in the production of electricity of course. I am confident that the RAB model will bring forward a lot more British investment and, exactly as you say, reduce our reliance on overseas investors.
We are currently very active in the Czech Republic, Poland, Ukraine and so on. Those nations predominantly have either majority Government-owned utilities developing nuclear projects or Government financing for up to 100% of the project. They are reducing the cost of capital by fully leveraging Government financing, which is the cheapest financing. Those are absolutely all regulated approaches. No projects that we are doing currently rely just on market forces to develop nuclear; it is too much of a long-term project, with massive long-term benefits, to leave it up to the market.
Before you start, Mr Pennycook, I should say that we have five people asking questions and 12 or 13 minutes left, so can everyone be swift in their questions and answers?
Q I will try and rattle through this. I have a series of questions relating to clause 1. Forgive me, Ms Pyke, but I think they will be directed mainly at you. It is quite clear in my mind that Sizewell C is the last project that can conceivably begin to generate by the end of this decade, so the Bill is very much about its effect on Sizewell C. Consumers in particular, but also Members of the House, will want to know whether the Bill is sufficiently discerning about which kinds of companies are designated, and who the RAB will ultimately go to. Could you detail precisely the interest in Sizewell C of China General Nuclear, or its subsidiaries or shell companies?
CGN currently has a 20% shareholding in Sizewell C. No material supply chain contracts are in place or intended to be in place with the Chinese supply chain or CGN. Whether CGN chooses to invest at financial close, and the extent to which it chooses to invest, is a matter for CGN itself and the UK Government. As Virginia’s question elicited, the RAB model is designed to bring in a lot more British financing and reduce reliance on overseas investors.
Q I do not want to get into the £1.7 billion—if I heard you correctly, you said that there were no express discussions, but that is really a question for the Minister rather than for you. Leaving the £1.7 billion aside, is it the company’s understanding that the Government’s intention is, as has been widely reported in the media, to divest themselves of that minority CGN stake? What options do you think are being considered in that regard?
Q Just to be very clear, because I think this has implications for the funding model, do you not think that that minority stake, and the potential force-out divestment by the Government, has any implications for the RAB funding model for Sizewell C?
As we have highlighted, the benefits of the RAB model are that it reduces the cost of finance and provides financial certainty for any project—those are two key inhibitors in the development of new nuclear fleet. However, the construction of nuclear power stations is inherently uncertain because of the risk associated with it, and costing that risk is extremely difficult. Are you satisfied that the Bill gives the Minister the opportunity to assess the cost of that risk effectively? The alternative would be the failure of the RAB model, which would undermine the fleet generation that we would like to seeQ .
I think that the Bill is a great framework under which there is a lot of detail to be developed, and we would expect more detail to be developed in relation to designation and the conditions of eligibility. While I could hardly deny that the cost of nuclear builds has had some uncertainty in some cases, what is not uncertain is whether nuclear works and the technology works. I think there are no cases worldwide of nuclear projects that have been abandoned for technical reasons. The industry knows how to make nuclear power stations work. So I think that there is a degree of uncertainty about the exact cost, but the whole point of building a replica of Hinkley is to minimise that uncertainty, benefit from all the lessons learned and get nuclear on to a stable, repeat-build footing.
We designed our SMR BWRX-300 on the basis of proven technology. So we know very much the cost base for that technology, and it is really in our interest and that of investors to ensure that we can deliver to time and to budget on that. With respect to the build, we would obviously want to try to minimise any impact and risk of cost and schedule overruns, because we see this as building a fleet of smaller reactors out of a more modular-type approach.
I do not think it is implicit, actually. We have heard about fleet benefits. What I think RAB does do, though, is ensure accessibility to the UK market for non-foreign-sovereign-owned entities. Under a CfD approach, frankly only large foreign Government-owned entities can stand that up-front cost. Then you are potentially delivering electrons, but you are delivering a foreign Government’s objectives and strategies rather than benefiting from the UK Government’s objectives.
Q Ms Pyke, you mentioned that you are basically responsible for getting the money in for Sizewell C. What hurdle rate do you anticipate that the investments will come in at as a result of RAB?
RAB is designed to attract low-cost capital, and the cost of capital will be set competitively. We anticipate a competition, which should drive down the cost of capital, between equity investors. We also anticipate that the cost of debt, which will actually be the majority cost of the project, will be set competitively. We do not have a hurdle rate, and deciding that hurdle rate will obviously be in part a matter for Government in terms of what will offer value for money. The Government’s impact assessment talks about example hurdle rates and we anticipate that the return will be somewhere in the region of the Thames Tideway tunnel rate, plus possibly some premium for it being nuclear, which is a novel asset class for private sector money in the UK.
Q You have absolutely correctly drawn attention to the impact assessment, which as you know projects a number of hurdle rates that could transpire below the 9% that is effectively the implied rate for Hinkley C. The calculations for the difference between what would have happened with a CfD as opposed to RAB depend on what hurdle rate comes out as a result of that. I wonder if you are able to give us any better indication of the area the hurdle rate is likely to fall to as a result of RAB being applied to the investments you are seeking?
As the Government have put in their impact assessment, you can run this at percentages over inflation that equate to the existing market in investing in RAB. I do not want to suggest a particular number—that would not be appropriate, because we are going to set the cost of capital competitively—but you can see the ranges that the Government have used, which they have based on the evidence of what is invested today in RAB assets.
Q Yes, but they have used that with what the impact assessment calls an “optimism bias assumption” behind it. What is your view of the optimism bias assumptions that you might have to make about the hurdle rate you are going to get? I am sorry you are not able to give even a range of percentages this morning.
Q No. I take it from the impact assessment that they are trying to price in, if at all possible, what they regard as the almost inevitable optimism bias in terms of initial figures. I am afraid it is a staple of nuclear calculations that there is usually a pretty optimistic bias in the initial calculations that the project will run exactly on cost calculations and exactly on time.
I think we are talking about two things here. There is optimism bias in relation to the outturn capital costs. The Government have taken a cautious approach to applying optimism bias to the capital costs, given that we are replicating the Hinkley design, using the experienced team, and we can see the savings made in unit 2 compared with unit 1. In relation to the cost of capital, it is entirely sensible for the Government to have based their calculations on the existing market of investment in regulated asset base industries in the UK. I do not think there is an optimism bias issue around their evaluation of existing investment rates.
Q But you would perhaps conclude that at least you can go to a 6% hurdle rate, if not better?
I would conclude no such thing. What investors choose to bid will be a function of how attractive the product is to the equity, what else is available in the market—it will be a whole range of considerations, but essentially it will be in the area of the existing investments in regulated assets in the UK, which are publicly available.
Q I think you would appreciate that the whole question of what RAB saves over a period of time depends on that hurdle rate?
But you are not able to help us this morning.
I do not think anybody is questioning the assumption that, in moving to a RAB from a contract for difference model, the cost of capital will come down, so it will save money compared with a contract for difference model.
Unless any other of our colleagues have a one-minute question, we are at 10.24 am and that very neatly brings us to the end of our time. [Interruption.] I am afraid we only have one minute, Alan; one yes or no question, perhaps?
Q If Sizewell C gets the go-ahead, how long do you think it will take to get to the commissioning stage and generate electricity in the grid?
Thank you very much. I thank all three of our witnesses, who have had a gruelling session. It has been very useful; a lot of information has been gleaned from your evidence and we are most grateful to you for taking the time to come and speak to us. Thank you very much indeed. Would you mind vacating the hot seat? You will be replaced by only one person in the room. Incidentally, you are more than welcome to stay and listen to the subsequent session. I invite the next panel to join us.