Richard Hall gave evidence.

We will now hear from Richard Hall, chief energy economist, Citizens Advice, who is appearing via video link. We have until 2.30 pm for this session. Welcome, Mr Hall. Would you like to introduce yourself?

Richard Hall:

Good afternoon. My name is Richard Hall. I am the chief energy economist at Citizens Advice. Citizens Advice has a statutory role to act as a consumer representative in the electricity and gas sectors. That comprises a research and advocacy function in terms of trying to understand the issues consumers face and propose better solutions for them; an advice function in terms of helping consumers to understand their rights and options that is provided through our bureaux, our website and a telephone consumer advice service; and providing advanced support to consumers with difficult complaints or issues through an extra help unit that is shared between ourselves and Citizens Advice Scotland based in Glasgow.

Thank you very much. Dr Alan Whitehead would like to ask a question.

Good afternoon, Richard. I will start the questioning by asking you to reflect on your consumer protection role at Citizens Advice and how you feel that the regulated asset base arrangement protects, or otherwise, consumers and their bills. For example, I know that you made a submission to the RAB consultation when it was under way, which made a number of points about how the customer might be best protected in a RAB situation of the size of Sizewell C and about the risks that might be run as a result of dealing with a project that has so many uncertainties in cost and timing. Could you expand on that for us?Q60

Richard Hall:

Yes, certainly, Alan. There are good reasons to think that a RAB model could reduce the cost of capital associated with bringing forward new nuclear projects, but it is important to be mindful that consumers are not simply exposed to the cost of capital; they are also exposed to the volume of capital. That is relevant in the case of nuclear because nuclear projects have a track record of coming in over budget and behind schedule.

If you look at the impact assessment that the Department for Business, Energy and Industrial Strategy published alongside the Bill, it highlights that, on average, new nuclear projects of the nth of a kind—not the first reactor of a particular model to be built, but an iteration of it—have come in 20% over budget within Europe and 100% over budget worldwide since 1990. It also highlights that nuclear projects within Europe have suffered construction time overruns averaging 40% following the final investment decision. The average is 90% on a worldwide basis since 1990. This matters to consumers because, under a RAB model, unlike a contracts for difference model, they are exposed to the cost overruns and to the time overruns if they occur in a different way.

Perhaps to unpack what we mean by that, I should point out that under the CfD model that was adopted for Hinkley Point C a price is guaranteed to the developer for every megawatt-hour of output it produces, and that is inflation-linked, but consumers do not become liable to start paying those costs until the plant is operational. Those costs are pay on delivery. Consumers are not expected to pay in advance of the plant being there. Under a RAB model, consumers would start paying towards the cost of the plant from the time the construction commenced. Indeed, the Bill as it is drafted allows for that. If there are construction cost overruns, consumers will essentially be paying for a benefit in terms of a production facility that is not actually being delivered yet. That is the point about construction time issues.

On cost overrun issues, while the strike price that was agreed for Hinkley Point C appears to some commentators to be quite high, it has the advantage to consumers of being, in effect, an all-in price. If the cost of the build project escalates over time, those escalating costs will have to be met, but they would be met by the developers; they would not be met by consumers. Essentially that risks sits with investors. Under the RAB model, however, it is likely that any cost escalations would be shared between the consumers and investors. At this stage, we do not know exactly how. The BEIS consultation from the autumn of 2019 suggested that it might look at putting in place mechanical sharing factors between the developer and consumer. That means if the construction were to run under or over budget, a proportion of the benefits or additional costs would be borne by the investors and the developers, but a proportion would also be borne by consumers. On that, it is important to be aware that although the developers have some control over construction because they are in control of the overall project, consumers do not have any control over the risk. Essentially, they are the passive recipient of the risks.

In a nutshell, the concern that we have is that if a project were to come in on budget, RAB looks like a very good model potentially, but there is a strong historical track record that suggests that projects may not come in on budget. Under the RAB model, consumers may be exposed to significant cost overruns as a consequence.

Q Thanks very much for that. I am sure you understand, having looked at the Bill, that the mechanism that is in place at the moment for the sort of overruns you mentioned is a revision of the allowable costs. That would be at the Secretary of State’s discretion to reformulate as far as RAB was concerned. That would then follow on into additional calculated costs for consumers as the RAB was re-costed according to the overruns. Do you have any thoughts about whether that is a good enough system for the protection of overall consumer interests, or are there ways that you might want to modify that to make sure that the allowable costs ceiling that was initially set out was, indeed, either shared by developers and consumers in future or might be considered for different methods of financing should it be breached?

Richard Hall:

There is a lot in that question. I will try to unpack it if I can—there was something about methods of financing, and something about cost caps too. Regarding cost caps, the Bill envisages that there would be a funding cap essentially—a point at which, if costs escalated significantly above the expected spend, the Secretary of State would be prompted to take a decision on what should happen with those additional costs. I do not believe that the face of the Bill actually stipulates what that materiality would be, and I think it also leaves that decision very much at the Secretary of State’s discretion, so there is the potential that they could simply acknowledge that there was a problem, but continue to put those costs on to consumer bills. That seems to be fairly vague: it leaves room for ambiguity on what a Secretary of State might do in that type of scenario in future.

A couple of things could be done to try to mitigate consumer costs. The first is that the sharing factors that are set out—they are not set out in the Bill; they are to be agreed between the Department and the developer, as to who bears the costs if there are significant cost overruns—should be slanted towards the developer facing most of those costs. Again, that is because consumers have no ability to control those costs whatsoever, whereas the developer does have the ability to control some of those costs. Effectively, that risk needs to be borne as much as possible by the developer. It should be borne in mind that, obviously, that creates some interactions with the cost of capital: effectively, the more you de-risk the developer, the more you reduce the cost of capital, but given that you are only doing that by pushing those risks on to consumers, we think it is probably better to ensure that the developers are subject to as sharp incentives as possible to build it on time.

Turning to the other areas that I think would be of assistance, the Bill envisages that the developer would have a right to appeal any decisions that Ofgem made on the price control that had been agreed for the developer. Intuitively, those appeals are only going to go in one direction—that is, if the developer feels that a settlement is not generous enough to it. It is hardly going to appeal if it feels a settlement is too generous. I notice that elsewhere, in terms of many aspects of energy governance, where appeals processes exist, they are bidirectional: they allow for someone to appeal that a settlement is too tough, but they also allow for people to appeal that a settlement is too weak. We think that type of approach should be followed here: if the developer has the right of appeal to basically ask for more money, other interested parties should have the right of appeal to argue that there should be less money, so there is bidirectional scrutiny and tension there.

A second area in which I think we could help to bear down on costs is that it is quite important that some form of independent third-party impact assessment is made of the key terms of any deal that is agreed under this Bill, and published before that agreement becomes legally binding. I would also like parliamentarians such as yourselves to have an opportunity to see the headline terms of any agreement and that independent third-party impact assessment, and to be able to scrutinise those costs before the agreement becomes legally binding. If that seems like it might be quite an unusual thing to do, because obviously Parliament does not micromanage individual infrastructure purchases, we would argue that it is justified in this case, because we are talking about building assets that will—even at the most conservative estimate—cost consumers tens of billions of pounds, and those costs will be recovered from consumers for potentially 50 or 60 years.

Thank you.

RichardQ , you have spoken with great insight about the balance between the advantages of the RAB model and the risks that come with it for consumers, and also about how those consumers might be better protected. Will you give the Committee your take on what we have learned from those infrastructure projects that have benefited from a RAB funding model, such as Thames Tideway or Heathrow terminal 5? Was the peak of costs on consumers within the estimated range at the start of the project, leaving aside cost and time overruns? How accurately can you predict the peak cost for consumers and ensure that it comes within a set range, if—as may be the case—amendments to protect consumers are not ultimately adopted? How accurate is the forecasting of the total impact on consumer bills?

Richard Hall:

On those two specific projects, Heathrow and Thames Tideway, I cannot give any insight. I am not particularly close to those individual cases. It is fair to note that in both cases the cost of capital brought forward by the model seems to have been low, in particular in the case of Thames Tideway. On nuclear, I simply go back to the point that there is a large base of literature looking at historical cost overruns and the extent to which things come in on budget. That tends to display fairly consistently that these types of projects are very likely to be subject to optimism bias at the time that they are procured—a belief that they will be cheaper than they actually will be.

In addition to the costs and dates I mentioned from the BEIS impact assessment suggesting the average levels of cost overruns, look at a couple of other examples from academia: Sovacool et al. looked at a global example of 180 new nuclear plants and found that 97% of them came in over budget and that the average cost overrun was 117%; and Flyvbjerg et al. found that in a sample of 194 nuclear plants, the median cost overrun was 68% and the median schedule or construction-time overrun was 40%. That is a fairly large sample set of projects, and the analysis tends to suggest considerable optimism bias for new nuclear—it tends to come in late and over budget.

Q I have one follow-up question. Leaving aside the particular problem historically in nuclear projects with overruns, will you elaborate on how the order of magnitude with this particular RAB—or a RAB that the Bill would facilitate for something like Sizewell—increases the amount of risk for consumers vis-à-vis those RABs that have been used on other infrastructure problems, which are smaller? Does the order of magnitude of the potential RAB we are talking about—independent of the dynamics around nuclear—inherently increase the risk significantly, just because it is so much bigger?

Richard Hall:

I think potentially it could, simply because of the scale of the project. The cheapest cost estimate in the impact assessment is that, for a Hinkley Point C-sized plant put forward on the RAB model, it would cost about £24 billion. That is the cheapest estimate, so we are talking about extremely chunky consumer spend.

Thank you.

Richard, following on about costs, you said that Hinkley Point C was estimated at £24 billion. Even if we say that Sizewell is £20 billion, we heard that Rolls-Royce is hoping to build five small modular reactors, which will be about £10 billion. If we look at consumer protection, value for money and achieving net zero—particularly heat decarbonisation—if I gave you £30 billion, would you spend it on nuclear, or would you do something different with such levels of capitalQ ?

Richard Hall:

It is hard to see a case for this being the most cost-effective way to spend money on generation. A lot of the argument for whether we need new nuclear or not comes down to whether it is perceived as being useful to provide a balanced generation mix, so that it is available when other forms of low-carbon generation are not available. On that point, I note that the Government are more confident on the need for new nuclear than some of their advisers are. The Committee on Climate Change’s sixth carbon budget work from last December shows a range of pathways to net zero by 2050, some of which involve new nuclear. It talks about it being “possibly” needed, not definitely needed.

The National Infrastructure Commission’s 2018 national infrastructure assessment recommended that the Government consider bringing forward one new large-scale nuclear plant in the 2020s—but only one, suggesting that in general terms the cost reductions in renewables were so sharp and likely to continue that a pivot to renewables appeared a better bet than backing nuclear more forcefully.

The case for whether new nuclear is needed is ambiguous at this stage. Could you get better value for money from investing in other things? I think the challenges of making our homes energy-efficient so that we stop spending so much on energy and reduce emissions should be tackled as a priority.

Q We heard this morning from the Sizewell C company that it is looking for a 60-year contract under the regulated asset base model. Do you have concerns about consumers getting locked into a 60-year payback period? Given that the longest operational lifespan of a UK nuclear power station has been 40 years, 60 years is 20 years beyond that maximum. Does the Bill need to address the risk of consumers paying for a nuclear power station that has reached the end of its life and is not generating?

Richard Hall:

I certainly think that the risk of it being brought out of service earlier than expected has to be borne by the developers rather than by consumers. There is no way in which consumers can forecast or manage that risk.

On affordability over 60 years, we are talking about a 60-year lifespan, but there may be another 10 years in addition for construction, so we are talking about a payback period that, if we had the decision now, might continue until 2091 or towards the end of the century. It is extremely hard to know what options will be available to consumers 10 or 20 years out, let alone 70 years. It is hard to forecast whether it will offer consumers good value for money over that period.

One can only note that the cost of alternatives—renewables, storage and so on—has fallen rapidly over time. There is some risk of buyer’s regret: an option that looks cost-competitive today might look quite cost-uncompetitive quite rapidly.

Q We also heard this morning that disposal of radioactive waste is built into the up-front cost and becomes part of the 60-year payback. Is there any way of ensuring that the risk stays with the developer? Might the risk transfer to the consumer? If a company became insolvent, who would be responsible for decommissioning and disposal of the waste?

Richard Hall:

That is a good question. If the special administration regime were to be used, I understand that effectively it would mean that the special administrator would be taking on that risk. That may mean that it became a public liability. I do not know how a special administrator would sell on that risk to others.

In terms of where it would be borne if the special administration regime were never used, I think that would come down to the terms of the contract agreed between the Government and the developer. In its current form, the Bill basically enables the Government to enter into negotiations with a developer to agree a contract based around the RAB model, but the details of that contract are not contained in the Bill. Earlier, I said that I thought it very important that an independent third-party impact assessment be laid before Parliament after a deal is struck but before it becomes contractually binding. That would provide the opportunity to understand where the liabilities would sit in that type of situation.

Q Obviously, I have heard what you just said about nuclear. Since Hinkley, we have taken an annualised payment from operators to deal with waste and decommissioning. It is not something that we have to deal with later in the special administration regime. I gather you have an anti-nuclear stance. Does the CAB have a preferred route to providing consumers with electricity? You have spoken a lot about renewables and the cost of renewables, but when we factor in constraint payments and various other issues, such as back-up, it becomes a very expensive way of delivering energy to the most vulnerable in society. Does the CAB have a view on a preferred electricity generation route, and if we are to build nuclear, do you have an alternative preferred model to RAB?

Richard Hall:

We do not have an anti-nuclear stance; we are technology neutral. In terms of the options between bringing forward new nuclear or leaving catastrophic climate change unchecked, there is no question that nuclear is an option that can help us to reduce our emissions and tackle the climate change crisis. We do not have concerns on the technology itself, and whether it can be done safely and so on. Our concerns are simply around cost. It looks like a costly option compared with others.

On whether we have a preferred approach, because we are technology neutral we do not have a preference for any particular technology over others. I would simply highlight such things as the analysis of the Committee on Climate Change, which showed a range of possible pathways to 2050 that it considered to be affordable. Some of them involved nuclear and some of them did not. It appears that there is a choice to be made.

I think this will be the last question to the witness.

Q Richard, you said earlier that under a CfD model, consumers do not pay anything regardless of overruns other than what they committed to pay through the CfD strike price, whereas in a RAB model, as we have discussed, they are committed to paying throughout the process and may well incur additional costs under a cost ceiling increase. In the impact assessment, it appears that the difference in the cost under a CfD model and under a RAB model was calculated on the basis of consumers paying in full for overruns through a CfD model. Do you agree that that is perhaps not an accurate way of putting it? If so, what sort of difference will that make to the suggestions of the savings between the two models put forward in the impact assessment?

Richard Hall:

Yes, certainly. Paragraph 4.2 of the impact assessment sets out a range of tables showing what the estimated construction and financing costs would be for a Hinkley Point C-sized power station in a range of scenarios: under a CfD with 20% cost overruns, or with 100% overruns, or under the RAB model at various different costs of capital—

Order. I am afraid that that brings us to the end of the time allotted for the Committee to ask questions. On behalf of the Committee, I thank you very much, Mr Hall.