Moved by
Lord Callanan Portrait Lord Callanan
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That the Bill be read a second time.

Lord Callanan Portrait The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
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My Lords, the Bill establishes a new funding model for new nuclear projects, known as a regulated asset base—RAB—model. This funding model would allow a company to receive funding from consumers through their energy suppliers in relation to the design, construction, commissioning and operation of a new nuclear project. By using a RAB model, a company’s investors share some of a project’s risks with consumers. This can lower the cost of finance for funding new nuclear plants, which is the main driver of project cost. This could deliver nuclear plants at a lower overall cost to consumers than if we relied on existing funding mechanisms alone.

As the National Audit Office observed in its 2017 report on Hinkley Point C, by using a model such as a RAB, which shares more project risk while providing the developer with a revenue stream, the required return to investors could be lower, resulting in lower project costs overall. As well as introducing a RAB model for nuclear, the Bill takes steps to remove barriers to private investment to further incentivise the development of new nuclear projects in the United Kingdom. These measures will reduce the UK’s reliance on overseas developers for finance and deliver better value for money for consumers. This legislation is vital in getting new nuclear projects off the ground and will help the UK meet its decarbonisation targets. As well as contributing to achieving our net-zero commitments, new nuclear will complement renewable energy to ensure that the UK has a resilient, low-cost, low-carbon electricity system for the long term.

With all but one of the UK’s current nuclear reactors scheduled to close by 2028, representing 85% of our existing nuclear capacity, the need for new nuclear projects is more urgent than ever. The UK was the first country in the world to establish a civil nuclear programme and the sector has a proud history of innovation and of creating high-skilled jobs across the length and breadth of the country. The Bill is an opportunity to boost this vital sector and its supply chain by getting projects off the ground, while supporting the Government’s recent levelling-up White Paper.

With construction of Hinkley Point C under way, the Government are aiming to bring at least one large-scale nuclear project to a final investment decision by the end of this Parliament, subject to value for money and all relevant approvals. The recent spending review provided up to £1.7 billion of direct government funding to support this objective. The Government have also provided further funding to support the development of future nuclear projects, including small modular reactors, led by Rolls-Royce.

This funding has been made available to develop and mature prospective projects. In addition, we need a new funding model that unlocks cost-effective nuclear power. This is the main objective of the legislation before us today. We must harness the potential of private capital to be partners in our nuclear sector and widen the pool of available finance for new projects. This will naturally take us away from reliance on single developers financing new projects at their own risk, something which has contributed to the cancellation of recent projects at Wylfa and Moorside. The effectiveness of the RAB model has been seen in the successful financing of other complex and large infrastructure projects, including the Thames Tideway tunnel and Heathrow terminal 5. With nuclear projects, the RAB model has the potential to bring in new sources of capital at a value for money cost to consumers.

In terms of international comparisons, it is important to stress that there are key differences between the RAB model and projects in the US that used the early cost recovery model. At projects such as those in South Carolina and Georgia, the economic regulatory approach taken was driven by unique company ownership models, which had implications for how costs were passed on to consumers. Other differences include the level of regulatory oversight and how incentives were established for projects to be delivered to cost and on schedule.

There were also several project-specific issues, including the maturity of design work at the start of major construction, the experience of the project supply chain, and the structures in place to manage the project. All potential nuclear projects in the UK will be subject to very rigorous due diligence, including the designation process set out in the Bill, which would mitigate against such issues arising in this country.

The Bill consists of four parts. Two of these establish the RAB model. The others take additional steps to incentivise investment and protect the interests of consumers. The first part of the legislation creates a framework for the implementation of an economic regulatory regime for the RAB model. The regime will be designed to share risk in a way that reduces the cost of financing projects, while incentivising investors to manage project costs and schedules.

This part of the Bill will allow the Secretary of State to designate a nuclear company for the purposes of the RAB model, as long as it meets specific criteria and relevant persons are consulted. The designation criteria require the Secretary of State to be of the opinion that the development of the relevant project is sufficiently advanced to benefit from the RAB model and that designation is likely to result in value for money. Once designation has occurred, the Secretary of State will be able to amend the nuclear company’s electricity generation licence, allowing it to receive a regulated revenue stream to support the design, construction, commissioning and, of course, the eventual operation of the nuclear project.

The second part of the Bill covers how funding will flow to a nuclear company that has been given access to RAB funding. This mechanism draws on the contract for difference model. Ofgem will calculate the nuclear company’s allowed revenue for a given period in accordance with its modified generation licence and how much will need to be collected from electricity suppliers. Suppliers will then pay their appropriate share of this to a counterparty, which will be responsible for passing the total amount on to the nuclear company. This will enable a steady flow of funding between domestic and non-domestic consumers and a nuclear company.

The third part of the Bill introduces a special administration regime, which will come into effect in the unlikely event of a project company’s insolvency. Unlike an ordinary administration, a special administrator must prioritise the commencement or continuation of electricity generation from a nuclear power plant which is benefiting from a RAB model. This seeks to ensure that consumers benefit from the investment they have made through RAB payments in the form of the electricity generation that the project will ultimately provide.

The fourth part of the Bill makes technical clarifications to the regime of funded decommissioning programmes in the Energy Act 2008. The Bill clarifies that entities such as security trustees and secured creditors will not be bodies “associated” with nuclear site operators simply by virtue of holding or exercising certain rights relating to the enforcement of security. This will facilitate these bodies’ involvement in the financing of nuclear projects. This part of the Bill also contains a financial provision that provides an indication to Parliament of the spending that may be incurred under the Bill’s provisions.

Finally, the commencement clause sets out the limited number of provisions in the Bill which are subject to early commencement. This is crucial in ensuring that the Government can bring at least one large-scale nuclear project to final investment decision in this Parliament, subject, as I said earlier, to value for money and all relevant approvals.

I have already touched on a number of the benefits that the Bill provides. As mentioned earlier, this legislation could significantly reduce the cost of financing new nuclear projects and reduce the UK’s reliance on overseas developers for financing new nuclear, while providing low-carbon, reliable energy. Consumers will therefore benefit from lower system costs than if the UK relied solely on intermittent power sources.

More broadly, this legislation also represents a significant opportunity for UK businesses. As Hinkley Point C proves, new nuclear build projects create jobs locally and nationally to support the supply chain and boost economic recovery. The nuclear sector employs approximately 60,000 people, which includes a significant proportion of highly skilled jobs, and the nuclear RAB model will help create thousands more.

In terms of the devolved Administrations, the nuclear RAB regime would extend to England, Wales and Scotland only. We understand that the Scottish Government do not share our position on the need for new nuclear projects. However, this Bill does not alter the current planning approval process for new nuclear projects. In addition, the Secretary of State would need to consult with Scottish Ministers before designating a nuclear company whose proposed project was wholly or partly in Scotland.

I was pleased to see the support expressed for this Bill by numerous MPs from all sides in the House of Commons representing constituencies in Wales. We will continue to work closely with the Welsh Government on options for a future nuclear project at Wylfa, and a RAB model remains an option for financing a nuclear project at this site. I was pleased also to see the support that the Bill got from Her Majesty’s Official Opposition as it passed through the other place. I look forward to further constructive engagement—indeed, we have already commenced it—and co-operation as the Bill proceeds through your Lordships’ House.

At Committee and Report stages in the Commons, there were broadly three key areas of debate. One of the issues raised was the role of foreign investment in the UK’s civil nuclear projects. The Government welcome investment but never at the expense of our national security. We recognise the importance of having appropriate protections and scrutiny in place to ensure that any investment aligns with our core interests. The National Security and Investment Act gives the Government significant oversight of acquisitions of control in a nuclear project. It is also important to note that national security considerations will form part of the wider approvals process.

Another issue raised in the Commons was costs to consumers. We recognise that the rise in global gas prices has increased the cost of energy for households. However, in the medium to long term the Government are clear that new nuclear is crucial to providing consumers with reliable, low-carbon and affordable energy.

The Bill also contains measures that will allow the Government to incentivise project developers to avoid cost overruns, providing protection to consumers prior to the approval of a project, as well as during its construction and operation. Ensuring that a project has matured to a suitable point of development will be a central criterion for approving a project under the RAB model. The Government will submit project proposals to a thorough business case process, and intensive due diligence will take place throughout project negotiations. This due diligence will allow the Government to produce a robust estimate of a project’s cost. Developers will then be incentivised to manage costs and timings effectively, overseen by the economic regulator.

Finally, the other place also had constructive debates around transparency. The Government fully recognise the importance of transparency, which is why the Bill places clear requirements on the Secretary of State to publish information and consult key stakeholders at each stage of the project.

The Government are clear that nuclear energy has a vital role in reducing our reliance on fossil fuels, thereby protecting us from volatile global gas prices. Nuclear power will need to play a significant role in the UK’s future energy mix to ensure reliable, low-cost, low-carbon power as we transition towards net zero. I hope that noble Lords will recognise the exciting opportunity that this Bill represents to further develop the UK’s civil nuclear sector, while stimulating economic growth and job creation in support of the Government’s levelling-up strategies. I beg to move.

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Lord Callanan Portrait Lord Callanan (Con)
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I start by thanking all noble Lords who contributed to this excellent debate. I was encouraged by the widespread support for the Bill across the House, with the honourable exception of the Liberal Democrats and the Green Party. I particularly welcome the support of Her Majesty’s Official Opposition. These are long-term projects and it is good that the only two serious parties of government support the Bill and the need for new nuclear power.

Before I address the questions raised, I remind noble Lords of the importance of the Bill. The legislation will create a new funding model for future nuclear projects, which can reduce the cost of nuclear power stations when compared to existing funding mechanisms. This will substantially widen the pool of private investors in nuclear projects and, in turn, reduce the UK’s reliance on overseas developers for finance. The lack of a funding model has been the biggest barrier to nuclear projects getting off the ground in recent years and the Bill will help to resolve this issue.

The RAB model will help ensure a cost-effective approach to new nuclear projects, which will play a critical role in the UK’s future energy mix in support of intermittent renewables, such as wind and solar. That is the key point missed by contributions from the Liberal Democrats and the noble Baroness, Lady Bennett. Of course, we want to encourage renewables; they are good thing. We have some of the largest renewable capacity in the world but, by their very nature, renewables are intermittent and we need stable baseload power to keep the lights on. It is no good telling people that they cannot run their car or cook their dinner because the wind is not blowing in the North Sea. This is an unrealistic way to finance the future energy mix. I think this is the key point that the noble Baroness misses.

I also agree with noble Lords on the importance of home insulation schemes. The noble Baroness mentioned the figure herself; we are spending £9 billion on insulation schemes. I will come to that later. These are all important things that we need to do—and in fact are doing—but they are not either/or approaches; we need to do both.

I start by welcoming the support of the noble Lord, Lord Rooker. He does not often support my Bills, so I am pleased that he is doing so on this occasion. I am delighted that he agrees that the funding model will be of benefit to consumers and that he recognises the opportunities for new apprenticeships. As the noble Lord, Lord McNicol, remarked, Hinkley Point C has already trained 800 apprentices and it is on track to meet the EDF target of 1,000 apprenticeships during the construction phase of the project.

The noble Lord also raised some important questions, to which other noble Lords added, about protections for consumers under a regulated asset base model—a point also made by my noble friend Lord Howell and the noble Lord, Lord Whitty. My noble friend Lady Neville-Jones was particularly keen that the Government should adopt a rigorous commitment to value for money in their approach. Of course, that is a point I completely agree with.

The Government totally agree with noble Lords that consumers should be protected. Recognising the unique risks of nuclear construction projects, our proposals for the RAB model include multiple mechanisms for ensuring that consumers are protected from unacceptable costs. This includes undertaking robust due diligence before a final investment decision so as to ensure that the project will be effectively managed. As well as satisfying the requirements of the RAB designation process, for a project to reach a final investment decision it will need to undertake a successful capital raise, complete a government business case and satisfy all other relevant approvals from Her Majesty’s Government. I reassure my noble friend Lady Neville-Jones that any decision to commit taxpayer or consumer funding to a nuclear project will be subject to negotiations with staged approvals and value-for-money tests in line with the Treasury Green Book. Also, during construction a project will be incentivised to deliver to time and to estimated costs through an incentives regime overseen by the economic regulator. I hope that the assurances I have been able to give will provide some comfort to noble Lords that we are very much on the case.

The noble Lord, Lord Whitty, referred to the Bill’s impact on small businesses, which is indeed an important point. We addressed that in the impact assessment accompanying the Bill, which stated that, if a nuclear RAB model is implemented on a new nuclear power plant in future, it would impact small and micro-businesses by creating jobs in a supply chain and would indirectly impact them as a result of any costs or cost savings passed through to electricity suppliers and then to consumers. The illustrative analysis in the impact assessment shows that society as a whole, including small businesses, could save significantly on the cost of a generic large-scale nuclear power plant, using an RAB as opposed to existing fundamental mechanisms.

The noble Lord, Lord Rooker, asked me about the role of foreign financing in future projects, an issue also raised by the noble Lord, Lord West, and my noble friends Lord Howell and Lady Neville-Jones. It is important to point out that we welcome overseas investment in the UK’s nuclear sector. We value the important role that international partners have in our current nuclear programmes and potential new projects. Let me emphasise that this will not and should not come at the cost of our national security. The RAB model will help us to attract the significant amount of investment needed for new nuclear power plants, including from British pension funds and institutional investors, as well as from our closest international partners. In doing so, it will reduce our reliance on overseas developers for finance, and open opportunities for British companies and investors to work with our closest international allies to develop projects across the United Kingdom.

Investment involving critical nuclear infrastructure is subject to thorough scrutiny and needs to satisfy our robust national security and other legal and regulatory requirements. In particular, as my noble friend Lady Neville-Jones highlighted, the recent National Security and Investment Act 2021 allows the Government to scrutinise and, if necessary, intervene in qualifying acquisitions that pose risks to the UK’s national security. As well as that Act, the independent Office for Nuclear Regulation, the ONR, applies a range of strict regulatory requirements to all organisations seeking to operate nuclear sites in the UK. That includes assessments of the organisation’s capability, organisation and resources to manage nuclear material safely and securely.

My noble friend Lord Howell mentioned the history of EPR reactor constructions. The projects he highlighted, at Olkiluoto and Flamanville, are first-of-a-kind builds in each of those countries. This brings unique risks and challenges with the construction process. Developers have learned lessons from these projects and several EPR reactors are now under construction or in operation around the world, including, of course, at Hinkley Point C.

The noble Lord, Lord Teverson, made a number of points about the underlying economic case for new nuclear capacity. He asked specifically about the Government’s action on investment in energy efficiency. As I said earlier, I agree with the noble Lord. The Government recognise the importance of increasing the energy efficiency of homes. It is a difficult and complicated task, as the noble Lord, Lord West, pointed out, but we are spending considerable sums of money on insulating the country’s homes, particularly those of low-income families, both to reach our decarbonisation targets and to tackle fuel poverty in the longer term. That is why we have introduced, among many schemes, the energy company obligation, the value of which we have just increased, to provide energy-efficiency and heating measures for fuel-poor households. In the next iteration, which will run from April this year to 2026, the funding will go up to £1 billion a year.

We have also released today the results of the sustainable warmth competition. If I remember the figures correctly, another £980 million of investment will be delivered through local authorities to insulate homes up and down the country. A number of other schemes are contributing to the £9.2 billion insulation scheme that the noble Baroness, Lady Bennett of Manor Castle, mentioned. So these are not either/or decisions. We need to do both, and, indeed, we are.

The noble Lord, my noble friend Lady Neville-Jones and the noble Lord, Lord Oates, raised the important issue of the long-term solution for nuclear waste. It is important to remember that around 94% of the waste arising from nuclear power stations and other sectors is low in radioactivity and is disposed of safely every day in existing facilities such as the UK’s Low Level Waste Repository. The remaining higher activity waste is currently stored safely and securely in facilities around the UK. We have a process in place to identify a suitable location for a geological disposal facility to permanently dispose of higher activity waste. We are making good progress on four areas in discussions with the developer, Nuclear Waste Services, which is a division of the NDA. The vast majority of the higher activity radioactive waste to be disposed of in a geological disposal facility is waste that already exists.

Baroness Bennett of Manor Castle Portrait Baroness Bennett of Manor Castle (GP)
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I thank the Minister for giving way. Very briefly, can he identity those four areas?

Lord Callanan Portrait Lord Callanan (Con)
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When we have announcements to make on those areas, I am sure the noble Baroness will be here to question me, but I am not in a position to release the names at the moment.

The noble Lords, Lord Whitty, Lord Wigley and Lord Ravensdale, all made important points about nuclear projects’ potential for the cogeneration of hydrogen. As the noble Lord, Lord Ravensdale, said, the Sizewell C project is in the initial phase of exploring the potential of using electricity and low-carbon heat for a range of cogeneration applications such as the production of low-carbon hydrogen and direct air capture of CO2 for carbon capture. While these cogeneration opportunities are currently outside the scope of consumer funding through the RAB model, they could provide benefits to consumers by enabling Sizewell C to be utilised as a more flexible asset. I look forward to exploring that further with the noble Lord. This could provide greater flexibility for the energy system, thereby facilitating a greater number of potential pathways to meet the net zero target by 2050. If used in this way, Sizewell C could become the first nuclear low-carbon heat source, setting an example that we can emulate at other future nuclear power plants.

The noble Lord, Lord Wigley, and my noble friends Lord Howell and Lord Trenchard asked about the application of legislation to small and advanced nuclear modular reactors, for which we see a vital role moving forward. The Prime Minister’s 10-point plan for a green industrial revolution highlighted that SMR technologies have the potential to be operational by the early 2030s in the UK. The recently published net-zero strategy committed to take measures to inform investment decisions during the next Parliament on further nuclear projects as we work to reach our net-zero target. This will of course include consideration of large-scale and advanced nuclear technologies, including SMRs and, potentially, AMRs. As part of this, the net-zero strategy announced a new £120 million future nuclear enabling fund to provide targeted support to barriers to entry. Let me reassure noble Lords that the Bill is not product-specific and could apply to all civil nuclear technologies, and we will make decisions on appropriate investment portfolios on a case-by-case basis when presented with specific project proposals.

The noble Lord, Lord Wigley, as he always does, asked me about the role of devolved Administrations in the process of designating a project company to benefit from the RAB model. Although the ultimate decision to designate a nuclear company for the purposes of the RAB model will sit with the Secretary of State, given that nuclear energy and electricity are not devolved matters for Scotland or Wales, the Bill takes steps to ensure there is both strong transparency in decision-making and involvement of the devolved Governments. The Secretary of State will need to consult the relevant devolved Government before designating a nuclear company where any part of the site of the relevant nuclear project is in Scotland or Wales. It is important to make the point that the Bill will not alter the current planning approval process for new nuclear or the responsibilities of the devolved Governments in the planning process. Nothing in the Bill will change the fact that devolved Ministers are responsible for approving applications for large-scale onshore electricity generation stations within their own territories.

To move on to address some of the points made by the noble Lord, Lord Oates—I addressed some earlier—renewables represent an important and ever-growing source of electricity, but it is important that we have a diverse mix of sources to ensure a resilient electricity system in which the lights do not go off. Just as consumers paid for the previous generation of nuclear power plants, which, according to EDF, have generated enough electricity to power all Britain’s homes for 20 years and saved something like 700 million tonnes of greenhouse gas emissions, it is right that all consumers should share the costs of these projects to help realise their overall longevity and ensure that future generators bear the cost of the low-carbon infrastructure that we need to reach our net-zero goals.

The noble Lord, Lord West—and, I think, the noble Lord, Lord McNicol—asked me about Chinese involvement. In a 2016 Statement to Parliament, the then Secretary of State, Greg Clark, set out Her Majesty’s Government’s intention to

“take a special share in all future nuclear new build projects.”—[Official Report, Commons, 15/9/16; col. 1066.]

This policy has not changed; as such, we intend to take a special share in the Sizewell C project at the suitable time and, of course, subject to negotiation.

Lord McNicol of West Kilbride Portrait Lord McNicol of West Kilbride (Lab)
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My Lords, the Minister mentioned taking a special share in Sizewell C. Are the Government looking to take one in Hinkley as well?

Lord Callanan Portrait Lord Callanan (Con)
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These matters are subject to future negotiations. I will come back to the noble Lord on that.

I have addressed most of the points made in the debate. I am encouraged by the general support for the Bill across your Lordships’ House and I look forward to continuing the constructive engagement with all sides as it progresses. I therefore commend the Bill to the House.

Bill read a second time and committed to a Grand Committee.