From the plant’s start date, if the reference price at which the producer sells electricity on the market is lower than the strike price set under the terms of the contract, the producer will receive an additional payment. If the reference price is higher than the strike price, the producer will be liable for the difference.
The key elements of the Contract for Difference are:
contract. In view of the pandemic, HPC has made a request to the LCCC (1) to extend the COD windows, citing force majeure as allowed by the CfD. Discussions with the LCCC continue;
There is no explicit volume guarantee in the CfD, nor is there a ceiling; however, the contract is protected against change in law risk and any curtailment on the export of electricity so that the project is put back in the same position it would have been had the change in law or curtailment event not occurred.
Beyond the commissioning phase, the IRR of the euro investment is mainly dependent on fluctuations in sterling and UK inflation, as revenue is generated in sterling and linked to inflation.
HPC project is protected against power market price changes during the CfD period and is exposed to fluctuations in electricity prices beyond the CfD period. Post CfD, a change in the price of electricity of £201510/MWh has an impact of 0.1% on the IRR.
In terms of foreign exchange, c. 1/3 of the project costs are denominated in Euro. This exposes both the project and EDF group to the GBP/EUR exchange rate. Should sterling fall against the euro, the Sterling cost of the project will go up and its IRR will therefore drop. A hedging strategy has been implemented at project level.
Nevertheless, at EDF group level, a Sterling devaluation will trigger a fall in euro funding requirements and therefore lower Group debt. Given the long-term investment horizon in the HPC project, EDF group has implemented a gradual strategy to cover the risk of an increase in sterling value for its HPC investment.
Contracts for the Funded Decommissioning Programme (FDP) of HPC were signed on 29 September 2016. For detailed explanation of statutory requirement for nuclear operators, see 1.4.5.1.2.2.
EDF and CGN signed the Sizewell C Project equity documents on 29 September 2016 alongside the HPC contracts, for the development, building and operation of two EPR reactors at Sizewell in Suffolk for a total capacity of 3.2GW. The power plant would provide electricity to 6 million households for around 60 years. The development of the project is led by EDF which holds 80% of the project as of end of 2021, with CGN owning the remaining 20%.
The project is based on an objective of replicating HPC as much as possible.
By the date of the final investment decision (FID) at the latest, EDF plans to reduce its stake to no more than 20%, and to deconsolidate the project from the Group’s financial statements (including in the calculation of the economic indebtedness by the rating agencies). Therefore, the project aims at achieving the conditions enabling third party investors and debt holders to invest in the project.
After the FID, EDF group intends to supply the design, some key nuclear equipment and components (including nuclear steam supply systems, instrumentation & control, fuel) as well as associated services.
On December 2020, as part of the steps to achieve net zero carbon emissions in 2050, the UK Government announced its ambition to bring at least one large scale nuclear project to the point of Final Investment Decision by the end of this Parliament (2024), subject to evidenced value for money and all relevant approvals.
On 27 October 2021, as part of the Spending Review 2021, the UK Government announced:
On 26 October 2021, the UK Government introduced the legislation (Nuclear Energy (Financing) Bill) to establish a revenue model to fund future nuclear projects, using the Regulated Asset Base (RAB) model. The final reading was passed by the House of Commons on 10 January 2022, at which point the Bill has gone to the House of Lords for consideration.
The RAB model is a method typically used in the UK to finance large scale infrastructure assets such as water, gas and electricity networks. Under this model a company receives a licence from an economic regulator to charge a regulated price to consumers in exchange for providing the infrastructure. The regulator sets an allowed revenue level for a project to recover costs (construction and operation) plus a financial return on the capital investment (a return on asset value). This model aims to enable investors to share the project’s construction and operating risks with consumers. With a nuclear RAB model, electricity suppliers would be charged, as the users of the electricity system, the cost of the project. The allowed revenue would be received from the start of the construction phase, reducing the overall cost of financing. The Sizewell C Project aims at being designated eligible to receive the benefit of the RAB licence condition.
In addition, a Government Support Package (GSP) that protects investors and debt holders from some risk events would be defined.
The terms of the RAB model and GSP for the Sizewell C project are currently being discussed.
The agreements between EDF and CGN set out a cap in the shareholders’ funding of the development phase, without any commitment to fund the project beyond the development phase. Discussions with the UK Government are ongoing on the financing of the remaining development costs until the final investment decision.
The aim is for the construction of the power plant to be largely financed by private equity and debt. The financing model has never been implemented in the UK for projects of this scale before and therefore would be one of the largest ever equity and debt issuance and project financing on the European scene. The project aims at obtaining an investment grade credit rating to attract private investors. Securing an appropriate regulation model and risk-sharing mechanism is, among others, key to achieve this objective.
On 27 January 2022, the UK Government decided a £100 million government funding in exchange for an option over the site land or over EDF’s shares in the project company.
EDF has planned to pre-finance the development up to its share of an initial budget of £458 million.
The project could face difficulties in accessing the necessary financing for its development due to the minority presence of a Chinese company operating in the nuclear field.
(1) Low Carbon Contracts Company.
