Sizewell – look on my works, ye mighty, and despair

What else could the focus of this week’s Friday Editorial be… other than financial close on Sizewell C, a deal described by infra luminaries as “eye-wateringly expensive”, “terminally stupid” and “pretty desperate”.

Financial close was achieved earlier this week on the project finance debt for the UK’s 3.2GW nuclear plant to power 6 million homes in the blink of an eon.

To achieve this, HM Treasury loosened the purse strings and the UK government took a deep breath, choosing to suck up a good deal more than required to shepherd the world’s first PF nuclear deal over the line.

Bpifrance wrapped £5 billion of debt with the same 13 lenders that are on the £500 million commercial loan.

However, the bulk of the debt is coming from the National Wealth Fund – the money bags formerly known as UK Infrastructure Bank (UKIB) – which has a cheeky Treasury-funded £36.6 billion to be drawn as construction progresses.

So, the true debt value (for now) is a cool £42.1 billion… and that’s being joined by £8.6 billion of equity that we wrote about in July when SZC reached FID with the UK government in for almost half of that – 44.9% – which equates to £3.8 billion.

The next largest ticket is held by La Caisse (the fund manager formerly known as CDPQ) and valued at £1.7 billion to give it a 20% stake; Centrica is on 15% at £1.3 billion; and EdF is at the table with 12.5%, amounting to £1.1 billion.

The final stake of 7.6% is held by Amber Infrastructure – with an option to buy a further 2.4% from government (can’t imagine that won’t happen) – and it has a value of £650 million. These investments will sit in Amber’s International Public Partnerships (INPP) and the Nuclear Liabilities Fund (NLF).

Add that all together (equity and debt) and you have a tidy £50.7 billion… and that doesn’t include the fortune already spent to get to where we are today.

Some people are saying that Sizewell C has now passed the point of no return. The truth is, that happened in 2018/19.

For now, make a note in your diaries for about 15 years’ hence (the late 2030s we’re told) and we’ll all – those still alive and residing that end of the UK – celebrate firing-up the Suffolk nuke.

But while we wait, let’s take a closer look at this deal and see what the market thinks of it… as if the intro doesn’t give it away.

It was the first of kinds. It was the last of kinds

Speaking to folk around the market, there’s bewilderment at the huge ticket from the NWF; the level of comfort given to investors; the amount of government engagement and resulting impact on the national balance sheet; and a general belief that Sizewell’s going to look a bit silly once the big nukes across Europe are financed.

The £36.6 billion ponied up – via HM Treasury – by the National Wealth Fund for the vast majority of the debt against Sizewell C is indeed eye-watering.

One nuclear specialist ponders: “Why would you do that? Was it because nobody else looked for it? No, it wasn’t.”

There’s a consensus from those in the know that the financial advisers did not achieve “the most efficient process possible” having suffered “heavy political interference”.

On the debt, one infra banking veteran points out: “The interesting thing is that a few years ago, banks would never have gone near it. What will be very interesting is to see whether the wider market buys in.”

Meanwhile, the investors are more than chuffed with their positions as they benefit from a floor on returns, so it’s money in the bag and – thanks to the RAB model – investors start earning money from Day 1 of construction. And that first day was 4 November, the date of financial close.

When it comes to government involvement – that huge 44.9% stake – sources close to the deal say: “Had the government wanted to, it could have got that down to less than 20%.”

In what can only be described as circular economy gone mad, the government is majority stakeholder and – by a long margin – majority debt provider… and that’s going to impact the UK balance sheet.

“The issue with the model is the balance sheet treatment,” says one source. “It means that you’re putting nuclear projects on the government’s balance sheet… which is terminally stupid. Given the level of public debt, it is going to cripple the ability to build new nukes in the UK, which is really stupid.”

Finance community

There’s a mixed response when reaching out to the finance community for its views on Sizewell C.

One says: “The UK government really had to step up and step in across multiple dimensions… not only in equity but also in adjusting the RAB model to allow revenues during construction – that's really the only way they could get private investment.”

Another describes SZC as being “primarily a government funded project” with “the taxpayer or user pretty much on the hook for all the cost overruns” and investors “who don’t take much risk” being “handed some pretty good returns in construction period”.

An infra banking worthy says: “The deal ended up this way as it’s on balance sheet. I think Tideway ended up on balance sheet too due to the government support to the RAB which is the case here, hence it’s a value for money call.

“But curious what is the debt rating and pricing and a small tranche of private debt – beyond the ECA tranche – may have helped to provide greater commercial confidence.”

As to the size of EdF’s ticket, it has been suggested that HM Treasury had to cough up a lot more as the French government may have had a word in the utility’s shell-like that it shouldn’t over-extend when there’s going to be so much to do in the home market.

All told, it’s not worth worrying too much about the £50.7 billion price tag today as it’ll be a damned sight higher than that by the time we get to the mid-2030s with no end in sight.