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Small Modular Reactors 'Low-Cost Nuclear' Challenge: Accounting officer assessment 2021 (HTML)

Updated 12 June 2023

Department for which the accounting officer who made the assessment is responsible:

Department for Business, Energy and Industrial Strategy

Project title:

Low-Cost Nuclear Challenge

Main scheme project stage:

Full Business Case approved by BEIS Projects and Investment Committee, Sept 2020.

Introduction

It is normal practice for Accounting Officers to scrutinise significant policy proposals or plans to start or vary major projects, and then assess whether they measure up to the standards set out in Managing Public Money. From April 2017, the government has committed to make a summary of the key points from these assessments available to Parliament when an Accounting Officer has agreed an assessment of projects within the government’s Major Projects Portfolio.

This Accounting Officer Assessment was made of the Low-Cost Nuclear Challenge Programme, following its Full Business Case stage. I made the assessment as the Accounting Officer for the Department for Business, Energy, and Industrial Strategy (BEIS).

Background and Context

The Low-Cost Nuclear Challenge (LCN) is a programme of work, initiated under the Industrial Strategy Challenge Fund, to develop the design for an indigenous Small Modular Reactor, with a Levelised Cost of Electricity (LCOE) below £70/MWh, to a point where it can progress through regulatory assessment and begin to attract investment towards commercial deployment in the 2030’s.

Phase 1 of the LCN commenced in November 2019. It was match funded with £18m from government and £18m from an industry consortium (the LCN consortium).

Phase 2 is a c£500m project – including an HMG grant of up to £210m, matched by c£258m private funding, through a new Joint Venture led by Rolls-Royce. It aims to move the programme towards a final design concept as well as completing the second stage of the Generic Design Assessment (GDA) process with the UK’s nuclear regulators.

The 2020 Ten Point Plan set out HMG intention to invest up to £215m into domestic SMR development (£210m to the Joint Venture, up to £5m to support delivery of the project). We have been negotiating Phase 2 of the programme as the key vehicle to deliver that commitment.

BEIS will have oversight of and be accountable for Phase 2 of the programme, which will be delivered through UKRI; a change from Phase 1 where accountability (the Senior Responsible Officer) was with UKRI.

Assessment against the Accounting Officer standards

Regularity

UKRI are the delivery body for Phase 2 of the programme. Funding for the programme will be provided to them from BEIS under Section 101 of the Higher Education and Research Act 2017.

The Phase 2 Business Case has been approved by BEIS Projects & Investment Committee (PIC), and HMT’s Treasury Approvals Process (TAP) subject to conditions set by the Chief Secretary of the Treasury. I have assessed the programme in view of relevant public law and procurement regulation, including the Subsidy control regime, and found it to be compliant.

To comply with Article 10 of the Trade and Cooperation Agreement (TCA) some aspects of the State Aid rules continue to apply to Northern Ireland. Since none of the current or proposed recipients or work will be based in Northern Ireland, we do not consider this to be an area of risk in terms of the transition arrangements for State Aid under the TCA.

The programme is supported by scrutiny from BEIS legal and commercial advisers, as well as external lawyers, to ensure best practice has been applied across the programme development.

Overall assessment: My assessment is that the regularity test is satisfied.

Propriety

UKRI, as the delivery body, will make the final decision as to whether to make the grant award of £210 million to the Joint Venture led by Rolls Royce.

The principles of the Cabinet Office Grant Management Functional standards are being applied and are consistent UKRI standard processes.

It is unlikely that private investors will fully commit until government has agreed and signed the Grant Agreement, creating a level of risk until that point. To mitigate this, the Grant Agreement will include a condition that at least 75% of the private investment needs to be in place within the first month and the remainder in 18 months. Failure to meet these conditions provides an immediate off-ramp for government.

Overall assessment: My assessment is that the propriety test is satisfied.

Value for money

The Business Case included a value for money assessment. BEIS has developed a methodology, which includes a staged assessment process of different scenarios of the cost of the optimal energy system (NPV) with and without nuclear investment.

This analysis shows that inclusion of nuclear power in a balanced energy mix has the potential to bring about lower cost scenarios in meeting Net Zero. The Business Case analysis also demonstrated that SMR’s, such as that in LCN, provide the optionality to deliver a portion of the nuclear capacity more flexibly and at lower costs through the deployment of modular build technologies and a fleet approach.

The Phase 1 Business Case set out an economic analysis for investment in LCN, including addressing market failures to catalyse private investment. These failures included information asymmetry, uncertainty around future capacity commitments and incomplete markets. Options of do-nothing, partial or full investment were also considered.

In the Phase 2 Business Case, Gross Value Added of the project was also assessed based on the likely jobs supported, and their high productivity as reflected by the highly skilled nature of the civil nuclear workforce. Spillover benefits were derived from multipliers used for the sector using published data.

Government will be funding 45% of the eligible costs of the project with grant claims paid in arrears against monitored and validated costs. Private sector investors will be funding the remainder of the costs. Separate analysis shows that the costs are similar or better than the costs of a number of other nuclear historic projects to get to the same stage of development.

Thus, using established economic appraisal techniques consistent with HM Treasury’s Green Book, the programme has been assessed to have a positive net present value that justifies the use of public funds to achieve the strategic aim of the programme.

Overall assessment: My assessment is that the value for money test is satisfied.

Feasibility

Whilst there have been some delays in approval of the Business case and funding for the programme, an assessment of feasibility in May 2021 shows that the programme could deliver its objectives by March 2025.

Once financial and security due diligence have been completed, and subject to final negotiations, officials believe it will be satisfactory to recommend proceeding, subject to satisfactory guarantees being in place. The commercial and financial risks associated with the investment will be within BEIS risk tolerance for research and development once guarantees have been secured.

Overall assessment: My assessment is that the feasibility test is satisfied.

Conclusion

As the BEIS Accounting Officer, I have considered this assessment of the Low Cost Nuclear programme and approved it on 30 July 2021.

I have prepared this summary to set out the key points which informed my decision. If any of these factors change materially during the lifetime of this project, I undertake to prepare a revised summary, setting out my assessment of them.

This summary will be published on the government’s website (GOV.UK). Copies will be deposited in the Libraries of the House and sent to the Comptroller and Auditor General and Treasury Officer of Accounts.

Sarah Munby
Permanent Secretary, BEIS
30 July 2021