ROLLS-ROYCE SMR LTD – ESI0021 – WRITTEN EVIDENCE – UK ENERGY SUPPLY AND INVESTMENT

Introduction

Is the Government’s energy strategy delivering investment in an energy supply that is resilient, affordable and in line with achieving net zero emissions? If not, what should be done?

The vision and scale of ambition set out by the Government’s energy strategy is absolutely right. Policy announcements from the Government, such as the Ten Point Plan, Energy White Paper and Net Zero Strategy are very important to overall investor confidence. Capital markets see a tremendous opportunity to invest in the UK’s decarbonisation plans and our Rolls-Royce Small Modular Reactor (SMR) business is testament to that.

For SMRs, the challenge is maintaining the pace of Government decision making and policy change so investors can move at the speed the climate crisis demands. We have confidence that the Secretary of State at BEIS, and wider Government see the benefits of SMR deployment and the consequential job creation through manufacturing growth and exports. It is important that the development of forthcoming ‘roadmaps’ for SMR deployment do not delay simple policy decisions that can be taken now to enable the deployment of a UK SMR solution.

In our view there needs to be direct accountability between Government and the private sector for delivering a certain volume of clean energy from SMRs over a specific time period. This will give clear responsibility – on Government and business for the rapid deployment of new nuclear – which has been missing in the developer led model which intended to deliver 16GW of new nuclear but has thus far only brought Hinkley Point C forward.

Question 1: To what extent are the causes of recent rises in energy prices likely to be long-term features of global energy markets? Are the Government’s policies for reducing the impact of higher energy prices on consumers sustainable and in line with long-term energy objectives? If not, what alternatives are there?

We agree with previous witnesses before the Committee that current energy price volatility is a feature of our current reliance on fossil fuels. UK energy prices are still determined by global energy markets and are, therefore, affected by global supply and demand and the geopolitics of international markets such as the global gas market.

As we move towards a net zero energy system and domestically generated power by 2035, the UK will largely be disconnected from global commodity prices. Renewable energy and nuclear power will be immune from international energy markets. Ultimately, therefore, as we move to become energy independent in the long term, we would expect a situation where domestic energy prices are far less volatile. The sooner we make the transition to a low carbon energy system the sooner the UK will be protected from these fluctuations in global energy prices.

Rolls-Royce SMR believes that SMRs are key to achieving a decarbonised electricity system in the UK as quickly as possible (see answer to Question 2 below). We must therefore make rapid progress on regulatory, planning and consenting processes so that SMRs can be deployed as soon as possible.

Question 2: What are the main challenges as regards energy supply and storage which public policy must address over the next decade?

We see two main challenges on energy supply over the next decade: firstly how to meet the higher volumes of decarbonised energy that will be needed and secondly how we can deliver the baseload power we need at an acceptable cost. 

By 2035, HMG forecasts that the UK must generate 20 percent more electricity than it does today as we electrify and decarbonise substantial parts of our economy such as transport, heating and industry. There are various scenarios which set out how quickly we can decarbonise and how much larger the electricity grid needs to become to host technologies such as electric vehicles and heat pumps. In all scenarios, while the absolute consumption of energy might vary, the absolute need for clean electricity is significantly greater than it is today.

By the 2030s there will also be larger volumes of renewables on the grid. Commensurately, this means there will be a more important role for baseload technologies to provide the grid stability needed to ensure that a stable power supply is available 24/7, providing consumers with access to clean energy when the wind does not blow and the sun does not shine.

The UK currently has 15 nuclear reactors, generating about 8.9GW, about a fifth of our electricity. However, five existing plants are due to be shut down in the next three years, removing more than 5.2GW from our system. If we look further forward to 2035, there is a clear gap in the provision of stable, clean baseload power. By then coal plants will also have been shut down and the existing nuclear assets, with the exception of Hinkley Point C, will all be in the decommissioning stage – leaving just 3.2GW of nuclear on the grid.

The risk of a shortage of baseload power in a decarbonised power system can only effectively be addressed by nuclear generation. Nuclear is the right solution to meet the need for stable, clean baseload power; there is no better source today of clean energy that is available 24/7 than nuclear energy.

For nuclear to play this pivotal role at low cost and in the timescale that the climate emergency demands, we cannot deliver nuclear in the way we did in the past; it will simply take too long and cost too much.

The Rolls-Royce SMR is designed specifically to address the difficulties with conventional nuclear power. A factory‑built, commoditised approach to nuclear is how Rolls-Royce SMR have addressed this challenge. Our SMR is designed to be low cost, deployable, and scalable. Creating a product that is factory built - by which we mean that 90 percent of our SMR is completed in factory conditions - radically reduces the construction risk and cost.

The Rolls-Royce SMR proposition is radically different to how large scale, conventional nuclear is delivered. This repeatable, standardised approach generates huge efficiency gains to make it a commoditised product. Rolls-Royce have been making submarine reactors for over 60 years and the civil development builds on that knowledge, heritage and expertise. Innovation is centred around deployment, not in the nuclear technology which is a standard pressurised water reactor (PWR) using standard fuel and standard fuel assemblies – all known quantities to the UK supply chain and regulators.

The innovation is centred around the way that we deploy the reactors – using modern modularisation techniques to take out construction risk. We have done this to make it deliverable and therefore also investable. The Rolls-Royce SMR will cost around a tenth of a conventional nuclear project and can be deployed at the pace required to support the UK’s decarbonisation aims.

Question 3: What are the main international and geopolitical factors and risks affecting the security and affordability of the UK’s energy supply? How should the Government work with international partners on energy policy and respond to greater international competition for energy supply?

Rolls-Royce SMR Ltd do not have a specific comment on the international and geopolitical factors affecting security of supply, apart from to say that, as we set out in our answer to question one, the faster that the UK domestically produces its own electricity, the sooner we will have greater security of supply. And we believe SMRs are key to achieving a UK based, low carbon electricity system as quickly as possible.

If we are able to export our technologies to other countries looking to decarbonise, the international market for low carbon energy can positively affect the affordability of energy infrastructure in the UK. The cost of any energy technology is not just caused by what you deploy domestically but also what can be deployed internationally. If we are able to export SMRs the cost of each UK reactor will fall through economies of scale.

The Rolls Royce SMR is currently the world leading small modular reactor and the only European SMR design in a regulatory review process, on a pathway to deployment. We must, however, move at pace, to maintain this advantage because SMRs are being developed in other countries. If we do not move at pace and continue the current momentum, non-UK SMR developers could very easily catch up and take over where we are.

We must capitalise upon our first mover advantage in the UK by getting to deployment quickly so that we can unlock the global SMR opportunity. Once we can point to SMR deployment in the UK, the international SMR market will open up significantly.

It is also worth pointing out that at present, the Rolls Royce SMR is the only UK clean energy product that can be exported globally to address the net zero transition in other countries.

Question 4: What level of investment will be needed in the UK’s energy supply to secure an orderly transition, particularly over the next decade? Is sufficient private capital being invested in reliable and affordable energy sources that are in line with climate objectives, including the commitment to net zero (for example, hydrogen and nuclear)?

The Rolls-Royce SMR is designed to ensure investability. It is a standardised, commoditised product that makes nuclear power affordable, deliverable and, crucially therefore, investable. We are confident in our ability to secure capital from the financial markets to deploy our SMRs as we have demonstrated through the match funding process which brought £280 million of equity into the business alongside £210 million of Government grant funding.

From our experience, the capital markets see a tremendous potential to invest in the UK’s decarbonisation plans when the opportunity is right. We are therefore speaking to the financial community on the basis of deploying SMRs with long term revenue support from a Contract for Difference (CfD) and securing all funds to enable this from the equity markets.

We believe SMRs are critical to reaching the Government’s 2035 target for decarbonising the UK’s electricity system. We expect the first SMR unit will be on the grid by 2031 with a further 15 reactors - 7.5GW of clean power – being deployed immediately after that, if we can make sufficient progress in the development of the necessary CfD architecture (see answer to Question 6).

Question 5: What effect is financial services regulation, and the commitments made by financial services providers to achieve net zero in 2050, having on energy investment? Specifically, is regulation getting the right balance between encouraging investment in renewable energy and supporting the green transition, while also ensuring security of supply?

As mentioned above, from our experience, the capital markets see a tremendous potential to invest in the UK’s decarbonisation plans when the opportunity is right. We will be looking to further tap into the global financial markets as we expand.

In the UK we need to ensure that the Green Financing Framework includes nuclear as a proper ESG-qualifying solution. This would enable nuclear power projects to gain access to the green infrastructure bank and other solutions that might be available to access capital in the UK.

Question 6: What should the Government do to incentivise and enable investment in, and financing of, reliable and affordable energy that is in line with its climate objectives, including net zero by 2050?

This answer focusses specifically on the steps required to incentivise and enable investment in SMRs. There are two main steps the Government can take: firstly committing to enter CfD negotiations for the deployment of SMRs and secondly taking steps to reduce the planning processes and interdependencies required in unclear deployment.

Firstly, certainty around the funding architecture for SMRs needs to be put in place. Nuclear power plants are 60‑year assets and longer‑term bankability does need to be built into the contracting structures. To provide investors with the certainty needed to finance SMRs it is necessary to have a long-term Government agreement through a Contract for Difference (CfD) for SMRs.

We are confident that with the certainty provided by a CfD that we can secure the private capital that is required to deploy. This would enable an SMR to generate power for the grid at around £50/60 per megawatt hour, roughly half of the cost of Hinkley (the underlying evidence of these figures can be provided separately and has been shared with UKRI and BEIS previously). Many analysts consider that energy prices may well actually be significantly higher than this by 2035. If the expectation is that prices will be above £60 per megawatt hour in the 2030s and beyond, by setting the CfD threshold relatively low we are setting a very cost competitive starting point for an SMR.

Secondly, Government must help to reduce the regulatory and planning risks as this further helps reduce the cost of capital. Regulatory barriers in the nuclear sector are particularly onerous around deployment, specifically the interplay of the planning processes and permitting. There are aspects of this which are inefficient and engender duplication across numerous regulators. By way of example, it will take longer to secure a Development Consent Order and the supporting licensing than it will to build the SMR power station itself.

Government must allow Rolls Royce SMR to work in parallel and not in series on regulatory, planning and consenting processes to deploy SMRs in the timescale required. While we are completing the Generic Design Assessment (GDA), we can be preparing the sites that host this technology, and in parallel we can also be building the factories.

On siting specifically, there are existing communities in the UK that have hosted nuclear assets for the last 50 years. Those communities are strong advocates for nuclear power. They understand it, see the economic benefits and want SMRs in their communities. We believe that a lengthy multiyear planning process to build an SMR on a site that has had a nuclear asset for the past 50 years is not necessary. The Government should consider accelerating the DCO process for sites such as Trawsfynydd, Anglesey and West Cumbria.

Question 7: What role will oil and gas play in the UK’s energy mix as it transitions to net zero? How should we ensure that these sectors receive sufficient investment to guarantee supply, while not slowing the move to renewable energy sources? What level of investment will be needed?

N/A

Question 8: What incentives could the Government provide to households and businesses to reduce demand for energy or to improve energy efficiency?

N/A

Question 9: What lessons are there for the UK from comparable countries in terms of securing investment in reliable and affordable energy?

The United Arab Emirates has been able to successfully secure 5.5GW of new nuclear power through the deployment of Korean reactors. The UAE started with no regulator, supply chain or operator yet in just 12-13 years has deployed nearly 6GW of power. This was achieved through an effective industry/Government collaboration and a desire to move at pace.

The UK has developed a nuclear deployment model that is no longer fit for purpose and should therefore look at successful nuclear roll outs like those in France, South Korea and the UAE.

11 March 2022

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