Imagine that you had joined a scheme with friends, each of you had decided that you would pay the money to a construction company to build a house. Once the house is completed you might think that you get a share of the property or a return on the money you provided, right? Wrong. You get nothing. You didn’t lend the money, you gave it away. That is how the UK’s new Nuclear power-stations will be funded using the Regulated Asset Base (RAB) model.

The scheme works like this. Every month a customer will have a small surcharge added to their electricity bill it might be a few pounds at the start of a project up to ten pounds or so during the main construction phase, theoretically, payments stop when the plant becomes operational. The bill surcharge stops because the plant is now selling electricity, which the investment company that constructed the plant gets a return on.

With the RAB model Bill payers pay the company building the power-station while receiving nothing back. They don’t get equity in the plant and they aren’t considered investors. The government claims that people benefit because their future bills will be lower, but that is a logical fallacy. Their bills may be lower, as they aren’t paying some absurd price like with Hinkley Point C £92.50, or Drax Biomass £150 (2012 prices). But that is the fault of poor government contract writing. Not the consequence of the RAB.

The government likes to portray the RAB model as the customer paying up front for construction. This is not the case. The customer is paying the investment company, which consequently receives a return on their ‘investment’ during construction, not just once the plant is operational. That investment company has financed the entire projected cost of the power-station, most likely with a large loan. As the customers pay the investment company from day 0 of construction, rather than day 0 of plant operation, there is significant savings for the investment company on the cost of the loan.

In the RAB model, the customer and taxpayer take on the risk for cost overruns. In any normal project the one taking on the risk should get a return.

Typically, anyone paying during the construction phase of a project would receive equity, a share in the project. In the RAB model, the customer’s money is seen as a grant. It is absorbed by the company which, once the plant is finished, will profit from owning the plant, and selling customers the electricity from that plant. The price of electricity is set by the government, at a rate that means the investment company can’t lose money.

The RAB model is absurd, it as an extremely roundabout way of trying to avoid nationalisation. Nationalisation could work exactly the same way. With customers paying upfront during the construction phase. The end result would be very different as the government, ipso facto the UK taxpayer, would own the plant, and it would be financed with cheap government debt as oppose to loans from the market. In a nationalised project case the taxpayer would receive the profits and the risk, as oppose to just the risk in the RAB model. Also the plant would be cheaper as it would be financed with government debt and so would the cost of electricity.