Energising development15 August 2018
Nuclear power could be a major catalyst for growth in emerging markets, but successful deployment requires a long-term commitment and strategic plan from the outset. Elina Teplinsky and Vincent Zabielski reveal key considerations for nations looking to nuclear energy.
THE PAST DECADE HAS SEEN tremendous growth of nuclear energy in emerging markets, principally in Asia.
China has more than doubled its nuclear power capacity in the past ten years and, with 15 reactors in final stages of commissioning or construction, will have more than 37GW of nuclear power capacity online by the end of 2020 – the third largest operating nuclear fleet in the world after the USA and France. India is constructing six new nuclear reactors and is planning construction of 15 more units in the near term. This past year saw the completion of the construction of the first nuclear reactor in the United Arab Emirates and the pouring of safety concrete for the first nuclear new-builds in Bangladesh and Turkey. Other markets – such as Indonesia, Malaysia and the Philippines – are considering embarking on a path to nuclear power.
Nuclear can be an attractive option for fast-growing economies, provided that the nuclear programme is carefully planned and executed. Industrial development is electricity intensive, and per capita energy and electricity consumption correlates with quality of life indicators. Nuclear energy provides reliable and clean baseload power that allows for the electrification of industrial clusters and cities, while reducing greenhouse gas emissions. Further, the development of nuclear power spurs the growth of local industries, incentivises technological advancement and creates well-paying jobs. A prime example of these benefits is South Korea, which first imported nuclear technologies in the 1970s and is now not only a leading operator of nuclear power plants, but also a successful vendor of nuclear reactors, fuel and services. Nuclear power has been cited in a number of studies as key to South Korea’s transformation from an emerging to a developed market.
However, the successful implementation of a nuclear power programme in an emerging market carries many challenges. Nuclear projects are technologically complex, capital intensive and subject to lengthy development timelines and significant construction risk. Even in developed economies, such as Finland, France and the USA, nuclear projects have suffered significant schedule delays and cost overruns. Project finance has not been a viable option for new nuclear build due to construction risk (and concomitant delay and cost risk), and long repayment terms. So nuclear power development has historically been financed with government funds or on the balance sheets of large electric utilities – mechanisms not always available in emerging markets. Finally, executing nuclear projects requires industrial, legal and regulatory infrastructures that are lacking in many of the emerging markets where it is under considering the option.
However, these obstacles are not insurmountable. With careful planning, understanding of lessons learned from the 60 years of nuclear project development and some innovative thinking, nuclear power could be a major catalyst for growth in emerging markets.
Strategic procurement and contracting
Nuclear projects are technologically complex large infrastructure endeavours that require a strategic procurement strategy. The history of the nuclear industry has demonstrated that the absence of procurement foresight or using the wrong strategy can be disastrous, resulting in failed procurements, do-overs and disputes.
In the past, procurement best practice was to force all the risks onto the contractor, regardless of whether the risks were within the contractors’ scope of control. This approach has contributed to project delays and bankruptcies and a more modern approach is emerging where the interests of the project developer and the contractor are aligned on project delivery.
In formulating the right procurement strategy for a nuclear project, the project developer should understand the risks inherent to nuclear projects, and contractually allocate each risk to the party that is in the best position to mitigate that risk.
A key aspect of procurement strategy is choosing the right contracting model. Nuclear contracting models can be divided into three general categories: turnkey engineering, procurement and construction (EPC) contract; split package; and multi contract. The successful choice depends on a multitude of factors, including the contracting parties’ experience in building nuclear power plants. Owners in emerging nuclear markets, which do not have experience managing nuclear projects, can benefit from a turnkey EPC contract where the vendor takes substantial completion risk but with the owner retaining risks that are under the owner’s control. However, placing responsibility for completion on the vendor is only likely to be successful where that vendor has demonstrated that it and its team has successfully constructed nuclear power plants in the recent past. To that end, the choice of contracting model should be supplemented by qualification requirements for both the vendor and its proposed project leaders.
Nuclear projects that need financing must be structured for bankability from the beginning.
Many of the emerging markets considering nuclear power do not have the financial capability to provide funding for these multi-billion dollar projects. Their success depends on the ability of the host government or the project developer to secure external financing. In these cases, the financing strategy must be developed in the early stages of the project.
Nuclear project owners have increasingly sought vendor financing and it has been made available through vendor equity investments, export credit agency financing and direct loans from vendor governments. However, vendor support has become more limited as the number of nuclear projects has grown. For this reason, innovative financing strategies will be required to allow future reactor projects to move forward.
One strategy may be selecting a vendor or a consortium with a diversified supply chain to provide for different sources of export credit agency financing. Emerging markets with energy-intensive industries may also consider implementing structures akin to the “Mankala” model in Finland, where non-profit companies are formed with a variety of shareholders for the purpose of producing electricity for these shareholders’ use at cost price.
The owner must structure not only the nuclear project delivery organisation but also its associated business operating and ownership structures to maximise bankability.
During due diligence, lenders review all key project contracts. Implementing a procurement and contracting model that mitigates construction and fuel security risks and provides for price certainty is key to bankability.
The business structure of the project must mitigate a key risk – uninsured liability for nuclear damage. Lenders are wary of funding a plant operator entity that has all the responsibility for nuclear liability under international conventions and local laws. Accordingly, the business structure of a nuclear project must ensure that financiers are lending to an entity that does not carry nuclear liability risk. Innovative structures will be required in regimes where laws require the owner also to be the operator.
Nuclear legal and regulatory infrastructure
Frequently, host country governments view the development of nuclear legal and regulatory infrastructure as separate and apart from project development. However, the absence of well-developed laws and regulations or enactment of ones that do not follow international standards could be calamitous for new nuclear project development. One example is India, where vendors’ concerns about certain provisions in the 2010 Civil Liability for Nuclear Damage Act have delayed the start of projects based on US AP1000 and French EPR technologies for almost a decade.
Nuclear legal and regulatory infrastructure must address all aspects of nuclear safety, security, safeguards and liability, while establishing regulatory certainty and transparency.
In emerging markets that are pursuing nuclear power for the first time, regulators have a steep learning curve and may require the backing of technical support organisations, staff training in mature markets or reliance on experienced ex-patriot staff.
Regulators may consider licensing approaches that allow acceptance of a vendor country design certification. Such an approach, used by the Federal Authority on Nuclear Regulation in the United Arab Emirates, allowed for streamlined construction licensing of the Barakah units in that country.
Establishing adequate protection against third-party nuclear liability is vital in securing vendor interest. Lenders are also concerned about their own exposure to nuclear liability, given cases where claimants have sued export credit agencies for environmental damage. Several international nuclear liability regimes – namely, the Vienna and Paris Conventions, and the Convention on Supplementary Compensation for Nuclear Damage – have sought to establish a global nuclear liability regime where all third party nuclear liability is channelled to the plant operator and secured by insurance and government back-stops. These regimes seek to provide swift and adequate compensation to victims, while shielding vendors, lenders and other project participants from uninsured liability for nuclear damage. In order to take advantage of protections offered by these liability regimes, host governments must ratify the conventions and ensure that they are appropriately implemented by domestic law. It is worth noting that each convention contains options for implementation, such as for the legal basis of compensation (financial security or state funding), geographic scope of coverage and certain heads of damage. These options will shape the protections of the national nuclear liability regime and can affect the appetite of stakeholders to support the project, as well as the guarantees and indemnities these stakeholders will seek from the host government and the project owner. Finally, in order to implement the nuclear liability regime, the host country will need to develop a national nuclear insurance pool or seek insurance funds from pools in mature markets.
Finally, host governments and vendors must consider whether other laws and regulations could create obstacles for new nuclear development. For example, in Turkey, laws prohibiting industrial development near olive groves and coastal areas had to be amended to allow construction of the Akkuyu plant, despite the fact that the site was licensed in the 1970s. A comprehensive study of all applicable laws and regulations affecting new nuclear development is required before reaching a decision to proceed. Host governments should take swift action to address such obstacles, such as enacting a comprehensive nuclear law.
There is a temptation to view nuclear projects in emerging markets as simply just another “plan-as-you-go” construction project, but that view is short-sighted and misguided. The reality is that successful deployment of nuclear power in emerging markets requires comprehensive strategic planning from the beginning that addresses all of the aspects of project delivery and operation through the expected 60+ year life of the power plant.
Author information: Elina Teplinsky, Partner at Pillsbury Winthrop Shaw Pittman LLP; Vincent Zabielski, Senior lawyer at Pillsbury Winthrop Shaw Pittman LLP