Guarantees are key

27 July 2009

Government support will be key for new nuclear build projects to take off during the credit crunch, according to a new report. In the USA, where loan guarantees are few and far between, state aid offers an alternative. By Caroline Peachey

A recent International Energy Agency report suggests that the economic crisis could cause the cancellation of new nuclear power plants, and hinder efforts to revive new build programmes. The Impact of the Financial and Economic Crisis on Global Energy Investment, prepared for the G8 Energy Ministerial in Rome on 24-25 May says that the huge capital requirements combined with risks of cost overruns and regulatory uncertainties, make investors and lenders very cautious about investing in nuclear, even when demand growth is robust.

The report says that: “governments wishing to encourage investment in nuclear may need to remove or mitigate some risks investors are facing, especially for first-of-a-kind nuclear plants and in countries where there is no existing nuclear programme or where there has been no new build for many years.”

And in today’s economic climate it is looking increasingly likely that government assistance – whether in the form of subsidies, tax credits or loan guarantees – will be needed to catalyse the construction of new nuclear power plants.

At a conference in London, EDF’s UK CEO Vincent de Rivaz denied that he was looking for a subsidy from government. But in a May interview in the Financial Times, he argued that the government should change the way it supports other competing energy sources, and become more involved in the carbon credit trading scheme. De Rivaz suggested that the best way to support the nuclear industry would be to put a floor under the price of carbon permits in the European Union’s emissions trading scheme. Keeping prices high enough would ensure that nuclear remains an attractive investment compared with its fossil fuel rivals.

Steve Thomas, energy policy professor at the University of Greenwich, argues that EDF is still angling for government support after buying British Energy. “Now EDF is in a game of chicken with the government,” he said. Thomas was speaking at the launch of International Perspectives of Energy Policy and the Role of Nuclear Power, a book he co-edited.

United States

According to the IEA report the USA offers the clearest example of state support. Through its 2005 Energy Act act the US government offers federal loan guarantees for up to 80% of the total project cost, risk insurance for licensing delays and production tax credits. But to be eligible for

federal guarantees, the US Department of Energy wants an innovative design, i.e., a design new to the US fleet, and with commercial viability.

In May the DoE selected four projects to enter the final phase of due diligence for a share of $18.5 billion in federal loan guarantees. Unistar (a joint venture of EDF and Constellation Energy) announced that its Calvert Cliffs project was one of four selected by the DoE. The South Texas Project (STP) was also confirmed as a contender.

When Exelon’s Victoria County project in Texas was not named among the DoE’s finalists, chairman and CEO John Rowe said that, as a result, the project would be delayed or cancelled.

Finally the regulatory framework within a state has a huge bearing on new nuclear build, which may be why over half of the potential new developments are located in the southern United States. Several of these states including in Florida, Georgia, Louisiana, North Carolina, South Carolina and Texas have put in place legislation and/or regulations to support the construction of new nuclear power plants. These policies range from property tax incentives to predetermination of ratemaking principles for a project before construction begins.

According to the US Nuclear Energy Institute, the policies that help most with financing new plants in regulated states are those that:

• Require the state public utility commission to determine if a proposed plant is prudent before construction begins and approve costs periodically during construction, thereby guaranteeing these capital costs will be added to the rate base when the plant comes online.

• Allow the carrying cost of construction work in progress (CWIP) – or the financing cost associated with construction – to be passed on to ratepayers during construction. This reduces the cost ratepayers will pay for power from the plant when it goes into commercial operation.

In a Platts webinar on 28 May, Standard & Poor director Dimitri Nikas said that one company was making progress in nuclear new-build because of support from the state. “Actually SCANA and its South Carolina utility SCE&G are moving forward. SCE&G are looking at building two AP1000 units at its existing VC Summer site and are doing so with the South Carolina public service authority.

“However South Carolina provides for the regulatory framework that we would view as supportive of this type of project. For example there is the base load review act.” The BLRA is a state law enacted in 2007 that allows for annual adjustments to rates during construction of the units to recover financing costs associated with the project.

On 29 May SCE&G filed with the South Carolina Public Service Commission and the South Carolina Office of Regulatory Staff (ORS) for an overall 1.1% increase to its electric rates under provisions of the BLRA.

SCE&G president Kevin Marsh said paying financing costs while construction is ongoing, as opposed to waiting until the project has been completed, lowers the cost of building the new units by about $1 billion, which in turn reduces the amount customers will have to pay through rates for the cost of capital, depreciation, property taxes and insurance.

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