Financing nuclear projects — new options?

12 March 2014

The lack of financing has held back nuclear new-build in recent years, but the nuclear power industry has only itself to blame for the delays and cost increases that harm the creditworthiness of nuclear power construction projects. Until those issues are resolved, it is uncertain that new financing models will really help.

Because building nuclear power plants is very expensive and projects stretch over many years, important financing issues almost inevitably arise. The nuclear industry often complains that despite all of the wonderful reactor projects available around the world, no financing is available to build them. The financial sector is often accused of not being willing to finance nuclear, while the development banks (such as the World Bank) have imposed moratoria on financing nuclear in emerging economies. So financing is seen just as a problem to be resolved in the process of getting a project underway. Several different approaches are being developed today. What are their prospects to help start more projects? Are there any downsides?

Nuclear loses out to small-scale energy projects

One possibility is that financing bodies simply don't understand nuclear and may, indeed, have some ideological opposition to it. This is a complaint frequently made against the development banks, but it has only limited traction. It is certainly true that people with anti-nuclear agendas have been influential within these financing bodies, but this can't fully explain their opposition to nuclear. The real problem runs much deeper. Development banks have moved away from financing all huge energy projects -- big hydro dams are a good example -- because they tend to cost a lot more than originally estimated (thus constraining the banks' other projects) while arguably often distorting the balance of the economies of relatively poor developing countries. The banks are therefore now favouring involvement in smaller-scale energy projects rather than huge infrastructure schemes, which they believe to be more in keeping with the development needs of such countries. Hence renewable energy schemes are seen as particularly appropriate for funding. If and when the nuclear industry develops much smaller reactors, the development banks may look again, but they are unlikely to finance nuclear projects costing $5 billion.

"There is essentially no shortage of money available for investment -- what's lacking are the right projects. This goes farther than nuclear"

Objections from the other financing bodies are also unlikely to be ideological and more to do with the risks and returns. Certainly industry bodies ought to do better at informing investment officers about nuclear, but the ultimate problem is that nuclear projects aren't attractive to them. Nuclear new-build projects typically have a long delay in financial return. This characteristic makes them very difficult to finance in liberalised power markets which have favoured gas projects that don't involve tying up such large sums of money for a long time. Nuclear projects, in contrast, involve a huge range of risks which are hard to allocate amongst all the stakeholders. There is political risk, the fear that governments may change and cancel projects before completion. But financiers not surprisingly have nightmares over the wider construction risks, given the delays to so many nuclear projects. Even if the sale of electricity from the new plant can be secured in stable contracts at attractive prices, the costs of projects overrunning (including the additional interest costs) can be fatal.

Financiers will argue that their role in a project is more an output than an input. Although there are a huge variety of creative financial packages in existence, nothing can rescue a project if the project doesn't make sense in the first place. However smart and creative the financial people are, they need good projects whose risks are carefully managed by all the participants and which ultimately grant a reasonable rate of return. There is essentially no shortage of money available for investment -- what's lacking are the right projects. This goes farther than nuclear. Interest rates are relatively low at the moment, which favours investments with long lead times, but identifying the right projects is a big challenge in every industry.

Vendors take on more construction risk

Within nuclear, given the escalation in the cost of building plants, a trend has emerged for plant vendors to take on more construction risk. In nuclear power plant projects, the operator is the most important stakeholder as it is the organisation that needs the power to satisfy the local demand, and needs it at a reasonable price. As such, operators (in many cases publicly-owned bodies) have traditionally taken on most of the risks in nuclear projects, but they are now seeking to lay as much as possible off to the vendor. The classic example of this is Olkiluoto 3 in Finland, where AREVA signed a fixed-price contract with the utility TVO. Yet this model is not sustainable. In the first place, there are not many vendors that can entertain taking on such risks, but it also doesn't make much sense. It can be argued that the fixed-price contract protects TVO having to pay for extra work when the project over-ran, but the contract has not protected TVO from the consequences of the project's delays; it needed the cheap nuclear electricity on the expected date and has suffered because it has not arrived. A far better contract structure spreads out the risks in a more equitable way to ensure that everyone is fully motivated to get the project completed on schedule and budget. Although vendors can, in turn, lay off some of the risks of going over budget by getting key suppliers and contractors to sign fixed-price contracts, this big risk should ideally be shared.

"Operators have traditionally taken on most of the risks in nuclear projects, but they are now seeking to lay as much as possible off to the vendor"

The other big risk is on the revenue side, particularly with liberalised power markets. This wasn't an issue with Olkiluoto 3 as the owners of TVO are willing to receive all the output of the plant at cost price. The favoured approach elsewhere is to sell the power at a guaranteed price at the time the investment decision is made. This is what is happening with Hinkley Point C in the United Kingdom, where the revenue side of the equation is guaranteed. Without this, it would be impossible to finance the project and, in particular, for EDF to persuade the other equity investors (AREVA and the Chinese) to participate. This takes away one huge risk and (assuming it gets past the EU regulators as an appropriate answer to 'market failure' in a liberalised market) may well be taken up in other countries too. This still leaves the huge risk of the project getting built on time and budget.

Build-Own-Operate: Is it a solution?

Beyond persuading the vendor to sign a fixed price contract, another option is to go further and get the vendor to take all the equity in the project. This is the model the Russians are adopting with their marketing of nuclear plants to many countries around the world. The so-called BOO (Build-Own-Operate) model means that the vendor builds the plant and then takes it over; this investment is paid for by selling the power at an agreed price to local power companies. The lead project for this approach is Akkuyu in Turkey, but it is planned for other countries where financing would be difficult, such as Vietnam and Bangladesh. Another variant is BOOT (Build Own Operate Transfer) where the equity in the project eventually gets taken over by a local investor - this could either be a state-owned body or a private investor.

From the point of view of the country, the BOO financing model provides a nuclear project which may otherwise be difficult to achieve, and so arguably gets it built much more quickly. On the other hand, the vendor-investor will expect the power to be paid for, and this may prove very expensive in developing countries, even if there is a degree of subsidy from the vendor (see below). Another big issue is over-dependence on a foreign body. A country could effectively ask a vendor to take over complete responsibility for its nuclear programme, which is inadvisable given the complex infrastructure and safety issues related to running a nuclear power plant. A strong local regulator is crucial to ensure that governments do not shirk their responsibility to their citizens of dealing with the nuclear power plants in their country. Although vendor-investors will promise to help build up local nuclear expertise and staff, the country will heavily depend on the foreign company for a long period. The question is whether it is advisable to have a large chunk of a country's power supply 'in hock' to an overseas party.

"Despite the Russian government's evident desire to see its nuclear industry build plants all over the world, doing so would be a very expensive undertaking, especially as poor client countries may be unable to pay for the power that is eventually generated."

From the vendor's point of view, a BOO project will help employ its domestic nuclear industry (assuming the level of local content is low) but there are concerns that by offering such a financing model there is a wider agenda in play. The accusation is made that Russia is both trying to achieve geopolitical goals and effectively 'dump' plants on client countries at less than fair prices. With Rosatom dominating the Russian nuclear industry, it could be seen to be charging high prices at home in order to subsidize reactors overseas. There may also be objections from rival vendors who are constrained by export financing rules. Under OECD rules, only 80% of a plant can be financed by export credits and the like, with a maximum 18-year payback period once the plant is in operation.

A bigger problem in reality may be for the vendor-investor itself to acquire the required funding. It is clear that Rosatom is seeking additional investors for Akkuyu, even though this is only the first of its mooted overseas projects to be developed with a BOO arrangement. Rosatom's total budget for nuclear power development in 2013 was apparently only $2.4 billion and it allocated $680 million of this to capitalise the Akkuyu project company in December. Despite the Russian government's evident desire to see its nuclear industry build plants all over the world, doing so would be a very expensive undertaking, especially as poor client countries may be unable to pay for the power that is eventually generated. Rosatom will probably now be seeking funding from the Russian National Wealth Fund (effectively a sovereign wealth fund based on its huge oil and gas revenues) currently valued at about $90 billion. The success of such an application is uncertain; there are always alternative demands on such funds, which are essentially regarded as rainy-day money and therefore not ideal for investing in any undertakings that are inherently risky.

Ultimately the BOO model doesn't offer any magic wand for financing nuclear projects. If a national government such as Russia, Korea or France sees its nuclear export programme as so important that it is willing to put billions of dollars behind it, BOOs could become numerous. But this seems unlikely, and would also be likely to raise big international competition issues. Since vendors cannot bear the substantial costs of nuclear projects on their own, they are going to have to seek outside equity investors, many of whom are the same people who have repeatedly turned down nuclear in the past. Given the long time horizon of sovereign wealth funds, there may be good reason to target them for investing, once they can be satisfied that projects will be built on time and budget. They will, however, take some persuasion.

The bigger issue that lies behind financing is the cost of the plants and the risk of overruns in construction. Until the nuclear industry solves these uncertainties, it is unlikely to get the funding to develop many new projects. Although Chinese companies may have entered a virtuous circle of building nuclear reactors in volume, securing low costs and earning plenty of profits, they are unlikely to invest in building them around the world unless they can foresee a decent return on their funds. Otherwise they may prefer to develop even more projects at home, where the returns are more assured and predictable.

About the author

Steve Kidd is an independent nuclear consultant and economist with17 years of work in senior positions at the World Nuclear Association and its predecessor organization, the Uranium Institute.

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