How can new nuclear power plants be financed?

1 September 2005

Over the past couple of years, there have been a number of studies showing that new nuclear power plants can definitely be economic propositions, when compared with the alternative of building gas- or coal-powered generating capacity of similar magnitude. The most important factors in these assessments are now well understood – particularly the construction cost of the nuclear plants, the price of gas and the rate of interest assumed in the plant financing (see earlier 'comment' titled "Do low external costs justify public support?", published in NEI May 2005, p14, or follow link provided below). Yet nobody is rushing to build new nuclear plants in the Western world, when the studies show that investors could potentially make a lot of money out of doing so. Why is this?

The entrenched and strong political opposition to nuclear in many countries is undoubtedly a factor; yet in the USA, clearly the key market for new nuclear build, the government has now come out strongly in support, offering various financial incentives in the new energy bill. But the power companies are still sitting on the sidelines, with their senior executives very cautious. It is clear that their major fear is the reaction of financial markets to any further engagement in nuclear power. Their credit ratings are likely to take a hit while the impact on their earnings per share of a major investment project, with no financial return for several years, must be carefully considered.

It is clear that financing new nuclear build in the financial markets will prove very challenging. Nuclear has a bad reputation there, with memories of the cost overruns of plants in the 1970s and 1980s still strong, with the attendant power utility ‘stranded costs’ – those investment costs never likely to be repaid by future electricity sales. There is a general perception that nuclear has not yet cleaned up its act – the recent problems at British Energy (although caused mainly by power market reforms) have caused further image problems for the industry. Financiers are loath to invest equity in new nuclear build, while loan finance is likely to come only with a hefty risk premium, such that the economics of new plants may not work out. (In general, financing needs to be available at under 10% to make new nuclear build work economically.)

The key issue in plant financing is the clear identification and management of the risks. How much can the private sector possibly bear and which are unavoidably to be left in the government domain? The balance here is very contentious. The industry’s public image has suffered badly owing to the accusation that it has always been heavily subsidised and cannot pay its own way. It is clear that nuclear contains enough ‘special features’ to make it unlikely that it can ever break completely free of state involvement in its affairs, but the industry now seeks to achieve new plant orders on a fully-commercial basis. Yet, at the same time, as energy is a strategic commodity, governments are seen as retaining a vital obligation to help manage and mitigate the obvious risks.

Where do these boundaries lie? From the industry’s viewpoint, it has a number of requirements of governments, which it seems reasonable for them to fulfil. First amongst these is a sound regulatory system, which allows reactor design certification to take place quickly, then allows construction and operating licences to follow without unreasonable delays. The local planning process is also important, as endless appeals against decisions can destroy nuclear plant economics, when the key requirement is to get a plant built and earning good revenue as soon as possible. These were the key areas where nuclear build got tripped up in the USA before, so there are currently important efforts being made to overcome them with a new generation of plants. Design certification of new reactor designs such as the AP1000 has gone quite smoothly, while early site permitting (ESP) and combined construction and operating licensing (COL) is proceeding apace. This will do a lot to assuage investor concerns and should be replicated in other countries too.


The industry’s public image has suffered badly owing to the accusation that it has always been heavily subsidised and cannot pay its own way

There are, however, other important areas where governments should be expected to act. There are issues such as nuclear safety, plant security and nuclear liability provisions where clear guidance, with consistent rules and regulations, are a reasonable expectation. Nuclear non-proliferation has now also become a major issue – yet the industry has little to fear if governments do their proper job of sorting out a workable international regime, which satisfies reasonable public concerns.

Perhaps the biggest requirement of governments, however, is deciding on (and then delivering) a workable national radioactive waste management policy. Without being able to demonstrate a workable solution to the waste issue, it will be difficult to build new nuclear plants. In the USA, the industry has rather put its eggs all in one basket, in the shape of the Yucca Mountain repository, to the extent that further delays will likely constrain any new nuclear build. The industry quite rightly insists that waste management is an area where they have offered a range of feasible technical solutions, but governments have failed them by lack of action. The related issue that comes up, particularly in the UK, is that of eventual plant decommissioning. It is hard to explain to even experienced financial analysts that this is really irrelevant as far as pure new reactor economics goes – decommissioning is so far in the future that the necessary payments to a fund for covering it are relatively small and don’t really bear on new build economics. However, the industry still needs the state to set the rules here – some would argue that it must also act as the ultimate guarantor as a plant owner could conceivably find a way of walking away from its future obligations, even with an adequate decommissioning fund in place.

Finally, it is a reasonable requirement of governments that they should create power markets where different technologies can compete on a level playing field and where long-term investment in capacity is incentivised. The state’s ultimate responsibility is clearly to prevent the lights going out by ensuring a reasonable capacity margin, but, as the revenue from billions of kWh of electricity is the only outside funding coming into the nuclear industry (a point often forgotten by those engaged in uranium production and other fuel cycle activities), the shape of power markets, the contracting and other market mechanisms, are very important. Investors have to take major risks with selling nuclear power at good prices for many years in the future, to recoup the heavy initial plant investment costs.

These requirements of the state are almost essential preconditions for cutting the risks of new nuclear build to manageable levels. That they have so often been absent in the past explains many of the problems the industry has even today. There are, however, further risks that a combination of the financiers and the plant owners will have to share between them, relating to the lifecycle of a nuclear plant.

Clearly construction delays, caused by technical or labour problems, have to be avoided. It has been demonstrated in Asia that new plants can be operational only four years after initial concrete is poured and this has to be replicated everywhere else. The sooner electricity revenues start flowing to repay the interest and capital costs accumulated since construction began, much the better. Once the plant is online, there are then a range of risks relating to its operations, including keeping its load factor at a high level by careful outage management and avoiding other time offline, and generally keeping the plant economics in a sound shape.


Most of the risks feared by investors are manageable if governments set out a proper framework for the industry

There are also risks relating to further capital expenditure. Key plant components, such as steam generators, will eventually have to be replaced but such costs have to be minimised as they are important to overall plant economics. Yet looking ahead, they can nearly always be justified by the advantages of receiving many further years of strong revenue from electricity sales.

Nuclear plants around the world have generally shown they are competent in adhering to all the rules set by governments on safety, plant security and non-proliferation. Once left to get on with the job of producing lots of electricity cheaply and safely, they are very good at it, so risks should be quite low. Yet when operators are careless, as has been the case of Japan, regulators will step in and close plants for extended periods until they are satisfied. The availability of sufficient trained personnel to staff new build is an issue that often comes up in discussions but is one that is solvable by a combination of the initiatives already underway in industry and education (perhaps, most easily, by paying plant operators rather better and increasing the prestige of working in what is sometimes regarded as a graveyard sector of the economy).

Looking at the whole picture, we may conclude that most of the risks feared by investors are manageable if governments set out a proper framework for the industry. This doesn’t include subsidising nuclear in a financial sense, only setting out a reasonable framework in which it should be allowed to operate, ensuring public safety is maintained and that new plans are subject to reasonable scrutiny by those directly affected. The risks of building and operating the plants seem quite minor in comparison as the industry can claim a good record when it is allowed to get on without expensive interference from outside.

Understanding all the risks and allocating them to their correct location is clearly something that financiers find very difficult. Nuclear projects are very complex when compared with building a gas-powered plant, bringing forward a complete new range of issues that they are neither familiar nor comfortable with. In addition, it has now been recognised that nuclear can contribute to national greenhouse gas and security of energy supply objectives, which may or may not persuade governments to guarantee additional revenue which need not be seen as subsidies – rather than a justified reward for offering something which other power generating modes do not.

These risks (and rewards) of nuclear investment are something the industry needs to explain much better to the financial community. There are investors with very long-term time horizons, such as pension and life assurance companies, who can potentially be persuaded of the merits of investing in nuclear. Yet we have a big selling job to do, in order to encourage them to put their minds to any innovative financing mechanisms they can come up with. It is not yet certain that unregulated merchant generating plants will everywhere be the favoured solution in power markets and regulated utilities, public private partnerships and power users investing directly in plants (as per Finland 5) remain open possibilities. The financial sector can be incredibly creative once it is convinced that there is good money to be made in something – they are now at the stage of just beginning to see this with nuclear, but feel weighed down by the huge number of potential risks. They must be allowed to see more clearly – definitely a case of letting them see the good quality wood amongst all the leafy trees.

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