State assurance, solid management key to clearing finance wall
Government commitment to consistent, long-term policy and tried-and-tested, well-executed building plans will provide investors with the security they need to lend under manageable financing terms, say expects.
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Industry experts believe the lack of cheap financing for nuclear projects has been more about the fundamentals behind market risk rather than a failure to find the correct financing model to fit the industry.
“I do not believe the key to lower cost finance lies in any creative financial tools,” says John Parsons, a financial economist who works in the area of financial risk management and is a senior lecturer at MIT.
Experimentation in the United Kingdom around the Hinkley Point C reactor with the Contract-for-Difference model and the Regulated-Asset-Base model under consideration for the proposed Sizewell C plant is something of a misdirection, Parsons says.
“I think the real key in what’s going on in all of these different financing issues is a topic that’s not discussed enough and that’s commitment,” Parsons says.
“You need the public authorities to make a commitment behind a multi-billion-dollar investment in a fixed asset and you can see in recent history what happens when you don’t have that political commitment.”
Significant political risks have been taken on by investors who have sunk capital into nuclear power plants in recent years, including outright bans on new nuclear or nuclear life extensions, such as in Germany and Taiwan, targeted taxes and out-of-market payments to competing generation technologies.
The failure of the European Commission to include nuclear in its green taxonomy – a classification system of generating technologies for investors to use when financing emission-free power projects – has led some commentators to dub the plan a ‘green-wash taxonomy’.
“The government’s role remains paramount in any capital project; it is absolutely fundamental. It needs to be the policy maker. It needs to establish a long-term policy. It needs to provide trust and confidence to the market to build these projects,” says Fiona Reilly, Managing Director FiRe Energy Ltd.
“We need trust and confidence in the market, a level playing field for low-carbon technology through taxonomies, and only once we have these things, can we find support for green financing and making nuclear an investable asset class.”
LCOE of a new nuclear power plant project according to the cost of capital
Note: Overnight cost of $4,500/kWe, a load factor 85%, 60-year lifetime and 7-year construction time.
(Source: OECD NEA)
Moral Hazard
There are downsides to making the government the insurer of last resort however. Shifting the risk from the operator to the state can take the onus off the constructor to efficiently manage and learn from each project, and performance is key to keeping risk perception down.
One suggestion is to finance a nuclear project with different contracts at different stages of development.
At the very beginning, especially for a first-of-a-kind (FOAK) reactor, the government could act as a lender or guarantor to get the project off the ground. Once up and running, private investors, buoyed by the successful start of the project and the government’s commitment to it, provide their own cash.
“I argue that you should be using different costs of capitals for different periods in the lifetime of the nuclear power plant,” Geoffrey Rothwell Chief Consulting Economist at Turner|Harris and author of the book ‘Economics of Nuclear Power’.
The plant might begin construction with a discount rate, or interest on investment, of a relatively high 10% to reflect the higher risk of the project at that stage. During the plant’s lifetime, once it’s up and running, the cost of capital might fall to 3% and even 0% by the time the plant is under decommissioning.
The assumption that lenders use the same cost of capital during each period means the bank is taking the same risk when lending to a fully functioning plant as it does when lending to a prospective builder, even before the first concrete is poured, two very different risk parameters, Rothwell says.
Cookie cutter approach
Operators of the new generation of nuclear power in the United States and Europe have been forced to prove themselves before return-conscious investors while at the same time must learn on the job with little-tested technologies that take years to put together.
China’s cookie cutter approach to nuclear has helped the country become the world’s leading nuclear energy power and helped keep financing costs down. Nuclear generating capacity rose by 9.1% in 2019 from a year earlier in China, with two power reactors connected to the Chinese grid in 2019, a further 16 reactors under construction and some 42 more units planned.
While this level of churn is difficult to replicate elsewhere, a successful design that may be repeated would go a long way to assuring investors of a guaranteed return.
France is considering plans to build six EPRs over the next 10 years, a move that could give the industry a leg up globally, says Jan Horst Keppler, Senior Economic Advisor at the OECD Nuclear Energy Agency (NEA).
“I think that would be a watershed. If they pull it off and put the will and the money into it, it will work, that will get us over the hump. If they fail, it’s going to be very difficult,” Horst Keppler says.
And projects struggle because of inexperienced management. Once a design is repeated, lessons learned can direct a more secure, less risky project that investors are more comfortable pouring money in to.
Effective shaping, where allocation of project benefits and costs into a configuration that is stable, stable basic data with no design changes during the project, a strong integrated owner team, and complete front-end loading can raise a megaproject’s potential success rate up to 80% from 35% says Ed Merrow, founder and president of the Independent Project Analysis consultancy.
Failure to meet these criteria has plagued the nascent next generation nuclear industry and have kept financing costs at untenable levels, he says.
However, Merrow is optimistic this failure can be addressed.
“The bad news is, we’re doing this to ourselves. The good news is, we’re going this to ourselves, because that means we can stop it,” he says.
By Paul Day