Securing Finance for Nuclear Projects

Historically, nuclear projects have been financed on the balance sheets of large utility companies or funded by government budgets. However, customers and host governments are increasingly less willing to solely undertake the risk of the immense costs associated with new nuclear build, which may negatively impact balance sheets and credit ratings.

Export credit agency (ECA) financing is therefore playing a growing role in supporting nuclear construction and, increasingly, vendor equity and industrial customer investment are viewed as other potential sources of funding. However, to-date, no nuclear project has been financed under a project finance model.

The barrier to project finance for nuclear new build has certainly not been the pure size of these projects. The largest energy project to be project-financed, the Australian Ichthys LNG gas project, is more capital-intensive than most nuclear projects: that project closed on a US$20bn debt package in 2012, which covered about 60% of the US$34bn total project cost.

Therefore, lenders’ reluctance to invest in nuclear projects has more to do with the unique risks posed by nuclear power. This article explores factors that distinguish nuclear projects from conventional power projects from a lenders’ perspective and suggests some solutions that could improve the bankability of nuclear projects.

Assessing and mitigating nuclear project risks

The differences between conventional fossil-fuelled power plants and nuclear power plants can be grouped into four general risk categories: (1) construction risks; (2) risks of radiation and nuclear damage; (3) nuclear regulation, political and licensing risks; and (4) risks associated with decommissioning and disposal of irradiated materials, spent fuel, and nuclear waste.

Other risks, such as the energy market risk, also affect the bankability of nuclear power projects; however, for the purposes of this article, we will only focus on the incremental risks of a nuclear power project vis-à-vis a conventional power project.

Construction risk

Compared with similarly-sized conventional power plants, nuclear plants have higher initial capital costs due in part to the cost of nuclear-grade materials, the need for extensive safety systems, and the requirement for back-up power systems.

The significantly longer construction period of a nuclear plant also increases the overall investment cost and is a major impediment to project finance – commercial banks usually seek five to seven-year payback periods, while just the planned construction periods for nuclear power plants are five to seven years. Another key issue for potential financiers is construction risk: Will the project be completed on time, on budget, and most importantly, will the revenue stream under the power purchase agreement (PPA) commence when it is expected to do so?

Sadly, history has shown that nuclear power projects are particularly susceptible to construction risks that delay the delivery of the project, especially in projects involving firstof- a-kind designs.

Take, for example, the case of the Olkiluoto 3 project in Finland, originally a €3.2bn turnkey contract with Areva and Siemens. Construction of the first-of-a-kind 1,600MW EPR pressurised water reactor began in 2005, with commercial operation originally planned for 2010.

However, by 2009 the cost over-runs for the project had become so massive that Stephen Thomas, a professor at the University of Greenwich Business School, wrote in his paper The Myth of the European Nuclear Renaissance, that “Olkiluoto has become an example of all that can go wrong in economic terms with new reactors”.

After a series of delays and spectacular cost increases, commercial operation of Olkiluoto 3 is now expected to achieve commercial operation late in 2018 at an expected cost of potentially over €8.5bn.

Similarly, another EPR, the Flamanville Unit 3 in France, is more than three years behind schedule and significantly over budget. Likewise, Korea Hydro & Nuclear Power’s first-of-a-kind APR-1400, Shin Kori 3, was scheduled to be operational by the end of 2013, but has been delayed for two years due to key plant cabling not meeting the requisite safety standards.

Construction risks in nuclear power projects can be mitigated, in part, by choosing licensed and proven technologies, properly allocating construction risks to the party that is in the best position to bear those risks, selecting an EPC contractor and subcontractors that have recent and proven experience in nuclear construction, putting in place a gold standard Quality Assurance/Quality Control programme and ensuring an excellent line of communication between the regulator and the project participants.

There are many examples of nuclear power plants that were previously constructed without delays, including reactors in Japan, China and South Korea. The construction of the Barakah NPP units in Abu Dhabi is currently reported to be in accordance with schedule. Moving forward, demonstrating an excellent construction risk mitigation strategy in any single project, and the collective experience of improved construction timelines in nuclear projects world-wide, should be a major factor in increasing the availability of commercial financing for nuclear power.

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