Funding challenges

Finance casts its eye over all aspects of proposed new build projects, from investigating the construction challenges to those throughout the long operational lives of nuclear power plants.

It seeks to measure up, as may be done, how downside risks of all types associated with a nuclear project – as for any major infrastructure or energy development – can be distilled, weighed and tallied. And, of course, to what upside ends, taken in terms of financial returns for this measure, though these, too, like downsides, offer no ready and simple metrics to call upon for analysis.

Each initiative, and project, is taken case by case. But many factors come to be common in the review of a potential project, and argument is often made for terms that would be more supportive of capital investments being considered by an industrial or energy sector, such as nuclear.

Often the role of electricity markets and, commensurately, the national regulators weigh significantly on financial risk analysis and the attractiveness, or otherwise, of a potential project. For nuclear, too, there is the further dimension of safety.

A few months ago, in Paris, the current questions around finance of nuclear power plants were taken forward to be further explored and examined in a gathering organised by the International Framework for Nuclear Energy Cooperation (IFNEC), a secretariat-service organisation of OECD’s Nuclear Energy Agency (NEA). The event was ‘Nuclear Energy’s Role in 21st century – Addressing the Challenge of Financing’.

Among topics covered were financing alternatives for nuclear power projects, financial risk management, future pricing and return on investment, transparency, and nuclear in the context of innovative financing solutions coming into clean and low-carbon energy. On the latter point, the desire for a more level playing field was voiced against other types of energy projects in the electricity markets assessing a project through a financial lens.

Dimensions of risk

Carbon and climate concerns have catalysed much action in international agenda in the last two decades, yet the majority of non- carbon sources of civil energy generation are presented with no radically simplified path, easing of challenges or fewer hurdles in their bids to bring more assets to market.

“A single energy source will not be the solution to meet the COP21 climate change goals,” the recently published report on the event says. “However, nuclear must play a role in securing a diverse clean energy portfolio.”

At the event, IFNEC steering group chair Edward McGinnis commented that nuclear offers baseload benefits and comparatively greater accessibility over time compared to most renewables. However, as he noted in his preparatory words ahead of the event, the challenges have “never been more formidable for nuclear reactor customers”.

William D Magwood, director-general of NEA, said in his opening remarks to the delegates that nuclear energy is at an important crossroads. Most of the reasons for the tough environment greeting project initiatives are highly uncertain and difficult to predict.

Through the many and varied discussions, the conference identified and listed a number of key challenges on the nuclear sector’s path to building new power plants. These challenges included, of course, data that tell of cost and time overruns on projects which, by their nature, are long-term undertakings.

The challenges identified by the conference include:

• Electricity market arrangements, such as the unpredictable and perhaps unstable electricity prices in liberalised market, and there not being adequate framework providing solid investment signals for low- carbon technologies, including nuclear;
• not enough carbon pricing to promote nuclear investments;
• the weight of government support leaning towards renewable energy sources in the clean and low-carbon sectors;
• political risk, including uncertainty around shifting political support in many places; and
• challenges of perception around nuclear safety, both in societal and in political spheres.

As with any challenge, the task is to address, manage and diminish the inherent risks in each, as they are categorised, ranked, framed and measured. From the many discussions at the event – and which had built on a trajectory of debate over the previous few years at a series of prior meetings (see Finance: vital, but one spotlight among many) – a number of key recommendations for financing new nuclear power plants were produced.

The key, albeit broad, recommendations to help new nuclear power projects to effectively identify appropriate financing mechanisms, include:

• reforms to electricity markets;
• win government support, and end taxes and penalties targeted on nuclear energy;
• harmonise regulatory frameworks, internationally;
• demonstrate a strong safety culture;
• better communications (always early, and strive for clarity) with all stakeholders; and
• employ effective tools for programme management of suites of projects.

But also, and by no means least, and critically for specific project execution, the key recommendations also call for proponents of prospective projects to:

• clearly demonstrate capability, and certainty, to build to schedule and within budget;
• choose and constructively work with proven technologies; and,
• employ and manage vendors and operators with positive nuclear experience.

While these are recommendations, each is a variables with degrees of perceived risk in financial analysis, whether the approach taken is to employ standard funding models or possibly alternate routes in financing. The paths to funding construct their own views on these risk parameters, and an added layer of complication is that the sensitivities vary between projects. 

Weighing risk

Some sessions at the event discussed alternatives for successful project funding. A key point of focus was the usefulness
of NEA’s Multinational Design Evaluation Programme (MDEP), aimed at developing innovative approaches for regulators to assess new nuclear power reactor designs. The MDEP system supports a convergence of codes, standards and safety goals in the licensing and regulatory processes, which should help towards increasing investor confidence in design and certification, said Ho Nieh, NEA’s division head on nuclear safety technology and regulation.

From a Q&A discussion, it was noted that pension funds are not invested in the sector because of risk being perceived as too high and also the investment periods too long on nuclear projects – even though such large funds regularly seek long-term investments in infrastructure and energy as part of portfolios to deliver stable cashflow returns.

A key summary note from the speakers on the first session – also including, respectively, Adriana Nicic, NEA’s head if nuclear safety, technology and regulation; and, Fiona Reilly, leading on nuclear projects and infrastructure for PwC – was the contention that financing can only be guaranteed with government involvement in funding as well as licensing and regulation.

But, the conference proceedings reports, a view was given by Ahab Abdel-Aziz of Gowling Lafleur Henderson , LLP, as co-chair for a session on financial risk management, that the energy market is broken and not much time is spent addressing financing challenges.

Electricity market risk on the Hinkley Point C new build project, in the UK, has been approached by using a contract for difference (CfD), said Vakisasai Ramany, project sponsor EDF’s senior vice president for new nuclear projects and engineering. The private law contract is between EDF and Low Carbon Contracts Co (LCCC), a UK government-backed counterparty to the CfD.

The arrangement brings a guaranteed “strike price” for the first 35 years of operation of Hinkley Point C. It also would deliver more than 95% of project return recovery, said Ramany.

In a separate presentation, Jeremy Allen, head of procurement and investor relations with the UK government’s Department of Energy and Climate Change, noted that Hinkley Point C is the first reactor to employ a CfD approach to help secure funding, and added the strike price agreed can be adjusted at fixed points over the duration of the contract to reflect certain cost changes.

In addition, the CfD arrangement has built-in incentives for shared savings gained from beating time and cost targets at the construction stage. Allen also explained that the CfD negotiated strike price system provides for the other end of the project lifecycle – waste management and decommissioning – by helping to fund a dedicate decommissioning programme. And, before the reactor is even allowed to start operating the developer is also expected to enter into a fee-based waste transfer contract (WTC) with the UK government.

Further aspects of the arrangements for Hinkley Point C include sharing benefits won through superior plant performance or a higher level of equity sales in comparison to the base case scenario, said Allen.

He added, though, that with respect on political risk the developer and UK government had an agreement that was separate to the CfD system.

Still, among the many points observed by EDF’s Ramany of the Hinkley Point C experience, he added that lenders will seek detailed audits to help provide them with confidence in the project and its numbers.

More generally with respect to lenders, George Borovas of Shearman & Sterling, LLP, placed a focus on the dimension of reputational risk in project assessments. He discussed how the reputational risks are chiefly around political, safety and societal concerns but are also informed by proven technology, although can be coloured by past and current project delivery performance in terms of cost and time.

Financial risks associated with large- scale infrastructure projects were discussed by Carl Cho of Citigroup, who reviewed a number of points, including:

• the large upfront capital investment required and the necessary larger pool of lenders;
• longer payback; and,
• even market risk continuing to some degree despite long-term sales contracts such as power purchase agreements (PPAs).

Away from the large projects, matters on delivery cost and time on small modular reactors (SMRs) were taken up by John Hopkins, chief executive of NuScale, which is active in the technology and project development. He made the point that SMRs can be built much faster and for less investment, which would translate into less capital and borrowing needs, and earlier returns on investment for equity stakeholders and payback to lenders.

Expanding on the topic of return on investment, Fabienne Pehuet of NucAdvisor doubled-down on the points of construction and revenue risks as being of vital concern to potential investors, not least lenders. Robust risk allocation and management approaches were key, it was said, and also that central roles are played by financial institutions such as banks and export credit agencies, and regional institutions.

The management of risk in those regards are within projects. In a separate session, the competitive context for nuclear projects when seeking funding was reviewed, including the relative disadvantage in comparison to other low-carbon energy schemes due to national approaches to carbon pricing; and, the need for political support but as that may change that can be a further dimension to the matter of political risk.