Mitigating financial risk in nuclear power projects

"It is the consensus of the international community of climate scientists that humans are influencing the global climate and the risks presented by rising temperatures are sufficient to warrant enactment of policies designed to limit emissions of greenhouse gases," Kray said. "ANS supports policies that are performance-based and technology neutral and believes that nuclear energy should be considered on the same bases as other non-emitting technologies."

The overall US nuclear industry objectives are, she said, to preserve the existing fleet of operating units while at the same time support the development of light water small modular reactors and advanced reactors for commercial deployment.

"It's important to have both of those because the momentum of the current fleet is needed to sustain the talent pipeline, the manufacturing capability and the regulatory infrastructure. All of that is needed in order to usher in the next generation of SMRs and advanced reactors," she said.

Three phases

She described the risks presented in each of the three main phases of nuclear project development.

In Phase 1 - design development and licensing - the main risks are the costs of design development, the regulatory uncertainty and the site approval process.

In Phase 2 - the final investment decision and construction - the key risks are cost overruns, schedule overruns and an extended period of investment without return.

"This is that period of time wherein the developer is expending vast amounts of capital but is not yet seeing any return depending what the financial model is in play," she said.

In Phase 3 - commercial operation - the risks are the performance of the design, the performance of the operating organisation and the market value of output.

"Certain risks appropriately stay with the designer or owner/operator and I’m not suggesting that we be relieved of those, but rather that there are other risks which, in the absence of an overall regulated market, special financial instruments are needed to mitigate those individual risks," she said.

Mitigators

In Phase 1, there are a number of opportunities, she said, including the government cost-sharing for design development and government assistance for research and development.

"The US Department of Energy has been very engaged with the various developers in the US to, in part, avail some of the assets of the national labs, and also to co-fund some of the research and development work that is being done," she said. "And with respect to centralising or at least centralising with certain families, whether it be the fast reactors by giving them a source for fast neutrons, or with the molten salt family by providing test loops for testing sodium characteristics, there’s a lot that can be done to share some of that R&D that will help the developers and which will then of course help the financial metrics as that project goes downstream.

"Also, there is a need for regulatory reform, which means looking at a phased approach to licensing to ensure there are milestones along the way, so as to support periodic investment decisions and to ensure that the technology and rules are really not specific to lightwater reactors, but rather can accommodate the wide range of advanced reactors that we’re looking at.

"And then lastly developing regulatory engagement plans, again in an effort to take away some of the uncertainty associated with the regulatory process, therefore making the project developer more comfortable and sometimes, more importantly, making those who are financing the project more comfortable. Another instrument is site characterisation costs funded by the host state or host entity."

In Phase 2, one of the biggest issues, she said, is trying to have a mechanism by which the developer can receive some sort of return or allowance for recovery during construction. The regulated asset base model that is being examined in the UK is an example of this, she said. Other examples are government loan guarantees, investment tax credits and standby insurance.

"Standby insurance was introduced in the US in the Energy Policy Act of 2005. I don't know that it was used, or at least used successfully," she said. "The difficulty with it is that it’s trying to separate those risks that should stay with the developer or the constructor, but to give insurance against those risks that perhaps were outside those entities’ control."

In Phase 3, risk mitigators include: power contracts, such as a long-term power purchase agreement with a creditworthy counterparty and the contract-for-difference (CfD) model; a low-carbon portfolio standard, whereby government imposes a requirement on electricity providers that some percentage of the power they purchase for resale to customers is sourced from generation that does not emit carbon; zero emission credits (ZECs), which electricity providers purchase related to nuclear and renewable sources, and the value of which government determines annually by comparing generation costs and market prices; the nuclear portfolio standard, which is similar to the low-carbon portfolio standard, but specific to nuclear; the carbon tax, which imposes a marginal cost on fossil-fired power plants, thus increasing electricity prices; and capacity market reform, implemented by electricity market operators via various approaches as a revenue supplement to electricity market and which rewards resiliency and penalises volatility.

Power contracts are available, she said, "not only for a new project to help with financing, but also many of these come from the activities that have been happening in the US to try to save some of the plants that would otherwise be shutting down prematurely". A power purchase agreement with a credit-worthy entity, typically some government entity, are generally long term, which has a "significant impact on the interest rate that somebody would borrow against for a new plant", she said, "but also for an existing plant, it is what’s needed to keep it online".

The CfD model, as established by the UK government for the Hinkley Point C project, is "essentially a two-way financial hedge", she said, based on the strike price agreed upon and the market price. "The developer has the protection that, if the market price is lower, there will be recovery for that, but also the public is protected that if the market price is extremely high, then it avoids that windfall as well."

The low-carbon portfolio standard requires electricity providers to have an established percentage of their generation from non-emitting sources, which would include nuclear, she said. "And one of the incentives to do that is the zero-emission credit feature, wherein the ZECs are established and they are purchased by the electricity providers and they are paid to the non-emitting sources, be they nuclear or renewable. And the values of those ZECs are a function of both the operating cost of the generator as well as the market price. In fact the ZEC programme has been successful in saving some of the plants in the US that would otherwise have been shut down prematurely," she said.

The nuclear portfolio standard is intended as an "add-in, or an afterthought, if you will" because the renewable portfolio standard did not recognise nuclear as a non-emitting form of generation. "All of those are, in a sense, revenue for the non-emitting generator," she said.

The impact of the carbon tax is that it raises the market price, "which is of benefit to the non-emitters", she said.

Capacity market reform assigns a value associated with those forms of generation that have the resiliency to withstand extreme weather or other kind of supply disruptions and penalise those that are more volatile, she said. "So it's recommending and monetising essentially an attribute particularly of baseload nuclear," she added.

These individual financial instruments can be targeted for specific risks "depending on where you are on that continuum of a plant development project", she said, adding that others are offered by various government entities with a "holistic approach" to a particular project. "And that would be whether financing is provided by typically the design country of origin, the build-own-operate model or the build-own-operate and then transfer model," she said. These typically involve a consortium of companies under a turnkey engineering, procurement, construction contract, or an engineering, procurement, construction, operation contract, facilitated by a government-to-government agreement, she added.