Risk key to new build success, says report

Friday, 5 September 2008

Tackling the risks associated with new-build projects will be vital if new nuclear projects are to be successful, according to a newly released report from an industry working group.

 

Introducing a report by the World Nuclear Association (WNA) Industry Economics Working Group, Milton Caplan, president of MZ Consulting, pointed out that risks need to be managed to get the money to pay for new build. The report is titled Structuring Nuclear Projects for Success.

 

Milton Caplan present the group's conclusions

Nuclear power plants are large, capital intensive projects with long project schedules. They have significant fixed operating and maintenance costs but relatively low fuel costs, exist within a complex regulatory environment and are subject to extensive public scrutiny. Ultimately, it is the utilities that take on the majority of the risk associated with a new project, and just like the lenders they turn to for funds, utilities are risk-averse. They need their projects to be successful - they can take steps to mitigate risk, but ultimately they will not risk the entire company on one project, explained Caplan.

 

Didier Beutier, Areva's vice president for economic and prospective studies and co-presenter of the report, said that outlining the structure of the whole project at the outset can ensure that the project goes smoothly and, importantly, that risk is minimised. Total costs and risk of failure will be minimised if each kind of risk is allocated to the most capable party with equitable reward sharing prospect.

 

Much of the risk can be addressed in the earliest stages of a project. Technical risk can be tackled through the adoption of internationally accepted standardised reactor designs, and selection of existing nuclear sites for new build. Business cases built on various demand scenarios and investment from major power users can address market risk, while measures such as public debate, gaining cross party consensus, and a clear national waste management policy control societal and political risks.

 

As projects enter the construction phase, measures such as sound contractual arrangements and investment in quality supply chain infrastructure are necessary, Beutier warned that such developments will not happen spontaneously but must be actively pursued. "When the nuclear industry is restarting after a long period of dormancy, the first projects are more at risk," he said.

 

The market context and ownership model for a plant also influence the project finance and the distribution of risk. A regulated utility offers high security for investors and lenders, whereas an unregulated merchant plant is more sensitive to risk and needs a low debt to equity ratio. Various "hybrid" combinations are emerging, especially in the liberalised European markets, and even utilities not previously involved in the sector are becoming interested in investing in nuclear. The formation of consortia to build nuclear plants can help utilities to share out the risk.

 

Government involvement, said Caplan, is vital in providing the framework for success, with at the very least a commitment to nuclear power as part of a national energy strategy with cross-party consensus. The government’s role in supporting planning systems, regulatory culture and waste management policies, nuclear liabilities and so on are vital in underpinning the project to enable utilities and investors to be happy to take on the risks.