Globalised economy opens up for risk sharing
Nowadays, countries can get financing for nuclear power plants from abroad, offering state guarantees to pay for them in the longer term using revenues from power generation. What challenges does this offer?
In the peak era of the nuclear industry (1970s and 1980s), nuclear power plants were usually financed by governments and / or national companies. Some of the nuclear power plants that are now being planned are financed by multinational companies whose majority owner is in some cases a government.
RiskSpectrum Magazine asked Dr Hans-Holger Rogner, an expert in the application of systems analysis to long-term energy demand and supply issues, to share his knowledge and insights with regard to this development.
Today some 45 countries are considering embarking on a peaceful nuclear programme. Some of these countries will be dependent on financing from other countries and governments for building the nuclear power plants. Is this a new trend, and do you see any challenges in this?
It is in a way a new trend in the nuclear industry. Early on, in the pioneering era of large-scale nuclear power plants, most were state financed or built with public money, like in France and Germany. We were simply not a globalised economy at the time. In regulated markets where one could pass on risks to consumers there was no need for cross-border finance (=risk sharing). As well as national pride, competition for civil nuclear leadership, etc. made nuclear power a matter of home priority.
In the USA, nuclear power has been financed by companies and consortiums operating in regulated electricity markets with electricity rates set by the regulator on a “cost plus” basis. Risks of cost overruns or inefficient operations were thus borne by the rate payers, i.e. consumers. After the TMI accident in 1979 all new builds were stopped in the USA. This was mainly due to uncertainty in the new safety regulations. It was judged that requirements could change, causing revisions in the designs even for plants already under construction. Due to the regulatory uncertainty it became a too risky business to invest in, especially at a time of excess generating capacity and cheaper fossil alternatives after the oil price collapse of 1986. Many projects were cancelled and those continued experienced enormous completion delays and cost overruns.
Today we have a mix of liberalised and competitive markets. In deregulated electricity markets, however, investing in capital-intensive nuclear power represents a much higher financial risk than before, as cost-plus rate-setting is history. Therefore the finance structure is very different today. Recognising that risks should be allocated to those who can best manage them, different entities assume risks for different phases during a nuclear power plant project.
The risk of each phase is also spread over several partners that only take a risk during their part of the construction or operational phase. Usually both the technology vendors and buyers assume a certain share of the risk. Because of the size of investment, there is no single company that by itself can take on such a big investment. On a per kW basis, investing in natural gas-fired combined-cycle plants is only a fifth to a fourth of the capital required for a nuclear plant.
As gas plants are also of smaller unit sizes, the financial risk exposure is further reduced – nuclear fell out of favour with utilities and investors.
Still, in the USA there are five nuclear power plants under construction today. Four of these projects were started last year, at a time of low gas prices which are expected to prevail for a long time into the future. At 2013 gas prices, nuclear is generally considered non-competitive.
Still, nuclear power is considered a sound investment as its fuel prices are not as volatile as the price of gas, and it protects against future climate legislation as it hardly emits any carbon dioxide. Moreover, all new builds are located in states with regulated electricity markets and at least two units have made use of billions of dollars of government loan guarantees – all of which reduces financial risks.
As regards large-scale vendor finance, ROSATOM, Russia, appears to be unique. They will soon be building and operating new nuclear power plants in Turkey and will provide financing based on 15-year fixed-price power purchasing agreement with the Turkish Electricity Trading and Contracting Company (TETAS).
Of course, a country’s political stability and past track record in serving loans for large infrastructure projects are factored into the risk assessment of a cross-border investment project.
What would you say are the driving forces for the interest shown by countries that currently do not have nuclear power in starting national nuclear power programmes?
Economic development is closely linked to access to reliable and affordable electricity. There is a huge demand for power in many developing countries and all electricity generating options are needed. Oil, coal and gas prices are volatile and high. Infrastructure investments are needed for importing and distributing fossil fuels. Renewables are growing fast but are still expensive and do not provide dispatchable electricity. Energy security is very important for a sound development of business and economy in a country and having nuclear power adds to energy security.
What is the driving force for countries to invest in power generating stations in foreign countries? Why not build nuclear power plants in their own country and export the power?
Nuclear power plants are built by the nuclear industry, which may or may not be state-owned. Regardless of ownership, a nuclear deal is always a political deal. Electricity demand in most industrialised countries (the nuclear technology holders) is flat compared to the demand growth in developing countries. Hence in the near-term there will be little demand for new builds other than the replacement of retired plants. In addition, many countries are implementing renewable directives which further reduce demand for non-renewable capacity. So the nuclear industry focuses on growth markets abroad.
Building at home and wheeling electricity to neighbouring countries is a consideration of some potential nuclear projects in Eastern Europe but this faces a certain risk with regard to demand as mentioned earlier. This could be partially mitigated by assuming interests in downstream operations, i.e. transmission and distribution which extend the exporters’ potential value chain.
What role will the nuclear fuel supply play in the future?
The future of nuclear energy will depend on numerous factors ranging from electricity demand, economic performance of non-nuclear alternatives and market structures to finance, government policy and socio-political preferences. Having analysed these factors globally, there is a future for the technology. Stable government policy support of the technology is key (“Yes, nuclear power is part of the country’s long-term energy mix”), especially for private sector involvement and finance. How much nuclear and when, etc., should be left to the market. In addition, the industry has to continue to innovate towards better economic and improved safety.
Are there already examples of cross-border infrastructure investments from other industries that we can learn from?
The Aswan Dam in Egypt was built in the 1960s and had a significant impact on the economy and culture of Egypt. The Soviet Union provided funding as well as technicians and heavy machinery for the dam project. This was finally agreed after a long period of negotiations involving the USA, the UK and others, and also included arms for the Egyptian army. There are other examples such as pipeline projects (the Russian Federation and Germany), or the numerous infrastructure projects China has embarked on, building roads, bridges and railways in Africa. Of course, these cross-border projects are not acts of altruism – it is all politics and strategy or as in the case of China investing in Africa, access to energy sources.
This article appeared in RiskSpectrum magazine, June 2014.